UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) |
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For the Quarterly Period Ended September 30, 2005 |
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OR |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) |
For the transition period from to
Commission File Number: 1-5153
Marathon Oil Corporation
(Exact name of registrant as specified in its charter)
Delaware |
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25-0996816 |
(State of Incorporation) |
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(I.R.S. Employer Identification No.) |
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5555 San Felipe Road, Houston, TX 77056-2723 |
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(Address of principal executive offices) |
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(713) 629-6600 |
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(Registrants telephone number) |
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 ý No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes ý No 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 ý
There were 366,479,353 shares of Marathon Oil Corporation common stock outstanding as of September 30, 2005.
MARATHON OIL CORPORATION
Form 10-Q
Quarter Ended September 30, 2005
INDEX
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
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Unless the context otherwise indicates, references in this Form 10-Q to Marathon, we, our, or us are references to Marathon Oil Corporation, including its wholly-owned and majority-owned subsidiaries, and its ownership interests in equity investees (corporate entities, partnerships, limited liability companies and other ventures over which Marathon exerts significant influence by virtue of its ownership interest, typically between 20 and 50 percent). On September 1, 2005, subsequent to the acquisition discussed on page 7, Marathon Ashland Petroleum LLC changed its name to Marathon Petroleum Company LLC. In this Form 10-Q, references to Marathon Petroleum Company LLC (MPC) are references to the entity formerly known as Marathon Ashland Petroleum LLC.
2
Part I - Financial Information
MARATHON OIL CORPORATION
Consolidated Statements of Income (Unaudited)
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Third Quarter Ended |
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Nine Months Ended |
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(Dollars in millions, except per share data) |
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2005 |
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2004 |
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2005 |
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2004 |
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Revenues and other income: |
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Sales and other operating revenues (including consumer excise taxes) |
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$ |
13,345 |
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$ |
9,701 |
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$ |
35,271 |
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$ |
27,935 |
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Revenues from matching buy/sell transactions |
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3,433 |
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2,263 |
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9,807 |
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6,714 |
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Sales to related parties |
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396 |
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285 |
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1,047 |
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766 |
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Income from equity method investments |
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69 |
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38 |
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154 |
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108 |
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Net gains on disposal of assets |
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12 |
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17 |
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46 |
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25 |
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Gain on ownership change in Marathon Petroleum Company LLC |
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1 |
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2 |
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Other income (loss) net |
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(7 |
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11 |
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34 |
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51 |
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Total revenues and other income |
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17,248 |
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12,316 |
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46,359 |
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35,601 |
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Costs and expenses: |
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Cost of revenues (excluding items shown below) |
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10,833 |
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7,699 |
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27,790 |
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21,676 |
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Purchases related to matching buy/sell transactions |
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3,038 |
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2,197 |
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9,312 |
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6,588 |
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Purchases from related parties |
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44 |
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58 |
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163 |
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152 |
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Consumer excise taxes |
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1,217 |
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1,137 |
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3,511 |
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3,327 |
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Depreciation, depletion and amortization |
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331 |
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296 |
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993 |
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896 |
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Selling, general and administrative expenses |
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325 |
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261 |
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853 |
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763 |
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Other taxes |
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128 |
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80 |
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352 |
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242 |
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Exploration expenses |
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64 |
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46 |
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135 |
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108 |
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Total costs and expenses |
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15,980 |
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11,774 |
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43,109 |
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33,752 |
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Income from operations |
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1,268 |
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542 |
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3,250 |
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1,849 |
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Net interest and other financing costs |
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32 |
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40 |
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99 |
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129 |
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Minority interests in income (loss) of: |
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Marathon Petroleum Company LLC |
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148 |
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384 |
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385 |
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Equatorial Guinea LNG Holdings Limited |
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(3 |
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(1 |
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(4 |
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(5 |
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Income from continuing operations before income taxes |
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1,239 |
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355 |
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2,771 |
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1,340 |
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Provision for income taxes |
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469 |
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133 |
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1,004 |
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512 |
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Income from continuing operations |
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770 |
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222 |
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1,767 |
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828 |
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Discontinued operations |
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4 |
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Net income |
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$ |
770 |
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$ |
222 |
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$ |
1,767 |
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$ |
832 |
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Income Per Share (Unaudited)
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Third Quarter Ended |
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Nine Months Ended |
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2005 |
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2004 |
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2005 |
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2004 |
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Basic: |
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Income from continuing operations |
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$ |
2.11 |
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$ |
0.64 |
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$ |
5.01 |
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$ |
2.48 |
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Net income |
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$ |
2.11 |
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$ |
0.64 |
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$ |
5.01 |
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$ |
2.49 |
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Diluted: |
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Income from continuing operations |
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$ |
2.09 |
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$ |
0.64 |
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$ |
4.97 |
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$ |
2.47 |
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Net income |
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$ |
2.09 |
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$ |
0.64 |
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$ |
4.97 |
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$ |
2.48 |
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Dividends paid per share |
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$ |
0.33 |
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$ |
0.25 |
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$ |
0.89 |
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$ |
0.75 |
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The accompanying notes are an integral part of these consolidated financial statements.
