2Q 2007 Earnings Conference Call Remarks

Ken Matheny
Vice President, Investor Relations and Public Affairs

July 31, 2007

Welcome to Marathon Oil Corporation's second quarter 2007 earnings Web cast and teleconference. I'm sure by now you've seen our press release announcing our acquisition of Western Oil Sands and Clarence Cazalot, Marathon President and CEO and Gary Heminger, Marathon executive vice president and president of our downstream organization, will discuss this in more detail at the end of the normal earnings overview. We will then open the line for questions from investors, analysts and the press.

As a reminder for telephone participants, you can find the synchronized slides that accompany this call on our website www.Marathon.com.

With us on the call today, in addition to Clarence and Gary, are Janet Clark, executive vice president and CFO, Phil Behrman, senior vice president Worldwide Exploration, Steve Hinchman, senior vice president Worldwide Production, Dave Roberts, senior vice president Business Development, 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 certain forward-looking statements that are 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, 2006, and subsequent Forms 8-K and 10-Q, 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.

Turning to slide 3, net income for the second quarter was $1.55 billion versus $1.748 billion in the second quarter 2006. This slide also provides a reconciliation of Net Income to Adjusted Net Income by quarter for the last two years.

The bar graphs on slide 4 show the quarterly net income adjusted for special items for the second quarter was $1.548 billion and provide the quarterly and yearly data for 2006 and 2005 for ease of comparison.

Adjusted net income for the second quarter 2007 was up slightly from the $1.515 billion recorded in the second quarter 2006.

Slide 5 shows that on a per share basis, adjusted net income was up $0.17 or eight percent from the year ago second quarter level and $1.23 per share or 120% above the first quarter. On a split-adjusted basis we had repurchased 57 million shares as of the end of the second quarter, at a cost of $2.5 billion.

Moving to slide 6, the year over year increase in net income adjusted for special items of $33 million for the second quarter was a result of higher margins in our downstream business largely offset by lower sales volumes and prices in our upstream business.

Moving to slide 7, adjusted net income for the second quarter 2007 was $841 million higher than the first quarter 2007. This increase was primarily a result of a higher average refining and wholesale marketing gross margin somewhat offset by higher income taxes.

Turning to slide 8, upstream segment income for the second quarter was relatively flat with the first quarter 2007. Positive price variances, slightly higher liquids volumes and higher other income were mostly offset by higher income taxes and higher exploration expenses.

As shown on slide 9, worldwide sales volumes on a BOE basis were relatively flat in the second quarter 2007 as compared to the first quarter 2007 while the average realized price per BOE increased $2.13 quarter over quarter.

Moving to slide 10, domestic upstream income increased $23 million from the first quarter, largely a result of higher prices and other income; partially offset by lower sales volumes and higher exploration expenses. The lower sales volumes were largely a result of a scheduled turnaround at the Kenai LNG facility in Alaska.

As shown on Slide 11, the NYMEX prompt price for WTI crude was up $6.79 per barrel from the first quarter while our average domestic realized price was up $5.87. Improved crude oil differentials for Gulf Coast sour and Gulf Coast sweet grades were more than offset by a higher Wyoming Asphaltic discount.

The Bid Week Natural Gas price was up $0.78 per mcf from the first quarter, while our natural gas realizations were up $0.25. Natural gas realizations as a percentage of the Henry Hub First of Month Index price decreased from the first quarter 2007 primarily due to weaker basis differentials for gas sold in the mid-continent and the Rockies.

Turning to slide 12, second quarter domestic upstream expense, excluding exploration expense, was $1.69 per BOE higher than the first quarter primarily as a result of the lower volumes. Domestic upstream income per BOE increased $2.66 quarter over quarter, reflecting the higher realized prices.

Moving to slide 13, international upstream income for the second quarter was essentially flat with the first quarter. Higher volumes and liquids prices, along with higher income from our LPG plant in EQUATORIAL GUINEA were essentially offset by higher income taxes and exploration expenses.

