Edgar Filing: MARATHON OIL CORP

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 March 31, 2019



[ ]	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)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, par value $1.00	MRO	New York Stock Exchange

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 817,916,151 shares of Marathon Oil Corporation common stock outstanding as of April 30, 2019.

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 2018 Annual Report on Form 10-K.



	Table of Contents
		Page
Part I - FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Consolidated Statements of Income (Unaudited)	2
	Consolidated Statements of Comprehensive Income (Unaudited)	3
	Consolidated Balance Sheets (Unaudited)	4
	Consolidated Statements of Cash Flows (Unaudited)	5
	Consolidated Statements of Stockholders' Equity (Unaudited)	6
	Notes to Consolidated Financial Statements (Unaudited)	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4.	Controls and Procedures	35
Part II - OTHER INFORMATION
Item 1.	Legal Proceedings	36
Item 1A.	Risk Factors	36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 6.	Exhibits	36
	Signatures	37

Part I – FINANCIAL INFORMATION

Item 1. Financial Statements

MARATHON OIL CORPORATION

Consolidated Statements of Income (Unaudited)



	Three Months Ended
	March 31,
(In millions, except per share data)	2019			2018
Revenues and other income:
Revenues from contracts with customers	$	1,200		$	1,537
Net loss on commodity derivatives	(91		)	(102		)
Income from equity method investments	11			37
Net gain on disposal of assets	42			257
Other income	35			4
Total revenues and other income	1,197			1,733
Costs and expenses:
Production	187			217
Shipping, handling and other operating	154			130
Exploration	59			52
Depreciation, depletion and amortization	554			590
Impairments	6			8
Taxes other than income	72			64
General and administrative	94			100
Total costs and expenses	1,126			1,161
Income from operations	71			572
Net interest and other	(49		)	(45		)
Other net periodic benefit costs	5			(3		)
Income before income taxes	27			524
Provision (benefit) for income taxes	(147		)	168
Net income	$	174		$	356
Net income per share:
Basic	$	0.21		$	0.42
Diluted	$	0.21		$	0.42
Weighted average common shares outstanding:
Basic	819			851
Diluted	820			852

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

MARATHON OIL CORPORATION

Consolidated Statements of Comprehensive Income (Unaudited)



	Three Months Ended
	March 31,
(In millions)	2019			2018
Net income	$	174		$	356
Other comprehensive income (loss), net of tax
Change in actuarial loss in postretirement and postemployment plans	(4		)	4
Other comprehensive income (loss)	(4		)	4
Comprehensive income	$	170		$	360

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

MARATHON OIL CORPORATION

Consolidated Balance Sheets (Unaudited)



	March 31,			December 31,
(In millions, except par value and share amounts)	2019			2018
Assets
Current assets:
Cash and cash equivalents	$	1,019		$	1,462
Receivables, less reserve of $12 and $11	1,086			1,079
Inventories	83			96
Other current assets	160			257
Current assets held for sale	428			27
Total current assets	2,776			2,921
Equity method investments	719			745
Property, plant and equipment, less accumulated depreciation, depletion and amortization of $17,669 and $21,830	16,714			16,804
Goodwill	97			97
Other noncurrent assets	440			723
Noncurrent assets held for sale	664			31
Total assets	$	21,410		$	21,321
Liabilities
Current liabilities:
Accounts payable	$	1,310		$	1,320
Payroll and benefits payable	76			154
Accrued taxes	149			181
Other current liabilities	220			170
Current liabilities held for sale	103			7
Total current liabilities	1,858			1,832
Long-term debt	5,501			5,499
Deferred tax liabilities	192			199
Defined benefit postretirement plan obligations	179			195
Asset retirement obligations	192			1,081
Deferred credits and other liabilities	317			279
Noncurrent liabilities held for sale	963			108
Total liabilities	9,202			9,193
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 March 31, 2019 and 1.925 billion shares authorized at December 31, 2018)	937			937
Held in treasury, at cost – 117 million shares and 118 million shares	(3,745		)	(3,816		)
Additional paid-in capital	7,149			7,238
Retained earnings	7,808			7,706
Accumulated other comprehensive income	59			63
Total stockholders' equity	12,208			12,128
Total liabilities and stockholders' equity	$	21,410		$	21,321

