Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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(Mark One) | |
[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the Quarterly Period Ended June 30, 2016 |
OR
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| |
[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period from _____ to _____ |
Commission file number 1-5153
Marathon Oil Corporation
(Exact name of registrant as specified in its charter)
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| | |
Delaware | | 25-0996816 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
5555 San Felipe Street, Houston, TX 77056-2723
(Address of principal executive offices)
(713) 629-6600
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes R No £
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes R No £
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer þ | Accelerated filer o |
Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
There were 847,258,512 shares of Marathon Oil Corporation common stock outstanding as of July 31, 2016.
MARATHON OIL CORPORATION
Unless the context otherwise indicates, references to “Marathon Oil,” “we,” “our,” or “us” in this Form 10-Q are references to Marathon Oil Corporation, including its wholly-owned and majority-owned subsidiaries, and its ownership interests in equity method investees (corporate entities, partnerships, limited liability companies and other ventures over which Marathon Oil exerts significant influence by virtue of its ownership interest).
For certain industry specific terms used in this Form 10-Q, please see "Definitions" in our 2015 Annual Report on Form 10-K.
Part I - Financial Information
Item 1. Financial Statements
MARATHON OIL CORPORATION
Consolidated Statements of Income (Unaudited)
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| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, | | June 30, |
(In millions, except per share data) | 2016 | | 2015 | | 2016 | | 2015 |
Revenues and other income: | | | | | | | |
Sales and other operating revenues, including related party | $ | 870 |
| | $ | 1,307 |
| | $ | 1,584 |
| | $ | 2,587 |
|
Marketing revenues | 89 |
| | 183 |
| | 147 |
| | 387 |
|
Income from equity method investments | 37 |
| | 26 |
| | 51 |
| | 62 |
|
Net gain (loss) on disposal of assets | 294 |
| | — |
| | 234 |
| | 1 |
|
Other income | 12 |
| | 15 |
| | 16 |
| | 26 |
|
Total revenues and other income | 1,302 |
| | 1,531 |
| | 2,032 |
| | 3,063 |
|
Costs and expenses: | |
| | |
| | | | |
|
Production | 350 |
| | 450 |
| | 678 |
| | 894 |
|
Marketing, including purchases from related parties | 88 |
| | 182 |
| | 146 |
| | 387 |
|
Other operating | 95 |
| | 81 |
| | 204 |
| | 188 |
|
Exploration | 189 |
| | 111 |
| | 213 |
| | 201 |
|
Depreciation, depletion and amortization | 561 |
| | 751 |
| | 1,170 |
| | 1,572 |
|
Impairments | — |
| | 44 |
| | 1 |
| | 44 |
|
Taxes other than income | 39 |
| | 78 |
| | 87 |
| | 145 |
|
General and administrative | 132 |
| | 168 |
| | 283 |
| | 339 |
|
Total costs and expenses | 1,454 |
| | 1,865 |
| | 2,782 |
| | 3,770 |
|
Income (loss) from operations | (152 | ) | | (334 | ) | | (750 | ) | | (707 | ) |
Net interest and other | (86 | ) | | (58 | ) | | (171 | ) | | (105 | ) |
Income (loss) before income taxes | (238 | ) | | (392 | ) | | (921 | ) | | (812 | ) |
Provision (benefit) for income taxes | (68 | ) | | (6 | ) | | (344 | ) | | (150 | ) |
Net income (loss) | $ | (170 | ) | | $ | (386 | ) | | $ | (577 | ) | | $ | (662 | ) |
Net income (loss) per share: | |
| | |
| | |
| | |
|
Basic | $ | (0.20 | ) | | $ | (0.57 | ) | | $ | (0.73 | ) | | $ | (0.98 | ) |
Diluted | $ | (0.20 | ) | | $ | (0.57 | ) | | $ | (0.73 | ) | | $ | (0.98 | ) |
Dividends per share | $ | 0.05 |
| | $ | 0.21 |
| | $ | 0.10 |
| | $ | 0.42 |
|
Weighted average common shares outstanding: | |
| | |
| | |
| | |
|
Basic | 848 |
| | 677 |
| | 790 |
| | 676 |
|
Diluted | 848 |
| | 677 |
| | 790 |
| | 676 |
|
The accompanying notes are an integral part of these consolidated financial statements.
MARATHON OIL CORPORATION
Consolidated Statements of Comprehensive Income (Unaudited)
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| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, | | June 30, |
(In millions) | 2016 | | 2015 | | 2016 | | 2015 |
Net income (loss) | $ | (170 | ) | | $ | (386 | ) | | $ | (577 | ) | | $ | (662 | ) |
Other comprehensive income (loss) | |
| | |
| | |
| | |
|
Postretirement and postemployment plans | |
| | |
| | |
| | |
|
Change in actuarial loss and other | 19 |
| | 86 |
| | (5 | ) | | 162 |
|
Income tax provision (benefit) | (7 | ) | | (30 | ) | | 2 |
| | (57 | ) |
Postretirement and postemployment plans, net of tax | 12 |
| | 56 |
| | (3 | ) | | 105 |
|
Other, net of tax | (2 | ) | | — |
| | (2 | ) | | — |
|
Other comprehensive income (loss) | 10 |
| | 56 |
| | (5 | ) | | 105 |
|
Comprehensive income (loss) | $ | (160 | ) |
| $ | (330 | ) |
| $ | (582 | ) |
| $ | (557 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
MARATHON OIL CORPORATION
Consolidated Balance Sheets (Unaudited)
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| | | | | | | |
| June 30, | | December 31, |
(In millions, except per share data) | 2016 | | 2015 |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 2,584 |
| | $ | 1,221 |
|
Receivables, less reserve of $4 and $4 | 822 |
| | 912 |
|
Inventories | 272 |
| | 313 |
|
Other current assets | 76 |
| | 144 |
|
Total current assets | 3,754 |
| | 2,590 |
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Equity method investments | 944 |
| | 1,003 |
|
Property, plant and equipment, less accumulated depreciation, | |
| | |
|
depletion and amortization of $21,659 and $23,260 | 25,657 |
| | 27,061 |
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Goodwill | 115 |
| | 115 |
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Other noncurrent assets | 2,057 |
| | 1,542 |
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Total assets | $ | 32,527 |
| | $ | 32,311 |
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Liabilities | |
| | |
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Current liabilities: | |
| | |
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Accounts payable | $ | 953 |
| | $ | 1,313 |
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Payroll and benefits payable | 114 |
| | 133 |
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Accrued taxes | 85 |
| | 132 |
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Other current liabilities | 229 |
| | 150 |
|
Long-term debt due within one year | 1 |
| | 1 |
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Total current liabilities | 1,382 |
| | 1,729 |
|
Long-term debt | 7,280 |
| | 7,276 |
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Deferred tax liabilities | 2,392 |
| | 2,441 |
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Defined benefit postretirement plan obligations | 409 |
| | 403 |
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Asset retirement obligations | 1,597 |
| | 1,601 |
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Deferred credits and other liabilities | 314 |
| | 308 |
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Total liabilities | 13,374 |
| | 13,758 |
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Commitments and contingencies |
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| |
|
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Stockholders’ Equity | |
| | |
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Preferred stock – no shares issued or outstanding (no par value, | | | |
26 million shares authorized) | — |
| | — |
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Common stock: | |
| | |
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Issued – 937 million shares and 770 million shares (par value $1 per share, | | | |
1.1 billion shares authorized) | 937 |
| | 770 |
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Securities exchangeable into common stock – no shares issued or | |
| | |
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outstanding (no par value, 29 million shares authorized) | — |
| | — |
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Held in treasury, at cost – 89 million and 93 million shares | (3,397 | ) | | (3,554 | ) |
Additional paid-in capital | 7,433 |
| | 6,498 |
|
Retained earnings | 14,320 |
| | 14,974 |
|
Accumulated other comprehensive loss | (140 | ) | | (135 | ) |
Total stockholders' equity | 19,153 |
| | 18,553 |
|
Total liabilities and stockholders' equity | $ | 32,527 |
| | $ | 32,311 |
|
The accompanying notes are an integral part of these consolidated financial statements.