3
MARATHON OIL CORPORATION
Consolidated Balance Sheets (Unaudited)
(Dollars in millions, except per share data) |
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September 30, |
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December 31, |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
1,043 |
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$ |
3,369 |
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Receivables, less allowance for doubtful accounts of $3 and $6 |
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3,808 |
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3,146 |
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Receivables from United States Steel |
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21 |
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15 |
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Receivables from related parties |
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102 |
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74 |
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Inventories |
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3,338 |
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1,995 |
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Other current assets |
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211 |
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267 |
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Total current assets |
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8,523 |
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8,866 |
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Investments and long-term receivables, less allowance for doubtful accounts of $11 and $10 |
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1,830 |
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1,546 |
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Receivables from United States Steel |
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576 |
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587 |
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Property, plant and equipment, less accumulated depreciation, depletion and amortization of $12,060 and $12,426 |
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13,704 |
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11,810 |
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Prepaid pensions |
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102 |
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128 |
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Goodwill |
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950 |
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252 |
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Intangibles |
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184 |
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118 |
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Other assets |
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116 |
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116 |
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Total assets |
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$ |
25,985 |
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$ |
23,423 |
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Liabilities |
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Current liabilities: |
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Commercial paper payable |
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$ |
285 |
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$ |
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Accounts payable |
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5,194 |
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4,430 |
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Payables to related parties |
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52 |
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44 |
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Payables to United States Steel |
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6 |
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Payroll and benefits payable |
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279 |
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274 |
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Accrued taxes |
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576 |
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397 |
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Deferred income taxes |
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496 |
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Accrued interest |
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52 |
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92 |
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Long-term debt due within one year |
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316 |
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16 |
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Total current liabilities |
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7,256 |
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5,253 |
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Long-term debt |
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3,728 |
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4,057 |
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Deferred income taxes |
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1,777 |
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1,553 |
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Employee benefits obligations |
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1,204 |
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989 |
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Asset retirement obligations |
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505 |
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477 |
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Payables to United States Steel |
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5 |
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5 |
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Deferred credits and other liabilities |
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451 |
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288 |
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Total liabilities |
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14,926 |
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12,622 |
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Minority interest in Marathon Petroleum Company LLC |
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2,559 |
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Minority interests in Equatorial Guinea LNG Holdings Limited |
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417 |
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131 |
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Commitments and contingencies |
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Stockholders Equity |
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Common stock: |
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Common stock issued 366,705,131 shares at September 30, 2005 and 346,727,029 shares at December 31, 2004 (par value $1 per share, 550,000,000 shares authorized) |
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367 |
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347 |
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Common stock held in treasury 225,778 shares at September 30, 2005 and 29,569 shares at December 31, 2004 |
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(9 |
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(1 |
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Additional paid-in capital |
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5,092 |
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4,028 |
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Retained earnings |
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5,261 |
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3,810 |
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Accumulated other comprehensive loss |
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(56 |
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(64 |
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Unearned compensation |
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(13 |
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(9 |
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Total stockholders equity |
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10,642 |
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8,111 |
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Total liabilities and stockholders equity |
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$ |
25,985 |
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$ |
23,423 |
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The accompanying notes are an integral part of these consolidated financial statements.
4
MARATHON OIL CORPORATION
Consolidated Statements of Cash Flows (Unaudited)
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Nine Months Ended |
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(Dollars in millions) |
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2005 |
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2004 |
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Increase (decrease) in cash and cash equivalents |
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Operating activities |
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Net income |
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$ |
1,767 |
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$ |
832 |
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Adjustments to reconcile net income to net cash provided from operating activities: |
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Income from discontinued operations |
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(4 |
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Deferred income taxes |
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(83 |
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(26 |
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Minority interests in income of subsidiaries |
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380 |
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380 |
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Depreciation, depletion and amortization |
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993 |
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896 |
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Pension and other postretirement benefits - net |
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21 |
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30 |
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Exploratory dry well costs |
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66 |
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44 |
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Net gains on disposal of assets |
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(46 |
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(25 |
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Changes in the fair value of long-term natural gas contracts in the United Kingdom |
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306 |
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210 |
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Changes in working capital: |
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Current receivables |
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(1,577 |
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(441 |
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Inventories |
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(457 |
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(372 |
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Current accounts payable and accrued expenses |
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727 |
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554 |
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All other - net |
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(134 |
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(101 |
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Net cash provided from operating activities |
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1,963 |
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1,977 |
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Investing activities |
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Capital expenditures |
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(2,015 |
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(1,377 |
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Acquisition |
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(506 |
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Disposal of assets |
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99 |
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47 |
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Proceeds from sale of minority interests in Equatorial Guinea LNG Holdings Limited |
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163 |
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Restricted cash |
- deposits |
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(27 |
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(25 |
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- withdrawals |
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19 |
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6 |
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Investments - loans and advances |
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(40 |
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(152 |
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All other - net |
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6 |
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3 |
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Net cash used in investing activities |
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(2,301 |
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(1,498 |
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Financing activities |
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Payment of debt assumed in acquisition |
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(1,920 |
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Commercial paper and revolving credit arrangements - net |
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285 |
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Debt issuance costs |
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(5 |
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Other debt repayments |
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(7 |
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(257 |
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Issuance of common stock |
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77 |
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1,036 |
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Dividends paid |
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(314 |
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(251 |
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Contributions from minority shareholders of Equatorial Guinea LNG Holdings Limited |
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175 |
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95 |
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Distributions to minority shareholder of Marathon Petroleum Company LLC |
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(272 |
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Net cash provided from (used in) financing activities |
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(1,976 |
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618 |
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Effect of exchange rate changes on cash |
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(12 |
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(1 |
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Net increase (decrease) in cash and cash equivalents |
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(2,326 |
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1,096 |
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Cash and cash equivalents at beginning of period |
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3,369 |
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1,396 |
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Cash and cash equivalents at end of period |
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$ |
1,043 |
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$ |
2,492 |
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The accompanying notes are an integral part of these consolidated financial statements.
