Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
FORM 10-Q
(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, 2017
 
OR
[   ]
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
mro_logoa33.jpg
Marathon Oil Corporation
(Exact name of registrant as specified in its charter)
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 þ No o

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 þ No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer o     
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company o   
Emerging growth company o
 
 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 849,834,915 shares of Marathon Oil Corporation common stock outstanding as of July 31, 2017.



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 2016 Annual Report on Form 10-K.

 
Table of Contents
 
 
 
Page
 
 
 
 
 
 
 
 
 
 


1


Part I - Financial Information
Item 1. Financial Statements

MARATHON OIL CORPORATION
Consolidated Statements of Income (Unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
(In millions, except per share data)
2017
 
2016
 
2017
 
2016
Revenues and other income:
 
 
 
 
 
 
 
Sales and other operating revenues, including related party
$
958

 
$
685

 
$
1,912

 
$
1,251

Marketing revenues
35

 
76

 
69

 
122

Income from equity method investments
51

 
37

 
120

 
51

Net gain (loss) on disposal of assets
6

 
294

 
7

 
234

Other income
9

 
11

 
23

 
15

Total revenues and other income
1,059

 
1,103

 
2,131

 
1,673

Costs and expenses:
 

 
 

 
 
 
 

Production
176

 
185

 
327

 
372

Marketing, including purchases from related parties
38

 
75

 
72

 
121

Other operating
111

 
87

 
200

 
190

Exploration
30

 
182

 
58

 
206

Depreciation, depletion and amortization
592

 
512

 
1,148

 
1,061

Impairments
—

 
—

 
4

 
1

Taxes other than income
45

 
35

 
84

 
78

General and administrative
93

 
131

 
202

 
282

Total costs and expenses
1,085

 
1,207

 
2,095

 
2,311

Income (loss) from operations
(26
)
 
(104
)
 
36

 
(638
)
Net interest and other
(86
)
 
(88
)
 
(164
)
 
(167
)
Income (loss) from continuing operations before income taxes
(112
)
 
(192
)
 
(128
)
 
(805
)
Provision (benefit) for income taxes
41

 
(54
)
 
75

 
(307
)
Income (loss) from continuing operations
(153
)
 
(138
)
 
(203
)
 
(498
)
Income (loss) from discontinued operations
14

 
(32
)
 
(4,893
)
 
(79
)
Net income (loss)
$
(139
)
 
$
(170
)
 
$
(5,096
)
 
$
(577
)
Per basic share:
 

 
 

 
 

 
 

Income (loss) from continuing operations
$
(0.18
)
 
$
(0.16
)
 
$
(0.24
)
 
$
(0.63
)
Income (loss) from discontinued operations
$
0.02

 
$
(0.04
)
 
$
(5.76
)
 
$
(0.10
)
Net income (loss)
$
(0.16
)
 
$
(0.20
)
 
$
(6.00
)
 
$
(0.73
)
Per diluted share:
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
(0.18
)
 
$
(0.16
)
 
$
(0.24
)
 
$
(0.63
)
Income (loss) from discontinued operations
$
0.02

 
$
(0.04
)
 
$
(5.76
)
 
$
(0.10
)
Net income (loss)
$
(0.16
)
 
$
(0.20
)
 
$
(6.00
)
 
$
(0.73
)
Dividends per share
$
0.05

 
$
0.05

 
$
0.10

 
$
0.10

Weighted average common shares outstanding:
 

 
 

 
 

 
 

Basic
850

 
848

 
850

 
790

Diluted
850

 
848

 
850

 
790

 The accompanying notes are an integral part of these consolidated financial statements.

2


MARATHON OIL CORPORATION
Consolidated Statements of Comprehensive Income (Unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
(In millions)
2017
 
2016
 
2017
 
2016
Net income (loss)
$
(139
)
 
$
(170
)
 
$
(5,096
)
 
$
(577
)
Other comprehensive income (loss)
 
 
 

 
 

 
 

Postretirement and postemployment plans
 

 
 

 
 

 
 

Change in actuarial loss and other
8

 
19

 
12

 
(5
)
Income tax provision (benefit)
—

 
(7
)
 
—

 
2

Postretirement and postemployment plans, net of tax
8

 
12

 
12

 
(3
)
Derivative hedges
 
 
 
 
 
 
 
Net unrecognized gain (loss)
(14
)
 
—

 
(13
)
 
—

Income tax provision
—

 
—

 
—

 
—

Derivative hedges, net of tax
(14
)
 
—

 
(13
)
 
—

Foreign currency hedges
 

 
 

 
 

 
 

Net recognized gain reclassified to discontinued operations
—

 
—

 
34

 
—

Income tax benefit (provision)
—

 
—

 
(4
)
 
—

Foreign currency hedges, net of tax
—

 
—

 
30

 
—

Other, Net of Tax
—

 
(2
)
 
—

 
(2
)
 
 
 
 
 
 
 
 
Other comprehensive income (loss)
(6
)
 
10

 
29

 
(5
)
Comprehensive income (loss)
$
(145
)

$
(160
)

$
(5,067
)

$
(582
)
 The accompanying notes are an integral part of these consolidated financial statements.


