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 September 30, 2018 | |
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
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 every Interactive Data File required to be submitted 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 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 | |
| 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 831,275,876 shares of Marathon Oil Corporation common stock outstanding as of October 31, 2018.
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 2017 Annual Report on Form 10-K.
Part I – FINANCIAL INFORMATION
Item 1. Financial Statements
MARATHON OIL CORPORATION
Consolidated Statements of Income (Unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
(In millions, except per share data) | 2018 | | 2017 | | 2018 | | 2017 |
Revenues and other income: | | | | | | | |
Revenues from contracts with customers | $ | 1,538 |
| | $ | 1,136 |
| | $ | 4,522 |
| | $ | 2,911 |
|
Net gain (loss) on commodity derivatives | (70 | ) | | (22 | ) | | (324 | ) | | 115 |
|
Marketing revenues | — |
| | 48 |
| | — |
| | 117 |
|
Income from equity method investments | 64 |
| | 63 |
| | 161 |
| | 183 |
|
Net gain (loss) on disposal of assets | 16 |
| | 19 |
| | 323 |
| | 26 |
|
Other income | 119 |
| | 8 |
| | 135 |
| | 31 |
|
Total revenues and other income | 1,667 |
| | 1,252 |
| | 4,817 |
| | 3,383 |
|
Costs and expenses: | |
| | |
| | | | |
|
Production | 215 |
| | 197 |
| | 637 |
| | 528 |
|
Marketing, including purchases from related parties | — |
| | 49 |
| | — |
| | 121 |
|
Shipping, handling and other operating | 152 |
| | 109 |
| | 408 |
| | 309 |
|
Exploration | 56 |
| | 294 |
| | 173 |
| | 352 |
|
Depreciation, depletion and amortization | 626 |
| | 641 |
| | 1,828 |
| | 1,789 |
|
Impairments | 8 |
| | 201 |
| | 50 |
| | 205 |
|
Taxes other than income | 86 |
| | 44 |
| | 215 |
| | 128 |
|
General and administrative | 101 |
| | 89 |
| | 306 |
| | 276 |
|
Total costs and expenses | 1,244 |
| | 1,624 |
| | 3,617 |
| | 3,708 |
|
Income (loss) from operations | 423 |
| | (372 | ) | | 1,200 |
| | (325 | ) |
Net interest and other | (58 | ) | | (35 | ) | | (168 | ) | | (199 | ) |
Other net periodic benefit costs | (8 | ) | | (5 | ) | | (11 | ) | | (16 | ) |
Loss on early extinguishment of debt | — |
| | (46 | ) | | — |
| | (46 | ) |
Income (loss) from continuing operations before income taxes | 357 |
| | (458 | ) | | 1,021 |
| | (586 | ) |
Provision (benefit) for income taxes | 103 |
| | 141 |
| | 315 |
| | 216 |
|
Income (loss) from continuing operations | 254 |
| | (599 | ) | | 706 |
| | (802 | ) |
Income (loss) from discontinued operations | — |
| | — |
| | — |
| | (4,893 | ) |
Net income (loss) | $ | 254 |
| | $ | (599 | ) | | $ | 706 |
| | $ | (5,695 | ) |
Per basic share: | |
| | |
| | |
| | |
|
Income (loss) from continuing operations | $ | 0.30 |
| | $ | (0.70 | ) | | $ | 0.83 |
| | $ | (0.94 | ) |
Income (loss) from discontinued operations | $ | — |
| | $ | — |
| | $ | — |
| | $ | (5.76 | ) |
Net income (loss) | $ | 0.30 |
| | $ | (0.70 | ) | | $ | 0.83 |
| | $ | (6.70 | ) |
Per diluted share: | | | | | | | |
Income (loss) from continuing operations | $ | 0.30 |
| | $ | (0.70 | ) | | $ | 0.83 |
| | $ | (0.94 | ) |
Income (loss) from discontinued operations | $ | — |
| | $ | — |
| | $ | — |
| | $ | (5.76 | ) |
Net income (loss) | $ | 0.30 |
| | $ | (0.70 | ) | | $ | 0.83 |
| | $ | (6.70 | ) |
Weighted average common shares outstanding: | |
| | |
| | |
| | |
|
Basic | 848 |
| | 850 |
| | 852 |
| | 850 |
|
Diluted | 849 |
| | 850 |
| | 853 |
| | 850 |
|
The accompanying notes are an integral part of these consolidated financial statements.
MARATHON OIL CORPORATION
Consolidated Statements of Comprehensive Income (Unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
(In millions) | 2018 | | 2017 | | 2018 | | 2017 |
Net income (loss) | $ | 254 |
| | $ | (599 | ) | | $ | 706 |
| | $ | (5,695 | ) |
Other comprehensive income (loss) | | | |
| | |
| | |
|
Postretirement and postemployment plans | |
| | |
| | |
| | |
|
Change in actuarial loss and other | 20 |
| | 5 |
| | 37 |
| | 17 |
|
Income tax provision (benefit) | — |
| | 19 |
| | — |
| | 19 |
|
Postretirement and postemployment plans, net of tax | 20 |
| | 24 |
| | 37 |
| | 36 |
|
Derivative hedges | | | | | | | |
Net unrecognized gain (loss) | — |
| | — |
| | — |
| | (13 | ) |
Reclassification of gains on terminated derivative hedges | — |
| | (46 | ) | | — |
| | (47 | ) |
Income tax provision (benefit) | — |
| | 21 |
| | — |
| | 21 |
|
Derivative hedges, net of tax | — |
| | (25 | ) | | — |
| | (39 | ) |
Foreign currency hedges | |
| | |
| | |
| | |
|
Net recognized loss reclassified to discontinued operations | — |
| | — |
| | — |
| | 34 |
|
Income tax provision (benefit) | — |
| | — |
| | — |
| | (4 | ) |
Foreign currency hedges, net of tax | — |
| | — |
| | — |
| | 30 |
|
Other, net of tax | — |
| | 1 |
| | 4 |
| | 2 |
|
Other comprehensive income (loss) | 20 |