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

MARATHON OIL CORPORATION

Consolidated Statements of Cash Flows (Unaudited)



	Three Months Ended
	March 31,
(In millions)	2019			2018
Increase (decrease) in cash and cash equivalents
Operating activities:
Net income	$	174		$	356
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion and amortization	554			590
Impairments	6			8
Exploratory dry well costs and unproved property impairments	49			42
Net gain on disposal of assets	(42		)	(257		)
Deferred income taxes	(31		)	(31		)
Net loss on derivative instruments	91			102
Net settlements of derivative instruments	22			(59		)
Pension and other post retirement benefits, net	(25		)	(34		)
Stock-based compensation	14			14
Equity method investments, net	14			32
Changes in:
Current receivables	(73		)	(130		)
Inventories	4			(9		)
Current accounts payable and accrued liabilities	(102		)	81
Other current assets and liabilities	14			(25		)
All other operating, net	(154		)	(31		)
Net cash provided by operating activities	515			649
Investing activities:
Additions to property, plant and equipment	(615		)	(662		)
Additions to other assets	14			(72		)
Acquisitions, net of cash acquired	—			(4		)
Disposal of assets, net of cash transferred to the buyer	13			1,180
Equity method investments - return of capital	12			9
All other investing, net	12			(2		)
Net cash provided by (used in) investing activities	(564		)	449
Financing activities:
Purchases of common stock	(30		)	(9		)
Dividends paid	(41		)	(42		)
All other financing, net	(1		)	2
Net cash used in financing activities	(72		)	(49		)
Effect of exchange rate on cash and cash equivalents	1			1
Net increase (decrease) in cash and cash equivalents	(120		)	1,050
Cash and cash equivalents at beginning of period	1,462			563
Cash and cash equivalents at end of period	$	1,342		$	1,613

Reconciliation of cash and cash equivalents
Cash and cash equivalents	$	1,019		$	1,613
Cash and cash equivalents included in current assets held for sale	323			—
Total cash and cash equivalents	$	1,342		$	1,613

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 Income (Loss)			Total Equity
Three Months Ended March 31, 2018
December 31, 2017 Balance	$	—	$	937	$	(3,325	)	$	7,379		$	6,779		$	(62	)	$	11,708
Shares issued - stock-based compensation	—		—		158			(93		)	—			—			65
Shares repurchased	—		—		(8		)	—			—			—			(8		)
Stock-based compensation	—		—		—			(49		)	—			—			(49		)
Net income	—		—		—			—			356			—			356
Other comprehensive income (loss)	—		—		—			—			—			4			4
Dividends paid (per share amount of $0.05)	—		—		—			—			(42		)	—			(42		)
March 31, 2018 Balance	$	—	$	937	$	(3,175	)	$	7,237		$	7,093		$	(58	)	$	12,034

Three Months Ended March 31, 2019
December 31, 2018 Balance	$	—	$	937	$	(3,816	)	$	7,238		$	7,706		$	63		$	12,128
Cumulative-effect adjustment (Note 2)	—		—		—			—			(31		)	—			(31		)
Shares issued - stock-based compensation	—		—		101			(39		)	—			—			62
Shares repurchased	—		—		(30		)	—			—			—			(30		)
Stock-based compensation	—		—		—			(50		)	—			—			(50		)
Net income	—		—		—			—			174			—			174
Other comprehensive income (loss)	—		—		—			—			—			(4		)	(4		)
Dividends paid (per share amount of $0.05)	—		—		—			—			(41		)	—			(41		)
March 31, 2019 Balance	$	—	$	937	$	(3,745	)	$	7,149		$	7,808		$	59		$	12,208

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 2018 Annual Report on Form 10-K. The results of operations for the first quarter of 2019 are not necessarily indicative of the results to be expected for the full year.

As a result of the announcement to sell our U.K. business in the first quarter of 2019, we have reflected these assets and liabilities as held for sale at March 31, 2019 in the consolidated balance sheet and the consolidated statement of cash flows. The related disclosures in this report exclude these held for sale amounts, unless otherwise noted. This divestiture is discussed in further detail in Note 4.

Reclassifications

We have reclassified certain prior year amounts between operating cash flow to present it on a basis comparable with the current year's presentation with no impact on net cash provided by operating activities.

