Marathon Oil Corporation (MRO)

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Marathon Oil (MRO)

Q2 2011 Earnings Call

August 02, 2011 2:30 pm ET

Executives

Clarence Cazalot - Chairman, Chief Executive Officer, President 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

Evan Calio - Morgan Stanley

John Herrlin - Societe Generale Cross Asset Research

Paul Cheng

Arjun Murti - Goldman Sachs Group Inc.

Douglas Leggate - BofA Merrill Lynch

Pavel Molchanov - Raymond James & Associates, Inc.

Faisel Khan - Citigroup Inc

Ann Kohler - CRT Capital Group LLC

Unknown Analyst -

Blake Fernandez - Howard Weil Incorporated

Presentation

Howard Thill

Welcome to Marathon Oil Corporation's Second Quarter 2011 Earnings Webcast and Conference Call. The synchronized slides that accompany this call can be found on our website, marathonoil.com. On the call today are Clarence Cazalot, Chairman President and CEO; Janet Clark, Executive Vice President and CFO; and Dave Roberts, Executive Vice President and COO.

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 on its annual report on Form 10-K for the year ended December 31, 2010, 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 to this presentation is a reconciliation of quarterly net income to adjusted income from continuing operations for 2010 and the first 2 quarters of 2011, preliminary balance sheet information, third quarter and full year 2011 and 2012 operating estimates and other data that you may find useful.

Slide 3 provides net income and adjusted income from continued operations on an absolute and per share basis. Our second quarter 2011 adjusted income from continued operations of $0.96 per share reflects a 9% increase from the first quarter and a 55% increase from the second quarter.

The waterfall chart on Slide 4 shows the first to second quarter change in pretax adjusted income from continued operations by segment and the change in income taxes. The increase in income was driven by improved results in Oil Sands Mining and lower income taxes, reflecting no production from our Libya operations in the quarter. These were partially offset by a decrease in E&P pretax earnings.

The effective income tax rate for the second quarter, including special items and the effect of foreign currency remeasurement of our deferred tax balances, was 67%. Excluding special items and the effect of foreign currency remeasurement of our deferred tax balance, the rate was 54%. We expect the effective tax rate for the full year 2011, excluding special items and the effect of foreign currency remeasurement of our deferred tax balances to be between 50% and 55%.

As shown on Slide 5, E&P segment income compared to the first quarter was down about 10% largely due to lower sales volumes, partially offset by higher realizations and lower cost. The lower sales volumes were a result of the Libyan conflict and downtime in Norway and Equatorial Guinea.

Our historical realizations are shown on Slide 6. Our liquid hydrocarbon average realization increased $9.14 per barrel compared to the first quarter, which is largely in line with the $7.74 per barrel increase in WTI and the $11.61 per barrel increase in Dated Brent.

Moving to Slide 7. As a result of lower international liftings, our second quarter sales volumes decreased 15%, while production available for sale decreased 13%, both primarily a result of the previously discussed downtime and conflict in Libya. The difference in sales volumes and production available for sale was the result of an underlift for the quarter of approximately 674,000 boe in the U.K. and Alaska, offset by an overlift of 341,000 boe in EG and Norway.

At the end of the second quarter, our cumulative international operations were underlifted by approximately 1.6 million barrels. Domestically, we remained 2 million boe cumulatively underlifted due to gas storage in Alaska.

Slide 8 shows the 7.5% growth in E&P production available for sale since the beginning of 2010, excluding Libya, by quarter.

Turning to Slide 9. Exploration expense fell in the second quarter with lower dry well expense, while field level controllable cost per boe increased as a result of additional domestic workover expense, the lack of lower-cost Libyan production and turnaround cost of Bre. Also influencing per barrel costs were lower volumes in the second quarter.

Turning to Slide 10. The second quarter E&P segment income increased 6%, primarily due to higher per boe realizations, partially offset by lower sales volumes. Total E&P expenses per boe were relatively unchanged.

Turning to Slide 11. The Oil Sands Mining segment's improved results were largely driven by higher prices and increased volumes, partially offset by higher operating and blendstock costs. DD&A and foreign income taxes were also higher because of the increased volumes. On a boe basis, operating cost per synthetic barrel actually declined, moving from $54 per barrel in the first quarter to $46 per barrel in the second quarter. We expect the per barrel cost to continue to trend downward as reliability and production increase.

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