MARATHON OIL CORPORATION
Consolidated Statements of Cash Flows (Unaudited) |
| | | | | | | |
| Six Months Ended |
| June 30, |
(In millions) | 2016 | | 2015 |
Increase (decrease) in cash and cash equivalents | | | |
Operating activities: | |
| | |
|
Net income (loss) | $ | (577 | ) | | $ | (662 | ) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |
| | |
|
Deferred income taxes | (392 | ) | | (185 | ) |
Depreciation, depletion and amortization | 1,170 |
| | 1,572 |
|
Impairments | 1 |
| | 44 |
|
Net (gain) loss on derivative instruments | 88 |
| | 17 |
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Net cash received (paid) in settlement of derivative instruments | 46 |
| | 4 |
|
Pension and other postretirement benefits, net | 14 |
| | 14 |
|
Exploratory dry well costs and unproved property impairments | 166 |
| | 148 |
|
Net (gain) loss on disposal of assets | (234 | ) | | (1 | ) |
Equity method investments, net | 22 |
| | 37 |
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Changes in: | | | |
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Current receivables | 88 |
| | 534 |
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Inventories | 30 |
| | 21 |
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Current accounts payable and accrued liabilities | (211 | ) | | (770 | ) |
All other operating, net | 41 |
| | (56 | ) |
Net cash provided by operating activities | 252 |
| | 717 |
|
Investing activities: | |
| | |
|
Additions to property, plant and equipment | (753 | ) | | (2,320 | ) |
Disposal of assets | 758 |
| | 2 |
|
Investments - return of capital | 37 |
| | 31 |
|
Purchases of short-term investments | — |
| | (925 | ) |
Deposit for acquisition | (89 | ) | | — |
|
All other investing, net | 2 |
| | (1 | ) |
Net cash used in investing activities | (45 | ) | | (3,213 | ) |
Financing activities: | |
| | |
|
Borrowings | — |
| | 1,996 |
|
Debt issuance costs | — |
| | (19 | ) |
Debt repayments | — |
| | (34 | ) |
Common stock issuance | 1,236 |
| | — |
|
Dividends paid | (77 | ) | | (285 | ) |
All other financing, net | — |
| | 11 |
|
Net cash provided by (used in) financing activities | 1,159 |
| | 1,669 |
|
Effect of exchange rate on cash and cash equivalents | (3 | ) | | 1 |
|
Net increase (decrease) in cash and cash equivalents | 1,363 |
| | (826 | ) |
Cash and cash equivalents at beginning of period | 1,221 |
| | 2,398 |
|
Cash and cash equivalents at end of period | $ | 2,584 |
| | $ | 1,572 |
|
The accompanying notes are an integral part of these consolidated financial statements.
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
These consolidated financial statements are unaudited; however, in the opinion of management, these statements reflect all adjustments necessary for a fair statement of the results for the periods reported. All such adjustments are of a normal recurring nature unless disclosed otherwise. These consolidated financial statements, including notes, have been prepared in accordance with the applicable rules of the SEC and do not include all of the information and disclosures required by U.S. GAAP for complete financial statements.
A reclassification between operating cash flow categories was made to the prior year's financial information to present it on a basis comparable with the current year's presentation with no impact on net cash provided by operating activities.
These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our 2015 Annual Report on Form 10-K. The results of operations for the second quarter and first six months of 2016 are not necessarily indicative of the results to be expected for the full year.
2. Accounting Standards
Not Yet Adopted
In June 2016, the FASB issued a new accounting standards update that changes the impairment model for trade receivables, net investments in leases, debt securities, loans and certain other instruments. The standard requires the use of a forward-looking "expected loss" model as opposed to the current "incurred loss" model. This standard is effective for us in the first quarter of 2020 and will be adopted on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the adoption period. Early adoption is permitted starting January 2019. We are evaluating the provisions of this accounting standards update and assessing the impact, if any, it may have on our consolidated results of operations, financial position or cash flows.
In March 2016, the FASB issued a new accounting standards update that changes several aspects of accounting for share-based payment transactions, including a requirement to recognize all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This standard is effective for us in the first quarter of 2017 and varying transition methods (modified retrospective, retrospective or prospective) should be applied to different provisions of the standard. Early adoption is permitted. We continue to evaluate the provisions of this accounting standards update but do not believe it will have a material effect on our consolidated results of operations, financial position or cash flows.
In February 2016, the FASB issued a new lease accounting standard, which requires lessees to recognize most leases, including operating leases, on the balance sheet as a right of use asset and lease liability. Short-term leases can continue being accounted for off balance sheet based on a policy election. This standard is effective for us in the first quarter of 2019 and should be applied using a modified retrospective approach at the beginning of the earliest period presented in the financial statements. Early adoption is permitted. We are evaluating the provisions of this accounting standards update and assessing the impact it will have on our consolidated results of operations, financial position or cash flows.
In January 2016, the FASB issued an accounting standards update that addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This standard is effective for us in the first quarter of 2018. Early adoption is allowed for certain provisions. We do not expect the adoption of this standard to have a significant impact on our consolidated results of operations, financial position or cash flows.
In July 2015, the FASB issued an update that requires an entity to measure inventory at the lower of cost and net realizable value. This excludes inventory measured using LIFO or the retail inventory method. This standard is effective for us in the first quarter of 2017 and will be applied prospectively. Early adoption is permitted. We do not expect the adoption of this standard to have a significant impact on our consolidated results of operations, financial position or cash flows.
In August 2014, the FASB issued an update that requires management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. This standard is effective for us for the annual period ending after December 15, 2016 and for annual periods and interim periods thereafter. Early adoption is permitted. We do not expect the adoption of this standard to have a significant impact on our consolidated results of operations, financial position or cash flows.
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
In May 2014, the FASB issued an update that supersedes the existing revenue recognition requirements. This standard includes a five-step revenue recognition model to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. Among other things, the standard requires enhanced disclosures about revenue, provides guidance for transactions that were not previously addressed comprehensively and improves guidance for multiple-element arrangements. This standard is effective for us in the first quarter of 2018 and should be applied retrospectively to each prior reporting period presented or with the cumulative effect of initially applying the update recognized at the date of initial application. While early adoption is permitted, we plan to adopt in the first quarter of 2018. We continue to evaluate certain provisions of this accounting standards update and are assessing the impact it will have on our consolidated results of operations, financial position or cash flows.
Recently Adopted
In May 2015, the FASB issued an update that removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The amendment also removes certain disclosure requirements regarding all investments that are eligible to be measured using the net asset value per share practical expedient and only requires certain disclosures on those investments for which an entity elects to use the net asset value per share expedient. This standard is effective for us in the first quarter of 2016 and was applied on a retrospective basis. This standard only modifies disclosure requirements; as such, there was no impact on our consolidated results of operations, financial position or cash flows.
In February 2015, the FASB issued an amendment to the guidance for determining whether an entity is a variable interest entity ("VIE"). The standard does not add or remove any of the five characteristics that determine whether an entity is a VIE. However, it does change the manner in which a reporting entity assesses one of the characteristics. In particular, when decision-making over the entity’s most significant activities has been outsourced, the standard changes how a reporting entity assesses if the equity holders at risk lack decision making rights. This standard is effective for us in the first quarter of 2016. The adoption of this standard did not have a significant impact on our consolidated results of operations, financial position or cash flows.
