Marathon Oil Reports 4Q06 Results
Marathon Oil Corporation (NYSE: MRO) reported fourth quarter 2006 net income of $1.079 billion, or $3.06 per diluted share. Net income in the fourth quarter of 2005 was $1.265 billion, or $3.43 per diluted share. For the fourth quarter of 2006, net income adjusted for special items was $838 million, or $2.38 per diluted share, compared to net income adjusted for special items of $1.329 billion, or $3.61 per diluted share, for the fourth quarter of 2005.
Marathon reported 2006 net income of $5.234 billion, or $14.50 per diluted share. Net income in 2005 was $3.032 billion, or $8.44 per diluted share. Marathon reported 2006 net income adjusted for special items of $4.636 billion, or $12.84 per diluted share, compared to net income adjusted for special items of $3.238 billion, or $9.02 per diluted share, for 2005.
Earnings Highlights* Quarter ended Year ended December 31 December 31 (Dollars in millions, except per diluted share data) 2006 2005 2006 2005 Net income adjusted for special items** $838 $1,329 $4,636 $3,238 Adjustments for special items (after tax): Gain (loss) on long-term U.K. natural gas contracts 139 (45) 232 (223) Deferred income taxes - tax legislation changes --- --- 21 15 - other adjustments 93 --- 93 --- Gain on dispositions 31 --- 274 --- Loss on early extinguishment of debt (22) --- (22) --- Cumulative effect of change in accounting principle --- (19) --- (19) Gain on sale of minority interests in Equatorial Guinea LNG Holdings Limited --- --- --- 21 Net income $1,079 $1,265 $5,234 $3,032 Net income adjusted for special items** - per diluted share $2.38 $3.61 $12.84 $9.02 Net income - per diluted share $3.06 $3.43 $14.50 $8.44 Revenues and other income $13,986 $17,215 $65,449 $63,345 Weighted average shares, in thousands - diluted 352,383 368,775 361,027 359,081 * Results are preliminary and unaudited. Marathon expects to issue its audited consolidated financial statements in March. ** See discussion of net income adjusted for special items noted below. Key Highlights Exploration and Production -- Increased 2006 sales volumes from continuing operations by 14 percent -- Announced seven exploration discoveries in Angola and Norway -- Realized 107 percent reserve replacement, exclusive of acquisitions and dispositions -- Established position in three key U.S. resource plays -- Progressed the Alvheim/Vilje development offshore Norway, first production expected second quarter 2007 -- Received Norwegian Government approval of Volund field plan for development and operation (PDO) -- Progressed the Neptune deepwater Gulf of Mexico development, first production expected by early 2008 -- Signed production sharing contract (PSC) for the Pasangkayu exploration block in Indonesia -- Realized substantial after-tax gain from sale of Russian businesses Refining, Marketing and Transportation -- Reached final investment decision on Garyville, La., refinery expansion project -- Achieved record refinery crude oil and total throughput for the year -- Formed ethanol joint venture (JV) and began construction of JV's first ethanol plant in Greenville, Ohio -- Awarded a front-end engineering and design (FEED) contract and launched a feasibility study for potential heavy oil upgrading projects at the Detroit and Catlettsburg, Ky., refineries, respectively -- Completed all Tier II low sulfur fuel projects required as of June 1, 2006, on time and under budget -- Continued to strengthen midstream business through strategic marine and terminal asset acquisitions -- Increased Speedway SuperAmerica's (SSA) same store gasoline and diesel sales volume 2.1 percent and merchandise sales 7.8 percent in 2006 -- Increased Marathon Brand gasoline and diesel sales volumes 5.8 percent in 2006 Integrated Gas -- Progressed Equatorial Guinea LNG Train 1 project, first shipment expected second quarter 2007 -- Awarded FEED contract for possible second LNG train in Equatorial Guinea Corporate -- Achieved 2006 top quartile total shareholder return of 55 percent -- Raised quarterly dividend rate 21 percent -- Repurchased approximately 21 million common shares at a cost of $1.7 billion in 2006 -- Maintained financial flexibility and achieved a cash-adjusted debt to total capital ratio of approximately 6 percent as of year-end -- Issued request for proposals (RFP) for potential Canadian oil sands venture -- Achieved dramatic second year results in Bioko Island Malaria Control Project (BIMCP)
"Our vision, business model and strategy established five years ago have served as the foundation for Marathon's continued success throughout 2006," said Clarence P. Cazalot, Jr., Marathon president and CEO. "Marathon's strong performance has been the result of dedicated employees throughout the Company who performed their jobs in a manner consistent with our corporate values. Through these efforts during 2006, we grew our upstream production, realized continued exploration success, achieved record refinery throughputs and continued to advance all of our major projects, including the significant Equatorial Guinea LNG Train 1 project.