| | — |
| | 41 |
| | 29 |
|
Comprehensive income (loss) | $ | 274 |
|
| $ | (599 | ) |
| $ | 747 |
|
| $ | (5,666 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
MARATHON OIL CORPORATION
Consolidated Balance Sheets (Unaudited)
|
| | | | | | | |
| September 30, | | December 31, |
(In millions, except per share data) | 2018 | | 2017 |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 1,564 |
| | $ | 563 |
|
Receivables, less reserve of $8 and $12 | 1,335 |
| | 1,082 |
|
Notes receivable | — |
| | 748 |
|
Inventories | 110 |
| | 126 |
|
Other current assets | 31 |
| | 36 |
|
Current assets held for sale | 25 |
| | 11 |
|
Total current assets | 3,065 |
| | 2,566 |
|
Equity method investments | 757 |
| | 847 |
|
Property, plant and equipment, less accumulated depreciation, depletion and amortization of $22,358 and $21,564 | 16,899 |
| | 17,665 |
|
Goodwill | 97 |
| | 115 |
|
Other noncurrent assets | 912 |
| | 764 |
|
Noncurrent assets held for sale | 48 |
| | 55 |
|
Total assets | $ | 21,778 |
| | $ | 22,012 |
|
Liabilities | |
| | |
|
Current liabilities: | |
| | |
|
Accounts payable | $ | 1,479 |
| | $ | 1,395 |
|
Payroll and benefits payable | 127 |
| | 108 |
|
Accrued taxes | 128 |
| | 177 |
|
Other current liabilities | 405 |
| | 288 |
|
Current liabilities held for sale | 3 |
| | — |
|
Total current liabilities | 2,142 |
| | 1,968 |
|
Long-term debt | 5,498 |
| | 5,494 |
|
Deferred tax liabilities | 215 |
| | 833 |
|
Defined benefit postretirement plan obligations | 286 |
| | 362 |
|
Asset retirement obligations | 1,243 |
| | 1,428 |
|
Deferred credits and other liabilities | 340 |
| | 217 |
|
Noncurrent liabilities held for sale | 10 |
| | 2 |
|
Total liabilities | 9,734 |
| | 10,304 |
|
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, 1.925 billion shares authorized at September 30, 2018 and 1.1 billion shares authorized at December 31, 2017) | 937 |
| | 937 |
|
Held in treasury, at cost – 99 million and 87 million shares | (3,455 | ) | | (3,325 | ) |
Additional paid-in capital | 7,226 |
| | 7,379 |
|
Retained earnings | 7,357 |
| | 6,779 |
|
Accumulated other comprehensive loss | (21 | ) | | (62 | ) |
Total stockholders' equity | 12,044 |
| | 11,708 |
|
Total liabilities and stockholders' equity | $ | 21,778 |
| | $ | 22,012 |
|
The accompanying notes are an integral part of these consolidated financial statements.
MARATHON OIL CORPORATION
Consolidated Statements of Cash Flows (Unaudited) |
| | | | | | | |
| Nine Months Ended |
| September 30, |
(In millions) | 2018 | | 2017 |
Operating activities: | |
| | |
|
Net income (loss) | $ | 706 |
| | $ | (5,695 | ) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |
| | |
|
Discontinued operations | — |
| | 4,893 |
|
Depreciation, depletion and amortization | 1,828 |
| | 1,789 |
|
Impairments | 50 |
| | 205 |
|
Exploratory dry well costs and unproved property impairments | 144 |
| | 294 |
|
Net (gain) loss on disposal of assets | (323 | ) | | (26 | ) |
Deferred income taxes | 62 |
| | 44 |
|
Net (gain) loss on derivative instruments | 324 |
| | (162 | ) |
Net settlements of derivative instruments | (255 | ) | | 88 |
|
Pension and other postretirement benefits, net | (60 | ) | | (38 | ) |
Stock-based compensation | 44 |
| | 38 |
|
Equity method investments, net | 42 |
| | 46 |
|
Changes in: | | | |
|
Current receivables | (389 | ) | | (192 | ) |
Inventories | (11 | ) | | 4 |
|
Current accounts payable and accrued liabilities | 334 |
| | 189 |
|
All other operating, net | (117 | ) | | 10 |
|
Net cash provided by operating activities from continuing operations | 2,379 |
| | 1,487 |
|
Investing activities: | |
| | |
|
Additions to property, plant and equipment | (2,069 | ) | | (1,305 | ) |
Additions to other assets | (135 | ) | | (23 | ) |
Acquisitions, net of cash acquired | (25 | ) | | (1,828 | ) |
Disposal of assets, net of cash transferred to buyer | 1,249 |
| | 1,757 |
|
Equity method investments - return of capital | 48 |
| | 49 |
|
All other investing, net | 11 |
| | (3 | ) |
Net cash provided by (used in) investing activities from continuing operations | (921 | ) | | (1,353 | ) |
Financing activities: | |
| | |
|
Borrowings | — |
| | 988 |
|
Debt repayments | — |
| | (1,764 | ) |
Debt extinguishment costs | — |
| | (46 | ) |
Purchases of common stock | (349 | ) | | (10 | ) |
Dividends paid | (128 | ) | | (128 | ) |
All other financing, net | 22 |
| | — |
|
Net cash provided by (used in) financing activities | (455 | ) | | (960 | ) |
Net increase in cash and cash equivalents of discontinued operations (Note 5) | — |
| | 130 |
|
Effect of exchange rate on cash and cash equivalents | (2 | ) | | 3 |
|
Net increase (decrease) in cash and cash equivalents | 1,001 |
| | (693 | ) |
Cash and cash equivalents at beginning of period | 563 |
| | 2,488 |
|
Cash and cash equivalents at end of period | $ | 1,564 |
| | $ | 1,795 |
|
The accompanying notes are an integral part of these consolidated financial statements.
