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1Q 2008 Earnings Conference Call Remarks
Howard J. Thill May 1, 2008 Howard Thill: Welcome to Marathon Oil Corporation's first quarter 2008 earnings Web cast and teleconference. The synchronized slides that accompany this call can be found on our website Marathon.com. 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, Steve Hinchman, executive vice president technology and services, Dave Roberts, executive vice president, upstream, Phil Behrman, senior vice president Worldwide Exploration, 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 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, 2007, 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. As most of the numbers we will discuss today are Adjusted Net Income, Slide 3 provides a reconciliation of Net Income to Adjusted Net Income by quarter for 2006, 2007 and 2008. Turning to slide 4, adjusted Net Income for the first quarter 2008 was $767 million, an increase of about 8.5 percent compared to the first quarter of 2007 and 53 percent compared to the fourth quarter 2007. Slide 5 compares these same quarters on a per share basis, and shows adjusted net income was up approximately 5 percent from the year ago first quarter and about 53 percent above the fourth quarter 2007. During the first quarter we had approximately 717 million weighted average fully diluted shares outstanding and we repurchased approximately 2.8 million shares during the quarter. Moving to slide 6, the year over year increase in Adjusted Net Income was largely a result of price and volume growth in our upstream segment and the increase in our integrated gas segment's income due to our Equatorial Guinea LNG facility which started operations during the second quarter of last year, mostly offset by a lower refining and wholesale marketing gross margin and higher exploration expense. As shown on slide 7, the increase in Adjusted Net Income for the first quarter 2008 compared to the fourth quarter 2007 was a result of higher upstream liquid hydrocarbon and natural gas realizations, higher upstream sales volumes, lower exploration expense, and higher contributions from the oil sands mining and integrated gas segments, both of which were slowed by maintenance activities in the fourth quarter of 2007. These positive effects were partially offset by a lower refining and wholesale marketing gross margin. Turning to slide 8, upstream segment income for the first quarter was up $219 million over the fourth quarter 2007, reflecting higher realizations and sales volumes and lower exploration costs and income taxes, partially offset by higher DD&A expense. As shown on slide 9, upstream sales volumes were higher in the first quarter 2008 as compared to both the first and fourth quarters of 2007 mainly as a result of the full uninterrupted quarter of natural gas sales to our LNG Plant in Equatorial Guinea. First quarter 2008 income also benefited from higher average realizations which increased $1.71 per barrel of oil equivalent or BOE over the fourth quarter 2007. Moving to slide 10, domestic upstream income increased $91 million from the fourth quarter, largely a result of higher realizations and sales volumes, and lower exploration expense. This was partially offset by higher income taxes and DD&A and lower other revenue mainly as a result of lower natural gas purchase and resale activities.
Turning to Slide 11, improved differentials for Gulf Coast Sour and Wyoming Asphaltic grades, and higher Gulf Coast Sweet and spot WTI premiums all contributed to our significant price realization improvement relative to the WTI benchmark. Turning to slide 12, first quarter domestic upstream expense, excluding exploration expense, was $2.17 per BOE higher than the fourth quarter primarily as a result of higher DD&A expense and increased production taxes. Domestic upstream income per BOE increased $6.74 quarter over quarter, reflecting both higher realized prices and higher sales volumes. Moving to slide 13, international upstream income for the first quarter increased $128 million from the fourth quarter to $440 million. This increase was mainly due to a reduction in income taxes, higher realizations and sales volumes, and lower production expenses, partially offset by higher exploration expenses related to seismic acquisition in Indonesia and seasonal exploration activity from our in-situ assets in Canada. The large decrease in international taxes was a result of year-end tax accrual adjustments recorded in the fourth quarter. As shown on Slide 14, our total international liquids realizations increased less than Dated Brent. While our international crude oil prices actually increased in-line with Dated Brent, NGL realizations did not keep up with the price of crude. Our international natural gas realizations decreased $0.77 per MCF due to the increased volumes of the lower priced natural gas sales to the LNG plant in Equatorial Guinea. Turning to slide 15, international upstream income increased $4.81 per BOE primarily due to reduced income taxes, as previously discussed, higher liquids realizations, and lower expenses, partially offset by lower gas price realizations. I would like to point out that additional value from the Equatorial Guinea gas volumes is realized through the LNG facility itself, and the sale of these LNG volumes is reflected in our Integrated Gas segment. Turning to slide 16, oil sands mining segment income for the first quarter was $27 million compared to a loss of $63 million in the fourth quarter of 2007, when operations were disrupted by a fire at the Scotford upgrader. Net bitumen production before royalties was 24,000 barrels per day for the first quarter, less than previous guidance due to weather-related issues at the mine and unplanned maintenance at the Scotford upgrader. Segment income for the first quarter includes a $36 million after-tax loss on derivative instruments which were put in place by Western Oil Sands prior to the acquisition, $32 million of which was unrealized. The last of these derivative instruments is set to expire in the fourth quarter 2009. Also during the first quarter, the royalty calculation methodology for the Athabasca Oil Sands Project was revised to allow for additional eligible