3. Variable Interest Entity
The owners of the Athabasca Oil Sands Project, in which we hold a 20% undivided interest, contracted with a wholly owned subsidiary of a publicly traded Canadian limited partnership (“Corridor Pipeline”) to provide materials transportation capabilities among the Muskeg River and Jackpine mines, the Scotford upgrader and markets in Edmonton, Alberta, Canada. Costs under this contract are accrued and recorded on a monthly basis, with current liabilities of $2 million recorded at June 30, 2016 and December 31, 2015. This contract qualifies as a variable interest contractual arrangement, and the Corridor Pipeline qualifies as a VIE. We hold a variable interest but are not the primary beneficiary because our shipments are only 20% of the total; therefore, the Corridor Pipeline is not consolidated by us. Our maximum exposure to loss as a result of our involvement with this VIE is the amount we expect to pay over the contract term, which was $468 million as of June 30, 2016. The liability on our books related to this contract at any given time will reflect amounts due for the immediately previous month’s activity, which is substantially less than the maximum exposure over the contract term.
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
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4. | Income (Loss) per Common Share |
Basic income (loss) per share is based on the weighted average number of common shares outstanding. Diluted income per share assumes exercise of stock options, provided the effect is not antidilutive. The per share calculations below exclude 14 million stock options for the three and six month periods ended June 30, 2016 and 13 million stock options for the three and six month periods ended June 30, 2015 that were antidilutive.
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| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(In millions, except per share data) | 2016 | | 2015 | | 2016 | | 2015 |
Net income (loss) | $ | (170 | ) | | $ | (386 | ) | | $ | (577 | ) | | $ | (662 | ) |
| | | | | | | |
Weighted average common shares outstanding | 848 |
| | 677 |
| | 790 |
| | 676 |
|
Weighted average common shares, diluted | 848 |
| | 677 |
| | 790 |
| | 676 |
|
Net income (loss) per share: | | | | | | | |
Basic | $ | (0.20 | ) | | $ | (0.57 | ) | | $ | (0.73 | ) | | $ | (0.98 | ) |
Diluted | $ | (0.20 | ) | | $ | (0.57 | ) | | $ | (0.73 | ) | | $ | (0.98 | ) |
5. Acquisitions
In June 2016, we executed a purchase agreement to acquire PayRock Energy Holdings, LLC ("PayRock"), a portfolio company of EnCap Investments, which closed on August 1, 2016 for $888 million, subject to closing adjustments. PayRock has approximately 61,000 net surface acres and current production of approximately 9,000 net barrels of oil equivalent in the oil window of the Anadarko Basin STACK play in Oklahoma. In the second quarter of 2016 an $89 million deposit was paid into escrow related to the acquisition. The purchase price was paid with cash on hand. We accounted for this transaction as an asset acquisition, with the majority of the purchase price allocated to property, plant and equipment.
2016 - North America E&P Segment
During the quarter, we announced the sale of our Wyoming upstream and midstream assets for proceeds of $870 million, before closing adjustments, of which approximately $690 million was received in the second quarter. A pre-tax gain of $266 million was recognized in the second quarter 2016. The remaining asset sales are subject to the receipt of certain tribal consents and are expected to close before year end. These assets are classified as held for sale in the consolidated balance sheet as of June 30, 2016 with total assets of $104 million and total liabilities of $4 million. The proceeds for the remaining asset sales were deposited into an escrow account by the buyer.
In March and April 2016, we entered into separate agreements to sell our 10% working interest in the outside-operated Shenandoah discovery in the Gulf of Mexico, operated natural gas assets in the Piceance basin in Colorado and certain undeveloped acreage in West Texas for a combined total of approximately $80 million in proceeds, before closing adjustments. We closed on certain of the asset sales and recognized a net pre-tax net loss on sale of $48 million for the six months ended June 30, 2016. The remaining asset sales are expected to close by year-end.
2015 - North America E&P Segment
In the third quarter of 2015, we closed on the sale of our East Texas/North Louisiana and Wilburton, Oklahoma natural gas assets for proceeds of approximately $100 million and recorded a pretax loss of $1 million. During the second quarter of 2015, we recorded a non-cash impairment charge of $44 million related to these assets as a result of the anticipated sale (see Note 13).
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
7. Segment Information
We have three reportable operating segments. Each of these segments is organized and managed based upon both geographic location and the nature of the products and services it offers.
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• | N.A. E&P – explores for, produces and markets crude oil and condensate, NGLs and natural gas in North America; |
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• | Int'l E&P – explores for, produces and markets crude oil and condensate, NGLs and natural gas outside of North America and produces and markets products manufactured from natural gas, such as LNG and methanol, in E.G.; and |
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• | Oil Sands Mining (“OSM”) – mines, extracts and transports bitumen from oil sands deposits in Alberta, Canada, and upgrades the bitumen to produce and market synthetic crude oil and vacuum gas oil. |
Information regarding assets by segment is not presented because it is not reviewed by the chief operating decision maker (“CODM”). Segment income represents income which excludes certain items not allocated to segments, net of income taxes, attributable to the operating segments. A portion of our corporate and operations support general and administrative costs are not allocated to the operating segments. These unallocated costs primarily consist of employment costs (including pension effects), professional services, facilities and other costs associated with corporate and operations support activities. Additionally, items which affect comparability such as: gains or losses on dispositions, certain impairments, change in tax expense associated with a tax rate change, unrealized gains or losses on commodity derivative instruments, pension settlement losses or other items (as determined by the CODM) are not allocated to operating segments.
