Marathon Oil Corporation (MRO)

MRO 
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Marathon Oil (MRO)

Q3 2011 Earnings Call

November 01, 2011 2:00 pm ET

Executives

Janet F. Clark - Chief Financial officer, Executive Vice President, Treasurer and Member of Proxy Committee

Clarence P. Cazalot - Chairman, Chief Executive officer, President and Member of Proxy Committee

Howard J. Thill - Vice President of Investor Relations & Public Affairs

David E. Roberts - Chief Operating officer and Executive Vice President

Analysts

Katherine Lucas Minyard - JP Morgan Chase & Co, Research Division

Evan Calio - Morgan Stanley, Research Division

Paul Y. Cheng - Barclays Capital, Research Division

Arjun N. Murti - Goldman Sachs Group Inc., Research Division

Mark Gilman - The Benchmark Company, LLC, Research Division

Blake Fernandez - Howard Weil Incorporated, Research Division

Edward Westlake - Crédit Suisse AG, Research Division

Pavel Molchanov - Raymond James & Associates, Inc., Research Division

Paul Sankey - Deutsche Bank AG, Research Division

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

Faisel Khan - Citigroup Inc, Research Division

Presentation

Howard J. Thill

I apologize for that confusion with regard to the technology. We were playing the second quarter. Apparently, they picked up the wrong quarter recording. So we'll do this the old-fashioned way live. And welcome to Marathon Oil Corporation Third 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 Treasurer; and David Roberts, Executive Vice President and COO.

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 in 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, there is a reconciliation of quarterly net income to adjusted income from continuing operations for 2010 and the first 3 quarters of 2011 and preliminary balance sheet information.

On Slide 3, you'll see the third quarter 2011 adjusted net income from continuing operations of $421 million with a 39% increase -- decrease, excuse me, from the second quarter of 2011. This decrease was largely driven by a noncash charge of $227 million for foreign tax credit that we currently expect the company to be unable to utilized in the future periods. This noncash charge is largely driven by an outlook of higher than originally anticipated Brent pricing and a higher production outlook for Norway.

As indicated on Slide 4, excluding the higher effective tax rate for the quarter, segment income improved across all 3 segments compared to the second quarter results. In addition to the previously discussed increase in taxes related to foreign tax credits, a higher proportion of third quarter earnings came from the international operations, also contributing to an increase in taxes.

As shown on Slide 5, the E&P segment third quarter to second quarter price and volume variances essentially offset. Lower DD&A and exploration expenses were largely offset by an increase in other expenses. The other expense category was higher primarily because of higher field level controllable associated with the timing of international liftings. This leads almost the entire difference in the quarters related to previously discussed change in mix and noncash deferred taxes.

Slide 6 shows our historical E&P realizations and highlights $3.05 per BOE decrease in our average realization. This decrease was driven by a $5.69 per barrel decline in liquids realizations, while natural gas realizations were $0.40 per Mcf lower quarter-to-quarter. Our liquids realizations were in line with the average of a $12.80 decrease in WTI and a $4.02 decrease in Brent, largely because of our higher exposure to Brent. Our natural gas price realizations fell more than the move and the market indicators because we had a higher percentage of lower priced international gas and the lagging price impacts in Alaska.

Moving to Slide 7, E&P production volumes sold in the third quarter increased approximately 4% from the second quarter, while production available for sale increased 1%. Europe was overlifted by almost 1 million BOE in the quarter, while EG was underlifted by 330,000 BOE and Alaska added 100,000 BOE to gas storage. As of the end of the quarter, our cumulative international underlift position was approximately 950,000 barrels. This consists of underlifts in EG and Libya of 600,000 and 850,000 barrels, respectively, offset by cumulative overlift in Europe of 500,000 barrels. Domestically, we are 2.1 million BOE underlifted as a result of gas storage in Alaska.

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

Slide 9 shows Marathon's E&P cost structure by category over the past 7 quarters. DD&A increased through the fourth quarter of 2010 but has started to decline in the past 2 quarters as a result of lower Gulf of Mexico volumes, while exploration expenses per BOE dropped again this quarter, primarily driven by lower dry well expense.

Turning to Slide 10. The third quarter E&P segment income decreased 48% primarily due to the previously discussed higher taxes. Lower per BOE realizations were partially offset by reduced expenses. Total E&P expenses per BOE were lower by $2.01.

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