Marathon's 2Q Profits Down, Production Up by 12% Year-Over-Year
Marathon Oil reported second quarter 2009 net income of $413 million, or $0.58 per diluted share. Net income in the second quarter 2008 was $774 million, or $1.08 per diluted share. For the second quarter 2009, adjusted net income was $251 million, or $0.35 per diluted share, compared to adjusted net income of $858 million, or $1.20 per diluted share, for the second quarter of 2008.
"Marathon's businesses performed very well in the second quarter. Our Exploration and Production segment achieved a 12 percent year-over-year increase in production available for sale from continuing operations while our Refining, Marketing and Transportation segment out-performed its competitors in the domestic market posting positive financial results, up slightly from both first quarter and prior year," said Clarence P. Cazalot, Jr., president and CEO of Marathon. "A continued focus on high mechanical reliability and cost control contributed to our overall solid operating performance. And, in spite of challenging global economic conditions, Marathon continues to maintain a very solid financial position, aided by the value captured from selective asset sales."
Total segment income was $400 million in the second quarter of 2009, compared to $925 million in the second quarter of 2008.
Exploration and Production
Exploration and Production (E&P) segment income totaled $220 million in the second quarter of 2009, compared to $822 million in the second quarter of 2008. The decrease was primarily a result of lower liquid hydrocarbon and natural gas price realizations.
Sales volumes from continuing operations increased 26 percent year on year, averaging 436,000 barrels of oil equivalent per day (boepd), compared to 347,000 boepd for the same period last year. While the increase in sales volumes is primarily due to the timing of international liftings, production available for sale from continuing operations in the quarter was up 12 percent to 411,000 boepd from the same quarter in 2008. Production increased with the addition of the Alvheim/Vilje development offshore Norway, which started operation in June 2008, and with increased natural gas sales volumes in Equatorial Guinea due to exceptional reliability at the LNG and methanol facilities on Bioko Island which purchase natural gas from the Company's Alba field, partially offset by lower United States natural gas production as investment activities have been curtailed due to lower natural gas prices.
International E&P income was $261 million in the second quarter of 2009, compared to $463 million in the second quarter of 2008. The decrease was primarily a result of lower liquid hydrocarbon price realizations in the second quarter 2009, partially offset by increased income from the Alvheim/Vilje development and improved operating reliability across the business, highlighted by operations at the Equatorial Guinea natural gas producing and processing facilities where reliability was 97.5 percent for the quarter. Additionally for the quarter, international E&P saw a 17 percent decline in per barrel operating costs [excluding depreciation, depletion and amortization (DD&A) and exploration expense], as costs fell to $6.22 per boe in the second quarter 2009 from $7.46 per boe in the comparable quarter of 2008 through stronger volume performance and increased focus on cost reduction initiatives. Lower exploration expenses also had a positive impact on results. The change in mix of product sales year-over-year included higher sales in jurisdictions with high tax rates. This change contributed to the higher segment effective tax rate for the quarter.
U.S. E&P reported a loss of $41 million in the second quarter of 2009, compared to income of $359 million in the second quarter of 2008, as revenues decreased by 60 percent, primarily the result of 52 percent lower liquid hydrocarbon and 58 percent lower natural gas price realizations. DD&A increased to $271 million during the second quarter 2009, up $100 million from the same period last year. The Neptune development, which started operation in July 2008, added $90 million of DD&A over the second quarter of 2008. Also contributing to the loss were pretax expenses totaling $28 million ($17 million after tax) recognized in the second quarter of 2009, primarily for partial impairment of a natural gas field in east Texas, as well as a rig cancellation in the Bakken and a loss on a sale. Pretax expenses during the first six months of 2009 from rig cancellations totaled $24 million, and the Company does not anticipate any additional cancellations for the remainder of the year. As a result of a capital expenditure program with more emphasis on oil projects, U.S. E&P reported a year-over-year increase in liquid hydrocarbon production volumes of approximately 1,000 barrels per day (bpd) for the second quarter and over 2,000 bpd for the first half of 2009.
Marathon's Alvheim/Vilje development in Norway completed a planned 12-day turn-around in the second quarter of 2009, and still achieved strong operational performance for the quarter, with production available for sale averaging 69,800 net boepd [64,300 net bpd of liquid hydrocarbons and 32.6 million net cubic feet per day (mmcfpd) of natural gas]. Also in Norway, the Volund development is on schedule to be operationally ready for production in the fourth quarter of 2009. Importantly, due to better than expected production from the Alvheim field, the Volund start-up is not expected until the first half of 2010, subject to available processing capacity on the Alvheim floating, production, storage and offloading vessel. Marathon has 65 percent operated interests in Alvheim and Volund and a 47 percent outside-operated interest in Vilje.
The Company announced the Oberon discovery on Angola Block 31. Also in Angola, the PSVM development, located in the northeast sector of the block, is proceeding with first production targeted in 2012. In July 2009, Marathon entered into a definitive agreement to sell an undivided 20 percent participating interest in the Production Sharing Contract and Joint Operating Agreement in Angola Block 32. See the Corporate section below for further discussion of this transaction.