5
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
These consolidated financial statements are unaudited but, in the opinion of management, reflect all adjustments necessary for a fair presentation of the results for the periods presented. All such adjustments are of a normal recurring nature unless disclosed otherwise. These consolidated financial statements, including selected notes, have been prepared in accordance with the applicable rules of the Securities and Exchange Commission and do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. Certain reclassifications of prior year data have been made to conform to 2005 classifications. These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Marathon Oil Corporation (Marathon) 2004 Annual Report on Form 10-K.
2. New Accounting Standards
Effective January 1, 2005, Marathon adopted FASB Staff Position (FSP) No. FAS 19-1, Accounting for Suspended Well Costs, which amended the guidance for suspended exploratory well costs in Statement of Financial Accounting Standards (SFAS) No. 19, Financial Accounting and Reporting by Oil and Gas Producing Companies. SFAS No. 19 requires costs of drilling exploratory wells to be capitalized pending determination of whether the well has found proved reserves. When a classification of proved reserves cannot yet be made, FSP No. FAS 19-1 allows exploratory well costs to continue to be capitalized when (a) the well has found a sufficient quantity of reserves to justify completion as a producing well and (b) the enterprise is making sufficient progress assessing the reserves and the economic and operating viability of the project. Marathons accounting policy for suspended exploratory well costs was in accordance with FSP No. FAS 19-1 prior to its adoption. FSP No. FAS 19-1 also requires certain disclosures to be made regarding capitalized exploratory well costs which were included in the footnotes to Marathons consolidated financial statements in its 2004 Annual Report on Form 10-K.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets an amendment of APB Opinion No. 29. This amendment eliminates the APB Opinion No. 29 exception for fair value recognition of nonmonetary exchanges of similar productive assets and replaces it with an exception for exchanges of nonmonetary assets that do not have commercial substance. Marathon adopted SFAS No. 153 on a prospective basis as of July 1, 2005.
3. Information about United States Steel
The Separation On December 31, 2001, in a tax-free distribution to holders of Marathons USXU. S. Steel Group class of common stock (Steel Stock), Marathon exchanged the common stock of its wholly owned subsidiary United States Steel Corporation (United States Steel) for all outstanding shares of Steel Stock on a one-for-one basis (the Separation).
Amounts Receivable from or Payable to United States Steel Arising from the Separation Marathon remains primarily obligated for certain financings for which United States Steel has assumed responsibility for repayment under the terms of the Separation. When United States Steel makes payments on the principal of these financings, both the receivable from United States Steel and the obligation are reduced.
Amounts receivable from and payable to United States Steel included in the consolidated balance sheet were as follows:
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September 30, |
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December 31, |
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(In millions) |
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2005 |
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2004 |
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Receivables related to debt and other obligations for which United States Steel has assumed responsibility for repayment: |
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Current |
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$ |
21 |
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$ |
15 |
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Noncurrent |
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576 |
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587 |
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Current income tax settlement and related interest payable |
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$ |
6 |
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$ |
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Noncurrent reimbursements payable under nonqualified employee benefit plans |
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5 |
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5 |
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Marathon remains primarily obligated for $46 million of operating lease obligations assumed by United States Steel, of which $37 million has been assumed by third parties that purchased plants and operations divested by United States Steel.
6
4. Acquisition
On June 30, 2005, Marathon acquired the 38 percent ownership interest in Marathon Ashland Petroleum LLC (MAP) previously held by Ashland Inc. (Ashland). In addition, Marathon acquired a portion of Ashlands Valvoline Instant Oil Change business, its maleic anhydride business, its interest in LOOP LLC, which owns and operates the only U.S. deepwater oil port, and its interest in LOCAP LLC, which owns a crude oil pipeline. As a result of the transactions (the Acquisition), MAP is now wholly owned by Marathon and its name was changed to Marathon Petroleum Company LLC (MPC) effective September 1, 2005. The Acquisition was accounted for under the purchase method of accounting and, as such, Marathons results of operations include the results of the acquired businesses from June 30, 2005. The total consideration, including debt assumed, is as follows:
(In millions) |
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Amount |
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Cash (a) |
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$ |
487 |
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MPC accounts receivable (a) |
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913 |
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Marathon common stock (b) |
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955 |
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Estimated additional consideration related to tax matters (c) |
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44 |
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Transaction-related costs |
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10 |
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Purchase price |
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$ |
2,409 |
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Assumption of debt (d) |
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1,920 |
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Total consideration including debt assumption(e) |
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$ |
4,329 |
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(a) The MAP Limited Liability Company Agreement was amended to eliminate the requirement for MPC to make quarterly cash distributions to Marathon and Ashland between the date the principal transaction agreements were signed and the closing of the Acquisition. Cash and MPC accounts receivable above include $509 million representing Ashlands 38 percent of MPCs estimated distributable cash as of June 30, 2005.
(b) Ashland shareholders received 17.539 million shares valued at $54.45 per share, which was Marathons average common stock price over the trading days between June 23 and June 29, 2005. The exchange ratio was designed to provide an aggregate number of Marathon shares worth $915 million based on Marathons average common stock price for each of the 20 consecutive trading days ending with the third complete trading day prior to June 30, 2005.