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| | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2016 |
| | | Not Allocated | | |
(In millions) | N.A. E&P | | Int'l E&P | | OSM | | to Segments | | Total |
Sales and other operating revenues | $ | 617 |
| | $ | 159 |
| | $ | 185 |
| | $ | (91 | ) | (c) | $ | 870 |
|
Marketing revenues | 53 |
| | 23 |
| | 13 |
| | — |
| | 89 |
|
Total revenues | 670 |
| | 182 |
| | 198 |
| | (91 | ) | | 959 |
|
Income from equity method investments | — |
| | 37 |
| | — |
| | — |
| | 37 |
|
Net gain on disposal of assets and other income | 2 |
| | 7 |
| | 1 |
| | 296 |
| (d) | 306 |
|
Less: | | | | | | | | | |
Production expenses | 129 |
| | 56 |
| | 165 |
| | — |
| | 350 |
|
Marketing costs | 52 |
| | 23 |
| | 13 |
| | — |
| | 88 |
|
Exploration expenses | 37 |
| | 4 |
| | 7 |
| | 141 |
| (e) | 189 |
|
Depreciation, depletion and amortization | 433 |
| | 68 |
| | 49 |
| | 11 |
| | 561 |
|
Other expenses (a) | 97 |
| | 22 |
| | 9 |
| | 99 |
| (f) | 227 |
|
Taxes other than income | 35 |
| | — |
| | 4 |
| | — |
| | 39 |
|
Net interest and other | — |
| | — |
| | — |
| | 86 |
| | 86 |
|
Income tax benefit | (41 | ) | | (2 | ) | | (10 | ) | | (15 | ) | | (68 | ) |
Segment income (loss) / Net income (loss) | $ | (70 | ) | | $ | 55 |
| | $ | (38 | ) | | $ | (117 | ) | | $ | (170 | ) |
Capital expenditures (b) | $ | 153 |
| | $ | 12 |
| | $ | 7 |
| | $ | 5 |
| | $ | 177 |
|
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(a) | Includes other operating expenses and general and administrative expenses. |
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(c) | Unrealized loss on commodity derivative instruments. |
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(d) | Primarily related to partial sale of Wyoming upstream and midstream assets. (See note 6.) |
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(e) | Impairments associated with decision to not drill remaining Gulf of Mexico undeveloped leases. |
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(f) | Includes pension settlement loss of $31 million (See note 8). |
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
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| | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2015 |
| | | Not Allocated | | |
(In millions) | N.A. E&P | | Int'l E&P | | OSM | | to Segments | | Total |
Sales and other operating revenues | $ | 993 |
| | $ | 211 |
| | $ | 147 |
| | $ | (44 | ) | (c) | $ | 1,307 |
|
Marketing revenues | 110 |
| | 30 |
| | 43 |
| | — |
| | 183 |
|
Total revenues | 1,103 |
| | 241 |
| | 190 |
| | (44 | ) | | 1,490 |
|
Income from equity method investments | — |
| | 26 |
| | — |
| | — |
| | 26 |
|
Net gain on disposal of assets and other income | 11 |
| | 4 |
| | — |
| | — |
| | 15 |
|
Less: | | | | | | | | | |
Production expenses | 179 |
| | 64 |
| | 207 |
| | — |
| | 450 |
|
Marketing costs | 112 |
| | 29 |
| | 41 |
| | — |
| | 182 |
|
Exploration expenses | 91 |
| | 20 |
| | — |
| | — |
| | 111 |
|
Depreciation, depletion and amortization | 634 |
| | 71 |
| | 35 |
| | 11 |
| | 751 |
|
Impairments | — |
| | — |
| | — |
| | 44 |
| (d) | 44 |
|
Other expenses (a) | 99 |
| | 19 |
| | 9 |
| | 122 |
| (e) | 249 |
|
Taxes other than income | 67 |
| | — |
| | 5 |
| | 6 |
| | 78 |
|
Net interest and other | — |
| | — |
| | — |
| | 58 |
| | 58 |
|
Income tax provision (benefit) | (23 | ) | | 27 |
| | (30 | ) | | 20 |
| (f) | (6 | ) |
Segment income (loss) / Net income (loss) | $ | (45 | ) | | $ | 41 |
| | $ | (77 | ) | | $ | (305 | ) | | $ | (386 | ) |
Capital expenditures (b) | $ | 551 |
| | $ | 99 |
| | $ | 16 |
| | $ | 12 |
| | $ | 678 |
|
| |
(a) | Includes other operating expenses and general and administrative expenses. |
| |
(c) | Unrealized loss on commodity derivative instruments. |
| |
(d) | Proved property impairment (See Note 13). |
| |
(e) | Includes pension settlement loss of $64 million (see Note 8). |
| |
(f) | Includes $135 million of deferred tax expense related to Alberta provincial corporate tax rate increase (see Note 9). |
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
|
| | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2016 |
| | | Not Allocated | | |
(In millions) | N.A. E&P | | Int'l E&P | | OSM | | to Segments | | Total |
Sales and other operating revenues | $ | 1,110 |
| | $ | 255 |
| | $ | 333 |
| | $ | (114 | ) | (c) | $ | 1,584 |
|
Marketing revenues | 84 |
| | 38 |
| | 25 |
| | — |
| | 147 |
|
Total revenues | 1,194 |
| | 293 |
| | 358 |
| | (114 | ) | | 1,731 |
|
Income from equity method investments | — |
| | 51 |
| | — |
| | — |
| | 51 |
|
Net gain on disposal of assets and other income | 3 |
| | 13 |
| | 1 |
| | 233 |
| (d) | 250 |
|
Less: | | | | | | | | | |
Production expenses | 263 |
| | 109 |
| | 306 |
| | — |
| | 678 |
|
Marketing costs | 84 |
| | 37 |
| | 25 |
| | — |
| | 146 |
|
Exploration expenses | 55 |
| | 10 |
| | 7 |
| | 141 |
| (e) | 213 |
|
Depreciation, depletion and amortization | 920 |
| | 118 |
| | 109 |
| | 23 |
| | 1,170 |
|
Impairments | 1 |
| | — |
| | — |
| | — |
| | 1 |
|
Other expenses (a) | 215 |
| | 38 |
| | 16 |
| | 218 |
| (f) | 487 |
|
Taxes other than income | 77 |
| | — |
| | 9 |
| | 1 |
| | 87 |
|
Net interest and other | — |
| | — |
| | — |
| | 171 |
| | 171 |
|
Income tax benefit | (153 | ) | | (14 | ) | | (27 | ) | | (150 | ) | | (344 | ) |
Segment income (loss) / Net income (loss) | $ | (265 | ) | | $ | 59 |
| | $ | (86 | ) | | $ | (285 | ) | | $ | (577 | ) |
Capital expenditures (b) | $ | 468 |
| | $ | 44 |
| | $ | 16 |
| | $ | 8 |
| | $ | 536 |
|
| |
(a) | Includes other operating expenses and general and administrative expenses. |
(b)Includes accruals.
| |
(c) | Unrealized loss on commodity derivative instruments. |
| |
(d) | Related to net gain on disposal of assets (see Note 6). |
| |
(e) | Impairments associated with decision to not drill remaining Gulf of Mexico undeveloped leases. |
| |
(f) | Includes pension settlement loss of $79 million and severance related expenses associated with workforce reductions of $8 million (see Note 8). |
|
| | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2015 |
| | | Not Allocated | | |
(In millions) | N.A. E&P | | Int'l E&P | | OSM | | to Segments | | Total |
Sales and other operating revenues | $ | 1,843 |
| | $ | 393 |
| | $ | 372 |
| | $ | (21 | ) | (c) | $ | 2,587 |
|
Marketing revenues | 288 |
| | 56 |
| | 43 |
| | — |
| | 387 |
|
Total revenues | 2,131 |
| | 449 |
| | 415 |
| | (21 | ) | | 2,974 |
|
Income from equity method investments | — |
| | 62 |
| | — |
| | — |
| | 62 |
|
Net gain on disposal of assets and other income | 11 |
| | 14 |
| | 1 |
| | 1 |
| | 27 |
|
Less: | | | | | | | | | |
Production expenses | 381 |
| | 131 |
| | 382 |
| | — |
| | 894 |
|
Marketing costs | 292 |
| | 54 |
| | 41 |
| | — |
| | 387 |
|
Exploration expenses | 126 |
| | 75 |
| | — |
| | — |
| | 201 |
|
Depreciation, depletion and amortization | 1,317 |
| | 135 |
| | 97 |
| | 23 |
| | 1,572 |
|
Impairments | — |
| | — |
| | — |
| | 44 |
| (d) | 44 |
|
Other expenses (a) | 216 |
| | 42 |
| | 18 |
| | 251 |
| (e) | 527 |
|
Taxes other than income | 128 |
| | — |
| | 10 |
| | 7 |
| | 145 |
|
Net interest and other | — |
| | — |
| | — |
| | 105 |
| | 105 |
|
Income tax provision (benefit) | (112 | ) | | 24 |
| | (36 | ) | | (26 | ) | (f) | (150 | ) |
Segment income (loss) / Net income (loss) | $ | (206 | ) | | $ | 64 |
| | $ | (96 | ) | | $ | (424 | ) | | $ | (662 | ) |
Capital expenditures (b) | $ | 1,484 |
| | $ | 245 |
| | $ | 37 |
| | $ | 14 |
| | $ | 1,780 |
|
| |
(a) | Includes other operating expenses and general and administrative expenses. |
| |
(c) | Unrealized loss on commodity derivative instruments. |
| |
(d) | Proved property impairments (See Note 13). |
| |
(e) | Includes pension settlement loss of $81 million and severance related expenses associated with workforce reductions of $43 million (see Note 8). |
| |
(f) | Includes $135 million of deferred tax expense related to Alberta provincial corporate tax rate increase (see Note 9). |
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
8. Defined Benefit Postretirement Plans
The following summarizes the components of net periodic benefit cost: |