Marathon was awarded a 49 percent interest and will serve as operator in the Kumawa Block offshore Indonesia, which is Marathon's third Indonesian offshore exploration block. The Kumawa Block encompasses 1.24 million acres in a high-potential, under-explored area.
In the Gulf of Mexico, Marathon has completed drilling all four development wells on its Droshky project, located on Green Canyon Block 244, and well completions are underway. First production is targeted for 2010.
Oil Sands Mining
Oil Sands Mining (OSM) segment income was $2 million for the second quarter of 2009 compared to a loss of $157 million in the second quarter of 2008 that included a $250 million after-tax loss on derivative instruments. Excluding the derivative impact, income was adversely impacted by a 53 percent decrease in average realizations, partially offset by lower blendstock and energy costs.
Marathon's second quarter 2009 net bitumen production from the Athabasca Oil Sands Project (AOSP) mining operation was 26,000 bpd, compared to 24,000 bpd in the same quarter of last year.
The AOSP Phase 1 expansion is on track and is anticipated to begin operations in the 2010/2011 timeframe. The Phase 1 expansion includes construction of mining and extraction facilities at the Jackpine mine, expansion of treatment facilities at the existing Muskeg River mine, expansion of the Scotford upgrader and development of related infrastructure.
In the second quarter, the operator of AOSP offered three additional leases to the joint venture partners as a life-of-mine extension for the Muskeg River mine. Terms of the transaction were as agreed in the original 1999 AOSP Joint Venture Agreement. Marathon elected to participate in these leases and was able to reclassify approximately 190 million net barrels of contingent resource. Net proved bitumen reserves increased approximately 168 million barrels and net probable bitumen reserves increased 22 million barrels. These additional reserve barrels resulted in reducing Marathon's OSM DD&A rate per barrel by approximately 40 percent, starting in June 2009.
Also during the second quarter, the Alberta Government announced its decision to consider AOSP's Quest carbon capture and storage (CCS) project, involving the Scotford base and Phase 1 expansion upgraders, for possible government funding. The AOSP partners are currently working with the government on a letter of intent, after which a funding agreement will be negotiated. A final investment decision on the Quest project will be made at a later date, pending agreement on funding details with the Government of Alberta, regulatory approvals, stakeholder engagement, as well as final joint venture partner agreement.
Marathon has certain deferred income tax balances denominated in foreign currencies. Fluctuations in currency exchange rates cause the U.S. dollar value of these deferred tax balances to change with the related currency gains and losses reflected within the provision for income taxes. For the second quarter of 2009, Marathon's provision for income taxes included a $94 million foreign currency remeasurement loss related to its deferred income tax balances, primarily in Canada, compared to a $16 million foreign currency remeasurement loss in the same period of 2008.
Marathon expects the overall corporate effective income tax rate on adjusted pretax income to be between 54 and 59 percent for the full year 2009, excluding the effect of foreign currency remeasurement of deferred tax balances. For the second quarter 2009, the effective income tax rate on adjusted pretax income was 59 percent, which excluded the foreign currency remeasurement loss described above.
At June 30, 2009, Marathon's main sources of short-term liquidity amounted to approximately $4.5 billion, comprised of approximately $1.5 billion of cash equivalents and its full capacity under its $3 billion committed revolving credit facility.
Since launching its asset review and divestiture program in March 2008, Marathon's announced asset sales amount to approximately $3.2 billion in transaction values. These strategic divestitures have included the recently announced sale of an undivided 20 percent participating interest in Angola Block 32, all of Marathon's holdings in Ireland, interests in the Heimdal area offshore Norway, interests in the Permian Basin in Texas and New Mexico, the Company's ownership interest in Pilot Travel Centers, as well as other smaller transactions. Marathon continues to evaluate its portfolio of assets.
In July 2009, Marathon entered into a definitive agreement to sell an undivided 20 percent participating interest in the Production Sharing Contract and Joint Operating Agreement in Angola Block 32 to CNOOC International Limited and Sinopec International Petroleum Exploration and Production Corporation. The transaction has a total value of $1.3 billion, excluding any purchase price adjustments at closing, with an effective date of Jan. 1, 2009. The companies expect to close the transaction by year-end 2009, subject to Government and regulatory approvals. Marathon will retain a 10 percent working interest in Block 32.
Marathon has exited its Irish businesses and as a result, the activities of those businesses have been presented as discontinued operations and excluded from E&P segment income for all periods presented. The sale of Marathon International Petroleum Hibernia Limited, which included an 18.5 percent interest in the Corrib natural gas development, was completed in late July 2009. The transaction with Vermilion Energy Trust has an effective date of Jan. 1, 2009. The final transaction value will range between $235 million and $400 million, subject to the timing of first commercial gas at Corrib. An initial payment of $100 million plus working capital adjustments was received at closing in late July, with the remaining balance due at the time of first commercial gas. In April 2009, Marathon completed the sale of its wholly owned subsidiary, Marathon Oil Ireland Limited to PSE Ireland Limited, a subsidiary of Petroliam Nasional Berhad (Petronas). The transaction had a total value of $180 million with an effective date of Dec. 31, 2007.
In June 2009, Marathon completed the sale of its operated and a portion of its outside-operated assets in the Permian Basin of New Mexico and West Texas. The transactions had a total value of $301 million, with an effective date of Jan. 1, 2009.
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