(c) Includes $9 million paid during the quarter ended September 30, 2005, for estimated tax obligations of Ashland under Internal Revenue Service Code Section 355(e).
(d) Assumed debt was repaid on July 1, 2005.
(e) Marathon is entitled to the tax deductions for Ashlands future payments of certain contingent liabilities related to businesses previously owned by Ashland. However, pursuant to the terms of the Tax Matters Agreement, Marathon has agreed to reimburse Ashland for a portion of these future payments. This contingent consideration will be included in the purchase price as such payments are made to Ashland.
The primary reasons for the Acquisition and the principal factors that contributed to a purchase price that resulted in the recognition of goodwill are:
Marathon believes the outlook for the refining and marketing business is attractive in MPCs core areas of operation. Complete ownership of MPC provides Marathon the opportunity to leverage MPCs access to premium U.S. markets where Marathon expects the levels of demand to remain high for the foreseeable future;
The Acquisition increases Marathons participation in the downstream business without the risks commonly associated with integrating a newly acquired business;
MPC provides Marathon with an increased source of cash flow which Marathon believes enhances the geographical balance in its overall risk portfolio;
Marathon anticipates the transaction will be accretive to income per share;
The Acquisition eliminated the timing and valuation uncertainties associated with the exercise of the Put/Call, Registration Rights and Standstill Agreement entered into with the formation of MPC in 1998, as well as the associated premium and discount; and
The Acquisition eliminated the possibility that a misalignment of Ashlands and Marathons interests, as co-owners of MPC, could adversely affect MPCs future growth and financial performance.
7
The allocation of the purchase price to specific assets and liabilities was based primarily on a third-party appraisal of the fair value of the acquired assets. The allocation of the purchase price is preliminary, pending the completion of that third-party valuation. The following table summarizes the preliminary purchase price allocation to the fair values of the assets acquired and liabilities assumed as of June 30, 2005:
(In millions) |
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|
|
|
Current assets: |
|
|
|
|
Cash and cash equivalents |
|
$ |
518 |
|
Receivables |
|
1,080 |
|
|
Inventories |
|
1,866 |
|
|
Other current assets |
|
28 |
|
|
Total current assets acquired |
|
3,492 |
|
|
|
|
|
|
|
Investments and long-term receivables |
|
482 |
|
|
Property, plant and equipment |
|
2,691 |
|
|
Goodwill |
|
694 |
|
|
Intangibles |
|
109 |
|
|
Other assets |
|
8 |
|
|
Total assets acquired |
|
$ |
7,476 |
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
Notes payable |
|
$ |
1,920 |
|
Deferred income taxes |
|
669 |
|
|
Other current liabilities |
|
1,700 |
|
|
Total current liabilities assumed |
|
4,289 |
|
|
|
|
|
|
|
Long-term debt |
|
16 |
|
|
Deferred income taxes |
|
246 |
|
|
Employee benefits obligations |
|
483 |
|
|
Other liabilities |
|
33 |
|
|
Total liabilities assumed |
|
$ |
5,067 |
|
Net assets acquired |
|
$ |
2,409 |
|
The preliminary valuations and lives of acquired intangible assets are as follows:
(In millions) |
|
Lives |
|
Amount |
|
|
Retail marketing tradenames |
|
Various |
|
$ |
52 |
|
Refinery permits and plans |
|
15 years |
|
26 |
|
|
Marketing brand agreements |
|
5-10 years |
|
13 |
|
|
Refining technology |
|
5-15 years |
|
12 |
|
|
Other |
|
Various |
|
6 |
|
|
Total |
|
|
|
$ |
109 |
|
The goodwill arising from the preliminary allocation was $694 million, which was assigned to the refining, marketing and transportation segment. None of the goodwill is deductible for tax purposes. The goodwill decreased $109 million from the initial estimated purchase price allocation as of June 30, 2005 primarily as a result of an $80 million reduction in the estimated additional consideration related to tax matters.
The purchase price allocated to equity method investments is $230 million higher than the underlying net assets of the investees. This excess will be amortized over the expected useful life of the underlying assets except for goodwill related to the equity investments.
The following unaudited pro forma results of operations are as if the Acquisition had been consummated at the beginning of each period presented. The pro forma data is based on historical information and does not reflect the actual results that would have occurred nor is it indicative of future results of operations.
|
|
Third Quarter Ended |
|
Nine Months Ended |
|
||||||||
(In millions, except per share data) |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
||||
Revenues and other income |
|
$ |
17,248 |
|
$ |
12,326 |
|
$ |
46,405 |
|
$ |
35,656 |
|
Net income |
|
$ |
770 |
|
$ |
294 |
|
$ |
1,976 |
|
$ |
1,025 |
|
Net income per share: |
|
|
|
|
|
|
|
|
|
||||
Basic |
|
$ |
2.11 |
|
$ |
0.81 |
|
$ |
5.42 |
|
$ |
2.92 |
|
Diluted |
|
$ |
2.09 |
|
$ |
0.81 |
|
$ |
5.38 |
|
$ |
2.91 |
|
8
5. Computation of Income Per Share
Basic net income per share is based on the weighted average number of common shares outstanding. Diluted net income per share assumes exercise of stock options, provided the effect is not antidilutive.