3



MARATHON OIL CORPORATION
Consolidated Balance Sheets (Unaudited)
 
June 30,
 
December 31,
(In millions, except per share data)
2017
 
2016
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
2,614

 
$
2,488

Receivables, less reserve of $5 and $6
767

 
748

Notes receivable
742

 
—

Inventories
140

 
136

Other current assets
160

 
66

Current assets held for sale
1

 
227

Total current assets
4,424

 
3,665

Equity method investments
821

 
931

Property, plant and equipment, less accumulated depreciation,
depletion and amortization of $21,238 and $20,255
18,337

 
16,727

Goodwill
115

 
115

Other noncurrent assets
543

 
558

Noncurrent assets held for sale
1

 
9,098

Total assets
$
24,241

 
$
31,094

Liabilities
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
1,158

 
$
967

Payroll and benefits payable
92

 
129

Accrued taxes
78

 
94

Other current liabilities
206

 
243

Long-term debt due within one year
548

 
686

Current liabilities held for sale
—

 
121

Total current liabilities
2,082

 
2,240

Long-term debt
6,715

 
6,581

Deferred tax liabilities
839

 
769

Defined benefit postretirement plan obligations
340

 
345

Asset retirement obligations
1,642

 
1,602

Deferred credits and other liabilities
211

 
225

Noncurrent liabilities held for sale
7

 
1,791

Total liabilities
11,836

 
13,553

Commitments and contingencies


 


Stockholders’ Equity
 

 
 

Preferred stock – no shares issued or outstanding (no par value,
26 million shares authorized)
—

 
—

Common stock:
 

 
 

Issued – 937 million shares and 937 million shares (par value $1 per share,
1.1 billion shares authorized)
937

 
937

Securities exchangeable into common stock – no shares issued or
outstanding (no par value, 29 million shares authorized)
—

 
—

Held in treasury, at cost – 87 million and 90 million shares
(3,318
)
 
(3,431
)
Additional paid-in capital
7,349

 
7,446

Retained earnings
7,491

 
12,672

Accumulated other comprehensive loss
(54
)
 
(83
)
Total stockholders' equity
12,405

 
17,541

Total liabilities and stockholders' equity
$
24,241

 
$
31,094

 The accompanying notes are an integral part of these consolidated financial statements.

4


MARATHON OIL CORPORATION
Consolidated Statements of Cash Flows (Unaudited)
 
Six Months Ended
 
June 30,
(In millions)
2017
 
2016
Operating activities:
 

 
 

Net income (loss)
$
(5,096
)
 
$
(577
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 

 
 

Discontinued operations
4,893

 
79

Depreciation, depletion and amortization
1,148

 
1,061

Exploratory dry well costs and unproved property impairments
45

 
159

Net (gain) loss on disposal of assets
(7
)
 
(234
)
Deferred income taxes
38

 
(352
)
Net (gain) loss on derivative instruments
(140
)
 
90

Net cash received (paid) in settlement of derivative instruments
3

 
44

Stock based compensation
26

 
26

Equity method investments, net
61

 
22

Changes in:
 
 
 

Current receivables
(15
)
 
92

Inventories
(5
)
 
25

Current accounts payable and accrued liabilities
(41
)
 
(207
)
All other operating, net
13

 
39

Net cash provided by operating activities from continuing operations
923

 
267

Investing activities:
 

 
 

Additions to property, plant and equipment
(775
)
 
(728
)
Acquisitions, net of cash acquired
(1,828
)
 
—

Deposits for acquisitions
—

 
(89
)
Disposal of assets, net of cash transferred to buyer
1,726

 
758

Equity method investments - return of capital
49

 
37

All other investing, net
(5
)
 
2

Net cash used in investing activities from continuing operations
(833
)
 
(20
)
Financing activities:
 

 
 

Debt repayments
(1
)
 
—

Common stock issuance
—

 
1,236

Purchases of common stock
(10
)
 
(4
)
Dividends paid
(85
)
 
(77
)
Net cash provided by (used in) financing activities
(96
)
 
1,155

Cash Flow from Discontinued Operations:
 
 
 
Operating activities
141

 
(11
)
Investing activities
(13
)
 
(25
)
Changes in cash included in current assets held for sale
2

 
36

Net increase in cash and cash equivalents of discontinued operations
130

 
—

Effect of exchange rate on cash and cash equivalents
2

 
(3
)
Net increase (decrease) in cash and cash equivalents
126

 
1,399

Cash and cash equivalents at beginning of period
2,488

 
1,119

Cash and cash equivalents at end of period
$
2,614

 
$
2,518

The accompanying notes are an integral part of these consolidated financial statements.

5
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.
These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our 2016 Annual Report on Form 10-K.  The results of operations for the second quarter and first six months of 2017 are not necessarily indicative of the results to be expected for the full year.
As a result of the announcement to divest our Canadian business in the first quarter of 2017, we have reflected this business as discontinued operations in all periods presented. Assets and liabilities are presented as held for sale in the historical periods presented in the consolidated balance sheets. The disclosures in this report related to the results of operations and cash flows are presented on the basis of continuing operations, unless otherwise noted. This transaction closed in the second quarter of 2017. The characteristics and composition of our North America E&P reporting segment remained unchanged and there was no effect on previously reported segment information. As all our remaining properties within the segment are located within the United States, we concluded that our North America E&P segment would be renamed United States E&P segment, effective June 30, 2017. During the quarter no changes occurred to our International E&P segment. See Note 6 for discussion of the divestiture in further detail and Note 7 for further information on our reportable segments.
During the first quarter of 2017, we adopted the accounting standards update issued by the FASB in March 2016 pertaining to share-based payment transactions. See Note 2 for additional discussion. As a result of this adoption, all cash payments for withheld shares made to taxing authorities on the employees' behalf will be presented within the financing activities section instead of the operating activities section of the statement of cash flows. We have elected the retrospective method for adoption of this update and the change in the statement of cash flows is not material for six months ended June 30, 2016. Excess tax benefits will be classified as an operating activity within the statement of cash flows on a prospective basis; as such, prior periods were not adjusted. See Note 2 for additional discussion.
2.   Accounting Standards
Not Yet Adopted
In March 2017, the FASB issued a new accounting standards update that will change how employers that sponsor defined pension and/or other postretirement benefit plans present the net periodic benefit cost in the income statement. Employers will present the service cost component of net periodic benefit cost in the same income statement line item(s) as other employee compensation costs arising from services rendered during the period. Only the service cost component will be eligible for capitalization in assets. This standard is effective for us in the first quarter of 2018 and shall be applied on a retrospective basis. Early adoption is permitted. We are evaluating the provisions of this accounting standards update and assessing the impact it may have on our results of operations, financial position, or cash flows.
In February 2017, the FASB issued a new accounting standards update that clarifies the accounting for the sale or transfer of nonfinancial assets and in substance nonfinancial assets to noncustomers, including partial sales. The standard also clarifies that the derecognition of all businesses (except those related to conveyances of oil and gas mineral rights or contracts with customers) should be accounted for in accordance with the derecognition and deconsolidation guidance in Subtopic 810-10. This standard is effective for us in the first quarter of 2018 and will be applied using the modified retrospective approach. Early adoption is permitted. We plan to adopt this new standard in the first quarter of 2018 concurrently with the new revenue recognition standard. We are evaluating the provisions of this accounting standards update and assessing the impact it may have on our consolidated results of operations, financial position or cash flows.
In January 2017, the FASB issued a new accounting standards update that changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities constitutes a business. The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities would not represent a business. The guidance also requires a business to include at least one substantive process and narrows the definition of outputs by more closely aligning it with how outputs are described in the new revenue guidance. This standard is effective for us in the first quarter of 2018 and shall be applied on a prospective basis. Early adoption is permitted for certain transactions as described in the guidance. Since we will adopt the standard on a prospective basis, we do not expect an impact on our consolidated results of operations, financial position or cash flows for prior periods.

