OilVoice - Marathon Reports Fourth Quarter and Full Year 2009 Results

Marathon Reports Fourth Quarter and Full Year 2009 Results

Wednesday, February 03, 2010

Marathon Oil Corporation has reported fourth quarter 2009 net income of $355 million, or $0.50 per diluted share. In the fourth quarter of 2008 the Company reported a net loss of $41 million, or $0.06 per diluted share. For the fourth quarter of 2009, net income adjusted for special items was $229 million, or $0.32 per diluted share, compared to net income adjusted for special items of $1.025 billion, or $1.44 per diluted share, for the fourth quarter of 2008.

Both net income and adjusted net income for the fourth quarter of 2009 include a $139 million increase to the provision for income tax due to a foreign currency remeasurement loss related to income tax balances denominated in foreign currencies, primarily in Canada. The fourth quarter 2008 provision for income tax was reduced by $138 million related to the foreign currency remeasurement gains. Fluctuations in currency exchange rates cause changes in the U.S. dollar value of deferred tax balances denominated in foreign currencies.

Marathon reported full year 2009 net income of $1.463 billion, or $2.06 per diluted share. Net income in 2008 was $3.528 billion, or $4.95 per diluted share. Marathon reported 2009 net income adjusted for special items of $1.156 billion, or $1.63 per diluted share, compared to net income adjusted for special items of $4.613 billion, or $6.47 per diluted share for 2008.

'In the face of one of the most challenging economic environments in decades, Marathon successfully executed a substantial capital investment program designed to focus on profitable growth, while maintaining a solid balance sheet and strong financial position, ending 2009 with an estimated 23 percent net debt-tocapital ratio,' said Clarence P. Cazalot, Jr., Marathon president and CEO. 'We also operated our assets with a high degree of reliability and cost control to maximize profitability, completed both the Volund project in Norway and the Garyville Major Expansion, and advanced other long-term, value-accretive projects toward start-up. These achievements have the Company well positioned to benefit from the ongoing global economic recovery and higher overall demand for our products.'

Full Year Key Highlights

Achieved continued production growth
• Increased 2009 average Exploration & Production (E&P) production available for sale to 405,000 barrels of oil equivalent per day (boepd), excluding Gabon and Ireland, an increase of 9 percent over 2008
• Achieved bitumen production of 26,000 barrels per day from the Athabasca Oil Sands Project (AOSP) in Canada and progressed Expansion 1 toward a second half 2010 start up
• Continued Bakken Shale production ramp-up, reaching a year-end rate over 11,000 net boepd
• Achieved first oil from the Volund field in Norway ahead of schedule
• Progressed Droshky development in the Gulf of Mexico - currently on schedule and under budget
• Added net proved reserves of 674 million barrels of oil equivalent (mmboe), excluding dispositions, of which 603 million barrels are proved synthetic crude reserves in Canada

Positioned for future opportunities
• Announced Shenandoah deepwater discovery and leased 16 new blocks in the Gulf of Mexico
• Announced the Marihone discovery south of the Volund and Alvheim fields offshore Norway
• Announced Leda, Oberon and Tebe deepwater discoveries in Angola
• Added three onshore exploration licenses in Poland with shale gas potential (including one added in January 2010)
• Added three additional leases in the AOSP area in Canada

High operational reliability at operated facilities
• Achieved operational availability of better than 95 percent at the Equatorial Guinea liquefied natural gas (LNG) facility during 2009
• Realized exceptional utilization of the Alvheim floating production, storage and offloading (FPSO) vessel, with a record average monthly production rate of 90,000 net boepd in October 2009
• Achieved Downstream's best overall refinery mechanical availability over the past six years

Improving scale efficiencies and feedstock flexibility in the Downstream
• Completed Garyville Major Expansion project and began full integration with the base refinery
• Progressed construction of Detroit Heavy Oil Upgrading Project, which is 30 percent complete

Growing retail marketing
• Increased Speedway SuperAmerica LLC same store gasoline sales volumes and merchandise sales 1.1 and 11.4 percent respectively, compared to 2008
• Speedway® named best gasoline brand in the nation in its category, 2009 EquiTrend® Brand Study

Divestiture program
• Completed asset divestiture program, generating $3.5 billion in total transaction values since March 2008

Segment Results
Total segment income was $499 million in the fourth quarter of 2009 and $1.819 billion for the full year 2009, compared with $701 million and $4.295 billion in the same periods of 2008.

Exploration and Production
E&P segment income totaled $439 million in the fourth quarter of 2009 compared to $240 million in the fourth quarter of 2008, with 2009 benefiting from higher liquid hydrocarbon realizations and sales volumes plus operating cost reductions, which were partially offset by lower natural gas realizations and sales volumes. For the year 2009, E&P segment income was $1.221 billion, compared to $2.556 billion for 2008. The year-overyear decrease was primarily a result of lower liquid hydrocarbon and natural gas realizations, partially offset by higher liquid hydrocarbon volumes.

