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Thomas J. Usher
Chairman of the Board
Clarence P. Cazalot Jr.
President and
Chief Executive Officer
Marathon’s emphasis on continuous improvements in the operating performance of each business segment, the growth of our international portfolio and sound financial discipline provide the backdrop for our review of key highlights and performance results for 2006.
Our vision, business model and strategy established five years ago have served as the foundation for Marathon’s continued success throughout 2006. Marathon’s strong performance has been the result of dedicated employees throughout the Company who performed their jobs in a manner consistent with our corporate values. Among the year’s highlights, Marathon posted strong financial and operational performance, witnessed positive price and volume improvements in the upstream segment, and enjoyed continued strength and growth in our downstream business.
Milestones Around the Globe
Exploration and Production. Marathon resumed operations in Libya following the 2004 lifting of trade sanctions imposed in 1986 by the United States Government. This re-entry into Libya has added significant reserves and production to our portfolio.
In Norway, Marathon submitted a plan for development and operation of the Volund Field (which received government approval in January 2007), announced the successful Gudrun appraisal well results, and completed the hull work on the floating production, storage and offloading (FPSO) vessel for our Alvheim development. Production from Alvheim is scheduled to commence in the second quarter of 2007. In the Gulf of Mexico, our Neptune development is on schedule for first production by early 2008.
We also made moves into resource plays in the U.S. in both oil and natural gas. Key acreage acquisitions during 2006 included an extensive leasehold position in the Bakken Shale of North Dakota and Montana, the Piceance Basin of Western Colorado and the Barnett Shale in North Central Texas. These new U.S. plays expose Marathon to net resources of approximately 285 million barrels of oil equivalent (boe), with the potential to add 50,000 boe per day of production by 2011.
Offshore Angola, we have announced 20 discoveries in Marathon’s exploration program on Blocks 31 and 32 since 2001. Four additional wells in Angola have reached total depth, and results will be forthcoming upon government and partner approvals.
Returning to Indonesia after a decade-long absence, Marathon was awarded a 70 percent interest and operatorship of the deepwater Pasangkayu Block.
We continued our strong reserve replacement, ending 2006 with a three-year reserve replacement of 171 percent, excluding divestitures. In addition, over the past five years we increased our total resource base approximately 86 percent, from 2.1 billion to 3.9 billion boe.
We are not simply looking to grow volumes but are also focused on adding value. This is exemplified in the 2006 sale of our Russian upstream businesses, which were monetized at a significant financial gain.
With defined production growth through 2010 at a compound average rate in the range of 6 to 9 percent and a strong resource base for growth beyond 2010, we are well positioned to continue delivering significant value through a strong upstream segment.
Integrated Gas. The construction of a liquefied natural gas (LNG) plant on Equatorial Guinea’s Bioko Island is ahead of schedule. Commissioning is under way, and first shipments are expected in the second quarter of 2007. Also on Bioko Island, Marathon and its partners awarded a front-end engineering and design (FEED) contract for initial work related to a potential second LNG train.
Refining, Marketing and Transportation. In 2006, the Board approved a projected $3.2 billion expansion of our Garyville refinery in Louisiana. In January 2007, the Company received the air permit for the project. This expansion will increase the crude oil refining capacity of the facility by 73 percent and the Company’s total crude oil refining capacity by 18 percent. Upon completion, the refinery will provide an additional 7.5 million gallons of clean transportation fuels per day. It is another example of Marathon’s commitment to making investment decisions that build energy infrastructure to supply the growing needs of consumers in the markets we serve.
Marathon also formed a 50/50 joint venture to construct and operate ethanol plants, the first of which will be located in Greenville, Ohio. With 15 years of experience as one of the nation’s leading blenders of ethanol in gasoline, Marathon is uniquely positioned to pursue this alternative energy source.
The Company’s seven-plant refining network and logistics system, managed as a single system, again proved to be a competitive advantage. Among notable highlights in 2006, we achieved record refinery throughputs, 94 percent mechanical availability and completed lower sulfur gasoline and ultra-low sulfur diesel (ULSD) fuel modifications required by June 1, 2006, on time and under budget.
A Focused Strategy
Living our values underpins all of the Company’s current and future success in delivering shareholder return. Aligned with our values is a strategy that focuses on remaining integrated across the value chain and delivering innovative energy solutions through unique partnerships. In doing so, Marathon seeks to:
- Maintain a fully integrated structure, including a competitive and growing exploration and production business segment.
- Grow our integrated gas business with world-class assets.
- Offer a top-tier U.S. refining, marketing and transportation component.
- Maximize the value of these business segments by investing in existing operations and, when appropriate, entering into new complementary ventures designed to enhance shareholder value.
By executing this strategy, Marathon has delivered top-quartile results in a number of key performance measures compared to our peers. Marathon ranked second in total shareholder return among the 13 companies in the American Oil Index (XOI) for the three-year period ended December 2006.
In January 2006, we announced a $2 billion share repurchase program. In January 2007, the Company’s Board authorized the extension of our share repurchase program by an additional $500 million. As of mid-February, the Company had repurchased 24.2 million shares at a cost of $2 billion. We anticipate completing the additional $500 million in share repurchases during the first half of 2007.
Board Development
In September, Marathon welcomed John W. Snow, former U.S. Treasury Secretary, to its Board of Directors. Mr. Snow was formerly Chairman and Chief Executive Officer of CSX Corporation and a former board member of USX Corporation. Mr. Snow’s knowledge of Marathon, our industry and global markets will be highly complementary to our ongoing efforts to profitably grow the Company.
Looking Forward
Financial soundness. Operational strength. Company-wide values. Collectively, these attributes position Marathon for continued success.
Our 2006 results validate the strategic course we mapped out five years ago, and we now look to 2007 with a focus on strategic intents that are ambitious, yet achievable:
- Deliver top-quartile returns in our peer group (the XOI).
- Leverage integration to create value.
- Invest in high-return, high-value projects.
- Maintain a significant position in Organization for Economic
Co-operation and Development (OECD) countries.
- Achieve earnings per share growth on a flat hydrocarbon-price basis.
- Maintain financial flexibility.
In closing, we offer our sincere appreciation to each shareholder for the confidence you continue to place in Marathon. And to our employees, your teamwork, excellence and integrity have made our Company an outstanding, progressive organization.
Respectfully,
Thomas J. Usher Clarence P. Cazalot Jr.
Chairman President and Chief Executive Officer
March 2007