Marathon Oil Corporation (MRO)

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Marathon Oil (MRO)

Q3 2010 Earnings Call

November 02, 2010 2:00 pm ET

Executives

Clarence Cazalot - Chief Executive Officer, President, Director and Member of Proxy Committee

Howard Thill - Vice President of Investor Relations & Public Affairs

David Roberts - Executive Vice President of Upstream

Analysts

Edward Westlake - Crédit Suisse AG

Xavier Cronin

Katherine Minyard

Mark Polak - Scotia Capital Inc.

Evan Calio - Morgan Stanley

Mark Gilman - The Benchmark Company, LLC

Pavel Molchanov - Raymond James & Associates

Paul Cheng

Faisel Khan - Citigroup Inc

Douglas Leggate - BofA Merrill Lynch

Blake Fernandez - Howard Weil Incorporated

Presentation

Operator

Good day, and welcome to the Marathon Oil 2010 Third Quarter Earnings Conference Call. [Operator Instructions] 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

Thanks, Cynthia, and welcome to Marathon Oil Corporation's Third Quarter 2010 Earnings Webcast and Conference Call. 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, Executive Vice President, Downstream; Dave Roberts, Executive Vice President, Upstream; and Garry Peiffer, Senior Vice President of Finance and Commercial Services, Downstream.

Slide 2 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 of the Private Securities Litigation Reform Act of 1995, Marathon Oil Corporation has included on its annual report on Form 10-K for the year ended December 31, 2009, 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.

Please note that in the appendix of this presentation, there is a reconciliation of quarterly net income to adjusted net income for 2009 and the first three quarters of 2010, preliminary balance sheet information, fourth quarter and full year 2010 operating estimates and other data that you will find useful.

On Slide 3, you'll see that our third quarter 2010 adjusted net income of $711 million was a 10% decrease from the second quarter of 2010 but a 63% increase from the third quarter of 2009.

The decrease from the second quarter was largely driven by the effect of reduced RM&T segment income. The increase in the year-over-year third quarter earnings reflects improved business results for most segments, the largest of which was the improvement in our Downstream operations as a result of increased refining and wholesale marketing gross margin and higher refining volumes.

Slide 4 provides details on the changes which resulted in the 10% decrease in second to third quarter adjusted net income. Pretax income increased for all three Upstream segments, while RM&T saw a decrease. Income taxes and other items netted to a nominal negative impact.

As shown on Slide 5, we had an 18% quarter-to-quarter increase in E&P segment income as a result of higher hydrocarbon sales and lower exploration expenses, partially offset by higher DD&A. Higher income from lower tax jurisdictions contributed to the lower E&P effective tax rate of 53% for the third quarter.

Slide 6 shows our historical E&P realizations and highlights the $1.13 per BOE decrease in our average realizations, driven by the $0.73 per barrel decrease in liquids realizations, while natural gas realizations increased $0.08 per mcf quarter-to-quarter.

Moving to Slide 7. Production volumes sold in the third quarter increased approximately 3% from the second quarter and 9% from the third quarter last year. Third quarter production available for sale increased 8% from the second quarter and over 3% from the same quarter last year.

During the quarter, we were underlifted in Europe by 12,000 BOE per day and overlifted in EG by about 4,000 BOE per day. As of the end of the quarter, on a cumulative basis, we were 700,000 BOE underlifted in Europe and 2.4 million BOE underlifted in Alaska, with the rest of our operations being in a relatively balanced position.

Turning to Slide 8, third quarter E&P segment income per BOE increased 13% compared to the second quarter of 2010, and was down slightly from the year ago quarter.

Slide 9 shows that field level controllable costs per BOE have remained relatively flat for the last several quarters, while exploration expenses per BOE dropped significantly this quarter, primarily driven by lower dry well expense in the Gulf of Mexico.

Turning to Slide 10, the improvement in the Oil Sands Mining segment income third quarter to second quarter was primarily a result of higher volumes and lower turnaround costs. The third quarter saw the return of the full quarter of operations at the Muskeg River Mine, as well as production from the Jackpine Mine, which began a phase start-up in the third quarter. The negative $61 million change in derivatives reflects the change from a gain of $53 million in the second quarter to a loss of $8 million in the third quarter.

For our Downstream business. Starting with Slide 11, I will compare our third quarter results against the same quarter in 2009 because of the seasonality in that business.

Third quarter 2010 segment income increased 80% from the same quarter last year. This was driven by higher margins and volumes, as well as better results at SSA, partially offset by income taxes and other miscellaneous expenses.

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