|
|
Third Quarter Ended September 30, |
|
||||||||||
|
|
2005 |
|
2004 |
|
||||||||
(Dollars in millions, except per share data) |
|
Basic |
|
Diluted |
|
Basic |
|
Diluted |
|
||||
Net income |
|
$ |
770 |
|
$ |
770 |
|
$ |
222 |
|
$ |
222 |
|
Shares of common stock outstanding (in thousands): |
|
|
|
|
|
|
|
|
|
||||
Average number of common shares outstanding |
|
365,137 |
|
365,137 |
|
345,037 |
|
345,037 |
|
||||
Effect of dilutive securities stock options |
|
|
|
3,427 |
|
|
|
1,932 |
|
||||
Average common shares including dilutive effect |
|
365,137 |
|
368,564 |
|
345,037 |
|
346,969 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Net income per share |
|
$ |
2.11 |
|
$ |
2.09 |
|
$ |
0.64 |
|
$ |
0.64 |
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2005 |
|
2004 |
|
||||||||
(Dollars in millions, except per share data) |
|
Basic |
|
Diluted |
|
Basic |
|
Diluted |
|
||||
Income from continuing operations |
|
$ |
1,767 |
|
$ |
1,767 |
|
$ |
828 |
|
$ |
828 |
|
Income from discontinued operations |
|
|
|
|
|
4 |
|
4 |
|
||||
Net income |
|
$ |
1,767 |
|
$ |
1,767 |
|
$ |
832 |
|
$ |
832 |
|
Shares of common stock outstanding (in thousands): |
|
|
|
|
|
|
|
|
|
||||
Average number of common shares outstanding |
|
352,807 |
|
352,807 |
|
333,456 |
|
333,456 |
|
||||
Effect of dilutive securities stock options |
|
|
|
2,919 |
|
|
|
1,713 |
|
||||
Average common shares including dilutive effect |
|
352,807 |
|
355,726 |
|
333,456 |
|
335,169 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Per share: |
|
|
|
|
|
|
|
|
|
||||
Income from continuing operations |
|
$ |
5.01 |
|
$ |
4.97 |
|
$ |
2.48 |
|
$ |
2.47 |
|
Income from discontinued operations |
|
$ |
|
|
$ |
|
|
$ |
0.01 |
|
$ |
0.01 |
|
Net income |
|
$ |
5.01 |
|
$ |
4.97 |
|
$ |
2.49 |
|
$ |
2.48 |
|
9
6. Stock-Based Compensation Plans
The following presents the effect on net income and net income per share if the fair value method had been applied to all outstanding awards in each period:
|
|
Third Quarter Ended |
|
Nine Months Ended |
|
||||||||
(In millions, except per share data) |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
||||
Net income: |
|
|
|
|
|
|
|
|
|
||||
As reported |
|
$ |
770 |
|
$ |
222 |
|
$ |
1,767 |
|
$ |
832 |
|
Add: Stock-based compensation expense included in reported net income, net of related tax effects |
|
28 |
|
19 |
|
69 |
|
43 |
|
||||
Deduct: Total stock-based compensation expense determined under fair value method for all awards, net of related tax effects |
|
(28 |
) |
(15 |
) |
(69 |
) |
(31 |
) |
||||
Pro forma net income |
|
$ |
770 |
|
$ |
226 |
|
$ |
1,767 |
|
$ |
844 |
|
Basic net income per share: |
|
|
|
|
|
|
|
|
|
||||
As reported |
|
$ |
2.11 |
|
$ |
0.64 |
|
$ |
5.01 |
|
$ |
2.49 |
|
Pro forma |
|
$ |
2.11 |
|
$ |
0.65 |
|
$ |
5.01 |
|
$ |
2.53 |
|
Diluted net income per share: |
|
|
|
|
|
|
|
|
|
||||
As reported |
|
$ |
2.09 |
|
$ |
0.64 |
|
$ |
4.97 |
|
$ |
2.48 |
|
Pro forma |
|
$ |
2.09 |
|
$ |
0.65 |
|
$ |
4.97 |
|
$ |
2.52 |
|
Marathon records compensation cost over the stated vesting period for stock options that are subject to specific vesting conditions and specify (i) that an employee vests in the award upon becoming retirement eligible or (ii) that the employee will continue to vest in the award after retirement without providing any additional service. Upon adoption of SFAS No. 123 (Revised 2004), Share-Based Payment, such compensation cost will be recognized immediately for awards granted to retirement-eligible employees or over the period from the grant date to the retirement eligibility date if retirement eligibility will be reached during the stated vesting period. The compensation cost determined under these two approaches did not differ materially for the periods presented above.
10
7. Segment Information
Marathons operations consist of three operating segments: 1) Exploration and Production (E&P) - explores for and produces crude oil and natural gas on a worldwide basis; 2) Refining, Marketing and Transportation (RM&T) - refines, markets and transports crude oil and petroleum products, primarily in the Midwest, the upper Great Plains and southeastern United States; and 3) Integrated Gas (IG) markets and transports natural gas and products manufactured from natural gas, such as liquefied natural gas (LNG) and methanol, on a worldwide basis.