"Marathon is poised to continue our success with a robust $4.2 billion capital, investment and exploration budget for 2007. In addition to the major projects now under construction, this budget includes funds for the 180,000 barrel per day Garyville refinery expansion, a 110 million gallon per year ethanol facility in Greenville, Ohio, a continued strong exploration program and the front-end engineering and design process for the potential Equatorial Guinea LNG Train 2 facility. During the three year period 2005 through 2007, Marathon will have invested over $15 billion, enabling us to meet the energy needs of our customers while also realizing continued profitable growth across all our business segments."
Effective January 1, 2006, Marathon revised its measure of segment income to reflect the effects of minority interests and income taxes related to the segments. In addition, the results of activities primarily associated with the marketing of the Company's equity natural gas production, which had been presented as part of the Integrated Gas segment prior to 2006, are now included in the Exploration and Production segment. Segment information for all periods presented in this release reflects these changes.
Total segment income was $833 million in the fourth quarter of 2006 and $4.814 billion for the full-year 2006 compared with $1.452 billion and $3.570 billion in the same periods of 2005.
Quarter ended Year ended December 31 December 31 (Dollars in millions) 2006 2005 2006 2005 Segment Income (Loss) Exploration and Production: United States $167 $301 $873 $983 International 140 375 1,130 904 Total E&P 307 676 2,003 1,887 Refining, Marketing and Transportation 533 765 2,795 1,628 Integrated Gas (7) 11 16 55 Segment Income*** $833 $1,452 $4,814 $3,570 *** See Preliminary Supplemental Statistics noted below for a reconciliation of segment income to net income as reported under generally accepted accounting principles.
Exploration and Production
Upstream segment income totaled $307 million in the fourth quarter of 2006 compared to $676 million in the same period of 2005. The decrease was primarily due to lower natural gas sales prices and volumes, and higher exploration expenses and income taxes, partially offset by higher liquid hydrocarbon sales volumes and prices.
For the year, upstream segment income totaled $2.003 billion compared to $1.887 billion for 2005. This increase was primarily due to higher liquid hydrocarbon sales volumes and prices, partially offset by higher income taxes, operating costs and exploration expenses and decreases in natural gas sales volumes.
Reported sales volumes for the fourth quarter of 2006 averaged 357,000 barrels of oil equivalent per day (boepd) and production available for sale averaged 363,000 boepd. The difference between the sales volume and production available for sale was primarily a result of the Company producing, and injecting into storage, natural gas contracted for future sale in Ireland. Reported sales volumes from continuing operations averaged 365,000 boepd for 2006, representing growth of 14 percent over 2005. Production available for sale from continuing operations for 2006 also averaged 365,000 boepd. The largest sales volume increase in both periods was in Libya, where first crude oil sales occurred in the first quarter of 2006.
United States upstream income was $167 million in the fourth quarter of 2006 compared to $301 million in the same period of 2005. This decline was primarily a result of lower natural gas sales prices and volumes. United States upstream income was $873 million for the year compared to $983 million in 2005. This decline was primarily a result of lower natural gas sales prices and volumes, higher operating costs and exploration expenses, partially offset by higher liquid hydrocarbon sales prices.