6
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)



In January 2017, the FASB issued a new accounting standards update that eliminates the requirement to calculate the implied fair value of the goodwill (i.e., Step 2 of goodwill impairment test under the current guidance) to measure a goodwill impairment charge. The standard will require entities to record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value (i.e., measure the charge based on Step 1 under the current guidance). This standard is effective for us in the first quarter of 2020 and shall be applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. Since we will adopt the standard on a prospective basis, we do not expect an impact on our consolidated results of operations, financial position or cash flows for prior periods.
In November 2016, the FASB issued a new accounting standards update that requires entities to show the changes in the total of cash, cash equivalents and restricted cash in the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash in the statement of cash flows. When cash, cash equivalents, and restricted cash are presented in more than one line item on the balance sheet, the standard requires a reconciliation of the totals in the statement of cash flows to the related captions in the balance sheet. This reconciliation can be presented either on the face of the statement of cash flows or in the notes to the financial statements. This standard is effective for us in the first quarter of 2018 and shall be applied on a retrospective basis. Early adoption is permitted. We are evaluating the provisions of this accounting standards update and assessing the impact it may have on our consolidated statements of cash flows and related disclosures.
In August 2016, the FASB issued a new accounting standards update which seeks to reduce the existing diversity in practice in how certain transactions are classified in the statement of cash flows. This standard is effective for us in the first quarter of 2018 and shall be applied on a retrospective basis. Early adoption is permitted. We are evaluating the provisions of this accounting standards update and assessing the impact, if any, it may have on our consolidated statements of cash flows and related disclosures.
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 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 does not apply to leases to explore for or use minerals, oil, natural gas and similar non-regenerative resources, including the intangible right to explore for those natural resources and rights to use the land in which those natural resources are contained. 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 may 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 May 2014 and August 2015, 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 shall be applied retrospectively to each prior reporting period presented (“full retrospective method”) or with the cumulative effect of initially applying the update recognized at the date of initial application (“modified retrospective method”). While early adoption is permitted, we plan to adopt this new standard in the first quarter of 2018 using the modified retrospective method. Based on our assessment to date, we do not expect the adoption of this ASU to have a material impact on our consolidated results of operations, financial position or cash flows. However, we do expect to change our presentation of future marketing revenues and marketing expenses from the current gross presentation to a net presentation for a portion of our international contracts. For the six months ended June 30, 2017, we estimate this impact to be

7
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)



approximately $50 million in marketing revenue and expenses in our consolidated results of operations. We continue to evaluate the disclosure requirements, are developing accounting policies, and assessing changes to the relevant business processes and the control activities as a result of this standard.
Recently Adopted
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 was effective for us in the first quarter of 2017. The new standard requires a company to make a policy election on how it accounts for forfeitures; we elected to continue estimating forfeitures using the same methodology practiced prior to adoption of this standard. See Note 1 for the impact this standard has on the presentation of our financial statements.
In July 2015, the FASB issued an update that requires an entity to measure inventory at the lower of cost or net realizable value. This excludes inventory measured using LIFO or the retail inventory method. This standard was effective for us in the first quarter of 2017, and was applied prospectively. 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
During the second quarter of 2017 we closed on the sale of our Canadian business, which included our 20% undivided interest in the Athabasca Oil Sands Project (AOSP). The owners of the AOSP 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.  This contract was transferred to the purchaser of our Canadian business upon closing of the sale in the second quarter of 2017. Historically, this contract qualified as a variable interest contractual arrangement, and the Corridor Pipeline qualified as a VIE.  Prior to the closing of the sale of our Canadian business, we held this variable interest but were not the primary beneficiary because our shipments were only 20% of the total; therefore, the Corridor Pipeline was not consolidated by us. See Note 6 for further discussion regarding dispositions.

