Marathon Oil Corporation (MRO)

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Marathon Oil Corporation (MRO)

Q1 2009 Earnings Call

April 30, 2009 11:00 am ET

Executives

Howard Thill - VP of IR

Clarence Cazalot - President and CEO

Janet Clark - EVP and CFO

Dave Roberts - EVP, Upstream

Gary Heminger - EVP and President of Refining, Marketing and Transportation Organization

Gary Peiffer - SVP of Finance and Commercial Services, Downstream

Analysts

Doug Leggate - Howard Weil

Mark Flannery - Credit Suisse

Robert Kessler - Simmons & Company

Erik Mielke - Merrill Lynch

Paul Sankey - Deutsche Bank

Paul Cheng - Barclays Capital

Mark Gilman - Benchmark

Faisel Khan - Citi

Neil McMahon - Sanford Bernstein

Presentation

Operator

Welcome to Marathon Oil 2009 first quarter earnings call. For opening remarks and introductions, I would like to turn the call over to Mr. Howard Thill, Vice President of Investor Relations and Public Affairs. Please go ahead, sir.

Howard Thill

Good afternoon and welcome to Marathon Oil Corporation's first quarter 2009 earnings web cast and teleconference. The synchronized slides that accompany this call can be found on our website, marathon.com.

On the call today are Clarence Cazalot, President and CEO; Janet Clark, Executive Vice President and CFO; Gary Heminger, Marathon Executive Vice President and President of our Refining, Marketing, and Transportation Organization; Dave Roberts, Executive Vice President, Upstream; and Gary Peiffer, Senior Vice President of Finance and Commercial Services, Downstream.

Slide two, contains a discussion of forward-looking statements and other information included in this presentation. Our remarks and answers to questions today will contain forward-looking statements subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements.

In accordance with Safe Harbor provisions and the Private Securities Litigation Reform Act of 1995, Marathon Oil Corporation has included in it's annual report on Form 10-K for the year ended December 31st, 2008 and subsequent Form 8-K cautionary language identifying the important factors but not necessarily all factors that could cause future outcomes to differ materially from those set forth in the forward-looking statements.

Please note that in the appendix to this presentation is a reconciliation of quarterly net income to adjusted net income 2008 and the first quarter of 2009, preliminary balance sheet information, second quarter and full year 2009 operating estimates and other data that you may find useful as there as well.

Slide three, provide net income and adjusted net income data both on an absolute and per share basis. Our first quarter 2009 adjusted net income of $240 million was down 77% from the fourth quarter of 2008 and down 69% from the first quarter of 2008.

The decrease from the fourth quarter was largely driven by the decline in commodity prices, a lower refining and wholesale marketing gross margin and lower E&P production sold. The decreased from the first quarter of 2008 was primarily result of the decline in commodity prices, partially offset by higher E&P production sold and higher refining and wholesale marketing gross margin.

Slide four, shows the decline in adjusted net income from just over $1 billion in the fourth quarter 2008 to the $240 million for the first quarter of 2009. While pre-tax earnings decreased across all segments, income taxes increased primarily as a result of fourth quarter 2008 tax benefits, totaling almost $270 million.

These tax benefits were related to the impact of currency re-measurement on foreign deferred tax liabilities and the full recognition of the Norwegian tax effect of unutilized net operating losses in Norwegian. On a positive note, unallocated administrative expenses decline.

Slide five shows the 62% decrease in E&P segment income from $264 million in the fourth quarter to $100 million in the first quarter. Shown in the waterfall graph are the impacts of the drop in crude oil and natural gas prices and lower liftings during the first quarter, which combined reduced pretax E&P segment income by almost $480 million. These negative impacts were partially offset by lower income taxes, other costs and exploration expenses.

Slide six shows our historical realizations in the $10.86/BOE decrease in our average realizations from $41.59/BOE in the fourth quarter to $30.73/BOE in the first quarter. Our liquid hydrocarbon realizations declined less than NYMEX prompt WTI as about 60% of our global liquid hydrocarbon sales volumes are priced off of Brent, which outperformed WTI during the quarter.

Slide seven shows the production volume sold in the first quarter of 2009 were down 3% compared to the fourth quarter of 2008 to 404,000 BOE per day, while production available for sale increased 7% to 429,000 BOE per day, primarily driven by increased reliability from our Equatorial Guinea and Alvheim/Vilje operations. As well as the return of the remaining Gulf of Mexico production disrupted by the 2008 hurricane.

Additionally, first quarter production available for sale included 5,000 BOE per day from our Ireland operations, which was not included in our previous production guidance for the quarter. The difference in sales volumes and production available for sale created an under lift for the quarter of approximately 2.3 million BOE.

Turning to slide eight. Total E&P expenses per BOE decreased 14% from the fourth quarter, largely attributable to reduced field level controllable, exploration and transportation costs partially offset by higher domestic DD&A per BOE.

A downward revision in proved reserves for Neptune during the first quarter increased DD&A and also led to a charge related to unutilized pipeline capacity. Results reflected $37 million pretax expense related to rig cancellations and excess pipeline capacity charges.

First quarter E&P segment income was $2.74 per BOE, a 60% decrease compared to the fourth quarter of 2008, again primarily due to the lower commodity price realizations.

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