Marathon Oil reported first quarter 2010 net income of $457 million, or $0.64 per diluted share. Net income in the first quarter of 2009 was $282 million, or $0.40 per diluted share. For the first quarter of 2010, net income adjusted for special items was $315 million, or $0.44 per diluted share, compared to net income adjusted for special items of $240 million, or $0.34 per diluted share, for the first quarter of 2009.
"Marathon delivered a strong operating performance across its businesses and solid financial results in the first quarter despite the largest amount of planned maintenance and turnaround activity in the Company's history," said Clarence P. Cazalot Jr., Marathon's president and chief executive officer. "With most of that work now behind us, the Company is well positioned to benefit from the ongoing global economic recovery and, in particular, from much better oil prices compared to this time last year and improving margins for refined products.
"Looking forward, our goals are unchanged and remain focused on delivering top-quartile financial and shareholder returns. We'll do that by continuing to control expenses, operating our businesses in a reliable and sustainable manner as well as maintaining our disciplined approach to capital investment," Cazalot said.
Total segment income was $292 million in the first quarter of 2010, compared to $245 million in the first quarter of 2009.
Exploration and Production
Exploration and Production (E&P) segment income totaled $502 million in the first quarter of 2010, compared to $83 million in the first quarter of 2009. The increase was primarily a result of higher liquid hydrocarbon price realizations.
E&P sales volumes during the quarter averaged 361,000 barrels of oil equivalent per day (boepd), compared to 393,000 boepd for the same period last year. E&P production available for sale in the first quarter of 2010 averaged 364,000 boepd, in line with previous guidance, compared to 419,000 boepd in the same period last year. The decrease from the prior year was primarily the result of a planned turnaround in Equatorial Guinea, the sale of a portion of the Company’s Permian Basin assets in the second quarter of 2009 and normal production declines. The difference between production volumes available for sale and recorded sales volumes was due to the timing of international liftings, primarily in the U.K.
United States E&P reported income of $109 million for the first quarter of 2010, compared to a loss of $52 million in the first quarter of 2009. The increase is primarily related to a 98 percent increase in liquid hydrocarbon realizations. Partially offsetting the increase were lower liquid hydrocarbon sales volumes from the Gulf of Mexico due to normal production declines and lower natural gas and liquid hydrocarbon sales volumes realized due to the Permian Basin divestitures. Depreciation, depletion and amortization (DD&A) expense decreased approximately $35 million as a result of lower sales volumes.
International E&P income was $393 million in the first quarter of 2010, compared to $135 million in the first quarter of 2009. This increase in income is primarily related to an 80 percent increase in liquid hydrocarbon realizations and increased liquid hydrocarbon sales volumes from Europe. Partially offsetting the impact of realizations were increased exploration expenses.
In the North Dakota Bakken Shale play, the Company added approximately 14,000 net acres during the quarter, bringing its total acreage holdings to approximately 350,000 net acres. Marathon currently has four drilling rigs operating in the play, with plans to add a fifth during the second quarter. Current net production amounts to approximately 11,000 boepd, compared to 8,500 boepd at the end of the first quarter 2009.
The Company submitted apparent high bids totaling approximately $24 million for five blocks offered in the Central Gulf of Mexico Lease Sale No. 213 conducted by the Minerals Management Service during the first quarter. Four blocks were bid 100 percent by Marathon and one block was bid in conjunction with partners. The acreage will build on Marathon's strong positions in the Miocene and Lower Tertiary deepwater plays.
In the Gulf of Mexico, the Droshky development (Green Canyon Block 244, 100 percent working interest) remains on schedule for first production in mid-2010. The Company has completed all four of its development wells and is awaiting modification of the Bullwinkle platform. The Droshky project is currently expected to cost less than $1 billion, down from the original $1.3 billion budgeted expense.
Also in the Gulf of Mexico, Marathon began drilling the Flying Dutchman prospect (Green Canyon Block 511, 63 percent WI and operator) in December 2009 and expects to reach total depth in the second quarter. Marathon also commenced drilling the Innsbruck prospect (Mississippi Canyon Block 993, 85 percent WI and operator) in April and expects to reach total depth in the third quarter.
In Indonesia, Marathon expects to spud a deepwater exploration well in the Pasangkayu block (70 percent WI and operator) mid-year.
Marathon was awarded three additional onshore exploration licenses with shale gas potential in Poland during the first quarter of 2010, and another in April, bringing its total number of licenses to seven and increasing its total acreage position to approximately 1.4 million net acres. Marathon has a 100 percent interest and is operator of all seven blocks. As previously stated, the Company is pursuing additional licenses in Poland. Marathon plans to begin geologic studies in Poland during 2010 followed by the acquisition of 2D seismic in 2011.
A planned turnaround at Marathon's production facilities in Equatorial Guinea that began in the first quarter of 2010 was completed under budget and ahead of schedule in April.
Marathon estimates second quarter E&P production available for sale will be between 365,000 and 380,000 boepd, excluding the effect of any future acquisitions or dispositions. Anticipated full-year E&P production available for sale remains unchanged at between 390,000 and 410,000 boepd.
Oil Sands Mining
The Oil Sands Mining (OSM) segment reported a loss of $17 million for the first quarter of 2010, compared to a loss of $24 million in the first quarter of 2009. The smaller segment loss in the first quarter of 2010 was primarily related to higher realizations, with a 92 percent improvement in realizations compared to the first quarter of 2009. This was offset by lower volumes sold, primarily as a result of the planned Athabasca Oil Sands Project (AOSP) turnaround. In addition, Marathon incurred incremental costs of $30 million related to the turnaround that began in March 2010.
Included in segment results is the impact of crude oil derivative instruments, which amounted to a net pre-tax loss of $10 million in the first quarter of 2010 and a net pre-tax gain of $8 million in the first quarter of 2009. The first quarter 2010 loss consisted of an $8 million realized gain and an $18 million unrealized loss, while the first quarter 2009 gain consisted of a $12 million realized gain and a $4 million unrealized loss.
Marathon's first quarter 2010 net synthetic crude production (upgraded bitumen excluding blendstocks) from the AOSP mining operation was 21,000 bpd, compared to 26,000 bpd in the same quarter last year.
As a result of the turnaround, production was completely shut down in April with a staged start-up of operations commencing in May. The turnaround is expected to cost $85 million to $120 million net to Marathon, of which $30 million pre-tax was incurred during the first quarter. Marathon holds a 20 percent working interest in the AOSP.
The AOSP Expansion 1 project is on track and anticipated to begin operations in the second half of 2010, and upgrader operations in late 2010/early 2011. Expansion 1 includes construction of mining and extraction facilities at Jackpine mine, expansion of treatment facilities at the existing Muskeg River mine, expansion of the Scotford upgrader and development of related infrastructure. During the AOSP turnaround discussed above, Expansion 1 tie-ins and pipeline commissioning work will be performed to optimize the construction
Marathon expects second quarter net synthetic crude production (upgraded bitumen excluding blendstocks) will be between 10,000 and 15,000 bpd, with anticipated full-year net synthetic crude production unchanged at between 22,000 and 28,000 bpd.
Integrated Gas segment income was $44 million in the first quarter of 2010, compared to $27 million in the first quarter of 2009. Decreased spending on natural gas technology research was the primary reason for the increase in income. Despite a planned turnaround at the Equatorial Guinea gas production facilities, which significantly reduced natural gas volumes to the LNG and methanol facilities during the quarter, Marathon was able to take advantage of higher LNG and methanol prices through the sale of inventories in Equatorial Guinea.
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