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 in all years, provided the effect is not antidilutive. The per share calculations below exclude 12 million stock options for the three and six month periods ended June 30, 2017 and 14 million stock options for the three and six month periods ended June 30, 2016 that were antidilutive.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In millions, except per share data)
2017
 
2016
 
2017
 
2016
Income (loss) from operations
$
(153
)
 
$
(138
)
 
$
(203
)
 
$
(498
)
Income (loss) from discontinued operations
14

 
(32
)
 
(4,893
)
 
(79
)
Net income (loss)
$
(139
)
 
$
(170
)
 
$
(5,096
)
 
$
(577
)
 
 
 
 
 
 
 
 
Weighted average common shares outstanding
850

 
848

 
850

 
790

Per basic share:
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
(0.18
)
 
$
(0.16
)
 
$
(0.24
)
 
$
(0.63
)
Income (loss) from discontinued operations
$
0.02

 
$
(0.04
)
 
$
(5.76
)
 
$
(0.10
)
Net income
$
(0.16
)
 
$
(0.20
)
 
$
(6.00
)
 
$
(0.73
)
Per diluted share:
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
(0.18
)
 
$
(0.16
)
 
$
(0.24
)
 
$
(0.63
)
Income (loss) from discontinued operations
$
0.02

 
$
(0.04
)
 
$
(5.76
)
 
$
(0.10
)
Net income
$
(0.16
)
 
$
(0.20
)
 
$
(6.00
)
 
$
(0.73
)

8
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)



5. Acquisitions
2017 - United States E&P
In the second quarter of 2017 we closed on our acquisitions to acquire approximately 91,000 net acres in the Permian basin, including over 70,000 net acres in the Northern Delaware basin of New Mexico. On May 1, 2017 we closed on our acquisition with BC Operating, Inc. and other entities for $1.1 billion in cash, subject to post-closing adjustments, to acquire approximately 70,000 net surface acres and current production of approximately 5,000 net barrels of oil equivalent per day. On June 1, 2017 we closed on our acquisition with Black Mountain Oil & Gas and other private sellers for approximately $700 million in cash, subject to post-closing adjustments, to acquire approximately 21,000 net surface acres. The purchase price for these acquisitions was paid with cash on hand. We accounted for these transactions as asset acquisitions, with substantially all of the purchase price allocated to unproved property within property, plant and equipment. Although the purchase price allocation has not been finalized, we do not expect to record any material adjustments to the preliminary purchase price allocation.
2016 - United States E&P
On August 1, 2016, we closed on our acquisition of PayRock Energy Holdings, LLC (“PayRock”), a portfolio company of EnCap Investments, including approximately 61,000 net surface acres in the oil window of the Anadarko Basin STACK play in Oklahoma. The purchase price of $904 million, subject to closing adjustments, was paid with cash on hand. We accounted for this transaction as an asset acquisition, with a majority of the purchase price allocated to unproved property within property, plant and equipment.
6.
Dispositions
Oil Sands Mining Segment
On May 31, 2017 we closed on the sale of our Canadian business, which includes our 20% non-operated interest in the AOSP to Shell and Canadian Natural Resources Limited (“CNRL”) for $2.5 billion, excluding closing adjustments. Under the terms of the agreement, $1.8 billion was paid to us upon closing and the remaining proceeds will be paid in the first quarter of 2018. At closing we received two notes receivable for the remaining proceeds, each with a face value of $375 million. We initially recorded these notes receivable at fair value and, in subsequent periods, will report them at amortized cost. See Note 13 for fair value measurements. Our notes receivable are with 10084751 Canada Limited (“Canada Limited”), an affiliate of Shell Canada Limited, and CNRL. The Canada Limited note receivable is guaranteed by Shell Canada Limited and the CNRL note receivable is guaranteed by Toronto Dominion Bank. In the first quarter of 2017, we recorded an after-tax non-cash impairment charge of $4.96 billion primarily related to the property, plant and equipment of our Canadian business. As the effective date of the transaction is January 1, 2017, we recorded a loss on sale of $43 million due to second quarter results of operations from our Canadian business that were recorded in our financial statements but transferred to the buyer upon closing.
Our Canadian business is reflected as discontinued operations in the consolidated statements of income and the consolidated statements of cash flows for all periods presented. The following table contains select amounts reported in our consolidated statements of income as discontinued operations:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In millions)
 
2017
 
2016
 
2017
 
2016
Total sales and other revenues and other income
 
$
173

 
$
199

 
$
431

 
$
359

Net gain (loss) on disposal of assets
 
(43
)
 
—

 
(43
)
 
—

Total revenues and other income
 
130

 
199

 
388

 
359

Costs and expenses:
 
 
 
 
 
 
 
 
Production expenses
 
103

 
165

 
254

 
306

Depreciation, depletion and amortization
 
1

 
49

 
40

 
109

Impairments
 
—

 
—

 
6,636

 
—

Other
 
12

 
31

 
25

 
60

Total costs and expenses
 
116

 
245

 
6,955

 
475

Pretax income (loss) from discontinued operations
 
14

 
(46
)
 
(6,567
)
 
(116
)
Provision (benefit) for income taxes
 
—

 
(14
)
 
(1,674
)
 
(37
)
Income (loss) from discontinued operations
 
$
14

 
$
(32
)
 
$
(4,893
)
 
$
(79
)

9
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)



The following table presents the carrying value of the major categories of assets and liabilities of our Canadian business reported as discontinued operations and assets and liabilities from continuing operations, that are reflected as held for sale on our consolidated balance sheets at June 30, 2017 and December 31, 2016:
 
 
June 30,
 
December 31,
(In millions)
 
2017
 
2016
Assets held for sale
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
—

 
$
2

Accounts receivables
 
—

 
129

Inventories
 
—

 
91

Other
 
—

 
4

Total current assets held for sale—discontinued operations
 
—

 
226

Total current assets held for sale—continuing operations
 
1

 
1

Total current assets held for sale
 
$
1

 
$
227

 
 
 
 
 
Noncurrent assets:
 
 
 
 
Property, plant and equipment, net
 
$
—

 
$
8,991

Other
 
—

 
106

Total noncurrent assets held for sale—discontinued operations
 
—

 
9,097

Total noncurrent assets held for sale—continuing operations
 
1

 
1

Total noncurrent assets held for sale
 
$
1

 
$
9,098

 
 
