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1Q 2011 Earnings Conference Call Remarks

Howard J. Thill
Vice President, Investor Relations and Public Affairs

May 3, 2011

Good afternoon and welcome to Marathon Oil Corporation's first quarter 2011 earnings Web cast and teleconference. The synchronized slides that accompany this call can be found on our website, http://www.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 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 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 the 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 percent higher than the fourth quarter of 2010 and a 276 percent 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. Pre-tax earnings increased in all segments.

Slide 5 shows the various impacts which lead 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 realizations 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 Dated Brent, which increased substantially more than WTI during the quarter.

Slide 7 shows that 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 production 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 UK, 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 BOEPD, 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. 2010 Domestic FLC cost were $7.10 / boe and for 2011 we expect them to be in the range of $7.25 - $8.30 per BOE.  In International E&P the 2010 FLC costs were $2.95 per boe and for 2011 we expect a range of $3.20 - $4.40 per BOE, with the largest portion of the increase due to the loss of 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 and determined the options to develop the Flying Dutchman were not viable.

Total expenses per BOE, as shown on slide 10, increased $0.59 per BOE from the fourth quarter primarily driven by the higher exploration expense and DD&A, partially offset by lower field level controllable costs. First quarter E&P segment income was $18.54 per BOE, a 43% increase compared to the fourth quarter of 2010 again primarily due to increased realizations.

Turning to Slide 11 and Oil Sands Mining, the segment income for the first quarter was $32 million, an increase of $23 million from the $9 million earned in the fourth quarter 2010, largely driven by higher synthetic crude realizations. 

Marathon's first quarter 2011 net synthetic crude sales (bitumen after upgrading including blendstocks) from the AOSP mining operation was 37,000 barrels per day, compared to 38,000 barrels per day in the fourth quarter.  Average realizations increased $10 per barrel from their fourth quarter level.  

Turning to Slide 12 and the Integrated Gas segment, first quarter segment income was $60 million, an increase of $27 million from the fourth quarter of 2010.  As a result of a turnaround in the fourth quarter of 2010, methanol sales volumes increased.   

Moving to our downstream financial results, as noted on Slide 13, RM&T's first quarter 2011 segment profit totaled $527 million ($821 million pre-tax) compared to a $237 million ($390 million pre‑tax) segment loss in the same quarter last year.

Because of the seasonality of the downstream business, I will compare our first quarter 2011 results against the same quarter in 2010.

Primary factors contributing to the increased segment income for the first quarter of 2011 included a wider sweet/sour crude differential, increased sales volumes and lower manufacturing costs resulting from decreased planned turnaround and major maintenance expenses compared to the first quarter of 2010. In addition, during the first quarter of 2011, the Company was able to take advantage of the wider than normal crude oil differentials between West Texas Intermediate and other light sweet crudes such as Light Louisiana Sweet and Dated Brent, which resulted in relatively lower crude oil acquisition costs versus the comparable quarter last year. Sales volumes increased as a result of higher first quarter 2011 refining throughputs compared to the same period in the previous year.

Primarily because of operating a fully integrated Garyville refinery for the entire first quarter 2011, our total throughputs were up approximately 20 percent quarter over quarter ($27 million), in spite of the  December 1, 2010 sale of the St. Paul Park refinery.  In addition, some other work which we recently completed in our refineries to enhance the efficiency of our fluid catalytic cracking units also improved last quarter's results over the first quarter 2010 as well as the higher prices we realized in the first quarter of 2011 on our FCCU gains ($201 million) ($228 million pre-tax - total).

Our manufacturing and other expenses were lower in the first quarter 2011 compared to the corresponding quarter last year primarily because we had much lower planned turnaround and major maintenance expenses ($95 million) and other major downstream project costs ($58 million)  in the current quarter ($173 million pre-tax - total).

Partially offsetting these positive improvements quarter over quarter, the average LLS crack spread decreased from $3.03 per barrel in the first quarter 2010 based upon 57 percent of our production in the Midwest and 43 percent in the U.S. Gulf Coast during that quarter to $0.71 per barrel in the first quarter 2011 based upon 53 percent of the production being in the Midwest market and 47 percent in the U.S. Gulf Coast (-$234 million pre-tax - total).

In addition, our average wholesale price realizations did not increase as much as the average of the spot market gasoline, distillate and three percent resid prices used in the LLS 6-3-2-1 crack spread calculation in the first quarter 2011 versus the comparable quarter last year (-$140 million pre-tax - total).

Total refinery crude oil throughput averaged 1,114,000 barrels per day in the first quarter 2011 compared to 1,003,000 barrels per day in the same quarter last year.  Total throughputs were 1,321,000 barrels per day in the first quarter 2011 as compared to 1,100,000 barrels per day in the first quarter 2010.

Speedway's refined product and merchandise gross margin was about $23 million lower in the first quarter 2011 compared to the first quarter 2010.  The decrease was primarily due to a reduction in the number of outlets as a result of the  Minnesota asset sale in December 2010.  On a per-gallon basis, Speedway's gasoline and distillate margins increased from 11.95 cents per gallon in the first quarter 2010 to 13.08 cents per gallon in the first quarter 2011.  Speedway's same store merchandise sales increased approximately 2 percent, while same store gasoline volumes were comparable in both quarters.

Slide 15 provides an analysis of preliminary cash flows for the first quarter of 2011.  Operating cash flow before changes in our working capital was $2,156 million.  Our cash balance was increased by working capital changes of $436 million.  Capital expenditures during the quarter were approximately $1.1 billion, proceeds from disposal of assets were $212 million and dividends paid totaled $178 million. The slide also reflects the financing activities carried out during the quarter in anticipation of the spin-off of our downstream business at June 30 this year.   

Slide 16 provides a summary of select financial data. At the end of the first quarter of 2011, our cash-adjusted debt-to-total capital ratio was 10%, a reduction of 4 percentage points from the fourth quarter of 2010. 

The effective tax rate for the first quarter of 2011 was 43%.  We expect our effective tax rate for the year to be in the range of 42 to 47%.  As you may recall, these tax rates reflect a full year as an integrated company. Both the quarter and estimated annual rates are lower than expected primarily due to the suspension of production operations in Libya, where as you know, our effective tax rate is over 90%.  The inclusion of only two months Libyan income and associated taxes in our estimated annual effective tax rate, accordingly reduced the effective tax rate applicable to the first quarter.

To accommodate all who wish to ask questions, we ask that you limit yourself to one question plus a follow-up.  You may re-prompt for additional questions as time permits.  With that we will now open the call to questions.