MARATHON OIL CORPORATION
Consolidated Statements of Stockholders’ Equity (Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Total Equity of Marathon Oil Stockholders | | |
(In millions) | | Preferred Stock | | Common Stock | | Treasury Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Equity |
Nine Months Ended September 30, 2017 | | | | | | | | | | | | | | |
December 31, 2016 Balance | | $ | — |
| | $ | 937 |
| | $ | (3,431 | ) | | $ | 7,446 |
| | $ | 12,672 |
| | $ | (83 | ) | | $ | 17,541 |
|
Shares issued - stock-based compensation | | — |
| | — |
| | 116 |
| | (51 | ) | | — |
| | — |
| | 65 |
|
Shares repurchased | | — |
| | — |
| | (9 | ) | | — |
| | — |
| | — |
| | (9 | ) |
Stock-based compensation | | — |
| | — |
| | — |
| | (28 | ) | | — |
| | — |
| | (28 | ) |
Net loss | | — |
| | — |
| | — |
| | — |
| | (5,695 | ) | | — |
| | (5,695 | ) |
Other comprehensive income | | — |
| | — |
| | — |
| | — |
| | — |
| | 29 |
| | 29 |
|
Dividends paid (per share amount of $0.15) | | — |
| | — |
| | — |
| | — |
| | (128 | ) | | — |
| | (128 | ) |
September 30, 2017 Balance | | $ | — |
| | $ | 937 |
| | $ | (3,324 | ) | | $ | 7,367 |
| | $ | 6,849 |
| | $ | (54 | ) | | $ | 11,775 |
|
| | | | | | | | | | | | | | |
Nine Months Ended September 30, 2018 | | | | | | | | | | | | | | |
December 31, 2017 Balance | | $ | — |
| | $ | 937 |
| | $ | (3,325 | ) | | $ | 7,379 |
| | $ | 6,779 |
| | $ | (62 | ) | | $ | 11,708 |
|
Shares issued - stock-based compensation | | — |
| | — |
| | 219 |
| | (115 | ) | | — |
| | — |
| | 104 |
|
Shares repurchased | | — |
| | — |
| | (349 | ) | | — |
| | — |
| | — |
| | (349 | ) |
Stock-based compensation | | — |
| | — |
| | — |
| | (38 | ) | | — |
| | — |
| | (38 | ) |
Net income | | — |
| | — |
| | — |
| | — |
| | 706 |
| | — |
| | 706 |
|
Other comprehensive income | | — |
| | — |
| | — |
| | — |
| | — |
| | 41 |
| | 41 |
|
Dividends paid (per share amount of $0.15) | | — |
| | — |
| | — |
| | — |
| | (128 | ) | | — |
| | (128 | ) |
September 30, 2018 Balance | | $ | — |
| | $ | 937 |
| | $ | (3,455 | ) | | $ | 7,226 |
| | $ | 7,357 |
| | $ | (21 | ) | | $ | 12,044 |
|
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.
These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our 2017 Annual Report on Form 10-K. The results of operations for the third quarter and first nine months of 2018 are not necessarily indicative of the results to be expected for the full year.
As a result of the sale of our Canadian business in 2017, we reflected this business as discontinued operations in all historical periods presented. Disclosures in this report related to results of operations and cash flows are presented on the basis of continuing operations unless otherwise stated. See Note 5 for discussion of this divestiture in further detail. Reclassifications
In the first quarter of 2018 we adopted the new Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers using the modified retrospective method. To conform the historical presentation to our current presentation, we reclassified gains/losses arising from our commodity derivatives out of the revenues from contracts with customers line into a separate line, net gain (loss) on commodity derivatives, on the consolidated statements of income. Additionally, in the first quarter of 2018 we adopted the new pension accounting standards update on a retrospective basis, and reclassified the required cost elements from general and administrative expense into production expense, exploration expense, and other net periodic benefit costs. See Note 2 for further discussion of the adoption of these accounting standards. 2. Accounting Standards
Not Yet Adopted
Lease accounting standard
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 shall be applied using a modified retrospective approach at the beginning of the earliest period presented in the financial statements. Early adoption is permitted.
In July 2018, the FASB issued a new transition option that allows entities to adopt the new lease accounting standard using the modified retrospective transition method by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption rather than in the earliest period presented. We plan to elect this new transition option and continue to apply the legacy guidance in ASC 840, Leases, including its disclosure requirements, in the comparative periods presented in the year of adoption.
We will adopt the new standard in the first quarter of 2019 using a modified retrospective approach and will recognize a right of use asset and lease liability on the adoption date. We plan to apply practical expedients provided in the standard that allow, amongst others, not to reassess contracts that commenced prior to the adoption. We also anticipate to elect a policy not to recognize right of use assets and lease liabilities related to short-term leases.
We continue to evaluate our contracts and are gathering the necessary data to determine the financial impact of this standard on our consolidated financial statements and related disclosures. We installed and are in the process of configuring software that we believe will facilitate the adoption of the standard. We are also evaluating our processes and internal control environment concurrent with the adoption of this standard. While we have yet to finalize the estimated impact this standard will have on our consolidated financial statements, the adoption is anticipated to result in an increase in both assets and liabilities related to our leases.
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
Hedge accounting standard
In August 2017, the FASB issued a new accounting standards update that amends the hedge accounting model to enable entities to hedge certain financial and nonfinancial risk attributes previously not allowed. The amendment also reduces the overall complexity of documenting, assessing and measuring hedge effectiveness. This standard is effective for us in the first quarter of 2019. Early adoption is permitted in any interim or annual period. The amendment mandates modified retrospective adoption when accounting for hedge relationships in effect as of the adoption date. None of our derivative instruments are currently designated as hedges; as a result 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.
Goodwill standard
In January 2017, the FASB issued a new accounting standards update that eliminates the requirement to calculate the implied fair value of the goodwill (Step 2 of goodwill impairment test under the current guidance) to measure a goodwill impairment charge. We anticipate the standard to require entities to record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value (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. We plan to adopt the standard on a prospective basis, and do not expect a material impact on our consolidated results of operations, financial position or cash flows for prior periods.
Financial instruments - credit losses
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.
Recently Adopted
Revenue recognition standard
On January 1, 2018, we adopted the new ASC Topic 606, Revenue from Contracts with Customers and all the related amendments ("new revenue standard") using the modified retrospective method. We evaluated the effect of transition by applying the provisions of the new revenue standard to contracts with remaining obligations as of January 1, 2018. No cumulative adjustment to retained earnings was necessary as a result of adopting this standard.
Results for reporting periods beginning after January 1, 2018 are presented under the new revenue standard, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting policies. The primary change relates to the presentation of marketing revenues and marketing expenses from the historical gross presentation to the current net presentation, included within revenues from contracts with customers, for a portion of our international contracts.
We concluded that the adoption of the new revenue standard did not result in any significant changes to our consolidated balance sheet or statement of cash flows. The following tables summarize the impacts of adopting the new revenue standard on our consolidated income statement for the three and nine month periods ended September 30, 2018.
