Marathon Oil Corporation (MRO)

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Marathon Oil (MRO)

Q1 2011 Earnings Call

May 03, 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

Analysts

Mark Polak - Scotia Capital Inc.

Evan Calio - Morgan Stanley

Mark Gilman - The Benchmark Company, LLC

Rakesh Advani - Crédit Suisse AG

Paul Cheng

Pavel Molchanov - Raymond James & Associates, Inc.

Faisel Khan - Citigroup Inc

Douglas Leggate - BofA Merrill Lynch

Joe Citarrella - Goldman Sachs Group Inc.

Paul Sankey - Deutsche Bank AG

Blake Fernandez - Howard Weil Incorporated

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Marathon Oil Corporation First Quarter 2011 Earnings Call. My name is John, and I'll be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I'll now turn the call over to Mr. Howard Thill. Mr. Thill, you may begin.

Howard Thill

Thanks, John, and good afternoon, everyone. Welcome to Marathon Oil Corporation's First Quarter 2011 Earnings Webcast 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, 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 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 in its annual report on Form 10-K for the year ended December 31, 2010 and subsequent Forms 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 to this presentation is a reconciliation of quarterly net income to adjusted net income for 2010 and first quarter of 2011, preliminary balance sheet information, second quarter and full-year 2011 operating estimates and other data that you may find useful.

Slide 3 shows that our adjusted net income of almost $1.2 billion, was 52% higher than the fourth quarter of 2010 and 276% increase from the first quarter of 2010.

Slide 4 shows the components of the increase in adjusted net income compared to the fourth quarter 2010. The increase from the fourth quarter was largely driven by higher commodity prices and higher refining and wholesale marketing gross margin, partially offset by lower E&P production sold as a result of the suspension of Libyan production operations and the downtime associated with the Droshky sidetrack completion during the quarter. Pretax earnings increased in all segments.

Slide 5 shows the various impacts which led to a 35% increase in E&P segment income. Higher liquid hydrocarbon prices and lower DD&A were partially offset by the lower sales volumes just discussed, along with higher income taxes.

Slide 6 shows our historical price realizations. Our first quarter average price realization increased $9.39 per BOE compared to the fourth quarter 2010. Our liquid hydrocarbon realization increased $14.29 per barrel compared to an increase of $9.36 per barrel increase in the NYMEX prompt WTI price. About 65% of our global liquid hydrocarbon sales volumes were priced off of Brent, which increased substantially more than WTI during the quarter.

Slide 7 shows the production volumes sold in the first quarter of 2011 were down 4% compared to the fourth quarter of 2010 to 400,000 BOE per day. While production available for sale decreased 5% to 398,000 BOE per day. As previously noted, the largest contributor to these decreases was the suspension of Libyan productions and the downtime associated with the Droshky sidetrack completion. The difference in sales volumes and production available for sale was the result of an overlift for the quarter of approximately 975,000 BOE in the U.K., Norway and Alaska, offset by an underlift of 782,000 BOE in Libya and EG.

Slide 8 demonstrates the 18% growth in E&P production available for sale since the beginning of 2010, excluding Libya. For the full-year 2011, we now expect production available for sale to be between 345,000 and 365,000 BOE per day, which includes the first quarter production available for sale from Libya but excludes any additional Libya production for the year. This is about a 7,000 boepd increase to our previous guidance when excluding Libya.

Turning to Slide 9, field level controllable costs per BOE returned to trend from the higher fourth quarter level when we had higher workover costs in the Gulf of Mexico. 2010 domestic field level controllable costs were $7.10 per BOE and for 2011, we expect it to be in the range of $7.25 to $8.30 per BOE. In International E&P, the 2010 field level controllable costs were $2.95 per BOE and for 2011, we expect a range of $3.20 to $4.40 per BOE with the largest portion of the increase due to the loss of the Libya production.

Exploration expense increased as a result of the approximately $159 million in dry well costs during the first quarter. This is attributed to costs associated with the Gulf of Mexico Flying Dutchman well and the Romeo prospect in Indonesia, which encountered water-bearing carbonates. In March 2011, we completed our evaluation to determine the options to develop the Flying Dutchman were not viable.

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