Marathon Oil Corporation (MRO)

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Marathon Oil Corporation (MRO)

Q4 2009 Earnings Call

February 2, 2010 2:00 pm ET

Executives

Howard J. Thill - Vice President - Investor Relations and Public Affairs

Clarence P. Cazalot Jr. - President, Chief Executive Officer, Director

Gary R. Heminger - Executive Vice President Downstream

Gary Piper - Senior Vice President of Finance and Commercial Services Downstream

David E. Roberts Jr. - Executive Vice President Upstream

Janet F. Clark - Chief Financial Officer, Executive Vice President

Analysts

Doug Leggate - Merrill Lynch

Jason Gamel - McCorey (ph)

Blake Fernandez – Howard Weil

Faisal Khan – Citi

Evan Calio – Morgan Stanley

Paul Cheng – Barclays Capital

Neil McMahon – Sanford Bernstein

Pavel Molchanov – Raymond James

Robert Kessler – Simmons & Company International

Kate Lucas - Collins Stewart

Mark Gilman – Benchmark Company

Jason Gamel - McCorey (ph)

Faisel Khan – Citigroup

Paul Cheng - Barclays Capital

Mark Gilman - The Benchmark Company

Presentation

Operator

Good day, and welcome to Marathon Oil's 2009 fourth quarter earnings call. Just a reminder, this call is being recorded. 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.

Howard J. Thill

Thanks Jeff. I would like to welcome each of you to Marathon Oil Corporation's fourth quarter 2009 earnings web-cast and teleconference. The synchronized slides that accompany this call can be found on our website at marathon.com. On the call today are Clarence Cazalot President and CEO, Janet Clark Executive Vice President and CFO, Gary Heminger Executive Vice President Downstream, David Roberts Executive Vice President Upstream and Gary Piper, Senior Vice President of Finance and Commercial Services Downstream.

Slide two contains the forward looking statements and other information related to 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 of the Privacy and Securities Litigation Reform Act of 1995, Marathon Oil Corporation has included in its annual report on Form 10-K for the year ended December 31st 2008 and subsequent Forms 10-Q and 8-K, cautionary language identifying important factors but not necessarily all factors that could cause future outcomes to differ materially from those set forth in the forward looking statements.

In the appendix of this presentation is a reconciliation of net income to adjusted net income by quarter for 2008 and 2009. Preliminary balance sheet information, first quarter and full year 2010 operating estimates and other data that you may find useful.

Moving onto slide three. During the fourth quarter out adjusted net income was weaker than the corresponding quarter in 2008. A significant contributor to this reduction was an almost $280 million swing in the foreign exchange on deferred income tax balances, largely in Canada. For the fourth quarter 2009, we incurred a $139 million loss while in the same quarter of 2008 we recorded a $138 million gain. While this is a number rarely if ever taken into account in analysts' estimates, I'd like to take this opportunity to point out that our adjusted net income would have been at the first call analyst average estimate if not for this non-cash swing in deferred tax balances. And we expect to make a one-time election during the first half of 2010 to begin paying Canadian income tax in U.S. dollars and thus eliminate the largest portion of these fluctuations.

Moving to slide four, and looking at key drivers to the year over year decrease in adjusted net income, we had a significant decrease in our RM&T segment income, driven by weaker refining and wholesale marketing margins as well as weaker retail margins, and lower earnings from our Oil Sands Mining segment.

These unfavorable effects were partially offset by an increase in E&P earnings and the result of a 3% increase in sales volumes and higher realized crude oil prices partially offset by lower natural gas prices during the quarter. While about half of the $570 million negative variance from income taxes was a result of the previously discussed affect impact, the other half of the variance was largely the result of adjustments made at the end of 2008 while the year end 2009 adjustments, other than affects were relatively small.

Moving to slide five, the key drivers to the year over year decrease in adjusted net income included significantly lower average realizations in our Upstream businesses and much lower refining and wholesale marketing gross margins in Downstream. On the positive side, we ran very well across all businesses posting significant increases in safety and reliability. This helped drive a top-tier increase in E&P production volume sales of 8% and a mechanical reliability of our refineries of 96.7% based on internal metrics.

Additionally our focus on cost controls resulted in a full year reduction in E&P operating costs per BOE of 15% excluding production taxes and DD&A. While we also reduced operating cost in the Downstream business, by approximately 9% excluding changes in crude and product purchases depreciation energy prices and certain other variable expenses.

As shown on slide six, E&P segment income for the fourth quarter decreased 10% compared to the third quarter of 2009, largely due to higher income taxes and higher geological and geophysical seismic expenses. The negative impacts were largely offset by quarter over quarter increases in both price realizations and sales volumes.

Slide seven shows the average E&P realizations as well as market indicators. Our average E&P realization per BOE increased $5.(inaudible) quarter over quarter while the same period nine mixed prompt wti (ph) increased $7.89 per barrel. In the bid week, natural gas prices increased $0.77 per million BTU's.

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