|
| | | | | | | | | |
| Three Months Ended September 30, 2018 |
(In millions) | As reported | Adjustments | Presentation without adoption of ASC Topic 606 |
Revenues and other income: | | | |
Revenues from contracts with customers | $ | 1,538 |
| $ | (2 | ) | $ | 1,536 |
|
Marketing revenues | — |
| 47 |
| 47 |
|
Other income | 119 |
| (1 | ) | 118 |
|
Costs and expenses: | | | |
Marketing, including purchases from related parties | $ | — |
| $ | 46 |
| $ | 46 |
|
Shipping, handling and other operating | 152 |
| (2 | ) | 150 |
|
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
|
| | | | | | | | | |
| Nine Months Ended September 30, 2018 |
(In millions) | As reported | Adjustments | Presentation without adoption of ASC Topic 606 |
Revenues and other income: | | | |
Revenues from contracts with customers | $ | 4,522 |
| $ | (4 | ) | $ | 4,518 |
|
Marketing revenues | — |
| 122 |
| 122 |
|
Other income | 135 |
| (3 | ) | 132 |
|
Costs and expenses: | | |
|
|
Marketing, including purchases from related parties | $ | — |
| $ | 122 |
| $ | 122 |
|
Shipping, handling and other operating | 408 |
| (7 | ) | 401 |
|
Pension accounting standard
In the first quarter of 2018, we adopted the new accounting standards update that changes how employers that sponsor defined pension and/or other postretirement benefit plans present the net periodic benefit cost in the income statement. As a result, employers are required to 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. We adopted this standard on a retrospective basis, and reclassified the required cost elements from general and administrative expense into production expense, exploration expense, and other net periodic benefit costs. The adoption of this standard did not have a significant impact on our consolidated balance sheet or statement of cash flows. The following tables summarize the impacts of adopting this standard on our historical consolidated income statement for the three and nine month periods ended September 30, 2017.
|
| | | | | | | | | |
| Three Months Ended September 30, 2017 |
(In millions) | Previously Reported | As reclassified | Effect of Change Higher/(Lower) |
Production | $ | 194 |
| $ | 197 |
| $ | 3 |
|
Exploration | 294 |
| 294 |
| — |
|
General and administrative | 97 |
| 89 |
| (8 | ) |
Income (loss) from operations | (377 | ) | (372 | ) | 5 |
|
Other net periodic benefit costs (a) | — |
| 5 |
| 5 |
|
|
| | | | | | | | | |
| Nine Months Ended September 30, 2017 |
(In millions) | Previously Reported | As reclassified | Effect of Change Higher/(Lower) |
Production | $ | 521 |
| $ | 528 |
| $ | 7 |
|
Exploration | 352 |
| 352 |
| — |
|
General and administrative | 299 |
| 276 |
| (23 | ) |
Income from operations | (341 | ) | (325 | ) | 16 |
|
Other net periodic benefit costs (a) | — |
| 16 |
| 16 |
|
(a) Includes net settlement loss and other net periodic benefit costs, excluding service costs (See Note 18).
Classification in the statement of cash flows
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 was effective for us in the first quarter of 2018, and was applied retrospectively. Adoption of this standard did not have a significant impact on our consolidated statements of cash flows.
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
Presentation of restricted cash in the statement of cash flows
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, we 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 was effective for us in the first quarter of 2018, and was applied retrospectively. Adoption of this standard did not have a significant impact on our consolidated statements of cash flows.
Accounting for sale or transfer of nonfinancial assets
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 was effective for us in the first quarter of 2018, and was applied using the modified retrospective approach. Adoption of this standard did not have a significant impact on our consolidated results of operations, financial position or cash flows.
Definition of a business
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 us 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 was effective for us in the first quarter of 2018, 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.
Financial instruments updates
In January 2016, the FASB issued an accounting standards update that addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. We adopted this standard in the first quarter of 2018. Adoption of this standard did not have a significant impact on our consolidated results of operations, financial position or cash flows.
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
| |
3. | Income (Loss) and Dividends 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 periods, provided the effect is not antidilutive. The per share calculations below exclude 5 million and 6 million of stock options for the three and nine months period ended September 30, 2018 and 10 million and 11 million stock options for the three and nine months period ended September 30, 2017 that were antidilutive.
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(In millions, except per share data) | 2018 | | 2017 | | 2018 | | 2017 |
Income (loss) from continuing operations | $ | 254 |
| | $ | (599 | ) | | $ | 706 |
| | $ | (802 | ) |
Income (loss) from discontinued operations | — |
| | — |
| | — |
| | (4,893 | ) |
Net income (loss) | $ | 254 |
| | $ | (599 | ) | | $ | 706 |
| | $ | (5,695 | ) |
| | | | | | | |
Weighted average common shares outstanding | 848 |
| | 850 |
| | 852 |
| | 850 |
|
Effect of dilutive securities | 1 |
| | — |
| | 1 |
| | — |
|
Weighted average common shares, diluted | 849 |
| | 850 |
| | 853 |
| | 850 |
|
Per basic share: | | | | | | | |
Income (loss) from continuing operations | $ | 0.30 |
| | $ | (0.70 | ) | | $ | 0.83 |
| | $ | (0.94 | ) |
Income (loss) from discontinued operations | $ | — |
| | $ | — |
| | $ | — |
| | $ | (5.76 | ) |
Net income (loss) | $ | 0.30 |
| | $ | (0.70 | ) | | $ | 0.83 |
| | $ | (6.70 | ) |
Per diluted share: | | | | | | | |
Income (loss) from continuing operations | $ | 0.30 |
| | $ | (0.70 | ) | | $ | 0.83 |
| | $ | (0.94 | ) |
Income (loss) from discontinued operations | $ | — |
| | $ | — |
| | $ | — |
| | $ | (5.76 | ) |
Net income (loss) | $ | 0.30 |
| | $ | (0.70 | ) | | $ | 0.83 |
| | $ | (6.70 | ) |
Dividends per share | $ | 0.05 |
| | $ | 0.05 |
| | $ | 0.15 |
| | $ | 0.15 |
|
4. Acquisitions
In the second quarter of 2017, we closed on two acquisitions which included approximately 91,000 net acres in the Permian basin of New Mexico. The first acquisition with BC Operating, Inc. and other entities closed for approximately $1.1 billion in cash and the second acquisition with Black Mountain Oil & Gas and other private sellers closed for approximately $700 million in cash. These acquisitions were paid with cash on hand and accounted for as asset acquisitions, with substantially all of the purchase price allocated to unproved property within property, plant and equipment.
United States E&P Segment
In the third quarter of 2018, we closed on the sale of non-core, non-operated conventional properties, primarily in the Gulf of Mexico, for combined net proceeds of $16 million, before closing adjustments. A pre-tax gain of $32 million was recognized in the third quarter of 2018.
In the third quarter of 2017, we closed on the sale of certain conventional assets in Oklahoma for proceeds of $25 million, subject to closing adjustments, and recognized a pre-tax gain of $21 million.
International E&P Segment
In the second quarter of 2018, we entered into an agreement to sell a non-core property for proceeds of $56 million, before closing adjustments. This property is classified as held for sale in the consolidated balance sheet at September 30, 2018, with total assets of $73 million, total liabilities of $13 million and is expected to close before year-end.