The following presents information by operating segment:
(In millions) |
|
E&P |
|
RM&T |
|
IG |
|
Total |
|
||||
Third Quarter 2005 |
|
|
|
|
|
|
|
|
|
||||
Revenues: |
|
|
|
|
|
|
|
|
|
||||
Customer |
|
$ |
1,400 |
|
$ |
14,989 |
|
$ |
471 |
|
$ |
16,860 |
|
Intersegment(a) |
|
104 |
|
78 |
|
46 |
|
228 |
|
||||
Related parties |
|
3 |
|
393 |
|
|
|
396 |
|
||||
Segment revenues |
|
1,507 |
|
15,460 |
|
517 |
|
17,484 |
|
||||
Elimination of intersegment revenues |
|
(104 |
) |
(78 |
) |
(46 |
) |
(228 |
) |
||||
Loss on long-term U.K. gas contracts |
|
(82 |
) |
|
|
|
|
(82 |
) |
||||
Total revenues |
|
$ |
1,321 |
|
$ |
15,382 |
|
$ |
471 |
|
$ |
17,174 |
|
|
|
|
|
|
|
|
|
|
|
||||
Segment income |
|
$ |
627 |
|
$ |
814 |
|
$ |
(6 |
) |
$ |
1,435 |
|
Income from equity method investments |
|
15 |
|
38 |
|
16 |
|
69 |
|
||||
Depreciation, depletion and amortization(b) |
|
198 |
|
123 |
|
2 |
|
323 |
|
||||
Capital expenditures(c) |
|
387 |
|
201 |
|
205 |
|
793 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Third Quarter 2004 |
|
|
|
|
|
|
|
|
|
||||
Revenues: |
|
|
|
|
|
|
|
|
|
||||
Customer |
|
$ |
1,110 |
|
$ |
10,578 |
|
$ |
405 |
|
$ |
12,093 |
|
Intersegment (a) |
|
99 |
|
38 |
|
42 |
|
179 |
|
||||
Related parties |
|
2 |
|
283 |
|
|
|
285 |
|
||||
Segment revenues |
|
1,211 |
|
10,899 |
|
447 |
|
12,557 |
|
||||
Elimination of intersegment revenues |
|
(99 |
) |
(38 |
) |
(42 |
) |
(179 |
) |
||||
Loss on long-term U.K. gas contracts |
|
(129 |
) |
|
|
|
|
(129 |
) |
||||
Total revenues |
|
$ |
983 |
|
$ |
10,861 |
|
$ |
405 |
|
$ |
12,249 |
|
|
|
|
|
|
|
|
|
|
|
||||
Segment income |
|
$ |
351 |
|
$ |
391 |
|
$ |
18 |
|
$ |
760 |
|
Income from equity method investments |
|
8 |
|
17 |
|
13 |
|
38 |
|
||||
Depreciation, depletion and amortization(b) |
|
180 |
|
105 |
|
2 |
|
287 |
|
||||
Capital expenditures(c) |
|
249 |
|
146 |
|
58 |
|
453 |
|
(a) Management believes intersegment transactions were conducted under terms comparable to those with unrelated parties.
(b) Differences between segment totals and Marathon totals represent amounts related to corporate administrative activities and are included in administrative expenses in the reconciliation below.
(c) Differences between segment totals and Marathon totals represent amounts related to corporate administrative activities.
11
(In millions) |
|
E&P |
|
RM&T |
|
IG |
|
Total |
|
||||
Nine Months 2005 |
|
|
|
|
|
|
|
|
|
||||
Revenues: |
|
|
|
|
|
|
|
|
|
||||
Customer |
|
$ |
4,139 |
|
$ |
39,939 |
|
$ |
1,306 |
|
$ |
45,384 |
|
Intersegment(a) |
|
291 |
|
161 |
|
134 |
|
586 |
|
||||
Related parties |
|
8 |
|
1,039 |
|
|
|
1,047 |
|
||||
Segment revenues |
|
4,438 |
|
41,139 |
|
1,440 |
|
47,017 |
|
||||
Elimination of intersegment revenues |
|
(291 |
) |
(161 |
) |
(134 |
) |
(586 |
) |
||||
Loss on long-term U.K. gas contracts |
|
(306 |
) |
|
|
|
|
(306 |
) |
||||
Total revenues |
|
$ |
3,841 |
|
$ |
40,978 |
|
$ |
1,306 |
|
$ |
46,125 |
|
|
|
|
|
|
|
|
|
|
|
||||
Segment income |
|
$ |
1,958 |
|
$ |
1,847 |
|
$ |
12 |
|
$ |
3,817 |
|
Income from equity method investments |
|
34 |
|
71 |
|
49 |
|
154 |
|
||||
Depreciation, depletion and amortization(b) |
|
631 |
|
332 |
|
6 |
|
969 |
|
||||
Capital expenditures(c) |
|
1,000 |
|
498 |
|
513 |
|
2,011 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Nine Months 2004 |
|
|
|
|
|
|
|
|
|
||||
Revenues: |
|
|
|
|
|
|
|
|
|
||||
Customer |
|
$ |
3,421 |
|
$ |
30,262 |
|
$ |
1,176 |
|
$ |
34,859 |
|
Intersegment(a) |
|
261 |
|
95 |
|
114 |
|
470 |
|
||||
Related parties |
|
9 |
|
757 |
|
|
|
766 |
|
||||
Segment revenues |
|
3,691 |
|
31,114 |
|
1,290 |
|
36,095 |
|
||||
Elimination of intersegment revenues |
|
(261 |
) |
(95 |
) |
(114 |
) |
(470 |
) |
||||
Loss on long-term U.K. gas contracts |
|
(210 |
) |
|
|
|
|
(210 |
) |
||||
Total revenues |
|
$ |
3,220 |
|
$ |
31,019 |
|
$ |
1,176 |
|
$ |
35,415 |
|
|
|
|
|
|
|
|
|
|
|
||||
Segment income |
|
$ |
1,253 |
|
$ |
1,017 |
|
$ |
25 |
|
$ |
2,295 |
|
Income from equity method investments |
|
17 |
|
48 |
|
43 |
|
108 |
|
||||
Depreciation, depletion and amortization(b) |
|
560 |
|
307 |
|
6 |
|
873 |
|
||||
Capital expenditures(c) |
|
601 |
|
419 |
|
346 |
|
1,366 |
|
(a) Management believes intersegment transactions were conducted under terms comparable to those with unrelated parties.