 
 
 
Liabilities associated with assets held for sale
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
—

 
$
111

Other
 
—

 
10

Total current liabilities held for sale—discontinued operations
 
—

 
121

Total current liabilities held for sale—continuing operations
 
—

 
—

Total current liabilities held for sale
 
$
—

 
$
121

 
 
 
 
 
Noncurrent liabilities:
 
 
 
 
Asset retirement obligations
 
$
—

 
$
95

Deferred tax liabilities
 
—

 
1,669

Other
 
—

 
20

Total noncurrent liabilities held for sale—discontinued operations
 
—

 
1,784

Total noncurrent liabilities held for sale—continuing operations
 
7

 
7

Total noncurrent liabilities held for sale
 
$
7

 
$
1,791

United States E&P Segment
As disclosed above, we closed on the sale of our Canadian business in May of 2017. This sale included interests in our exploration stage in-situ leases which were included within our historically named North America E&P Segment. See Note 1 for further detail. These interests have been reflected as discontinued operations and are included within the disclosure above.
In April 2016, we announced the sale of our Wyoming upstream and midstream assets. During the second quarter 2016, we received proceeds of approximately $690 million and recorded a pre-tax gain of $266 million with the remaining asset sales closing in November 2016 for proceeds of $155 million, excluding closing adjustments. A pre-tax gain of $38 million was recognized in the fourth quarter 2016.

10
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)



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 and New Mexico, for a combined total of approximately $80 million in proceeds. We closed on certain of the asset sales and recognized a net pre-tax loss on sale of $48 million in the second quarter of 2016, with the remaining Piceance basin asset sale expected to close in the second half of 2017.
7.    Segment Information
  We have two reportable operating segments. Both of these segments are organized and managed based upon geographic location and the nature of the products and services offered.
•
U.S. E&P – explores for, produces and markets crude oil and condensate, NGLs and natural gas in the United States
•
Int’l E&P – explores for, produces and markets crude oil and condensate, NGLs and natural gas outside of the United States and produces and markets products manufactured from natural gas, such as LNG and methanol, in Equatorial Guinea (“E.G.”)
Information regarding assets by segment is not presented because it is not reviewed by the chief operating decision maker (“CODM”).  Segment income (loss) represents income (loss) 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, 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.
As discussed in Note 6, we closed on the sale of our Canadian business, which includes our Oil Sands Mining segment and exploration stage in-situ leases, in the second quarter of 2017. The Canadian business is reflected as discontinued operations and is excluded from segment information in all periods presented. Additionally, we have renamed our North America E&P segment to United States E&P segment effective June 30, 2017 in all periods presented. See Note 1 for further information.
 
Three Months Ended June 30, 2017
 
 
Not Allocated
 
 
(In millions)
U.S. E&P
 
Int'l E&P
 
to Segments
 
Total
Sales and other operating revenues
$
695

 
$
220

 
$
43

(c) 
$
958

Marketing revenues
7

 
28

 
—

 
35

Total revenues
702

 
248

 
43

 
993

Income from equity method investments
—

 
51

 
—

 
51

Net gain on disposal of assets and other income
2

 
4

 
9

 
15

Less:
 
 
 
 
 
 
 
Production expenses
118

 
58

 
—

 
176

Marketing costs
9

 
29

 
—

 
38

Exploration expenses
30

 
—

 
—


30

Depreciation, depletion and amortization
495

 
89

 
8

 
592

Other expenses (a)
126

 
22

 
56

(d) 
204

Taxes other than income
33

 
—

 
12

 
45

Net interest and other
—

 
—

 
86

 
86

Income tax provision (benefit)
—

 
46

 
(5
)
 
41

Segment income (loss) / Income (loss) from continuing operations
$
(107
)
 
$
59

 
$
(105
)
 
$
(153
)
Capital expenditures (b)
$
575

 
$
14

 
$
10

 
$
599

(a) 
Includes other operating expenses and general and administrative expenses.
(b) 
Includes accruals.
(c) 
Unrealized gain on commodity derivative instruments.

11
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)



(d) 
Includes pension settlement loss of $3 million. (See Note 8.)
 
Three Months Ended June 30, 2016
 
 
Not Allocated
 
 
(In millions)
U.S. E&P
 
Int'l E&P
 
to Segments
 
Total
Sales and other operating revenues
$
617

 
$
159

 
$
(91
)
(c) 
$
685

Marketing revenues
53

 
23

 
—

 
76

Total revenues
670

 
182

 
(91
)
 
761

Income from equity method investments
—

 
37

 
—

 
37

Net gain on disposal of assets and other income
2

 
7

 
296

(d) 
305

Less:
 
 
 
 
 
 
 
Production expenses
129

 
56

 
—

 
185

Marketing costs
52

 
23

 
—

 
75

Exploration expenses
37

 
4

 
141

(e) 
182

Depreciation, depletion and amortization
433

 
68

 
11

 
512

Other expenses (a)
97

 
22

 
99

(f) 
218

Taxes other than income
35

 
—

 
—

 
35

Net interest and other
—

 
—

 
88

 
88

Income tax provision (benefit)
(41
)
 
(2
)
 
(11
)
 
(54
)
Segment income (loss) / Income (loss) from continuing operations
$
(70
)
 
$
55

 
$
(123
)
 
$
(138
)
Capital expenditures (b)
$
153

 
$
12

 
$
5

 
$
170

(a) 
Includes other operating expenses and general and administrative expenses.
(b) 
Includes accruals.
(c) 
Unrealized loss on commodity derivative instruments.
(d) 
Primarily related to partial sale of Wyoming upstream and midstream assets. (See Note 6.)
(e) 
Impairments associated with decision to not drill remaining Gulf of Mexico undeveloped leases.
(f) 
Includes pension settlement loss of $31 million (See Note 8).