In the first quarter of 2018, we closed on the sale of our subsidiary, Marathon Oil Libya Limited, which held our 16.33% non-operated interest in the Waha concessions in Libya, to a subsidiary of Total S.A. (Elf Aquitaine SAS) for proceeds of approximately $450 million, excluding closing adjustments, and recognized a pre-tax gain of $255 million.
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
In the third quarter of 2017, we entered into separate agreements to sell certain non-core properties for combined proceeds of $53 million, before closing adjustments. We closed on one of the asset sales in the fourth quarter of 2017 and recognized no pre-tax gain or loss on sale. We closed on the remaining asset sale during the third quarter of 2018 for a pre-tax loss of $18 million.
Canadian Business - Discontinued Operations
On May 31, 2017 we closed on the sale of our Canadian business, which included our 20% non-operated interest in the AOSP to Shell and Canadian Natural Resources Limited for $2.5 billion, excluding closing adjustments. Under the terms of the agreement, $1.8 billion was paid to us upon closing. At closing we received two notes receivable for a combined $750 million for the remaining proceeds, which was received in the first quarter of 2018. In the first quarter of 2017, we recorded a non-cash impairment charge of $6.6 billion (after-tax of $4.96 billion) primarily related to the property, plant and equipment of our Canadian business. 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. As the effective date of the transaction was January 1, 2017, we recorded a loss on sale of $43 million during the second quarter of 2017 due to results of operations from our Canadian business that were 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 historical consolidated statements of income and consolidated statements of cash flows as discontinued operations: |
| | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(In millions) | | 2018 | | 2017 | | 2018 | | 2017 |
Total revenue and other income | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 431 |
|
Net gain (loss) on disposal of assets | | — |
| | — |
| | — |
| | (43 | ) |
Total revenues and other income | | — |
| | — |
| | — |
| | 388 |
|
Costs and expenses: | | | | | | | | |
Production | | — |
| | — |
| | — |
| | 254 |
|
Depreciation, depletion and amortization | | — |
| | — |
| | — |
| | 40 |
|
Impairments | | — |
| | — |
| | — |
| | 6,636 |
|
Other | | — |
| | — |
| | — |
| | 25 |
|
Total costs and expenses | | — |
| | — |
| | — |
| | 6,955 |
|
Pretax income (loss) from discontinued operations | | — |
| | — |
| | — |
| | (6,567 | ) |
Provision (benefit) for income taxes | | — |
| | — |
| | — |
| | (1,674 | ) |
Income (loss) from discontinued operations | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (4,893 | ) |
|
| | | | | | | |
| Nine Months Ended September 30, |
(In millions) | 2018 | | 2017 |
| | | |
Cash flow from discontinued operations: | | | |
Operating activities | $ | — |
| | $ | 141 |
|
Investing activities | — |
| | (13 | ) |
Changes in cash included in current assets held for sale | — |
| | 2 |
|
Net increase in cash and cash equivalents of discontinued operations | $ | — |
| | $ | 130 |
|
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
The majority of our revenues are derived from the sale of crude oil and condensate, natural gas liquids ("NGLs") and natural gas under spot and term agreements with our customers in the U.S. and various international locations.
The following tables present our revenues from contracts with customers disaggregated by product type and geographic areas.
|
| | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2018 |
United States E&P | | | | Northern | | |
(In millions) | Eagle Ford | Bakken | Oklahoma | Delaware | Other U.S. | Total |
Crude oil and condensate | $ | 436 |
| $ | 447 |
| $ | 114 |
| $ | 59 |
| $ | 34 |
| $ | 1,090 |
|
Natural gas liquids | 70 |
| 19 |
| 48 |
| 12 |
| 3 |
| 152 |
|
Natural gas | 36 |
| 9 |
| 46 |
| 6 |
| 5 |
| 102 |
|
Other | — |
| — |
| — |
| — |
| 3 |
| 3 |
|
Revenues from contracts with customers | $ | 542 |
| $ | 475 |
| $ | 208 |
| $ | 77 |
| $ | 45 |
| $ | 1,347 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2018 |
International E&P | | | | Other | |
(In millions) | E.G. | U.K. | Libya | International | Total |
Crude oil and condensate | $ | 100 |
| $ | 41 |
| $ | — |
| $ | 20 |
| $ | 161 |
|
Natural gas liquids | 1 |
| 1 |
| — |
| — |
| 2 |
|
Natural gas | 9 |
| 11 |
| — |
| — |
| 20 |
|
Other | — |
| 8 |
| — |
| — |
| 8 |
|
Revenues from contracts with customers | $ | 110 |
| $ | 61 |
| $ | — |
| $ | 20 |
| $ | 191 |
|
|
| | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2018 |
United States E&P | | | | Northern | | |
(In millions) | Eagle Ford | Bakken | Oklahoma | Delaware | Other U.S. | Total |
Crude oil and condensate | $ | 1,196 |
| $ | 1,182 |
| $ | 340 |
| $ | 173 |
| $ | 131 |
| $ | 3,022 |
|
Natural gas liquids | 157 |
| 51 |
| 130 |
| 24 |
| 8 |
| 370 |
|
Natural gas | 102 |
| 27 |
| 127 |
| 13 |
| 17 |
| 286 |
|
Other | 3 |
| — |
| — |
| — |
| 12 |
| 15 |
|
Revenues from contracts with customers | $ | 1,458 |
| $ | 1,260 |
| $ | 597 |
| $ | 210 |
| $ | 168 |
| $ | 3,693 |
|
|
| | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2018 |
International E&P | | | | Other | |
(In millions) | E.G. | U.K. | Libya | International | Total |
Crude oil and condensate | $ | 271 |
| $ | 207 |
| $ | 187 |
| $ | 65 |
| $ | 730 |
|
Natural gas liquids | 3 |
| 4 |
| — |
| — |
| 7 |
|
Natural gas | 28 |
| 31 |
| 9 |
| — |
| 68 |
|
Other | — |
| 24 |
| — |
| — |
| 24 |
|
Revenues from contracts with customers | $ | 302 |
| $ | 266 |
| $ | 196 |
| $ | 65 |
| $ | 829 |
|
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
The pricing in our hydrocarbon sales agreements are variable, determined using various published benchmarks which are adjusted for negotiated quality and location differentials. As a result, revenue collected under our agreements with customers is highly dependent on the market conditions and may fluctuate considerably as the hydrocarbon market prices rise or fall. Typically, our customers pay us monthly, within a short period of time after we deliver the hydrocarbon products. As such, we do not have any financing element associated with our contracts. We do not have any issues related to returns or refunds, as product specifications are standardized for the industry and are typically measured when transferred to a common carrier or midstream entity, and other contractual mechanisms (e.g., price adjustments) are used when products do not meet those specifications.