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, |
| Pension Benefits | | Other Benefits |
(In millions) | 2016 | | 2015 | | 2016 | | 2015 |
Service cost | $ | 6 |
| | $ | 12 |
| | $ | 1 |
| | $ | 1 |
|
Interest cost | 10 |
| | 13 |
| | 2 |
| | 2 |
|
Expected return on plan assets | (13 | ) | | (17 | ) | | — |
| | — |
|
Amortization: | |
| | |
| | |
| | |
|
– prior service cost (credit) | (3 | ) | | (2 | ) | | (1 | ) | | (1 | ) |
– actuarial loss | 4 |
| | 7 |
| | — |
| | — |
|
Net settlement loss (a) | 31 |
| | 64 |
| | — |
| | — |
|
Net curtailment loss (b) | — |
| | — |
| | — |
| | 2 |
|
Net periodic benefit cost | $ | 35 |
| | $ | 77 |
| | $ | 2 |
| | $ | 4 |
|
|
| | | | | | | | | | | | | | | |
| Six Months Ended June 30, |
| Pension Benefits | | Other Benefits |
(In millions) | 2016 | | 2015 | | 2016 | | 2015 |
Service cost | $ | 12 |
| | $ | 24 |
| | $ | 2 |
| | $ | 2 |
|
Interest cost | 21 |
| | 27 |
| | 5 |
| | 5 |
|
Expected return on plan assets | (28 | ) | | (36 | ) | | — |
| | — |
|
Amortization: | | | |
| | |
| | |
|
– prior service cost (credit) | (5 | ) | | (1 | ) | | (2 | ) | | (2 | ) |
– actuarial loss | 7 |
| | 14 |
| | — |
| | — |
|
Net settlement loss (a) | 79 |
| | 81 |
| | — |
| | — |
|
Net curtailment loss (gain) (b) | — |
| | 1 |
| | — |
| | (4 | ) |
Net periodic benefit cost | $ | 86 |
|
| $ | 110 |
|
| $ | 5 |
|
| $ | 1 |
|
| |
(a) | Settlements are recognized as they occur, once it is probable that lump sum payments from a plan for a given year will exceed the plan's total service and interest cost for that year. |
| |
(b) | Related to workforce reductions, which reduced the future expected years of service for employees participating in the plans. |
During the first six months of 2016, we recorded the effects of settlements of our U.S. pension plans. As required, we remeasured the plans' assets and liabilities as of the applicable balance sheet dates. The cumulative effects of these events are included in the remeasurement and reflected in both the pension liability and net periodic benefit cost.
During the first six months of 2016, we made contributions of $30 million to our funded pension plans. We expect to make additional contributions up to an estimated $34 million to our funded pension plans over the remainder of 2016. During the first six months of 2016, we made payments of $37 million and $10 million related to unfunded pension plans and other postretirement benefit plans, respectively.
9. Income Taxes
Effective Tax Rate
The effective income tax rate is influenced by a variety of factors including the geographic and functional sources of income and the relative magnitude of these sources of income. The difference between the total provision and the sum of the amounts allocated to segments is reported in the “Not Allocated to Segments” column of the tables in Note 7.
Our effective income tax rates for the first six months of 2016 and 2015 were 37% and 18%. In Libya, considerable uncertainty remains around the timing of future production and sales levels. Reliable estimates of 2016 and 2015 Libyan annual ordinary income from our operations could not be made, and the range of possible scenarios in the worldwide annual effective tax rate calculation demonstrates significant variability. Thus, the tax benefit applicable to Libyan ordinary loss was
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
recorded as a discrete item in the first six months of 2016 and 2015. For the first six months of 2016 and 2015, estimated annual effective tax rates were calculated excluding Libya and applied to consolidated ordinary income (loss). Excluding Libya, the effective tax rates would be 36% and 15% for the first six months of 2016 and 2015. The change was driven by a shift in jurisdictional income and tax legislation enacted by the Alberta government on June 29, 2015 to increase the provincial corporate tax rate from 10% to 12%. As a result of this legislation, we recorded additional non-cash deferred tax expense of $135 million in the second quarter of 2015.
Deferred Tax Assets
In connection with our assessment of the realizability of our deferred tax assets, we consider whether it is more likely than not that some portion or all of our deferred tax assets will not be realized. In the event it is more likely than not that some portion or all of our deferred taxes will not be realized, such assets are reduced by a valuation allowance. Future increases to our valuation allowance are possible if our estimates and assumptions (particularly as they relate to our long-term commodity price forecast) are revised such that they reduce estimates of future taxable income during the carryforward period.
10. Short-term Investments
As of June 30, 2015, we held short-term investments comprised of bank time deposits with original maturities of greater than three months and remaining maturities of less than twelve months. These short-term investments, which were classified as held-to-maturity investments and recorded at amortized cost, matured in the third quarter of 2015.
11. Inventories
Liquid hydrocarbons, natural gas and bitumen are recorded at weighted average cost and carried at the lower of cost or market value. Supplies and other items consist principally of tubular goods and equipment which are valued at weighted average cost and reviewed periodically for obsolescence or impairment when market conditions indicate.
|
| | | | | | | |
| June 30, | | December 31, |
(In millions) | 2016 | | 2015 |
Liquid hydrocarbons, natural gas and bitumen | $ | 31 |
| | $ | 35 |
|
Supplies and other items | 241 |
| | 278 |
|
Inventories, at cost | $ | 272 |
| | $ | 313 |
|
12. Property, Plant and Equipment, net of Accumulated Depreciation, Depletion and Amortization
|
| | | | | | | |
| June 30, | | December 31, |
(In millions) | 2016 | | 2015 |
North America E&P | $ | 13,965 |
| | $ | 15,226 |
|
International E&P | 2,479 |
| | 2,533 |
|
Oil Sands Mining | 9,101 |
| | 9,197 |
|
Corporate | 112 |
| | 105 |
|
Net property, plant and equipment | $ | 25,657 |
|
| $ | 27,061 |
|
Our Libya operations continue to be impacted by civil unrest. Operations were interrupted in mid-2013 as a result of the shutdown of the Es-Sider crude oil terminal, and although temporarily re-opened during the second half of 2014, production remains shut-in. Earlier this year, an Internationally-backed Unity Government was established in Tripoli. During the second quarter, the two National Oil Companies agreed to unify and reportedly have begun preliminary discussions on re-opening the Es-Sider and other crude oil terminals which, if successful, will allow resumption of production operations at our Waha concessions. However, considerable uncertainty remains around the timing of future production and sales levels.
As of June 30, 2016, our net property, plant and equipment investment in Libya is $775 million, and total proved reserves (unaudited) in Libya as of December 31, 2015 are 235 million barrels of oil equivalent ("mmboe"). We and our partners in the Waha concessions continue to assess the situation and the condition of our assets in Libya. Our periodic assessment of the carrying value of our net property, plant and equipment in Libya specifically considers the net investment in the assets, the duration of our concessions and the reserves anticipated to be recoverable in future periods. The undiscounted cash flows related to our Libya assets continue to exceed the carrying value of $775 million by a material amount. However, changes in
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
management's forecast assumptions may cause us to reassess our assets in Libya for impairment, and could result in non-cash impairment charges in the future.
Exploratory well costs capitalized greater than one year after completion of drilling were $118 million and $85 million as of June 30, 2016 and December 31, 2015. The $33 million increase primarily relates to the Alba Block Sub Area B offshore Equatorial Guinea where the Rodo well reached total depth in the first quarter of 2015. We have since completed a seismic feasibility study and continue to finalize next steps in the Alba Block Sub Area B exploration program.
