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3Q 2008 Earnings Conference Call Remarks
Howard J. Thill October 30, 2008 Welcome to Marathon Oil Corporation's third quarter 2008 earnings Web cast and teleconference. The synchronized slides that accompany this call can be found on our website Marathon.com and a transcript will be available on our web site shortly after this call. On the call today are Clarence Cazalot, president and CEO, Janet Clark, executive vice president and CFO, Gary Heminger, Marathon executive vice president and president of our Refining, Marketing and Transportation organization, Dave Roberts, executive vice president, exploration and production, and Garry Peiffer, senior vice president of finance and commercial services downstream.
Slide 2 contains the Forward Looking Statement and other information related to 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. Moving to slide 3, the third quarter was a record quarter both for net income with just over $2 billion in earnings, or $2.90 per share, and for adjusted net income where we posted just under $2 billion in earnings. Adjusted net income of $1,963 MM was a 93 percent increase compared to the third quarter 2007 and a 27 percent increase over our previous record from the second quarter last year. Adjusted net income per diluted share increased over 86% from the third quarter 2007 to $2.76. The slight variation in the percentage increase is a result of a higher share count post the Western Oil Sands acquisition completed in October 2007. Moving to slide 4, key drivers to the year over year improvement included strong pricing and increased production, in spite of hurricane disruptions, in the E&P business, significantly improved R&M gross margins, and earnings from our Oil Sands Mining segment which again, wasn't closed until the fourth quarter of last year. These favorable effects were partially offset by significantly higher income taxes as shown on the slide. Turning to Slide 5, E&P segment income increased 96% year over year to $939 million. The segment benefited from a year-over-year increase in realizations of $31.74 per BOE. Sales volumes also increased, and there was a favorable shift in the sales mix, with liquid hydrocarbons increasing to 59% of E&P sales volumes from 54% in the year ago period due to the ramp up of volumes at Alvheim and Neptune as well as the impact of gas sales from the planned downtime at the Equatorial Guinea LNG facility. We also had an underlift of about 940,000 BOE.
Slide 6 highlights the 4% year-over-year increase in production available for sale and the production sold volume for the third quarter of 379,000 boepd. Excluding hurricane impacts, the year-over-year increase would have been nearly 7% as production available for sale was reduced approximately 9,500 boepd as a result of Hurricanes Gustav and Ike. Production volumes sold were negatively impacted by the timing of liftings in Norway and Libya and lower seasonal gas sales in Ireland and Alaska.
Turning to Slide 8 and Oil Sands Mining, a segment we didn't have in the third quarter last year, the increase over the second quarter was primarily a result of a $190 million after-tax gain on derivative activity and a 15% increase in production due to greater reliability of the mining operation. As a reminder, the last of these derivative instruments expire at the end of the fourth quarter, 2009. Moving to our Downstream business, as noted on Slide 9, third quarter 2008 segment income increased almost 60% year-over-year to $771 million, primarily reflecting an increase in the refining and marketing gross margin of $0.08 per gallon. The substantial drop in crude oil prices and the improvement in the average sweet/sour differentials were the primary factors contributing to this improvement. The increase in gross margin was achieved despite the 19% decline in the LLS 6-3-2-1 crack spread, on a two-thirds Chicago and a one-third U.S. Gulf Coast basis. Total refinery crude oil throughput was down 8% year-over-year to 1,144,000 barrels per day, primarily a result of weather related impacts. Additionally, our downstream business increased its volume of ethanol blending by approximately 50% compared to the prior-year period. The refining and wholesale marketing gross margin for the third quarter includes a pre-tax derivative gain of $156 million compared to a loss of $360 million in the third quarter 2008. While we no longer use derivatives to mitigate domestic crude oil acquisition price risk, we do selectively continue the practice of using derivatives to protect the carrying value of seasonal inventories and long haul foreign crude oil spot purchases. Slide 10 provides historical performance indicators for the Downstream business and historical crack spreads. Turning to Slide 11, the Integrated Gas segment saw a $13 MM increase in segment earnings from a year ago for the third quarter to $65 million, primarily a result of higher EG LNG price realizations. Segment income decreased from second quarter 2008 largely due to lower Henry Hub gas prices as well as lower volumes. Worldwide LNG net sales volumes of 6,048 metric tonnes per day in the third quarter 2008 were slightly lower than the 6,137 metric tones per day recorded in the second quarter 2008 due to downtime associated with planned turnaround activity in EG. Post turnaround, the facility has delivered increased reliability and throughputs have exceeded nameplate capacity. Year-to-date the facility has operated at 97.8% of rated capacity. Pre-tax earnings from our 45 percent interest in Atlantic Methanol Production Company LLC were approximately $5 million in the third quarter compared to nearly $15 million in the third quarter of 2007. The decrease was largely due to lower methanol volumes as a result of a series of planned and unplanned maintenance events. Slide 12 provides a summary of select financial data. At the end of the third quarter 2008, our cash-adjusted debt to total capital ratio was 23%, a reduction of 1 percentage point from the second quarter, and as a reminder, includes $485 million of debt serviced by U.S. Steel. The effective tax rate for the third quarter was 44% compared to a rate of 51% in the second quarter. The decrease was primarily due to the increase in the downstream segment's percent of third quarter income. We expect our full year tax rate to be in the previously disclosed range of 46 to 49 percent. Third quarter net debt increased $255 million, while both cash flow from operation and capital expenditures were approximately $1.8 billion. At the bottom of this slide is a summary of certain metrics related to cash flows and uses of cash for the third quarter and first nine months of the year. Operating cash flow for the first nine months of 2008 was approximately $4.8 billion, while capital spending during the period amounted to approximately $5.2 billion. $402 million was expended on share repurchases and $511 million on dividends. Our net debt increased approximately $1.3 billion during this period. Clarence Cazalot will now provide a summary and comments on the outlook for the fourth quarter and beyond. [Additional remarks were made by Clarence Cazalot, President and Chief Executive Officer.] |