In limited cases, we may also collect advance payments from customers as stipulated in our agreements; payments in excess of recognized revenue are recorded as contract liabilities on our consolidated balance sheet.
Under our hydrocarbon sales agreements, the entire consideration amount is variable either due to pricing and/or volumes. We recognize revenue in the amount of variable consideration allocated to distinct units of hydrocarbons transferred to a customer. Such allocation reflects the amount of total consideration we expect to collect for completed deliveries of hydrocarbons and the terms of variable payment relate specifically to our efforts to satisfy the performance obligations under these contracts. Our performance obligations under our hydrocarbon sales agreements are to deliver either the entire production from the dedicated wells or specified contractual volumes of hydrocarbons.
We often serve as the operator for jointly owned oil and gas properties. As part of this role, we perform activities to explore, develop and produce oil and gas properties in accordance with the joint operating arrangement and collective decisions of the joint parties. Other working interest owners reimburse us for costs incurred based on our agreements. We determined that these activities are not performed as part of customer relationships, in accordance with the new revenue standard, and such reimbursements will continue to not be recorded as revenues within the scope of the new revenue standard.
In addition, we commonly market the share of production belonging to other working interest owners as the operator of jointly owned oil and gas properties. We concluded that those marketing activities are carried out as part of the collaborative arrangement, and we do not purchase or otherwise obtain control of other working interest owners’ share of production. Therefore, we act as a principal only in regards to the sale of our share of production and recognize revenue for the volumes associated with our net production.
Crude oil and condensate
For the crude sales agreements, we satisfy our performance obligations and recognize revenue once customers take control of the crude at the designated delivery points, which include pipelines, trucks or vessels.
Natural gas and NGLs
When selling natural gas and NGLs, we engage midstream entities to process our production stream by separating natural gas from the NGLs. Frequently, these midstream entities also purchase our natural gas and NGLs under the same agreements. In these situations, we determined the performance obligation is complete and satisfied at the tailgate of the processing plant when the natural gas and NGLs become identifiable and measurable products. We determined the plant tailgate is the point in time where control, as defined in the new revenue standard, is transferred to midstream entities and they are entitled to significant risks and rewards of ownership of the natural gas and NGLs.
The amounts due to midstream entities for gathering and processing services are recognized as shipping and handling cost, since we make those payments in exchange for distinct services. Under some of our natural gas processing agreements, we have an option to take the processed natural gas and NGLs in-kind and sell to customers other than the processing company. In those circumstances, our performance obligations are complete after delivering the processed hydrocarbons to the customer at the designated delivery points, which may be the tailgate of the processing plant or an alternative delivery point requested by the customer.
We have “percentage-of-proceeds” arrangements with some midstream entities where they retain a percentage of the proceeds collected for selling our processed natural gas and NGLs as compensation for their processing and marketing services. We recognize revenue for the gross sales volumes and recognize the proceeds retained by midstream companies as shipping and handling cost.
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
Contract receivables and liabilities
The following table provides information about receivables and contract assets (liabilities) from contracts with customers.
|
| | | | | | |
(In millions) | September 30, 2018 | January 1, 2018 |
Receivables from contracts with customers, which are included in receivables, less reserves | $ | 937 |
| $ | 811 |
|
Contract asset (liability) | $ | (1 | ) | $ | — |
|
The contract liability primarily relates to the advance consideration received from customers for crude oil sales and processing services in the U.K. A contract asset would represent crude oil delivered in the U.K. to a customer for which payment will be collected over time as it becomes due under the pricing terms stipulated in the sales agreement. As a practical expedient, when the balance of this U.K. customer is a contract asset, we do not adjust revenue for the effects of a significant financing element as the period between when crude oil is delivered to the customer and when payment is expected to be received is one year or less at contract inception.
Significant changes in the contract asset (liability) balance during the period are as follows.
|
| | | |
| Nine Months Ended |
(In millions) | September 30, 2018 |
Contract asset balance as of January 1, 2018 | $ | — |
|
Revenue recognized as performance obligations are satisfied | 85 |
|
Amounts invoiced to customers | (86 | ) |
Contract asset (liability) balance as of September 30, 2018 | $ | (1 | ) |
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 it offers.
| |
• | United States E&P ("U.S. E&P") – explores for, produces and markets crude oil and condensate, NGLs and natural gas in the United States |
| |
• | International E&P ("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 our operating segments, net of income taxes. A portion of our corporate and operations general and administrative support 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.
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2018 |
| | Not Allocated | | |
(In millions) | U.S. E&P | | Int'l E&P | | to Segments | | Total |
Revenues from contracts with customers | $ | 1,347 |
| | $ | 191 |
| | $ | — |
| | $ | 1,538 |
|
Net gain (loss) on commodity derivatives | (89 | ) | | — |
| | 19 |
| (b) | (70 | ) |
Income from equity method investments | — |
| | 64 |
| | — |
| | 64 |
|
Net gain (loss) on disposal of assets | — |
| | — |
| | 16 |
| (c) | 16 |
|
Other income | 2 |
| | 4 |
| | 113 |
| (d) | 119 |
|
Less costs and expenses: | | | | | | | |
Production | 172 |
| | 43 |
| | — |
| | 215 |
|
Shipping, handling and other operating | 136 |
| | 16 |
| | — |
| | 152 |
|
Exploration | 55 |
| | 1 |