(b) Differences between segment totals and Marathon totals represent amounts related to corporate administrative activities and are included in administrative expenses in the reconciliation below.
(c) Differences between segment totals and Marathon totals represent amounts related to corporate administrative activities.
The following reconciles segment income to income from operations as reported in Marathons consolidated statements of income:
|
|
Third Quarter Ended |
|
||||
(In millions) |
|
2005 |
|
2004 |
|
||
Segment income |
|
$ |
1,435 |
|
$ |
760 |
|
Items not allocated to segments: |
|
|
|
|
|
||
Administrative expenses |
|
(108 |
) |
(90 |
) |
||
Loss on long-term U.K. gas contracts |
|
(82 |
) |
(129 |
) |
||
Gain on ownership change in MPC |
|
|
|
1 |
|
||
Gain on sale of minority interests in Equatorial Guinea LNG Holdings Limited |
|
23 |
|
|
|
||
Total income from operations |
|
$ |
1,268 |
|
$ |
542 |
|
|
|
|
|
|
|
||
|
|
Nine Months Ended |
|
||||
(In millions) |
|
2005 |
|
2004 |
|
||
Segment income |
|
$ |
3,817 |
|
$ |
2,295 |
|
Items not allocated to segments: |
|
|
|
|
|
||
Administrative expenses |
|
(284 |
) |
(238 |
) |
||
Loss on long-term U.K. gas contracts |
|
(306 |
) |
(210 |
) |
||
Gain on ownership change in MPC |
|
|
|
2 |
|
||
Gain on sale of minority interests in Equatorial Guinea LNG Holdings Limited |
|
23 |
|
|
|
||
Total income from operations |
|
$ |
3,250 |
|
$ |
1,849 |
|
12
8. Pensions and Other Postretirement Benefits
The following summarizes the components of net periodic benefit costs:
|
|
Pension Benefits |
|
Other Benefits |
|
|||||||||
|
|
Third Quarter Ended September 30, |
|
|||||||||||
(In millions) |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
|||||
Service cost |
|
$ |
31 |
|
$ |
24 |
|
$ |
5 |
|
$ |
4 |
|
|
Interest cost |
|
30 |
|
26 |
|
10 |
|
8 |
|
|||||
Expected return on plan assets |
|
(24 |
) |
(23 |
) |
|
|
|
|
|||||
Amortization |
net transition gain |
|
(1 |
) |
(1 |
) |
|
|
|
|
||||
|
prior service costs (credits) |
|
1 |
|
1 |
|
(3 |
) |
(2 |
) |
||||
|
actuarial loss |
|
12 |
|
12 |
|
2 |
|
|
|
||||
Multi-employer and other plans |
|
1 |
|
|
|
1 |
|
1 |
|
|||||
Settlement and curtailment losses (gains) (a) |
|
|
|
19 |
|
|
|
(9 |
) |
|||||
Net periodic benefit cost(b) |
|
$ |
50 |
|
$ |
58 |
|
$ |
15 |
|
$ |
2 |
|
(a) Includes $10 million in costs related to business transformation programs for the third quarter of 2004.
(b) Includes MPCs net periodic pension cost of $34 million and $29 million and other benefits cost of $9 million and $6 million for the third quarter of 2005 and 2004. Includes international net periodic pension cost of $5 million and $6 million for the third quarter of 2005 and 2004.
|
|
Pension Benefits |
|
Other Benefits |
|
|||||||||
|
|
Nine Months Ended September 30, |
|
|||||||||||
(In millions) |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
|||||
Service cost |
|
$ |
88 |
|
$ |
76 |
|
$ |
14 |
|
$ |
14 |
|
|
Interest cost |
|
88 |
|
80 |
|
29 |
|
32 |
|
|||||
Expected return on plan assets |
|
(70 |
) |
(69 |
) |
|
|
|
|
|||||
Amortization |
net transition gain |
|
(3 |
) |
(3 |
) |
|
|
|
|
||||
|
prior service costs (credits) |
|
3 |
|
3 |
|
(9 |
) |
(10 |
) |
||||
|
actuarial loss |
|
42 |
|
38 |
|
7 |
|
8 |
|
||||
Multi-employer and other plans |
|
2 |
|
1 |
|
2 |
|
2 |
|
|||||
Settlement and curtailment losses (gains) (c) |
|
|
|
29 |
|
|
|
(9 |
) |
|||||
Net periodic benefit cost (d) |
|
$ |
150 |
|
$ |
155 |
|
$ |
43 |
|
$ |
37 |
|
(c) Includes $13 million in costs related to business tranformation programs for the first nine months of 2004.
(d) Includes MPCs net periodic pension cost of $102 million and $88 million and other benefits cost of $26 million and $25 million for the first nine months of 2005 and 2004. Includes international net periodic pension cost of $16 million and $17 million for the first nine months of 2005 and 2004.