13. Fair Value Measurements
Fair Values - Recurring
The following tables present assets and liabilities accounted for at fair value on a recurring basis as of June 30, 2016 and December 31, 2015 by fair value hierarchy level.
|
| | | | | | | | | | | | | | | |
| June 30, 2016 |
(In millions) | Level 1 | | Level 2 | | Level 3 | | Total |
Derivative instruments, assets | | | | | | | |
Commodity (a) | $ | — |
| | $ | 6 |
| | $ | — |
| | $ | 6 |
|
Interest rate | — |
| | 12 |
| | — |
| | 12 |
|
Derivative instruments, assets | $ | — |
| | $ | 18 |
| | $ | — |
| | $ | 18 |
|
Derivative instruments, liabilities | | | | | | | |
Commodity (a) | $ | — |
| | $ | 70 |
| | $ | — |
| | $ | 70 |
|
Derivative instruments, liabilities | $ | — |
| | $ | 70 |
| | $ | — |
| | $ | 70 |
|
| |
(a) | Derivative instruments are recorded on a net basis in the company's balance sheet (see Note 14). |
|
| | | | | | | | | | | | | | | |
| December 31, 2015 |
(In millions) | Level 1 | | Level 2 | | Level 3 | | Total |
Derivative instruments, assets | | | | | | | |
Commodity (a) | $ | — |
| | $ | 51 |
| | $ | — |
| | $ | 51 |
|
Interest rate | — |
| | 8 |
| | — |
| | 8 |
|
Derivative instruments, assets | $ | — |
| | $ | 59 |
| | $ | — |
| | $ | 59 |
|
Derivative instruments, liabilities | | | | | | | |
Commodity (a) | $ | — |
| | $ | 1 |
| | $ | — |
| | $ | 1 |
|
Derivative instruments, liabilities | $ | — |
| | $ | 1 |
| | $ | — |
| | $ | 1 |
|
| |
(a) | Derivative instruments are recorded on a net basis in the company's balance sheet (see Note 14). |
Commodity derivatives include three-way collars, two-way collars, call options and swaptions. These instruments are measured at fair value using either the Black-Scholes Model or the Black Model. Inputs to both models include commodity prices, interest rates, and implied volatility. The inputs to these models are categorized as Level 2 because predominantly all assumptions and inputs are observable in active markets throughout the term of the instruments.
Interest rate swaps are measured at fair value with a market approach using actionable broker quotes, which are Level 2 inputs. See Note 14 for additional discussion of the types of derivative instruments we use.
Fair Values – Goodwill
Unlike long-lived assets, goodwill must be tested for impairment at least annually, or between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Goodwill is tested for impairment at the reporting unit level. We estimate the fair value of our International E&P reporting unit using a combination of market and income approaches. The market approach referenced observable inputs specific to us and our industry, such as the price of our common equity, our enterprise value, and valuation multiples of us and our peers from the investor analyst community. The income approach utilized discounted cash flows, which were based on forecasted assumptions. Key assumptions to the income approach include future liquid hydrocarbon and natural gas pricing, estimated quantities of liquid hydrocarbons and natural gas proved and probable reserves, estimated timing of production, discount rates, future capital requirements and operating expenses and tax rates. The assumptions used in the income approach
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
are consistent with those that management uses to make business decisions. These valuations methodologies represent Level 3 fair value measurements. We performed our annual impairment test in April 2016 and concluded no impairment was required. While the fair value of our International E&P reporting unit exceeded the book value, subsequent commodity price and/or common stock declines may cause us to reassess our goodwill for impairment, and could result in non-cash impairment charges in the future.
Fair Values- Nonrecurring
The following table shows the values of assets, by major category, measured at fair value on a nonrecurring basis in periods subsequent to their initial recognition.
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, |
| 2016 | | 2015 |
(In millions) | Fair Value | | Impairment | | Fair Value | | Impairment |
Long-lived assets held for use | $ | — |
| | $ | — |
| | $ | 17 |
| | $ | 44 |
|
|
| | | | | | | | | | | | | | | |
| Six Months Ended June 30, |
| 2016 | | 2015 |
(In millions) | Fair Value | | Impairment | | Fair Value | | Impairment |
Long-lived assets held for use | $ | — |
| | $ | 1 |
| | $ | 17 |
| | $ | 44 |
|
Long-lived assets held for use that were impaired are discussed below. The fair values of each were measured using an income approach based upon internal estimates of future production levels, prices and discount rate, all of which are Level 3 inputs. Inputs to the fair value measurement include reserve and production estimates made by our reservoir engineers, estimated future commodity prices adjusted for quality and location differentials and forecasted operating expenses for the remaining estimated life of the reservoir.
During the second quarter of 2015, we recorded a non-cash impairment charge of $44 million related to East Texas, North Louisiana and Wilburton, Oklahoma natural gas assets as a result of the anticipated sale (See Note 6). The fair values were measured using a probability weighted income approach based on both the anticipated sales price and a held-for-use model.
Fair Values – Financial Instruments
Our current assets and liabilities include financial instruments, the most significant of which are receivables, long-term debt and payables. We believe the carrying values of our receivables and payables approximate fair value. Our fair value assessment incorporates a variety of considerations, including (1) the short-term duration of the instruments, (2) our credit rating, and (3) our historical incurrence of and expected future insignificant bad debt expense, which includes an evaluation of counterparty credit risk.
The following table summarizes financial instruments, excluding receivables, payables and derivative financial instruments, and their reported fair values by individual balance sheet line item at June 30, 2016 and December 31, 2015.
|
| | | | | | | | | | | | | | | |
| June 30, 2016 | | December 31, 2015 |
| Fair | | Carrying | | Fair | | Carrying |
(In millions) | Value | | Amount | | Value | | Amount |
Financial assets | | | | | | | |
Other noncurrent assets | $ | 198 |
| | $ | 206 |
| | $ | 104 |
| | $ | 118 |
|
Total financial assets | $ | 198 |
| | $ | 206 |
| | $ | 104 |
| | $ | 118 |
|
Financial liabilities | |
| | |
| | |
| | |
|
Other current liabilities | $ | 25 |
| | $ | 24 |
| | $ | 34 |
| | $ | 33 |
|
Long-term debt, including current portion (a) | 7,186 |
| | 7,291 |
| | 6,723 |
| | 7,291 |
|
Deferred credits and other liabilities | 121 |
| | 117 |
| | 97 |
| | 95 |
|
Total financial liabilities | $ | 7,332 |
| | $ | 7,432 |
| | $ | 6,854 |
| | $ | 7,419 |
|
(a) Excludes capital leases, debt issuance costs and interest rate swap adjustments.
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
Fair values of our financial assets included in other noncurrent assets, and of our financial liabilities included in other current liabilities and deferred credits and other liabilities, are measured using an income approach and most inputs are internally generated, which results in a Level 3 classification. Estimated future cash flows are discounted using a rate deemed appropriate to obtain the fair value.
Most of our long-term debt instruments are publicly-traded. A market approach, based upon quotes from major financial institutions, which are Level 2 inputs, is used to measure the fair value of such debt. The fair value of our debt that is not publicly-traded is measured using an income approach. The future debt service payments are discounted using the rate at which we currently expect to borrow. All inputs to this calculation are Level 3.