| | — |
| | 56 |
|
Depreciation, depletion and amortization | 571 |
| | 49 |
| | 6 |
| | 626 |
|
Impairments | — |
| | — |
| | 8 |
| (e) | 8 |
|
Taxes other than income | 86 |
| | — |
| | — |
| | 86 |
|
General and administrative | 37 |
| | 7 |
| | 57 |
| | 101 |
|
Net interest and other | — |
| | — |
| | 58 |
| | 58 |
|
Other net periodic benefit costs | — |
| | (3 | ) | | 11 |
| (f) | 8 |
|
Income tax provision (benefit) | 2 |
| | 30 |
| | 71 |
| | 103 |
|
Segment income (loss) / Income (loss) from continuing operations | $ | 201 |
| | $ | 116 |
| | $ | (63 | ) | | $ | 254 |
|
Capital expenditures (a) | $ | 691 |
| | $ | 6 |
| | $ | 7 |
| | $ | 704 |
|
| |
(b) | Unrealized gain on commodity derivative instruments (See Note 13). |
| |
(c) | Sales of certain non-core proved properties in our International and United States E&P segments (See Note 5). |
| |
(d) | Reduction of our asset retirement obligation in our International E&P segment (See Note 12). |
| |
(e) | Due to the anticipated sale of non-core property in our International E&P segment (See Note 11). |
| |
(f) | Includes pension settlement loss of $10 million (See Note 18). |
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2017 |
| | Not Allocated | | |
(In millions) | U.S. E&P | | Int'l E&P | | to Segments | | Total |
Revenues from contracts with customers | $ | 772 |
| | $ | 364 |
| | $ | — |
| | $ | 1,136 |
|
Net gain (loss) on commodity derivatives | 34 |
| | — |
| | (56 | ) | (b) | (22 | ) |
Marketing revenues | 12 |
| | 36 |
| | — |
| | 48 |
|
Income from equity method investments | — |
| | 63 |
| | — |
| | 63 |
|
Net gain on disposal of assets | 1 |
| | — |
| | 18 |
| (c) | 19 |
|
Other income | 3 |
| | — |
| | 5 |
| | 8 |
|
Less costs and expenses: | | | | | | | |
Production | 121 |
| | 76 |
| | — |
| | 197 |
|
Marketing costs | 14 |
| | 35 |
| | — |
| | 49 |
|
Shipping, handling and other operating | 80 |
| | 31 |
| | (2 | ) | | 109 |
|
Exploration | 41 |
| | 3 |
| | 250 |
| (d) | 294 |
|
Depreciation, depletion and amortization | 531 |
| | 102 |
| | 8 |
| | 641 |
|
Impairments | — |
| | — |
| | 201 |
| (e) | 201 |
|
Taxes other than income | 44 |
| | — |
| | — |
| | 44 |
|
General and administrative | 29 |
| | 6 |
| | 54 |
| | 89 |
|
Net interest and other | — |
| | — |
| | 35 |
| (f) | 35 |
|
Other net periodic benefit costs | — |
| | — |
| | 5 |
| (g) | 5 |
|
Loss on early extinguishment of debt | — |
| | — |
| | 46 |
| (h) | 46 |
|
Income tax provision (benefit) | — |
| | 106 |
| | 35 |
| | 141 |
|
Segment income (loss) / Income (loss) from continuing operations | $ | (38 | ) | | $ | 104 |
| | $ | (665 | ) | | $ | (599 | ) |
Capital expenditures (a) | $ | 541 |
| | $ | 4 |
| | $ | 9 |
| | $ | 554 |
|
| |
(b) | Unrealized loss on commodity derivative instruments (See Note 13). |
| |
(c) | Primarily related to the sale of certain conventional assets in Oklahoma (See Note 5). |
| |
(d) | Primarily related to unproved property impairments associated with certain non-core properties within our International E&P segment (See Note 11). |
| |
(e) | Primarily related to proved property impairments associated with certain non-core properties within our International E&P segment (See Note 11). |
| |
(f) | Includes a gain of $46 million resulting from the termination of our forward starting interest rate swaps (See Note 13). |
| |
(g) | Includes pension settlement loss of $8 million (See Note 18.) |
| |
(h) | Primarily related to the make-whole call provisions paid upon redemption of our senior unsecured notes (See Note 15). |
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
|
| | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2018 |
| | Not Allocated | | |
(In millions) | U.S. E&P | | Int'l E&P | | to Segments | | Total |
Revenues from contracts with customers | $ | 3,693 |
| | $ | 829 |
| | $ | — |
| | $ | 4,522 |
|
Net gain (loss) on commodity derivatives | (255 | ) | | — |
| | (69 | ) | (b) | (324 | ) |
Income from equity method investments | — |
| | 161 |
| | — |
| | 161 |
|
Net gain (loss) on disposal of assets | — |
| | — |
| | 323 |
| (c) | 323 |
|
Other income | 7 |
| | 7 |
| | 121 |
| (d) | 135 |
|
Less costs and expenses: |
| |
| |
| |
|
Production | 476 |
| | 162 |
| | (1 | ) | | 637 |
|
Shipping, handling and other operating | 364 |
| | 45 |
| | (1 | ) | | 408 |
|
Exploration | 170 |
| | 3 |
| | — |
| | 173 |
|
Depreciation, depletion and amortization | 1,655 |
| | 153 |
| | 20 |
|
| 1,828 |
|
Impairments | — |
| | — |
| | 50 |
| (e) | 50 |
|
Taxes other than income | 218 |
| | — |
| | (3 | ) | | 215 |
|
General and administrative | 108 |
| | 25 |
| | 173 |
| | 306 |
|
Net interest and other | — |
| | — |
| | 168 |
| | 168 |
|
Other net periodic benefit costs | — |
| | (7 | ) | | 18 |
| (f) | 11 |
|
Income tax provision (benefit) | 5 |
| | 226 |
| | 84 |
| | 315 |
|
Segment income (loss) / Income (loss) from continuing operations | $ | 449 |
| | $ | 390 |
| | $ | (133 | ) | | $ | 706 |
|
Capital expenditures (a) | $ | 1,943 |
| | $ | 28 |
| | $ | 17 |
| | $ | 1,988 |
|
| |
(b) | Unrealized loss on commodity derivative instruments (See Note 13). |
| |
(c) | Primarily related to the gain on sale of our Libya subsidiary (See Note 5). |
| |
(d) | Reduction of our asset retirement obligation in our International E&P segment (See Note 12). |
| |
(e) | Due to the anticipated sales of certain non-core proved properties in our International and United States E&P segments (See Note 11). |
| |
(f) | Includes pension settlement loss of $16 million (See Note 18). |
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
|
| | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2017 |
| | Not Allocated | | |
(In millions) | U.S. E&P | | Int'l E&P | | to Segments | | Total |
Revenue from contracts with customers | $ | 2,124 |
| | $ | 787 |
| | $ | — |
| | $ | 2,911 |
|
Net gain (loss) on commodity derivatives | 51 |
| | — |
| | 64 |
| (b) | 115 |
|
Marketing revenues | 25 |
| | 92 |
| | — |
| | 117 |
|
Income from equity method investments | — |
| | 183 |
| | — |
| | 183 |
|
Net gain (loss) on disposal of assets | 2 |
| | — |
| | 24 |
| (c) | 26 |
|
Other income | 9 |
| | 14 |
| | 8 |
| | 31 |
|
Less costs and expenses: | | | | | | | |
Production | 348 |
| | 180 |
| | — |
| | 528 |
|
Marketing costs | 30 |
| | 91 |
| | — |
| | 121 |
|
Shipping, handling and other operating | 250 |
| | 59 |
| | — |
| | 309 |
|
Exploration | 97 |
| | 5 |
| | 250 |
| (d) | 352 |
|
Depreciation, depletion and amortization | 1,498 |
| | 266 |
| | 25 |
| | 1,789 |
|
Impairments | 4 |
| | — |
| | 201 |
| (e) | 205 |
|
Taxes other than income | 116 |
| | — |
| | 12 |
| | 128 |
|
General and administrative | 92 |
| | 21 |
| | 163 |
| | 276 |
|
Net interest and other | — |