2. Accounting Standards

Not Yet Adopted

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

Lease accounting standard

In February 2016, the FASB issued a new leasing accounting standard, which modified the definition of a lease and established comprehensive accounting and financial reporting requirements for leasing arrangements. It requires lessees to recognize a lease liability and a right-of-use ("ROU") asset for all leases, including operating leases, with a term of greater than 12 months on the balance sheet. On January 1, 2019, we adopted the new lease accounting standard using the modified retrospective method and applied to all leases that existed as of that date. It 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.

MARATHON OIL CORPORATION

Notes to Consolidated Financial Statements (Unaudited)

The new lease standard requires certain accounting policy decisions while also providing a number of optional practical expedients for transition accounting. Our accounting policies and the practical expedients utilized are summarized below:


•	Implemented an accounting policy to not recognize any right-of-use assets and lease liabilities related to short-term leases on the balance sheet.


•	Implemented an accounting policy to not separate the lease and nonlease components for all asset classes, except for vessels.


•	Elected the package of practical expedients which allows us to not reassess our prior conclusions regarding the lease identification and lease classification for contracts that commenced or expired prior to the effective date.


•	Elected the practical expedient pertaining to land easements which allows us to continue accounting for existing agreements under the previous accounting policies as nonlease transactions. Any modifications of existing contracts or new agreements will be assessed under the new lease accounting guidance and may become leases in the future.

As a result of the adoption, we recorded approximately $156 million of ROU assets and $160 million of lease liabilities on our consolidated balance sheet and a cumulative-effect adjustment to stockholders' equity on the date of adoption of $31 million. As of March 31, 2019, we have approximately $254 million of lease liabilities and $247 million of ROU assets on our consolidated balance sheet related to long-term leases further discussed in Note 12. The increase in ROU assets and liabilities during the quarter is due to new contracts signed in the first quarter of 2019. We continue presenting all prior comparative periods without any restatements.

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 was effective for us in the first quarter of 2019. Adoption of this standard did not have a significant impact on our consolidated results of operations, financial position or cash flows.


3.	Income 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 8 million of stock options for the three months ended March 31, 2019 and 2018 that were antidilutive.



	Three Months Ended March 31,
(In millions, except per share data)	2019		2018
Net income	$	174	$	356

Weighted average common shares outstanding	819		851
Effect of dilutive securities	1		1
Weighted average common shares, diluted	820		852
Net income per share:
Basic	$	0.21	$	0.42
Diluted	$	0.21	$	0.42

Dividends per share	$	0.05	$	0.05


4.	Dispositions

International Segment

In the first quarter of 2019, we entered into an agreement to sell our U.K. business, Marathon Oil U.K. LLC ("MOUK") and Marathon Oil West of Shetlands Limited ("MOWOS"). Subject to customary adjustments, the closing consideration payable to us will be approximately $140 million, which reflects the assumption by the buyer of the cash equivalent balance and working capital balance, which was approximately $350 million at December 31, 2018. These properties are classified as held for sale in the consolidated balance sheet at March 31, 2019, with total assets of $947 million and total liabilities of $997 million, including an asset retirement obligation of $960 million. For the three months ended March 31, 2019 and 2018, we had approximately $13 million and $52 million in income before income taxes relating to our U.K business. Though there are certain contractual

MARATHON OIL CORPORATION

Notes to Consolidated Financial Statements (Unaudited)

requirements that must be satisfied, the transaction is expected to close in the second half of 2019, with an effective date of January 1, 2019.

In the fourth quarter of 2018, we entered into an agreement to sell our subsidiary, Marathon Oil KDV B.V., which holds our 15% non-operated interest in the Atrush block in Kurdistan for proceeds of $63 million, before closing adjustments. This property is classified as held for sale in the consolidated balance sheet at March 31, 2019 and December 31, 2018, with total assets of $145 million and $58 million, and total liabilities of $69 million and $17 million. We expect the transaction to close in the second quarter of 2019.

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.


5.	Revenues

The majority of our revenues are derived from the sale of crude oil and condensate, NGLs and natural gas under spot and term agreements with our customers in the United States and various international locations.

The following tables present our revenues from contracts with customers disaggregated by product type and geographic areas.