14. Derivatives
For further information regarding the fair value measurement of derivative instruments, see Note 13. All of our interest rate and commodity derivatives are subject to enforceable master netting arrangements or similar agreements under which we may report net amounts. The following tables present the gross fair values of derivative instruments and the reported net amounts where they appear on the consolidated balance sheets.
|
| | | | | | | | | | | | | |
| June 30, 2016 | | |
(In millions) | Asset | | Liability | | Net Asset | | Balance Sheet Location |
Fair Value Hedges | | | | | | | |
Interest rate | $ | 12 |
| | $ | — |
| | $ | 12 |
| | Other noncurrent assets |
Total Designated Hedges | $ | 12 |
| | $ | — |
| | $ | 12 |
| | |
| | | | | | | |
| June 30, 2016 | | |
(In millions) | Asset | | Liability | | Net Liability | | Balance Sheet Location |
Not Designated as Hedges | | | | | | | |
Commodity
| $ | 6 |
| | $ | 39 |
| | $ | 33 |
| | Other current liabilities |
Commodity | — |
| | 31 |
| | 31 |
| | Deferred credits and other liabilities |
Total Not Designated as Hedges | $ | 6 |
| | $ | 70 |
| | $ | 64 |
| | |
|
| | | | | | | | | | | | | |
| December 31, 2015 | | |
(In millions) | Asset | | Liability | | Net Asset | | Balance Sheet Location |
Fair Value Hedges | | | | | | | |
Interest rate | $ | 8 |
| | $ | — |
| | $ | 8 |
| | Other noncurrent assets |
| | | | | | | |
Not Designated as Hedges | | | | | | | |
Commodity | $ | 51 |
| | $ | 1 |
| | $ | 50 |
| | Other current assets |
Derivatives Designated as Fair Value Hedges
The following table presents, by maturity date, information about our interest rate swap agreements, including the weighted average, London Interbank Offer Rate (“LIBOR”)-based, floating rate.
|
| | | | | | | | | | | |
| June 30, 2016 | | December 31, 2015 |
| Aggregate Notional Amount | Weighted Average, LIBOR-Based, | | Aggregate Notional Amount | Weighted Average, LIBOR-Based, |
Maturity Dates | (in millions) | Floating Rate | | (in millions) | Floating Rate |
October 1, 2017 | $ | 600 |
| 4.94 | % | | $ | 600 |
| 4.73 | % |
March 15, 2018 | $ | 300 |
| 4.77 | % | | $ | 300 |
| 4.66 | % |
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
The pretax effects of derivative instruments designated as hedges of fair value in our consolidated statements of income are summarized in the table below. There is no ineffectiveness related to fair value hedges.
|
| | | | | | | | | | | | | | | | |
| | Gain (Loss) |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
(In millions) | Income Statement Location | 2016 | | 2015 | | 2016 | | 2015 |
Derivative | | | | | | | | |
Interest rate | Net interest and other | $ | — |
| | $ | (2 | ) | | $ | 4 |
| | $ | 3 |
|
Hedged Item | | |
| | |
| | |
| | |
|
Long-term debt | Net interest and other | $ | — |
| | $ | 2 |
| | $ | (4 | ) | | $ | (3 | ) |
Derivatives not Designated as Hedges
We have entered into multiple crude oil and natural gas derivatives indexed to NYMEX WTI and Henry Hub related to a portion of our forecasted North America E&P sales through December 2017. These commodity derivatives consist of three-way collars, two-way collars, call options and swaptions. Three-way collars consist of a sold call (ceiling), a purchased put (floor) and a sold put. The ceiling price is the maximum we will receive for the contract volumes, the floor is the minimum price we will receive, unless the market price falls below the sold put strike price. In this case, we receive the NYMEX WTI/Henry Hub price plus the difference between the floor and the sold put price. These commodity derivatives were not designated as hedges. The following table sets forth outstanding derivative contracts as of June 30, 2016 and the weighted average prices for those contracts:
|
| | | |
Crude Oil |
| | Year Ending December 31, |
| Third Quarter | Fourth Quarter | 2017 |
Three-Way Collars |
Volume (Bbls/day) | 47,000 | 47,000 | — |
Price per Bbl: | | | |
Ceiling | $55.37 | $55.37 | — |
Floor | $50.23 | $50.23 | — |
Sold put | $40.96 | $40.96 | — |
Sold call options (a) | | | |
Volume (Bbls/day) | 10,000 | 10,000 | 35,000 |
Price per Bbl | $72.39 | $72.39 | $61.91 |
Two-way Collars | | | |
Volume (Bbls/day) | 10,000 | 10,000 | — |
Price per Bbl: | |
| — |
Ceiling | $50.00 | $50.00 | |
Floor | $41.55 | $41.55 | |
| |
(a) | Call options settle monthly. |
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
|
| | | |
Natural Gas |
| | Year Ending December 31, |
| Third Quarter | Fourth Quarter | 2017 |
Three-Way Collars (a) | | | |
Volume (MMBtu/day) | 20,000 | 20,000 | 40,000 |
Price per MMBtu | | | |
Ceiling | $2.93 | $2.93 | $3.28 |
Floor | $2.50 | $2.50 | $2.75 |
Sold put | $2.00 | $2.00 | $2.25 |
| |
(a) | On our 2016 collars, the counterparty has the option to execute fixed-price swaps (swaptions) at a weighted average price of $2.93 per MMBtu indexed to NYMEX Henry Hub, which is exercisable on December 22, 2016. If counterparty exercises, the term of the fixed-price swaps would be for the calendar year 2017 and, if all such options are exercised, 20,000 MMBtu per day. |
The mark-to-market impact of these commodity derivative instruments appears in sales and other operating revenues in our consolidated statements of income for the three and six month periods ended June 30, 2016 was a net loss of $88 million and $90 million compared to a net loss of $43 million and $17 million for the same respective periods in 2015. Net cash received from settlements of commodity derivative instruments for the three and six month periods ended June 30, 2016 was $14 million and $46 million compared to $4 million for both of the respective periods in 2015.
15. Incentive Based Compensation
Stock options, restricted stock awards and restricted stock units
The following table presents a summary of activity for the first six months of 2016:
|
| | | | | | | | | | | | | |
| Stock Options | | Restricted Stock Awards & Units |
| Number of Shares | | Weighted Average Exercise Price | | Awards | | Weighted Average Grant Date Fair Value |
Outstanding at December 31, 2015 | 12,665,419 |
| |
| $29.97 |
| | 4,017,344 |
| |
| $30.76 |
|
Granted | 1,680,000 |
| (a) |
| $7.22 |
| | 5,233,984 |
| |
| $7.91 |
|
Options Exercised/Stock Vested | — |
| | — |
| | (1,148,953 | ) | |
| $32.29 |
|
Canceled | (973,295 | ) | |
| $25.76 |
| | (557,051 | ) | |
| $23.20 |
|
Outstanding at June 30, 2016 | 13,372,124 |
| |
| $27.42 |
| | 7,545,324 |
| |
| $15.23 |
|
(a) The weighted average grant date fair value of stock option awards granted was $1.97 per share.
Stock-based performance unit awards
During the first six months of 2016, we granted 1,205,517 stock-based performance units to certain officers. The grant date fair value per unit was $3.72.
16. Debt
Revolving Credit Facility
As of June 30, 2016, we had no borrowings against our revolving credit facility (the "Credit Facility"), as described below.
In March 2016, we increased our $3.0 billion unsecured Credit Facility by $300 million to a total of $3.3 billion.
The Credit Facility includes a covenant requiring that our ratio of total debt to total capitalization not exceed 65% as of the last day of each fiscal quarter. If an event of default occurs, the lenders holding more than half of the commitments may terminate the commitments under the Credit Facility and require the immediate repayment of all outstanding borrowings and the cash collateralization of all outstanding letters of credit under the Credit Facility. As of June 30, 2016, we were in compliance with this covenant with a debt-to-capitalization ratio of 28%.
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
Debt Issuance
In the second quarter of 2015, we issued $2 billion aggregate principal amount of unsecured senior notes and used the aggregate net proceeds to repay our $1 billion 0.90% senior notes November 1, 2015, and for general corporate purposes.