costs of the project. As a result, the one percent royalty rate was retroactively applied to the project as of July 1, 2007. Marathon expects a refund of approximately $32 million, with $16 million of that amount realized in the first quarter and the other half as a purchase price adjustment. As shown on slide 17, our total production on a combined basis for the upstream and oil sands mining segments was 399,000 BOE per day for the first quarter of 2008, an increase of about 16 percent from the first quarter of 2007 and about 9 percent higher than the fourth quarter of 2007. Moving to our downstream business, as noted on Slide 18, first quarter 2008 segment loss totaled $75 million compared to $345 million earned in the same quarter last year. Because of the seasonality of the downstream business, I will compare our first quarter results against the same quarter in 2007. The primary factor contributing to downstream's change in results quarter to quarter was the significant reduction in the Light Louisiana Sweet, or LLS, Chicago 6-3-2-1 crack spread, which averaged only 7 cents per barrel in the first quarter 2008 compared to $5.26 per barrel in the first quarter 2007. On a two-thirds Chicago and a one-third U.S. Gulf Coast basis, the average LLS 6-3-2-1 crack spread decreased from $5.14 per barrel in the first quarter 2007 to $0.51 per barrel in the first quarter 2008. In addition, the Company's per-gallon wholesale sales price realizations for non-gasoline and non-distillate products did not increase over the comparable prior-year period as much as the average spot market price for the applicable product in the LLS 6-3-2-1 calculation. For example, the average price of all the products we sell other than gasoline and distillate only increased about $0.55 per gallon, whereas the price of 3 percent residual fuel oil increased by $0.73 per gallon, on average, quarter to quarter. Our first quarter downstream results were also significantly impacted by planned maintenance activities at our Garyville, Robinson, and Detroit refineries. Primarily because of this maintenance activity, our crude oil throughputs averaged only 845,000 barrels per day in the quarter compared to 968,000 barrels per day in the first quarter last year. In addition, manufacturing expenses were about $175 million higher in the first quarter 2008 compared to the same quarter last year, primarily due to the previously-mentioned maintenance activities, light product transportation costs and purchased energy costs. The first quarter 2008 segment loss includes a pre-tax derivatives-related loss of about $120 million compared to a pre-tax derivatives-related gain of $26 million in the first quarter of 2007. As Gary Heminger mentioned during our Analyst Meeting in March, we are transitioning away from the use of derivatives in our P+ pricing strategy. Partially offsetting these negative factors was an improvement in the spread between gasoline and ethanol prices during the first quarter 2008 compared to the same quarter of 2007. The first quarter 2008 also marked the start-up of ethanol production at the 110 million gallon per year Greenville, Ohio, plant that is 50% owned by Marathon. As shown on Slide 19, Speedway SuperAmerica's, or SSA, gasoline and distillate sales were down approximately 8 million gallons in the first quarter 2008 compared to the same quarter in 2007, or a decrease of 1 percent. SSA's same store gasoline sales volumes were down 2.4 percent and same store merchandise sales were down 0.7 percent in the first quarter 2008 compared to the same quarter in 2007. SSA's gross margin for gasoline and distillate was about 11.5 cents per gallon in the first quarter 2008 compared to about 12.2 cents per gallon in the same quarter of 2007. Slide 20 provides a summary of segment data, along with a reconciliation to Net Income. Slide 21 provides selected preliminary Balance Sheet and Cash Flow data. Cash-adjusted debt to total capital at the end of the first quarter was approximately 24%. As a reminder, the cash-adjusted debt balance includes just under $500 million of debt serviced by U.S. Steel. Year-to-date preliminary cash flow from operations was approximately $800 million, and preliminary cash flow from operations before working capital changes was approximately $1.3 billion. Slide 22 provides guidance for the second quarter and full year 2008. Production available for sale, excluding oil sands mining, is forecast to be between 355,000 and 370,000 barrels of oil equivalent per day versus 375,000 barrels of oil equivalent per day available for sale in the first quarter 2008. The decrease is largely a result of seasonally lower gas sales in the North Sea and Alaska combined with scheduled downtime at our Equatorial Guinea LNG facility. I will now turn the call over to Clarence Cazalot, Marathon President and CEO. Clarence Cazalot: Thank you Howard. As we have reported, our Upstream segment's recorded sales volume in the first quarter of 2008 was 378,000 barrels of oil equivalent per day. It's important to note that this representa a growth of 11.5 percent above the first quarter of 2007 and a 6.6 percent growth over the fourth quarter of 2007. This growth is mainly attributable to our gas sales to the LNG plant in EG. For 2008, we are on track to deliver the production guidance discussed with you at our recent meeting in New York of 380,000 to 420,000 barrels of oil equivalent per day despite the delays we have seen in our Alvheim and the outside-operated Neptune projects. At Alvheim, we experienced a ten day weather delay in sail away to the offshore location. Commissioning of the FPSO is nearly complete and we expect first production to occur over the next two to three weeks. Production from the Vilje field is anticipated during the latter half of the second quarter and peak production of 75,000 net barrels of oil equivalent per day from these two fields is expected by early 2009. At Neptune, the operator BHP advises the repair design is ongoing and they expect to provide additional guidance on timing of completing repairs in the coming weeks. The operator has suggested that first production may occur in the third quarter. Howard Thill: We will now open the call to questions.
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