As the Company continued to focus on controlling costs, E&P reduced operating costs per barrel of oil equivalent (BOE), excluding production taxes and depreciation, depletion and amortization (DD&A), by 26 percent and 15 percent for the fourth quarter and full year 2009 respectively compared to the same periods of 2008.

E&P sales volumes averaged 413,000 boepd for the fourth quarter of 2009, compared to 402,000 boepd for fourth quarter 2008, both periods exclude Gabon and Ireland. For the full year 2009, sales volumes averaged 400,000 boepd, an 8 percent increase over the 369,000 boepd in 2008, both periods exclude Gabon and Ireland. Full-year liquid hydrocarbon sales volumes benefited from a full year of production from the Alvheim development offshore Norway, versus a half year of Alvheim production in 2008, and increasing production in the Bakken fields in North Dakota.

Production available for sale averaged 403,000 boepd for the fourth quarter of 2009 and 405,000 boepd for the year, compared to 388,000 boepd and 371,000 boepd respectively for the same periods in 2008, all periods exclude Gabon and Ireland. This represented increases of 4 and 9 percent respectively. Production available for sale differs from average sales primarily due to the timing of international liquid hydrocarbon liftings and natural gas sales.

Marathon estimates 2010 E&P production available for sale will be between 390,000 and 410,000 boepd, excluding the effect of any future acquisitions or dispositions.

U.S. E&P reported income of $116 million in the fourth quarter of 2009, compared to a loss of $19 million in the same period of 2008. The income increase was primarily related to higher liquid hydrocarbon realizations and lower operating expenses, largely due to the absence of rig cancellation fees. This increase was partially offset by lower sales volumes from Alaska and the Permian Basin, primarily due to the Permian divestitures in the second quarter of 2009. U.S. E&P income was $55 million for the full year 2009, compared to $869 million in 2008. The majority of the income decrease for the full year was due to liquid hydrocarbon and natural gas realizations averaging almost 40 percent lower than in 2008, as well as lower natural gas sales volumes and higher DD&A, partially offset by lower operating costs and exploration expenses. Exploration expenses were $153 million for the year 2009, compared to $238 million for 2008, reflecting decreased geological and geophysical spending and lower exploration dry well expense.

International E&P income was $323 million in the fourth quarter of 2009 compared to $259 million in the same period of 2008, with 2009 benefiting from higher liquid hydrocarbon realizations and sales volumes. Liquid hydrocarbon sales volumes were 9 percent higher primarily due to improved operating reliability at the Alvheim FPSO in Norway. Natural gas sales volumes were 14 percent higher due to increased reliability at the Equatorial Guinea LNG complex. The increase in Equatorial Guinea natural gas sales contributed to the decline in the average natural gas realizations for the quarter and for the year. International E&P income was $1.166 billion for the year, compared to $1.687 billion in 2008. The majority of the income decrease is tied to lower liquid hydrocarbon and natural gas realizations and overall higher DD&A primarily associated with a full year of Alvheim production, partially offset by improved sales volumes from Norway and Equatorial Guinea. Additionally, operating costs and exploration expenses were lower. Exploration expenses were $154 million for the full year 2009, compared to $251 million for 2008, reflecting lower dry well expense and decreased geological and geophysical spending.

In the North Dakota Bakken Shale play, the Company continues to achieve best-in-class drilling and completion performance, and improved drilling time and well costs. Marathon increased its year-over-year Bakken production by nearly 40 percent, with a December 2009 production rate of over 11,000 net boepd, compared to approximately 8,000 boepd at the end of 2008.

As part of the Company's targeted expansion into key resource plays, Marathon drilled its first four wells in the Marcellus Shale play in West Virginia, and spud its first well in the Haynesville Shale play in Texas during the fourth quarter of 2009. The Company plans to complete these wells during 2010.

In the Gulf of Mexico, the Droshky development (Green Canyon Block 244, 100 percent WI) remains under budget and on schedule for first production in mid-2010. After finishing all drilling operations in July 2009, the Company had completed three of the four Droshky development wells at the end of January 2010. The project is currently expected to cost less than $1 billion compared to the original $1.3 billion budget.

Also in the Gulf, Marathon was awarded an additional 16 deepwater blocks and announced a deepwater discovery on the Shenandoah prospect (Walker Ridge Block 52, 10 percent WI) in 2009. The Company is currently drilling an exploration well on the operated Flying Dutchman prospect (Green Canyon Block 511, 63 percent WI).

In Norway, first production was achieved in September 2009 from the Volund development, which will produce through the Alvheim FPSO. Due to the sustained performance of the Alvheim fields, the first Volund well continues to be available as a swing producer at this time. The FPSO achieved strong reliability throughout the year, reaching a record average monthly production rate of 90,000 net boepd in October 2009. Also, in October 2009, Marathon and its partners announced the Marihone discovery, the first of several prospects near the FPSO with tieback potential. Marathon has a 65 percent working interest in Alvheim, Volund and Marihone. Additionally, in January 2010, the Company was offered three new licenses in the area south of Alvheim.