	Three Months Ended March 31, 2019
United States							Northern
(In millions)	Eagle Ford		Bakken		Oklahoma		Delaware		Other U.S.		Total
Crude oil and condensate	$	318	$	372	$	77	$	64	$	28	$	859
Natural gas liquids	35		10		22		8		2		77
Natural gas	34		12		45		6		6		103
Other	2		—		—		—		21		23
Revenues from contracts with customers	$	389	$	394	$	144	$	78	$	57	$	1,062



	Three Months Ended March 31, 2019
International					Other
(In millions)	E.G.		U.K.		International		Total
Crude oil and condensate	$	47	$	56	$	10	$	113
Natural gas liquids	1		1		—		2
Natural gas	7		8		—		15
Other	—		8		—		8
Revenues from contracts with customers	$	55	$	73	$	10	$	138



	Three Months Ended March 31, 2018
United States							Northern
(In millions)	Eagle Ford		Bakken		Oklahoma		Delaware		Other U.S.		Total
Crude oil and condensate	$	366	$	330	$	115	$	55	$	53	$	919
Natural gas liquids	42		15		37		6		3		103
Natural gas	33		10		43		5		7		98
Other	2		—		—		—		3		5
Revenues from contracts with customers	$	443	$	355	$	195	$	66	$	66	$	1,125

MARATHON OIL CORPORATION

Notes to Consolidated Financial Statements (Unaudited)



	Three Months Ended March 31, 2018
International							Other
(In millions)	E.G.		U.K.		Libya		International		Total
Crude oil and condensate	$	71	$	95	$	187	$	23	$	376
Natural gas liquids	1		—		—		—		1
Natural gas	9		8		9		—		26
Other	—		9		—		—		9
Revenues from contracts with customers	$	81	$	112	$	196	$	23	$	412

Contract receivables and liabilities

The following table provides information about receivables and contract assets (liabilities) from contracts with customers.



(In millions)	March 31, 2019		January 1, 2019
Receivables from contracts with customers, included in receivables, less reserves	$	751	$	714
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.

Changes in the contract asset (liability) balance during the period are as follows.



	Three Months Ended
(In millions)	March 31, 2019
Contract asset (liability) balance as of January 1, 2019	$	(1	)
Revenue recognized as performance obligations are satisfied	24
Amounts invoiced to customers	(23		)
Contract asset (liability) balance as of March 31, 2019	$	—


6.	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.


•	United States ("U.S.") – explores for, produces and markets crude oil and condensate, NGLs and natural gas in the United States


•	International ("Int’l") – 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 represents income 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, proved property impairments, change in tax associated with a tax legislation change, unrealized gains or losses on commodity derivative instruments, pension settlement losses or other items (as determined by the CODM) are not allocated to operating segments.

MARATHON OIL CORPORATION

Notes to Consolidated Financial Statements (Unaudited)



	Three Months Ended March 31, 2019
							Not Allocated
(In millions)	U.S.			Int'l			to Segments				Total
Revenues from contracts with customers	$	1,062		$	138		$	—			$	1,200
Net gain (loss) on commodity derivatives	22			—			(113		)	^(b)	(91		)
Income from equity method investments	—			11			—				11
Net gain on disposal of assets	—			—			42			^(c)	42
Other income	1			3			31			^(d)	35
Less costs and expenses:
Production	139			50			(2		)		187
Shipping, handling and other operating	140			13			1				154
Exploration	59			—			—				59
Depreciation, depletion and amortization	514			34			6				554
Impairments	—			—			6			^(e)	6
Taxes other than income	74			—			(2		)		72
General and administrative	29			7			58				94
Net interest and other	—			—			49				49
Other net periodic benefit costs	—			(2		)	(3		)		(5		)
Income tax benefit	(2		)	(11		)	(134		)	^(f)	(147		)
Segment income	$	132		$	61		$	(19	)		$	174
Capital expenditures^(a)	$	606		$	5		$	3			$	614


^(a)	Includes accruals.


^(b)	Unrealized loss on commodity derivative instruments (See Note 13).


^(c)	Primarily related to the sale of our working interest in the Droshky field (Gulf of Mexico), which closed during the first quarter of 2019.


^(d)	Primarily related to the indemnification of certain tax liabilities in connection with the 2010-2011 Federal Tax Audit with the IRS (See Note 7).


