Marathon Oil Corporation (MRO)

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Marathon Oil (MRO)

Q4 2010 Earnings Call

February 02, 2011 2:00 pm ET

Executives

Gary Heminger - Executive Vice President of Downstream and President of Marathon Ashland Petroleum LLC

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

Janet Clark - Chief Financial Officer, Executive Vice President and Member of Proxy Committee

Analysts

Edward Westlake - Crédit Suisse AG

Katherine Minyard

Jeffrey A. Dietert

Douglas Terreson - ISI Group Inc.

Evan Calio - Morgan Stanley

Pavel Molchanov - Raymond James & Associates

Mark Gilman - The Benchmark Company, LLC

Paul Cheng

Arjun Murti - Goldman Sachs Group Inc.

Faisel Khan - Citigroup Inc

Douglas Leggate - BofA Merrill Lynch

Paul Sankey - Deutsche Bank AG

Blake Fernandez - Howard Weil Incorporated

Presentation

Operator

Welcome to the Marathon Oil Corporation Fourth Quarter and Full Year 2010 Earnings Conference Call. My name is Monica, and I'll be your operator for today's conference. [Operator Instructions] I will now turn the call over to Howard Thill, Marathon Vice President, Investor Relations and Public Affairs. Mr. Thill, you may begin.

Howard Thill

Thank you, Monica. And I, too, would like to welcome you to Marathon Oil Corporation's Fourth Quarter 2010 Earnings Webcast and Teleconference. The synchronized slides of the company in 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 the forward-looking statement 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 Private Securities Litigation Reform Act of 1995, Marathon Oil Corporation has included in 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.

In the Appendix of this presentation is a reconciliation of: net income to adjusted net income, by quarter, for 2009 and 2010; preliminary balance sheet information; first quarter and full year 2011 operating estimates; and other data that you may find useful.

Moving to Slide 3. Our fourth quarter 2010 adjusted net income of $780 million was a 241% increase over the fourth quarter 2009 and 10% higher than the third quarter 2010. Slide 4 shows key drivers to the fourth quarter-over-quarter increase in adjusted net income.

Earnings before tax for all four segments were lower but the decrease was offset by lower taxes, which resulted from a shift within the quarter toward greater domestic versus foreign income along with normal year-end true-ups. The quarter-to-quarter difference in taxes was also impacted by the absence of currency fluctuations in prior quarters. The overall income tax for 2010 was 50%, within our previously provided guidance of 49% to 54%. For 2011, we expect the rates between 54% and 59%. And please remember, the overall rate is highly sensitive to the mix of income and can fluctuate from quarter-to-quarter.

As shown on Slide 5, our adjusted net income more than doubled year-over-year going from $1.2 billion in 2009 to almost $2.6 billion in 2010. Slide 6 shows the key drivers to this year-over-year increase in adjusted net income, including significantly better earnings in both our E&P [Exploration and Production] and Downstream businesses, partially offset by higher income taxes and lower earnings in our Oil Sands Mining [OSM] segment.

As shown on Slide 7, E&P segment income was slightly lower for the fourth quarter compared to the third quarter of 2010. Higher realizations and sales volumes were largely offset by higher domestic DD&A associated primarily with the Droshky field and higher exploration expenses.

Average E&P realizations and market indicators are shown on Slide 8. Quarter-over-quarter, our average E&P realization per BOE [barrels of oil equivalent] increased $6, while NYMEX prompt WTI [West Texas Intermediate] increased $9 per barrel and the bid week natural gas price decreased $0.58 per MMBTU [Million Metric British Thermal Units].

Slide 9 shows our E&P production volumes. Production sold increased 5% from the third quarter to the fourth quarter. The higher sales volumes in the fourth quarter 2010 as compared to the third quarter were a result of a smaller underlift in the fourth quarter. We ended the year approximately 3.4 million BOE underlifted. The makeup of this underlift was 2.1 million BOE in Alaska gas storage and underlift in Europe of about 700,000 BOE in both EG [Equatorial Guinea] and Libya being underlifted by approximately 300,000 BOE. Fourth quarter 2010 production available for sale increased 3% from the third quarter 2010 and 4% from the fourth quarter 2009. These increases were primarily a result of a full quarter of Droshky production.

Turning to Slide 10. Compared to the prior quarter, fourth quarter E&P earnings per BOE decreased $12.95, primarily a result of the higher exploration expenses largely attributable to unsuccessful exploration wells in Indonesia and Norway, higher DD&A from Droshky and higher field level controllable costs and other expenses. These negatives were partially offset by higher commodity prices and higher volumes. Total operating costs per BOE increased from $24.47 to $33.34 quarter-over-quarter.

Slide 11 shows the trend, by quarter, over the last three years for field level controllable costs and exploration expenses per BOE. The increase in exploration expense per BOE is attributable to the aforementioned dry wells. The increase in field level controllable cost per BOE is largely a result of work-over costs in the Gulf of Mexico, timing of international listings and year-end accruals from outside operator properties, which added $0.66 per BOE to the fourth quarter results.

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