12
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)



 
Six Months Ended June 30, 2017
 
 
Not Allocated
 
 
(In millions)
U.S. E&P
 
Int'l E&P
 
to Segments
 
Total
Sales and other operating revenues
$
1,369

 
$
423

 
$
120

(c) 
$
1,912

Marketing revenues
13

 
56

 
—

 
69

Total revenues
1,382

 
479

 
120

 
1,981

Income from equity method investments
—

 
120

 
—

 
120

Net gain on disposal of assets and other income
7

 
14

 
9

 
30

Less:
 
 
 
 
 
 
 
Production expenses
227

 
100

 
—

 
327

Marketing costs
16

 
56

 
—

 
72

Exploration expenses
56

 
2

 
—


58

Depreciation, depletion and amortization
967

 
164

 
17

 
1,148

Impairments
4

 
—

 
—

 
4

Other expenses (a)
233

 
43

 
126

(d) 
402

Taxes other than income
72

 
—

 
12

 
84

Net interest and other
—

 
—

 
164

 
164

Income tax provision (benefit)
—

 
96

 
(21
)
 
75

Segment income (loss) / Income (loss) from continuing operations
$
(186
)
 
$
152

 
$
(169
)
 
$
(203
)
Capital expenditures (b)
$
924

 
$
23

 
$
11

 
$
958

(a) 
Includes other operating expenses and general and administrative expenses.
(b) 
Includes accruals.
(c) 
Unrealized gain on commodity derivative instruments.
(d) 
Includes pension settlement loss of $17 million. (See Note 8.)
 
Six Months Ended June 30, 2016
 
 
Not Allocated
 
 
(In millions)
U.S. E&P
 
Int'l E&P
 
to Segments
 
Total
Sales and other operating revenues
$
1,110

 
$
255

 
$
(114
)
(c) 
$
1,251

Marketing revenues
84

 
38

 
—

 
122

Total revenues
1,194

 
293

 
(114
)
 
1,373

Income from equity method investments
—

 
51

 
—

 
51

Net gain on disposal of assets and other income
3

 
13

 
233

(d) 
249

Less:
 
 
 
 
 
 
 
Production expenses
263

 
109

 
—

 
372

Marketing costs
84

 
37

 
—

 
121

Exploration expenses
55

 
10

 
141

(e) 
206

Depreciation, depletion and amortization
920

 
118

 
23

 
1,061

Impairments
1

 
—

 
—

 
1

Other expenses (a)
215

 
38

 
219

(f) 
472

Taxes other than income
77

 
—

 
1

 
78

Net interest and other
—

 
—

 
167

 
167

Income tax provision (benefit)
(153
)
 
(14
)
 
(140
)
 
(307
)
Segment income (loss) / Income (loss) from continuing operations
$
(265
)
 
$
59

 
$
(292
)
 
$
(498
)
Capital expenditures (b)
$
468

 
$
44

 
$
8

 
$
520

(a) 
Includes other operating expenses and general and administrative expenses.
(b) 
Includes accruals.
(c) 
Unrealized loss on commodity derivative instruments.

13
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)



(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).

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)
2017
 
2016
 
2017
 
2016
Service cost
$
5

 
$
6

 
$
—

 
$
1

Interest cost
7

 
10

 
2

 
2

Expected return on plan assets
(10
)
 
(13
)
 
—

 
—

Amortization:
 

 
 

 
 

 
 

– prior service cost (credit)
(2
)
 
(3
)
 
(1
)
 
(1
)
– actuarial loss
2

 
4

 
—

 
—

Net settlement loss (a)
3

 
31

 
—

 
—

Net periodic benefit cost
$
5

 
$
35

 
$
1

 
$
2

 
Six Months Ended June 30,
  
Pension Benefits
 
Other Benefits
(In millions)
2017
 
2016
 
2017
 
2016
Service cost
$
11

 
$
12

 
$
1

 
$
2

Interest cost
15

 
21

 
4

 
5

Expected return on plan assets
(22
)
 
(28
)
 
—

 
—

Amortization:
 
 
 

 
 

 
 

– prior service cost (credit)
(4
)
 
(5
)
 
(3
)
 
(2
)
– actuarial loss
4

 
7

 
—

 
—

Net settlement loss (a)
17

 
79

 
—

 
—

Net periodic benefit cost
$
21


$
86


$
2


$
5

(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.

During the first six months of 2017, 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 2017, we made contributions of $27 million to our funded pension plans and we expect to make additional contributions up to an estimated $33 million over the remainder of 2017.  During the first six months of 2017, we made payments of $8 million and $12 million related to unfunded pension plans and other postretirement benefit plans, respectively.

14
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)



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. For the second quarter and first six months of 2017 and 2016, our effective income tax rates on continuing operations were as follows:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In millions)
 
2017
 
2016
 
2017
 
2016
Total pre-tax income (loss) from continuing operations
 
$
(112
)
 
$
(192
)
 
$
(128
)
 
$
(805
)
Total income tax expense (benefit)
 
$
41

 
$
(54
)
 
$
75

 
$
(307
)
Effective income tax expense (benefit) rate on continuing operations
 
37
%
 
(28
)%
 
59
%
 
(38
)%
 
 
 
 
 
 
 
 
 
Income taxes at the statutory tax rate of 35%
 
$
(39
)
 
$
(67
)
 
$
(45
)
 
$
(282
)
Effects of foreign operations
 
2

 
5

 
(2
)
 
(30
)
Adjustments to valuation allowances
 
76

 
5

 
133

 
5

State income taxes
 
—

 
3

 
(13
)
 
(3
)
Other federal tax effects
 
2

 
—

 
2

 
3

Income tax expense (benefit) on continuing operations
 
$
41

 
$
(54
)
 