| | — |
| | 199 |
| (f) | 199 |
|
Other net periodic benefit costs | — |
| | (4 | ) | | 20 |
| (g) | 16 |
|
Loss on early extinguishment of debt | — |
| | — |
| | 46 |
| (h) | 46 |
|
Income tax provision (benefit) | — |
| | 202 |
| | 14 |
| | 216 |
|
Segment income (loss) / Income (loss) from continuing operations | $ | (224 | ) | | $ | 256 |
| | $ | (834 | ) | | $ | (802 | ) |
Capital expenditures (a) | $ | 1,465 |
| | $ | 27 |
| | $ | 20 |
| | $ | 1,512 |
|
| |
(b) | Unrealized gain on commodity derivative instruments (See Note 13). |
| |
(c) | Primarily related to the sale of certain conventional assets in Oklahoma (See Note 5). |
| |
(d) | Primarily related to unproved property impairments associated with certain non-core properties within our International E&P segment (See Note 11). |
| |
(e) | Primarily related to proved property impairments associated with certain non-core properties within our International E&P segment (See Note 11). |
| |
(f) | Includes a gain of $46 million resulting from the termination of our forward starting interest rate swaps (See Note 13). |
| |
(g) | Includes pension settlement loss of $25 million (See Note 18). |
| |
(h) | Primarily related to the make-whole call provisions paid upon redemption of our senior unsecured notes (See Note 15). |
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
8. 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 three and nine months ended September 30, 2018 and 2017, our effective income tax rates from continuing operations were as follows: |
| | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
Effective income tax expense (benefit) rate from continuing operations* | | 29 | % | | 31 | % | | 31 | % | | 37 | % |
* In all periods presented, we maintained our valuation allowance on our net federal deferred tax assets in the U.S.
The following items caused the effective tax rates from continuing operations to be different from our U.S. statutory tax rate of 21% and 35% for 2018 and 2017:
| |
• | Income taxes for the third quarter 2018 were impacted by a $76 million deferred tax expense due to the reduction in estimated costs relating to our U.K. asset retirement obligation, see Note 12 for further detail. |
| |
• | During the nine months ended September 30, 2018 income taxes were impacted by tax expense in Libya of $162 million and the reduction in estimated costs relating to our U.K. asset retirement obligation. |
| |
• | Income taxes for the third quarter 2017 were impacted by tax expense in Libya of $102 million. During the nine months ended September 30, 2017, we incurred tax expense in Libya of $179 million and settled our 2011-2013 Alaska income tax audit resulting in a tax benefit of $13 million. |
Excluding Libya, the effective income tax expense rates from continuing operations were an expense of 17% and an expense of 5% for the nine months ended September 30, 2018 and 2017. As a result of the sale of our Libya subsidiary in the first quarter of 2018, see Note 5 for further detail, we do not expect to incur further tax expense related to our Libya subsidiary. During 2018 and 2017, income taxes for Libya were recorded as a discrete item due to the uncertainty around the timing of future production and sales volumes. As a result of progression in the 2010-2011 IRS Federal Tax Audit (“IRS Audit”), during the third quarter of 2018 we have established a receivable classified in other noncurrent assets on the consolidated balance sheet of $136 million related to corporate alternative minimum tax (“AMT") credits. Due to the repeal of corporate AMT with the enactment of the Tax Cuts and Jobs Act (the “Tax Reform Legislation”), discussed below, AMT credits are refundable. We do not currently consider the IRS Audit effectively settled as it is still subject to Joint Committee review. As a result, we have established an uncertain tax position for the same amount resulting in no impact to the consolidated statement of income in the third quarter of 2018.
We are under income tax examination in various jurisdictions in which we operate. We believe it is reasonably possible there could be a change in our uncertain tax positions resulting from the progression of examination or appeals activity, which could impact our annual effective tax rate, in the next 12 months.
On December 22, 2017, the U.S. enacted the Tax Reform Legislation. Tax Reform Legislation significantly changes U.S. corporate income tax laws by, among other things, reducing the U.S. corporate income tax rate to 21% starting in 2018, and repeal of the corporate AMT, and a one-time deemed repatriation of accumulated foreign earnings. In the fourth quarter of 2017, we remeasured our deferred taxes at 21%, in accordance with U.S. GAAP standards. We plan to finalize our tax positions taken with respect to Tax Reform Legislation in the fourth quarter of 2018 as we await further guidance from U.S. Treasury, and conclude whether any further adjustments are required to our net tax position as of December 31, 2017. Any adjustments to these provisional amounts will be reported as a component of income tax expense (benefit) in the reporting period in which any such adjustments are determined. As of the third quarter of 2018, there are no material impacts on tax expense with respect to the finalization of tax positions taken due to Tax Reform Legislation.
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
9. 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.
|
| | | | | | | |
| September 30, | | December 31, |
(In millions) | 2018 | | 2017 |
Crude oil and natural gas | $ | 11 |
| | $ | 9 |
|
Supplies and other items | 99 |
| | 117 |
|
Inventories | $ | 110 |
| | $ | 126 |
|
10. Property, Plant and Equipment, net of Accumulated Depreciation, Depletion and Amortization
|
| | | | | | | |
| September 30, | | December 31, |
(In millions) | 2018 | | 2017 |
United States E&P | $ | 16,011 |
| | $ | 15,867 |
|
International E&P | 805 |
| | 1,710 |
|
Corporate | 83 |
| | 88 |
|
Net property, plant and equipment | $ | 16,899 |
|
| $ | 17,665 |
|
Exploratory well costs capitalized greater than one year after completion of drilling are associated with one project in E.G. with costs of $32 million as of both September 30, 2018 and December 31, 2017.
11. Impairments
The following table summarizes impairment charges of proved properties from continuing operations. Additionally, it presents 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 September 30, |
| 2018 | | 2017 |
(In millions) | Fair Value | | Impairment | | Fair Value | | Impairment |
Long-lived assets | $ | 39 |
| | $ | 8 |
| | $ | 169 |
| | $ | 201 |
|
|
| | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2018 | |