As shown on Slide 14, our international liquids realizations were approximately $2.00 less than the increase in the price of Dated Brent. International crude realizations outperformed Dated Brent primarily due to the timing of liftings. However our reported NGL realizations had a negative impact which reduced total international liquid hydrocarbon realizations.

The decrease in the international natural gas price, compared to the first quarter, was a result of lower volumes and realized prices in Europe and the commencement of gas sales to the liquefied natural gas facility in Equatorial Guinea. Please remember that our LNG business is reported through the Integrated Gas segment, so the additional uplift in value realized by this facility is not reported through our upstream business.

Turning to slide 15, second quarter international upstream expense, excluding exploration expense, decreased $1.35 per BOE over the first quarter 2007, largely a result of the increased volume of lower cost natural gas production in EQUATORIAL GUINEA.

Moving to slide 16 and our downstream business, second quarter 2007 segment income was a record $1.246 billion compared to $917 million earned in the same quarter last year. Because of the seasonality of the downstream business, I will compare our second quarter 2007 results against the same quarter of 2006.

The most significant factor contributing to downstream's improved results quarter to quarter was the improvement in the refining and wholesale marketing gross margin in the second quarter of 2007. As discussed in our interim update earlier this month, the pricing of WTI crude has become disconnected from the actual cost of most light sweet crude available to refiners on the U.S. Gulf Coast and in the Midwest. Because of this, we have switched to marker prices utilizing Light Louisiana Sweet, or LLS, crude oil prices which better represent the actual cost of light sweet crudes available both in the U.S. Gulf Coast and the Midwest.

The LLS 6-3-2-1 crack spread, on a two-thirds Chicago and one-third U.S. Gulf Coast basis, increased from $11.24 per barrel in the second quarter 2006 to $15.47 per barrel in the second quarter 2007.

Another positive impact in the second quarter 2007 compared to the same quarter last year was the change in our average wholesale sales price realization per gallon was higher than the change in the average spot market prices for the products that are used in the LLS 6-3-2-1 calculation during these periods.

Our refineries ran extremely well in the second quarter 2007, setting quarterly records for crude oil and total refinery throughputs. Crude oil throughputs were up 3.3 percent and total refinery throughputs were up 2.8 percent compared to the second quarter of 2006. These higher throughputs combined with the extremely strong margins in the quarter positively impacted our financial results on a quarter-to-quarter basis.

For the full year, we expect our total crude oil throughputs will exceed the record level of 980,000 BPD we achieved in 2006.

Partially offsetting these positive results was the fact that our crude oil and other feedstock acquisition costs were relatively higher than the change in LLS prices during the second quarter 2007 compared to the second quarter 2006 would indicate. This was primarily due to the fact that non-crude oil feedstock prices tend to move more closely with refined product prices than the cost of crude. Therefore, the relatively larger increase in refined product prices we experienced during the second quarter 2007 compared to the change in LLS prices, which on average actually decreased $1.41 per barrel quarter to quarter, resulted in relatively higher charge and other blendstock costs than would have resulted just based on the change in LLS prices quarter to quarter.

In addition, we built inventories during the second quarter of 2007 versus drawing down inventories in the second quarter 2006 which, given the change in prices in each quarter, negatively impacted our second quarter 2007 results compared to the second quarter 2006.

As shown on Slide 17, Speedway SuperAmerica, or SSA's, gasoline and distillate sales were up 12 million gallons or an increase of 1.5 percent quarter over quarter. SSA's same store gasoline sales volumes were up 0.9 percent and same store merchandise sales increased 3.4 percent in the second quarter 2007 compared to the same quarter in 2006.

SSA's gross margin for gasoline and distillate was 10.29 cents per gallon compared to 10.19 cents per gallon in the same quarter last year.

Slide 18 provides a summary of segment data, along with a reconciliation to net income. I will discuss three items of interest on this slide.