$
75

 
$
(307
)
Income tax expense for the second quarter and first six months of 2017 was impacted by a full valuation allowance on our federal deferred tax assets generated in 2017 and increased sales volumes in our Libyan operations where the statutory income tax rate is in excess of 90%. Our Libya income tax expense was $32 million in the second quarter and $77 million in the first six months of 2017 compared to a benefit of $10 million and $21 million for the same periods last year.
In the first six months of 2017 we settled our 2011-2013 Alaska income tax audit, which resulted in the recognition of a tax benefit totaling $13 million. As of June 30, 2017 there are no uncertain tax positions for which it is reasonably possible that the amount would significantly increase or decrease in the next twelve months.  However, as discussed in Note 20, we may be required to adjust the timing of our tax deduction for decommissioning costs and make a payment to the U.K. tax authorities of approximately $130 million in the next twelve months, which would be recovered as future decommissioning activities are performed and deductions claimed. We estimate that any revisions to current and deferred tax liabilities, if we do not prevail, would have no cumulative adverse earnings impact in our consolidated results of operations.  While we believe that it is more likely than not that we will prevail in the Tribunal, if we do not, we have the option to seek appeal. 
The effective tax rate change between years for the second quarter and first six months of 2017 and 2016, was driven by the full valuation allowance on our federal deferred tax assets generated in 2017, and the impacts of foreign operations which includes the tax effects associated with increased sales volumes in Libya.
The impact of foreign operations for the second quarter and first six months of 2017 totaled tax expense of $2 million for three months ended June 30, 2017 and a tax benefit of $2 million for the first six months of 2017 due to income tax rate differentials from the U.S. statutory rate of 35% associated with foreign operations in Libya, E.G. and the U.K. This was offset by deferred tax benefits being generated in the U.K. related to future tax refunds associated with abandonment costs.
In Libya, reliable estimates of 2017 and 2016 annual ordinary income from our Libyan 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 impacts applicable to Libyan ordinary income (loss) were recorded as a discrete item in the second quarter and the first six months of 2017 and 2016.  For the second quarter and the first six months of 2017 and 2016, estimated annual effective tax rates were calculated excluding Libya and applied to consolidated ordinary income (loss). Excluding Libya, the effective income tax expense and benefit rates would be an expense of 7% and a benefit of 25% for the second quarter of 2017 and 2016. Excluding Libya, the effective income tax expense and benefit rates would be a benefit of 1% and 36% for the first six months of 2017 and 2016.
We expect to be in a cumulative loss position in 2017, and as a result we have placed a full valuation allowance on our federal deferred tax assets. In the second quarter and first six months of 2017 this valuation allowance was $76 million and

15
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)



$133 million. During 2017 we expect to realize no tax benefit on any federal deferred tax assets generated. See Deferred Tax Assets section below for further detail.
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. The estimated realizability of the benefit of our deferred tax asset is assessed considering a preponderance of evidence. This assessment requires analysis of all available positive and negative evidence. Positive evidence includes reversals of temporary differences, forecasts of future taxable income, assessment of future business assumptions and applicable tax planning strategies. Negative evidence includes losses in recent years as well as the forecasts of future income (loss) in the realizable period. As of the fourth quarter of 2016, we expected to be in a cumulative loss position in 2017, which constitutes significant objective negative evidence as to the future realizability of the value of our federal deferred tax assets. Due to this negative evidence, we placed a full valuation allowance on our federal deferred tax assets in the fourth quarter of 2016 and expect to realize no tax benefit on any federal deferred tax assets generated in 2017.
10.   Inventories
 Crude oil and natural gas are recorded at weighted average cost and carried at the lower of cost or net realizable 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)
2017
 
2016
Crude oil and natural gas
$
11

 
$
6

Supplies and other items
129

 
130

Inventories
$
140

 
$
136

11.  Property, Plant and Equipment, net of Accumulated Depreciation, Depletion and Amortization
 
June 30,
 
December 31,
(In millions)
2017
 
2016
United States E&P
$
15,888

 
$
14,158

International E&P
2,358

 
2,470

Corporate
91

 
99

Net property, plant and equipment
$
18,337


$
16,727


Our Libya operations have been interrupted in recent years due to civil unrest. On September 14, 2016, Force Majeure was lifted and production resumed in October 2016 at our Waha concession. During December 2016, liftings resumed from the Es Sider crude oil terminal. Sales volumes and production continued during the first six months of 2017, except for a brief interruption in March 2017 due to civil unrest.
As of June 30, 2017, our net property, plant and equipment investment in Libya is $767 million, and total proved reserves (unaudited) in Libya as of December 31, 2016 are 206 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 $767 million by a significant amount.
Exploratory well costs capitalized greater than one year after completion of drilling were $96 million and $118 million as of June 30, 2017 and December 31, 2016. The decrease in costs of $22 million was primarily due to an April 2017 approval by the host government in E.G. to develop Block D offshore E.G. through unitization with the Alba field.  As such, the $22 million exploratory well costs capitalized greater than one year after completion associated with the Corona well are no longer being deferred.

16
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)



12. Impairments and Exploration Expenses
As a result of our announced disposition of our Canadian business in the first quarter of 2017, we recorded a pre-tax non-cash impairment charge of $6.6 billion primarily related to property, plant and equipment. This impairment in our Canadian business is reflected as discontinued operations in the consolidated statements of income and the consolidated statements of cash flows for all periods presented. See Note 6 for relevant detail regarding dispositions.

The following table summarizes the components of exploration expenses:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In millions)
2017
 
2016
 
2017
 
2016
Exploration Expenses
 
 
 
 
 
 
 
Unproved property impairments
$
25

 
$
133

 
$
45

 
$
144

Dry well costs
—

 
15

 
—

 
15

Geological and geophysical
—

 
—

 
1

 
—

Other
5

 
34

 
12

 
47

Total exploration expenses
$
30

 
$
182

 
$
58

 
$
206


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, 2017 and December 31, 2016 by fair value hierarchy level.
 
