Marathon Oil Corporation (MRO)

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Marathon Oil (MRO)

Q3 2012 Earnings Call

November 06, 2012 2:00 pm ET

Executives

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

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

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

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

Analysts

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

Scott Hanold - RBC Capital Markets, LLC, Research Division

Guy A. Baber - Simmons & Company International, Research Division

Faisel Khan - Citigroup Inc, Research Division

Paul Sankey - Deutsche Bank AG, Research Division

Evan Calio - Morgan Stanley, Research Division

Paul Y. Cheng - Barclays Capital, Research Division

John Malone - Global Hunter Securities, LLC, Research Division

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

Presentation

Howard J. Thill

Welcome to Marathon Oil Corporation's Third Quarter 2012 Earnings Webcast and Conference Call. The synchronized slides that accompany this call can be found on our website at 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 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, 2011 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 net income for 2011 and to adjusted net income for the first 3 quarters of 2012, as well as preliminary balance sheet and cash flow information.

As described in our press release, we had a very good quarter operationally and financially. And as you see on Slide 3, our third quarter 2012 adjusted net income increased 9% from the second quarter of 2012. As shown on Slide 4, the third quarter saw improvements across all 3 segments.

And as shown on Slide 5, this earnings improvement was largely driven by an increase in liquid hydrocarbon sales of 26,000 barrels per day in the third quarter over the second quarter, both excluding Libya. The U.S., Canada, E.G. and Norway sales volumes were higher in the third quarter, largely as a result of growth in the U.S. resource plays and the resumption of production after second quarter turnarounds internationally, offset by lower U.K. sales volumes as a result of planned turnarounds.

In the Appendix of this presentation, you will find a similar slide comparing actual third quarter to estimated fourth quarter sales volumes to help you model the company's fourth quarter.

As shown on Slide 6, the third quarter was another outstanding operating quarter for that E&P segment as reflected by a 17% increase in segment income. This increase was primarily a result of higher liquid hydrocarbon and natural gas sales volumes, partially offset by higher operating costs and DD&A associated with those additional volumes.

Moving to Slide 7. Our U.S. E&P earnings increased 57% in the third quarter versus the second quarter, largely a result of the performance of our resource plays driving higher liquid hydrocarbon and natural gas sales volumes. This was partially offset by higher operating costs and DD&A associated with the increased volume.

As shown on Slide 8, total U.S. E&P cost per boe declined quarter-over-quarter. This was primarily as a result of lower exploration expenses and operating costs. Excluding the exploration expenses, cost per boe in the U.S. were down $0.34 quarter-over-quarter.

Slide 9 graphically demonstrates the lower 48 onshore production growth we have realized over the past several quarters with the production increase from second to third quarter of approximately 25%. We now expect to reach between 145,000 and 160,000 boed in the fourth quarter 2012, 25,000 to 30,000 boed higher than we previously estimated. This increase is the result of both better operational performance, particularly in the resource plays, and the previously announced Eagle Ford bolt-on acquisitions. From the third quarter 2011 through the fourth quarter of this year, we expect an increase of over 93%. Importantly, oil volumes are expected to increase to 61% and NGLs to 11% of these production volumes.

Slide 10 shows the impact on international E&P earnings from the higher international liquid hydrocarbon and natural gas sales volumes, lower DD&A and other, plus higher price realizations. The third quarter saw a continued solid performance from our international assets and the execution of a gas sales agreement in Libya, which resulted in additional international gas sales volumes of approximately 23 MMcfd.

Slide 11 shows the international E&P cost structure per boe by category over the past 7 quarters. Compared to the second quarter of 2012, DD&A and other costs decreased in the third quarter partially offset by an increase in field level controllable cost and exploration expenses.

As shown on Slide 12, quarter-over-quarter, our E&P segment production available for sale was 16% higher while sales volumes increased approximately 12%. Increased production available for sale from the continued ramp-up in our U.S. resource plays and the previously mentioned sales agreement in Libya were partially offset by decreased volumes in the U.K. as a result of planned turnarounds.

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