17. Reclassifications Out of Accumulated Other Comprehensive Loss
The following table presents a summary of amounts reclassified from accumulated other comprehensive loss:
|
| | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, | | |
(In millions) | 2016 | | 2015 | | 2016 | | 2015 | | Income Statement Line |
| | | |
Postretirement and postemployment plans | | | | | | | | |
Amortization of actuarial loss | $ | (4 | ) | | $ | (7 | ) | | $ | (7 | ) | | $ | (14 | ) | | General and administrative |
Net settlement loss | (31 | ) | | (64 | ) | | (79 | ) | | (81 | ) | | General and administrative |
Net curtailment gain (loss) | — |
| | (2 | ) | | — |
| | 3 |
| | General and administrative |
| (35 | ) | | (73 | ) | | (86 | ) | | (92 | ) | | Income (loss) from operations |
| 13 |
| | 25 |
| | 29 |
| | 32 |
| | Provision (benefit) for income taxes |
Total reclassifications to expense | $ | (22 | ) | | $ | (48 | ) | | $ | (57 | ) | | $ | (60 | ) | | Net income (loss) |
18. Stockholder's Equity
In March 2016, we issued 166,750,000 shares of our common stock, par value $1 per share, at a price of $7.65 per share, excluding underwriting discounts and commissions, for net proceeds of $1,236 million. The proceeds were used to strengthen our balance sheet and for general corporate purposes, including funding a portion of our Capital Program.
19. Supplemental Cash Flow Information |
| | | | | | | |
| Six Months Ended June 30, |
(In millions) | 2016 | | 2015 |
Net cash (used in) operating activities: | | | |
Interest paid (net of amounts capitalized) | $ | (177 | ) | | $ | (143 | ) |
Income taxes paid to taxing authorities | (61 | ) | | (165 | ) |
Noncash investing activities: | |
| | |
|
Asset retirement cost increase | $ | 2 |
| | $ | 6 |
|
Asset retirement obligations assumed by buyer | 83 |
| | — |
|
20. Commitments and Contingencies
We are a defendant in a number of legal and administrative proceedings arising in the ordinary course of business, including, but not limited to, royalty claims, contract claims, tax disputes and environmental claims. While the ultimate outcome and impact to us cannot be predicted with certainty, we believe the resolution of these proceedings will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.
We have incurred and will continue to incur capital, operating and maintenance, and remediation expenditures as a result of environmental laws and regulations. If these expenditures, as with all costs, are not ultimately reflected in the prices of our products and services, our operating results will be adversely affected. We believe that substantially all of our competitors must comply with similar environmental laws and regulations. However, the specific impact on each competitor may vary depending on a number of factors, including the age and location of its operating facilities, marketing areas and production processes.
21. Subsequent Event
During the third quarter 2016, we executed an agreement to terminate our Gulf of Mexico deepwater drilling rig contract. As a result, we expect to recognize a termination payment of $113 million in other operating expense in that quarter.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the preceding consolidated financial statements and notes in Item 1.
Executive Overview
We are an independent global exploration and production company based in Houston, Texas with operations in North America, Europe and Africa and a focus on U.S. unconventional resource plays. Total proved reserves were 2.2 billion boe at December 31, 2015 and total assets were $33 billion at June 30, 2016.
Our significant strategic actions and financial results include the following:
| |
• | Strengthened balance sheet |
| |
◦ | At the end of the second quarter of 2016, we had $5.9 billion of liquidity, comprised of $2.6 billion in cash and an undrawn $3.3 billion revolving credit facility |
| |
◦ | Cash-adjusted debt-to-capital ratio of 20% at June 30, 2016, as compared with 25% at December 31, 2015 |
| |
• | Focused on cost reductions |
| |
◦ | Production expenses per boe in the second quarter of 2016, as compared to the same period last year improved in the North America E&P segment by 13% to $6.28 per boe and in the International E&P segment by 22% to $5.09 per boe |
| |
◦ | 2016 Capital Program reduced by $100 million to $1.3 billion |
| |
◦ | Eagle Ford completed well costs down 30% to $4.2 million versus the same quarter last year |
| |
• | Simplifying and concentrating portfolio |
| |
◦ | Closed on the PayRock acquisition of STACK assets in Oklahoma for $888 million, funded with cash on hand |
| |
◦ | Entered into agreements for over $1 billion of transaction value related to non-core asset sales; already received over $800 million in proceeds through August 1, 2016 |
| |
◦ | Alba B3 compression project in E.G., designed to maintain the production plateau two additional years and extend field life up to eight years, was completed within budget and on schedule with first gas in July |
| |
◦ | Outside-operated Gunflint development project in the Gulf of Mexico achieved first oil in July |
| |
◦ | Cash provided by operating activities of $252 million for the first six months of 2016, despite average crude oil and condensate price realizations of $35.27 per bbl. |
| |
◦ | Net loss per share of $0.20 in the second quarter of 2016 as compared to net loss per share of $0.57 in the same period last year. Included in the second quarter 2016 net loss are: |
| |
▪ | Unrealized losses from our commodity derivative instruments totaling $91 million, pre-tax |
| |
▪ | Net gains on disposal of non-core assets totaling $294 million, pre-tax |
| |
▪ | Non-cash impairments totaling $141 million, pre-tax, as a result of our decision not to drill any of our remaining Gulf of Mexico leases |
Outlook
Commodity prices are the most significant factor impacting our revenues, profitability, operating cash flows and the amount of capital available to reinvest into our business. Our focus continues on the strengthening of the balance sheet, the simplification and concentration of our portfolio and cost reductions which during the second quarter of 2016 included a reduction to our Capital Program of $100 million to $1.3 billion for the year.
Exploration Update
In September 2015, we announced our intention to scale back our conventional exploration program, with future exploration investment focused on fulfilling our existing commitments in the Gulf of Mexico and Gabon. In second quarter of 2016, we made the decision to not drill our remaining Gulf of Mexico undeveloped leases. As a result, we recorded a non-cash impairment of $141 million in the second quarter of 2016. Additionally, during the third quarter 2016, we executed an agreement to terminate our Gulf of Mexico deepwater drilling rig contract. As a result, we expect to recognize a termination payment of $113 million in other operating expense in that quarter.
Operations
The following table presents a summary of our sales volumes for each of our segments. Refer to the Results of Operations for a price-volume analysis for each of the segments.
|
| | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
Net Sales Volumes | 2016 | | 2015 | | Increase (Decrease) | | 2016 | | 2015 | | Increase (Decrease) |
North America E&P (mboed) | 224 | | 274 | | (18)% | | 232 | | 278 | | (17)% |
International E&P (mboed) | 120 | | 108 | | 11% | | 108 | | 112 | | (4)% |
Oil Sands Mining (mbbld) (a) | 49 | | 29 | | 69% | | 54 | | 44 | | 23% |
Total (mboed) | 393 | | 411 | | (4)% | | 394 | | 434 | | (9)% |
(a) Includes blendstocksNorth America E&P
Net sales volumes in the segment were lower in the second quarter and first six months of 2016 primarily as a result of decreased drilling and completion activity resulting in fewer wells brought to sales as well as 17 mboed relating to dispositions of certain non-core assets (Gulf of Mexico and East Texas, North Louisiana and Wilburton, Oklahoma) during the second half of 2015. The following tables provide details regarding net sales volumes, sales mix and operational drilling activity for our significant operations within this segment:
|
| | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
Net Sales Volumes | 2016 | | 2015 | | Increase (Decrease) | | 2016 | | 2015 | | Increase (Decrease) |
Equivalent Barrels (mboed) | | | | | | | | | | | |
Eagle Ford | 109 | | 135 | | |