June 30, 2017
(In millions)
Level 1
 
Level 2
 
Level 3
 
Total
Derivative instruments, assets
 
 
 
 
 
 
 
     Commodity (a)
$
—

 
$
60

 
$
—

 
$
60

     Interest rate
—

 
54

 
—

 
54

Derivative instruments, assets
$
—

 
$
114

 
$
—

 
$
114

Derivative instruments, liabilities
 
 
 
 
 
 
 
     Commodity (a)
$
—

 
$
—

 
$
—

 
$
—

Derivative instruments, liabilities
$
—

 
$
—

 
$
—

 
$
—

(a)  
Derivative instruments are recorded on a net basis in our balance sheet. See Note 14.

 
December 31, 2016
(In millions)
Level 1
 
Level 2
 
Level 3
 
Total
Derivative instruments, assets
 
 
 
 
 
 
 
     Commodity (a)
$
—

 
$
—

 
$
—

 
$
—

Interest rate
—

 
68

 
—

 
68

Derivative instruments, assets
$
—

 
$
68

 
$
—

 
$
68

Derivative instruments, liabilities
 
 
 
 
 
 
 
     Commodity (a)
$
—

 
$
60

 
$
—

 
$
60

Derivative instruments, liabilities
$
—

 
$
60

 
$
—

 
$
60

(a)  
Derivative instruments are recorded on a net basis in our balance sheet. See Note 14.
Commodity derivatives include three-way collars, call options and swaps. These instruments are measured at fair value using either a Black-Scholes or a modified Black-Scholes Model. Inputs to the models include commodity prices, interest rates, and implied volatility and are categorized as Level 2 because predominantly all assumptions and inputs are observable in active markets throughout the term of the instruments.

17
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)



Both our interest rate swaps and forward starting 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. As of June 30, 2017 we have $115 million of goodwill associated with our International E&P reporting unit. 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, operating expenses and tax rates. The assumptions used in the income approach 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 2017 and concluded no impairment was required. As of the date of our last impairment assessment, the fair value of our International E&P reporting unit exceeded its book value by over 40%. While the fair value of our International E&P reporting unit exceeded the book value, subsequent variations in the above assumptions could result in materially different calculations of fair value and determinations of whether or not an impairment is indicated.
Fair Values- Nonrecurring
The following discusses the values of assets measured at fair value on a nonrecurring basis in periods subsequent to their initial recognition.
As a result of our announced disposition of our Canadian business in the first quarter of 2017, we recorded a non-cash impairment charge of $6.6 billion primarily related to property, plant and equipment. This impairment was recorded for excess net book value over anticipated sales proceeds less costs to sell. Fair values of assets held for sale were determined based upon the anticipated sales proceeds less costs to sell, which resulted in a Level 2 classification. See Note 6 for relevant detail regarding dispositions.
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, 2017 and December 31, 2016.
 
June 30, 2017
 
December 31, 2016
 
Fair
 
Carrying
 
Fair
 
Carrying
(In millions)
Value
 
Amount
 
Value
 
Amount
Financial assets
 
 
 
 
 
 
 
Current assets (a)
$
753

 
$
753

 
$
7

 
$
7

Other noncurrent assets
104

 
107

 
105

 
108

Total financial assets  
$
857

 
$
860

 
$
112

 
$
115

Financial liabilities
 

 
 

 
 

 
 

     Other current liabilities
$
43

 
$
54

 
$
68

 
$
75

     Long-term debt, including current portion (b)
7,451

 
7,293

 
7,449

 
7,292

Deferred credits and other liabilities
110

 
103

 
114

 
107

Total financial liabilities  
$
7,604

 
$
7,450

 
$
7,631

 
$
7,474


18
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)



(a)    Includes our two notes receivable relating to the sale of our Canadian business as of June 30, 2017, see note 6 for further information.
(b) Excludes capital leases, debt issuance costs and interest rate swap adjustments.
Fair values of our notes receivable and 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, 2017
 
 
(In millions)
Asset
 
Liability
 
Net Asset
 
Balance Sheet Location
Fair Value Hedges
 
 
 
 
 
 
 
     Interest rate
$
1

 
$
—

 
$
1

 
Other current assets
Total Designated Hedges
$
1

 
$
—

 
$
1

 
 
 
 
 
 
 
 
 
 
Not Designated as Hedges
 
 
 
 
 
 
 
     Interest rate
$
53

 
$
—

 
$
53

 
Other current assets
   Commodity
57

 
—

 
57

 
Other current assets
   Commodity
3

 
—

 
3

 
Other noncurrent assets
Total Not Designated as Hedges
$
113

 
$
—

 
$
113

 
 
     Total
$
114


$
—

 
$
114

 
 

 
December 31, 2016
 
 
(In millions)
Asset
 
Liability
 
Net Asset
 
Balance Sheet Location
Fair Value Hedges
 
 
 
 
 
 
 
     Interest rate
$
3

 
$
—

 
$
3

 
Other current assets
     Interest rate
1

 
—

 
1

 
Other noncurrent assets
Cash Flow Hedges
 
 
 
 
 
 
 
     Interest rate
$
64

 
$
—

 
$
64

 
Other noncurrent assets
Total Designated Hedges
$
68

 
$
—

 
$
68

 
 
 
 
 
 
 
 
 
 
Not Designated as Hedges
 
 
 
 
 
 
 
     Commodity
$
—

 
$
60

 
$
(60
)
 
Other current liabilities
Total Not Designated as Hedges
$
—

 
$
60

 
$
(60
)
 
 
     Total
$
68

 
$
60