^(e)	Due to the anticipated sale of our non-operated interest in the Atrush block in Kurdistan (See Note 10).


^(f)	Primarily relates to the settlement of the 2010-2011 Federal Tax Audit with the IRS (See Note 7).

MARATHON OIL CORPORATION

Notes to Consolidated Financial Statements (Unaudited)



	Three Months Ended March 31, 2018
							Not Allocated
(In millions)	U.S.			Int'l			to Segments				Total
Revenue from contracts with customers	$	1,125		$	412		$	—			$	1,537
Net loss on commodity derivatives	(59		)	—			(43		)	^(b)	(102		)
Income from equity method investments	—			37			—				37
Net gain on disposal of assets	—			—			257			^(c)	257
Other income	3			1			—				4
Less costs and expenses:
Production	151			67			(1		)		217
Shipping, handling and other operating	111			19			—				130
Exploration	51			1			—				52
Depreciation, depletion and amortization	528			54			8				590
Impairments	—			—			8				8
Taxes other than income	64			—			—				64
General and administrative	36			9			55				100
Net interest and other	—			—			45				45
Other net periodic benefit costs	—			(2		)	5			^(d)	3
Income tax provision (benefit)	3			170			(5		)		168
Segment income	$	125		$	132		$	99			$	356
Capital expenditures^(a)	$	611		$	6		$	5			$	622


^(a)	Includes accruals.


^(b)	Unrealized loss on commodity derivative instruments (See Note 13).


^(c)	Primarily related to the gain on the sale of our Libya subsidiary (See Note 4).


^(d)	Includes pension settlement loss of $4 million (See Note 18).

MARATHON OIL CORPORATION

Notes to Consolidated Financial Statements (Unaudited)

7. 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 6.

For the three months ended March 31, 2019 and 2018, our effective income tax rates were as follows:



	Three Months Ended March 31,
	2019		2018
Effective income tax expense (benefit) rate^(a)	(544	)%	32	%


^(a)	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 income tax rates to be different from our U.S. statutory tax rate of 21% for 2019 and 2018:

•

During the three months ended March 31, 2019, we settled the 2010-2011 U.S. Federal Tax Audit ("IRS Audit") resulting in a tax benefit of $126 million. Additionally, we recorded a non-cash deferred tax benefit of $18 million in the U.K. related to an internal restructuring. These two items are discrete to the first quarter of 2019. Excluding these discrete adjustments, the effective income tax rate for the quarter was a benefit of 8%.


•	During the three months ended March 31, 2018, we incurred tax expense in Libya of $162 million. Excluding Libya, the effective income tax rate for the three months ended March 31, 2018, was an expense of 2%.

As a result of the IRS Audit settlement, the uncertain tax positions previously established are now effectively settled. The release of the accrued uncertain tax positions resulted in a $126 million tax benefit, primarily related to the additional alternative minimum tax (“AMT”) credits, see Note 22 for further detail.

Pursuant to the Tax Sharing Agreement we entered into with Marathon Petroleum Corporation (“MPC”) in connection with the 2011 spin-off transaction, MPC agreed to indemnify us for certain liabilities. In addition to the benefit from the settlement of the IRS Audit in the first quarter of 2019, we recorded a current receivable and other income of $42 million for indemnity payments due from MPC for tax expense and interest we had previously recognized. The indemnity relates to tax and interest allocable to MPC as a result of the IRS Audit. During the second quarter of 2019, we paid the IRS, and were subsequently reimbursed by MPC which settled their indemnity obligation.

During the three months ended March 31, 2019, we withdrew our appeal related to the Brae area decommissioning costs in the U.K, thus the uncertain tax positions previously established are now considered effectively settled with no tax expense or benefit impact in the first quarter of 2019.

8. 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.



	March 31,		December 31,
(In millions)	2019		2018
Crude oil and natural gas	$	12	$	11
Supplies and other items	71		85
Inventories	$	83	$	96

MARATHON OIL CORPORATION

Notes to Consolidated Financial Statements (Unaudited)

9. Property, Plant and Equipment



	March 31,		December 31,
(In millions)	2019		2018
United States	$	16,068	$	16,011
International	566		710
Corporate	80		83