International upstream income was $140 million in the fourth quarter of 2006 compared to $375 million in the same period of 2005. On a pre-tax basis, international upstream income increased $58 million as a result of higher liquid hydrocarbon sales volumes and prices, primarily due to the resumption of production in Libya, partially offset by lower natural gas sales volumes and prices and higher exploration expenses. Exploration expenses for the fourth quarter of 2006 included $47 million for exiting the Cortland and Empire leases in Nova Scotia. This increase in pre-tax income was more than offset by a $293 million increase in income taxes for the quarter, primarily in Libya and the United Kingdom. International upstream income was $1.130 billion for the year, compared to $904 million in 2005. This increase was primarily a result of higher liquid hydrocarbon sales volumes due to the resumption of production in Libya and higher liquid hydrocarbon prices. The increase for the year was substantially offset by higher income taxes and exploration expenses.
Quarter ended Year ended December 31 December 31 2006 2005 2006 2005 Key Production Statistics Net Sales: United States - Liquids (mbpd) 74 78 76 76 United States - Gas (mmcfpd) 522 599 532 578 International - Liquids (mbpd) 138 116 147 88 International - Gas (mmcfpd) 352 406 315 354 Net Sales from Continuing Operations (mboepd) 357 362 365 319 Discontinued Operations (mboepd) - 30 12 27 Total Net Sales (mboepd) 357 392 377 346
In an effort to deliver profitable growth opportunities, Marathon continues to expand its resource base through successful exploration as well as selective acquisitions. These efforts have created a well defined portfolio of development opportunities which are expected to yield a compound average production growth rate of six to nine percent through 2010. Production available for sale in 2007 is expected to range between 390,000 and 425,000 boepd. During 2006, the Company added net proved reserves of 143 million barrels of oil equivalent (boe), excluding 45 million boe of dispositions and three million boe of acquisitions, while producing 134 million boe during the year, resulting in a reserve replacement of 107 percent. Including acquisitions, reserve replacement was 109 percent.
Key acreage acquisitions during 2006 include an extensive leasehold position in the Bakken Shale of North Dakota and Montana, the Piceance Basin of Western Colorado and the Barnett Shale in North Central Texas. These new U.S. resource plays expose Marathon to potential net resources of approximately 285 million boe.
Key among Marathon's major upstream future production drivers are the Company's Alvheim/Vilje development on the Norwegian Continental Shelf, gas production from the Alba field offshore Equatorial Guinea which will supply the Equatorial Guinea LNG Train 1 facility, and the Neptune development in the Gulf of Mexico.
Construction on the Alvheim/Vilje project is nearly complete and commissioning has commenced. Lower productivity in electrical and instrumentation activity delayed the start of commissioning by approximately one month. First production from the Alvheim/Vilje development is now expected during the second quarter of 2007. Nevertheless, this project remains on an industry leading completion schedule, moving from discovery to first production in four years. Four wells will be available at first production and drilling activities will continue into 2008. A peak net rate of approximately 75,000 boepd is expected in early 2008.
Approval was received from the Norwegian Ministry of Petroleum and Energy for the Volund plan for development and operation (PDO). Volund, which is located near the Alvheim complex, will be tied back to the Alvheim floating production, storage and offloading (FPSO) vessel. First production is expected in the second quarter of 2009.
Development of Neptune continues to progress. The project is 63 percent complete and on target for first production by early 2008.
Marathon's production growth opportunities include seven discoveries announced during 2006 in Norway and Angola. In the fourth quarter, Marathon participated in the Salsa discovery in deepwater Angola Block 32 and the Terra discovery in deepwater Angola Block 31. Additional drilling is required to determine the commerciality of these two discoveries. In addition, Marathon has participated in five wells that have reached total depth in deepwater Angola. More details will be announced upon government and partner approvals.
In June 2006, Marathon was awarded a 70 percent interest and operatorship in the Pasangkayu Block offshore Indonesia as part of that country's 2005 regular tender round. Current exploration plans call for the collection of geophysical data during 2007, followed by drilling during 2008 and 2009.
In the fourth quarter, Marathon sold 90 percent of its interest in the Ash Shaer and Cherrife natural gas fields in Syria for an after-tax gain of $31 million. The Company expects to sell the remaining 10 percent interest in 2007. Also in 2006, Marathon completed the sale of its Russian oil exploration and production businesses for $787 million, plus preliminary working capital and other closing adjustments of approximately $56 million, for a total transaction value of $843 million and an after-tax gain of $243 million.