First, the integrated gas segment had income of $12 million during the second quarter 2007 compared to $19 million in the first quarter. As mentioned earlier, the LNG production facility in Equatorial Guinea shipped the first three cargoes of LNG during the second quarter. The increase in earnings from EQUATORIAL GUINEA LNG was more than offset by a decline in methanol income as a result of lower prices and volumes, lower domestic LNG income due to planned maintenance and increased technology development costs.

Once the LNG production facility commenced primary operations and began to generate revenue in May 2007, EGHoldings was no longer a variable interest entity. Effective May 1, 2007, we no longer consolidate EGHoldings because the minority shareholders have rights limiting our ability to exercise control over the entity. Our investment in EGHoldings is accounted for prospectively using the equity method of accounting.

Second, unallocated administrative expense increased to $96 million, $24 million higher than the first quarter, primarily as a result of higher stock-based compensation and pension expenses. And third, net interest and financing income was $20 million, essentially flat with the first quarter.

Slide 19 provides selected preliminary Balance Sheet and Cash Flow data. Cash-adjusted debt to total capital at the end of the second quarter was 8%, up slightly from 7% at the end of the first quarter. As a reminder, the cash-adjusted debt balance includes approximately $510 million of debt serviced by U.S. Steel.

Year-to-date preliminary cash flow from operations was approximately $2.4 billion, and preliminary cash flow from operations before working capital changes was approximately $3.1 billion.

Slide 20 provides guidance for the third quarter and full year 2007. Specifically related to production, our previous 2007 production available for sale guidance assumed first oil from the Alvheim/Vilje development in the first quarter 2007. While all other areas of our business remain within initial guidance, as announced this morning in the earnings release, the delay in first production from Alvheim/Vilje to the fourth quarter results in our 2007 production forecast now being 350,000 to 375,000 boepd. Despite this delay, our strong portfolio of development opportunities continues to underpin our 2006 though 2010 average production growth rate of 6 to 9 percent per year.

I will now turn the call over to Clarence.

Thanks Ken and again good morning everyone. Ken has covered the quarterly earnings and I will just add that we did have another exceptional quarter from our downstream operations which allowed us to supply our markets to the fullest extent possible.

In integrated gas, we completed commissioning of the Equatorial Guinea LNG facility and made our first shipment in late May, about six months ahead of the originally planned date.

In the upstream segment, operations and production are moving ahead as planned everywhere except the Alvheim/Vilje project in Norway. Due to the commissioning delays, which Steve Hinchman outlined last quarter, we now expect first production to occur in the fourth quarter.

As Ken outlined earlier, we've moved our 2007 production guidance down, due to the Alvheim/Vilje which Ken provided the details earlier in the call, I want to emphasize two things,

First, our new guidance does NOT include any production from our just announced acquisition of Western Oil Sands but is an apples to apples comparison from our previous guidance and second, we still on track to realize six to nine percent production growth between 2006 and 2010 and again, this is an apples to apples comparison and does NOT include any production from Western Oil Sands, which would simply be additive to our production profile.

I want to now discuss this acquisition. As you know, we have been working hard for the past two years to identify a Canadian Oil Sands business opportunity that would enable us to link our best-in-class U.S. downstream business with the very substantial Canadian oil sands resource base to create increased value through lower cost integrated solutions

Moving to the first slide you will find the Forward Looking Statement associated with the following presentation.

Moving to slide two, as you've undoubtedly read by now, we have signed an agreement to acquire Western Oil Sands. As shown on this map, Western Oil Sands has a substantial position in the Canadian Oil Sands, primarily through their 20 percent interest in the Athabasca Oil Sands Project or AOSP.

This acquisition will link the world-class AOSP multi-phase development with our best-in-class refining assets in the Midwest and Gulf Coast, providing opportunities for significant value enhancement.

It also means that we will maintain complete ownership and control through the value chain while providing a lower cost alternative to upgrading the crude than is available in Alberta and will provide finished products rather than synthetic crude which would still need to be refined.