In Angola, Marathon announced the deepwater Leda, Oberon and Tebe discoveries in 2009.

In late January 2010, Marathon was awarded a third exploration license in Poland with shale gas potential, the 269,000-acre Brodnica Block. The Brodnica Block in north-central Poland borders the 296,000-acre Kwidzyn Block awarded to the Company in October 2009. Also, in December 2009, Marathon was awarded the 249,000-acre Orzechow Block in southern Poland. The Company holds a 100 percent interest and operatorship in all three blocks with a combined 814,000 acres.

Oil Sands Mining
The Oil Sands Mining segment reported income of $41 million for the fourth quarter of 2009 and $44 million for the full year, compared to income of $100 million and $258 million respectively for the same periods in 2008. Results for 2008 included after-tax gains on crude oil derivative instruments of $128 million in the fourth quarter and $32 million for the full year, while the impact of derivatives on the 2009 periods was not significant. Those derivative instruments expired December 2009. Exclusive of the derivative impact, fourth quarter 2009 income reflects an increase of nearly $20 per barrel in synthetic crude oil realizations, higher sales volumes and lower DD&A, somewhat offset by increased costs of blendstocks. The majority of the decrease in income for 2009 was due to synthetic crude oil realizations averaging almost 40 percent lower than in 2008, partially offset by lower blendstock and energy costs.

Marathon's fourth quarter 2009 net bitumen production from the AOSP mining operation was 26,000 barrels per day (bpd), consistent with the same period of 2008. Bitumen production for full-year 2009 was 26,000 bpd, compared to 25,000 bpd for 2008.

Under the revised Securities and Exchange Commission (SEC) regulations, Marathon will begin reporting Oil Sands Mining production and reserves in terms of synthetic crude production, which is bitumen after upgrading excluding blendstocks. For 2010, net synthetic crude production is expected to be between 22,000 to 28,000 bpd.

The AOSP Expansion 1 is on track and anticipated to begin mining operations in the second half of 2010, and upgrader operations in late 2010 or early 2011. The AOSP Expansion 1 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. Marathon holds a 20 percent working interest in the AOSP.

Beginning late in the first quarter of 2010 and continuing into the second quarter, the existing AOSP mine and upgrader operations will undergo a scheduled turnaround. The last scheduled turnaround occurred in 2006. Production is planned to be curtailed for approximately 60 to 70 days, during which the facilities will be completely shutdown for approximately two-thirds of the time. The turnaround is expected to cost approximately $85 to $120 million net to Marathon. There will also be additional tie-ins and pipeline commissioning work related to the Expansion 1 during this period with capital costs allocated to the Expansion.

In October 2009, the Government of Canada and Government of Alberta jointly announced their intent to partially fund the AOSP Quest Carbon Capture and Storage (CCS) project. Under the terms of their Letters of Intent, the Government of Alberta would contribute CAD$745 million and the Government of Canada would provide CAD$120 million toward the project's development. A final investment decision on the Quest CCS project will be made at a later date, and is subject to regulatory approvals, stakeholder engagement, detailed engineering studies, as well as a final joint venture partner agreement.

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. Marathon elected to participate in these leases and was able to reclassify approximately 190 million net barrels of contingent resource to reserves, with 168 million being proved reserves.

Reserves
During 2009, Marathon added net proved reserves of 674 mmboe, excluding dispositions of 41 mmboe, while producing 149 mmboe, resulting in a reserve replacement ratio of 452 percent. The additions included 603 million barrels of proved synthetic crude reserves in Canada, which are now reported in total proved reserves in combination with traditional oil and natural gas under the revised SEC regulations. Year-end 2009 net proved reserves totaled 1,679 mmboe.

For the three-year period ended Dec. 31, 2009, Marathon added net proved reserves of 872 mmboe, excluding dispositions of 44 mmboe, while producing 411 mmboe, resulting in an average reserve replacement ratio of 212 percent. Marathon anticipates providing greater detail about its proved reserves in a mid-February news release.

Integrated Gas
Integrated Gas segment income totaled $37 million in the fourth quarter of 2009 and $90 million for the full year 2009, compared to $36 million and $302 million respectively in the comparable periods of 2008. The decrease in segment income in both the fourth quarter and full-year 2009, as compared to the 2008 periods, was primarily the result of lower realizations for LNG and methanol. As evidenced by higher sales volumes, strong operational reliability at the EG LNG facility throughout 2009 mitigated the impact of lower prices. The LNG production facility averaged higher than 95 percent operational availability during 2009. Marathon holds a 60 percent interest in Equatorial Guinea LNG operations.

Refining, Marketing and Transportation
Refining, Marketing and Transportation (RM&T) segment reported a loss of $18 million in the fourth quarter of 2009 and income of $464 million for the year, compared to income of $325 million and $1.179 billion in the same periods of 2008. The refining and wholesale marketing gross margin per gallon was 0.62 cents in the fourth quarter of 2009 compared to 12.48 cents in the fourth quarter of 2008, and 6.10 cents per gallon for full year 2009 compared to 11.66 cents for 2008.