Refining, Marketing and Transportation
Downstream segment income was $533 million in the fourth quarter of 2006 and $2.795 billion for the year compared to segment income of $765 million and $1.628 billion in the comparable periods of 2005. Segment income for the full year of 2006 benefited from Marathon's June 30, 2005, acquisition of the 38 percent minority interest in the downstream operations.
The key driver of the changes in quarterly and full-year segment income was the Company's refining and wholesale marketing gross margin, which averaged 17.07 cents per gallon in the fourth quarter of 2006 compared to 21.84 cents in the same quarter of 2005 and averaged 22.88 cents per gallon for 2006 compared to 15.82 cents per gallon in 2005. These gross margin changes were consistent with the changes in the relevant market indicators (crack spreads) for the Midwest and Gulf Coast markets. Narrower sweet/sour crude differentials in the fourth quarter of 2006 also contributed to declining margins in that period. The increase in the refining and wholesale marketing gross margin for the year reflected wider crack spreads, improved refined product sales realizations, the favorable effects of the Company's ethanol blending program and increased refinery throughputs.
While derivative effects in the fourth quarter of 2006 did not differ significantly from the same period in 2005, the Company's full-year refining and wholesale marketing gross margins included a pre-tax gain of $400 million in 2006 and a pre-tax loss of $238 million in 2005 related to derivatives utilized primarily to manage price risk. These derivative gains and losses are largely offset by gains and losses on the physical commodity transactions related to these derivative positions.
Crude oil refined during the fourth quarter of 2006 averaged 952,000 barrels per day (bpd), down slightly from the record throughput achieved in the fourth quarter of 2005. This decrease was due to production levels being maximized in late 2005 to replenish refined product supplies depleted by the effects of Hurricanes Katrina and Rita. Crude oil refined for the year 2006 averaged a record 980,000 bpd, 7,000 bpd higher than 2005. Total refinery throughputs averaged a record 1,214,000 bpd for the year 2006, three percent higher than the 1,178,000 bpd for 2005. This record throughput was primarily a result of the expansion of the Detroit refinery from 74,000 to 100,000 bpd, which was completed during the fourth quarter of 2005.
SSA's gasoline and distillate gross margin averaged 11.21 cents per gallon during the fourth quarter of 2006, down from the 14.00 cents per gallon realized in the fourth quarter of 2005, and averaged 11.56 cents per gallon for the full-year 2006, down from the 12.30 cents per gallon realized in 2005. SSA's same store merchandise sales increased 5.9 percent during the fourth quarter and 7.8 percent for the full-year 2006.
In the fourth quarter, Marathon reached a final investment decision for the projected $3.2 billion Garyville refinery expansion project which will increase the refinery's 245,000 bpd capacity by 180,000 bpd. In addition, the Louisiana Department of Environmental Quality has recently approved the air permit for the expansion project. When completed in late 2009, this expansion will enable the refinery to provide an additional 7.5 million gallons of clean transportation fuels to the market each day.
Also in the fourth quarter, Marathon announced that it had awarded a FEED contract for a potential heavy oil upgrading project at the Company's 100,000 bpd Detroit refinery, and that it is undertaking a feasibility study for a similar upgrading project at the Company's 222,000 bpd Catlettsburg refinery.
In 2006, Marathon and its partner announced that the companies signed a definitive agreement forming a 50/50 joint venture, which will construct one or more ethanol plants. In the fourth quarter, the companies selected the venture's initial plant site, Greenville, Ohio, and groundbreaking and construction have commenced on a 110 million gallon per year ethanol facility. The facility is expected to be operational as soon as the first quarter of 2008.
To increase the Company's marine transportation flexibility in supplying fuel, crude oil and other petroleum products, Marathon acquired five towboats and 10 heater barges during the fourth quarter. Also in 2006, the Company acquired refined products terminals in Hartford, Ill., and Clermont, Ind., to improve its ability to serve these markets.