The acquisition secures for Marathon long-life production of OECD crude for future refinery upgrade projects and positions Marathon across the total value chain

And it will allow for our future refinery upgrade projects and transportation solutions to be sequenced so as to coincide with the planned production growth from the AOSP expansion projects.

Turning to the next slide, we are acquiring Western Oil Sands for a total consideration of about Canadian $6.5 billion or US$6.2 billion, using the July 27 midday exchange rate and Marathon's closing share price as of July 27, and including Western Oil Sands' debt of approximately US$650 million at June 30.

Western Oil Sands shareholders will receive approximately Canadian $3.8 billion in cash and 34.3 million shares of Marathon common stock

This acquisition will significantly increase our access to resource, providing 2 billion barrels of net resource from mined bitumen acreage and another 600 million barrels of net oil resource from in-situ acreage, for a total of 2.6 billion barrels of net resource at very attractive prices.

On a pro forma basis at year end 2006, this acquisition will increase our reserve to production life from nine years to 12 years and increase our proved reserves by over a third to 1.7 billion boe.

In addition to the mining and in-situ assets this deal encompasses, it also includes a 20 percent interest in the Scotford upgrader which creates additional value by processing the AOSP bitumen into higher value synthetic products.

Currently, Western's share in the upstream operations of AOSP produces 31,000 barrels per day of mined bitumen and as shown on the next slide, with five well defined expansions, net production is projected to growing to over 130,000 barrels per day by 2020 and will in fact remain at that plateau for many years thereafter.

We see Marathon's refining network as very well positioned to provide the best value processing solution to the increasing volumes of Canadian oil sands in general and AOSP in particular.

I'd now like Gary Heminger to share with you additional information on our planned integration of these assets.

Thank you Clarence, as we likely have many Western Oil Sands shareholders and analysts on the call I'd like to share with you some highlights of our downstream operations and potential projects.

As you'll see on the next slide, Marathon's seven refineries, with almost one million barrels per day of refining capacity, really operate as one fully integrated system through our extensive pipeline, barge and terminal operations.

Those of you that follow us will recall that we are currently conducting a front-end engineering and design or FEED study for a heavy oil upgrading project at our Detroit refinery as shown on the next slide.

If approved, this project will increase the refinery's crude unit capacity to approximately 115,000 barrels per day, and include the construction of a 28,000 barrel per day heavy oil coker and other associated process units.

While we are not finished with the FEED study we are close enough that we believe that we can process an incremental 80,000 barrels per day of heavy sour crude at Detroit for less than half of the capital investment needed to build new upgrading capacity in Alberta.

Not only will this be at a substantially lower cost, as I just described, but it will also provide higher value consumer products such as gasoline and diesel rather than synthetic crude oil which, as Clarence already mentioned, would still need to be refined into finished products.

Beyond the Detroit project, we continue to evaluate the potential for similar heavy oil processing projects at our St. Paul Park, Minn. and Robinson, Ill. Refineries. In addition, both our current Garyville, LA refinery and the new Garyville refinery currently under construction have the ability to run Canadian heavy crude and through our extensive barge system we will have the ability to transport AOSP crude oil to that location when economics warrant this supply alternative. Importantly, these upgrading projects can be sequenced to coincide with the planned production growth from the Western Oil Sands expansion projects, as well as production growth from other oil sands projects seeking to find markets for their crude oil.

Finally, moving to the last slide, you will see that there are a number of already proposed pipeline solutions to move increasing volumes of Canadian crude into the U.S. and we will work with the same diligence that brought us what we believe to be an outstanding win-win solution for capturing value across the integrated oil value chain with Western Oil Sands in seeking the proper additional pipeline solutions needed.

With that I'll turn it back over to Clarence.

We see this acquisition as providing a significant value opportunity for not only Marathon shareholders but for Western Oil Sands shareholders as well. This provides what we believe is the highest value commercial solution to a world-class asset.

With that I'll turn it back over to Ken for questions.

Thank you Clarence. We will now open the call to questions. To accommodate all who want 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. For the benefit of all listeners we ask that you identify yourself and your affiliation.