The Integrated Gas segment reported a loss of $7 million in the fourth quarter of 2006 and income of $16 million for the year 2006 compared to income of $11 million and $55 million in the comparable periods of 2005. In the fourth quarter of 2006, a $17 million pre-tax loss was recognized as a result of the renegotiation of a technology agreement with Syntroleum Corporation. Also contributing to the full-year decline was a reduction in income from the Company's equity method investment in Atlantic Methanol Production Company LLC (AMPCO) due to a planned turnaround and compressor repair.
The Equatorial Guinea LNG Train 1 project continued to progress during 2006. As of the end of the fourth quarter, construction of the project was nearly complete and commissioning has commenced. First LNG shipments are projected to begin in the second quarter of 2007. In 2006, Marathon and its project partners awarded a FEED contract for initial work related to a potential second LNG train on Bioko Island, Equatorial Guinea. The FEED work is expected to be completed by the end of the first quarter of 2007. The scope of the FEED work for the potential 4.4 million metric tonnes per annum (mmtpa) Train 2 LNG project includes feed gas metering, liquefaction, refrigeration, ethylene storage, boil off gas compression, product transfer to storage and LNG product metering. A final investment decision is expected in early 2008.
In 2006, Marathon's Board of Directors approved an increase in the Company's quarterly dividend for the third time in three years for a total increase of 74 percent. In January 2006, Marathon announced a $2 billion share repurchase program. As of December 31, 2006, the Company has repurchased approximately 21 million of its common shares, or six percent of outstanding shares at December 31, 2005, at a cost of $1.7 billion. Recently, the Company's Board of Directors authorized a $500 million increase in the share repurchase program. Marathon currently anticipates completing share repurchases under the initial $2 billion program in February 2007, with the additional $500 million in share repurchases projected to be completed during the first half of 2007. This program may be changed based on the Company's financial condition or changes in market conditions and is subject to termination prior to completion.
In the fourth quarter, Marathon issued a request for proposals (RFP) to engage interested parties in a process that could lead to a Canadian oil sands venture. The RFP process is intended to explore various commercial arrangements under which Marathon would provide heavy Canadian oil sands crude oil processing capacity in exchange for an equity interest in a Canadian oil sands project through a joint venture, or other alternative business arrangements.
Marathon and its project partners have achieved dramatic results during the second year of the five-year, $12.8 million Bioko Island Malaria Control Project (BIMCP) in Equatorial Guinea. Year two results included a 95 percent reduction in malaria transmitting mosquitoes and a 44 percent reduction in the presence of malaria parasites in children. These results further demonstrate that the BIMCP is steadily eradicating the transmission of a disease that poses the most significant health threat to the citizens of Equatorial Guinea.
Marathon has two long-term natural gas sales contracts in the United Kingdom that are accounted for as derivative instruments. Mark-to-market changes in the valuation of these contracts must be recognized in current period income. The non-cash after-tax mark-to-market gains on these two long-term natural gas sales contracts related to Marathon's Brae natural gas production totaled $139 million in the fourth quarter of 2006 and $232 million for the year. Due to the volatility in the fair value of these contracts, Marathon excludes these non-cash gains and losses from "net income adjusted for special items."
During the fourth quarter of 2006, Marathon recorded a deferred income tax benefit of $93 million related to cumulative income tax basis differences associated with prior period transactions. This benefit was excluded from "net income adjusted for special items."
In the fourth quarter of 2006, Marathon sold 90 percent of its interest in natural gas fields in Syria. The $31 million after-tax gain on this disposition has been excluded from "net income adjusted for special items."
Also in the fourth quarter of 2006, Marathon extinguished a portion of its outstanding debt at a premium, and recognized a $22 million after-tax loss. This loss has been excluded from "net income adjusted for special items."
Other special items excluded from full-year 2006 "net income adjusted for special items" were the gain on the disposition of the Company's Russian oil exploration and production businesses and the impact of a U.K tax legislation change. These special items were discussed in the quarters in which they occurred.
Operates 4 Offshore Rigs
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