During the nine months ended September 30, 2005, MPC contributed $127 million to its qualified pension plan and Marathon contributed $16 million to its international pension plans. Marathon expects to contribute an additional $15 million to its international pension plans during the remainder of 2005. In addition, during the nine months ended September 30, 2005, contributions made from the general assets of Marathon to cover current benefit payments related to unfunded pension and other postretirement benefit plans were $2 million and $24 million.
On June 30, 2005, as a result of the Acquisition, MPCs pension and other postretirement benefit plan obligations were remeasured using current discount rates and plan assumptions. The discount rate was decreased to 5.25 percent from 5.75 percent. As part of the application of the purchase method of accounting, MPC recognized 38 percent of its unrecognized net transition gain, prior service costs and actuarial losses related to its pension and other postretirement benefit plans. As a result, obligations related to the pension and other postretirement benefit plans increased by $263 million and $28 million.
In addition, certain employees of the maleic anhydride business were granted credit for prior service and extended pension and other postretirement benefits under the MPC plans which increased MPCs obligations by $5 million for both the pension and other postretirement benefit plans. There was not a material impact to future net periodic benefit cost for the remainder of 2005.
13
9. Income Taxes
The provision for income taxes for interim periods is based on Marathons best estimate of the effective tax rate expected to be applicable for the current fiscal year plus any adjustments arising from a change in the estimated amount of taxes related to prior periods.
In the second quarter of 2005, the state of Ohio enacted legislation which phases out Ohios income-based franchise taxes over a five-year period. Marathons provision for income taxes for the first nine months of 2005 includes a $15 million benefit related to the reversal of deferred income taxes as a result of this change in tax law. The state of Ohio replaced the income-based franchise tax with a commercial activity tax based on gross receipts which will be phased in over five years. The commercial activity tax will be reported in costs and expenses.
In the first quarter of 2005, the state of Kentucky enacted legislation which causes limited liability companies to be subject to Kentuckys corporation income tax. In the first nine months of 2005, Marathons provision for income taxes includes $13 million related to the effects of this Kentucky income tax on deferred tax assets and liabilities as of January 1, 2005. The unfavorable effect on net income (after minority interest) was $6 million.
Also beginning in the first quarter of 2005, Marathons effective tax rate reflects the estimated impact of a special deduction for qualified domestic production expected to be taken as a result of the American Jobs Creation Act of 2004. This deduction will be treated as a permanent difference. Based on Marathons best estimate of taxable income for 2005, the deduction will reduce the effective tax rate by approximately one-half percent.
10. Comprehensive Income
The following presents Marathons comprehensive income for the periods shown:
|
|
Third Quarter Ended |
|
Nine Months Ended |
|
||||||||
(In millions) |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
||||
Net income |
|
$ |
770 |
|
$ |
222 |
|
$ |
1,767 |
|
$ |
832 |
|
Other comprehensive income (loss), net of tax |
|
|
|
|
|
|
|
|
|
||||
Minimum pension liability adjustments |
|
|
|
|
|
24 |
|
|
|
||||
Change in fair value of derivative instruments |
|
(1 |
) |
(5 |
) |
(16 |
) |
(26 |
) |
||||
Total comprehensive income |
|
$ |
769 |
|
$ |
217 |
|
$ |
1,775 |
|
$ |
806 |
|
During the third quarter and first nine months of 2004, $2 million of losses related to derivative instruments, net of tax, were reclassified into net income as it was no longer probable the related forecasted transactions would occur.
11. Inventories
Inventories are carried at lower of cost or market. Cost of inventories of crude oil and refined products is determined primarily under the last-in, first-out (LIFO) method.
(In millions) |
|
September 30, |
|
December 31, |
|
||
Liquid hydrocarbons and natural gas |
|
$ |
1,340 |
|
$ |
676 |
|
Refined products and merchandise |
|
1,862 |
|
1,192 |
|
||
Supplies and sundry items |
|
136 |
|
127 |
|
||
Total (at cost) |
|
$ |
3,338 |
|
$ |
1,995 |
|
12. Suspended Exploratory Well Costs
Marathons suspended exploratory well costs at September 30, 2005 were $344 million, an increase of $5 million from December 31, 2004, due to drilling activities in several countries offset by transfers to proved properties and dry well expense. During the first nine months of 2005, there were no impairments of exploratory well costs that had been capitalized for a period of greater than one year after the completion of drilling at December 31, 2004.
During the quarter ended September 30, 2005, $22 million of exploratory well costs related to the Annapolis project offshore Nova Scotia were written off. Sufficient progress toward an economically viable project had not been made since completion of drilling in this prospect in the third quarter of 2004.
14
13. Debt
At September 30, 2005, Marathon had no borrowings against its $1.5 billion long-term revolving credit facility and had $285 million of commercial paper outstanding under its U.S. commercial paper program that is backed by the long-term revolving credit facility. Certain banks provide Marathon with uncommitted short-term lines of credit totaling $200 million. At September 30, 2005, there were no borrowings against these facilities. Additionally, as part of the Acquisition on June 30, 2005 discussed in Note 4, Marathon assumed $1.920 billion in debt which was repaid on July 1, 2005.
MPC has a $500 million long-term revolving credit facility that terminates in May 2009. At September 30, 2005, there were no borrowings against this facility.
In the event of a change in control of Marathon, debt obligations totaling $1.574 billion at September 30, 2005 may be declared immediately due and payable. In such event, Marathon may also be required to either repurchase certain equipment at United States Steels Fairfield Works for $82 million or provide a letter of credit to secure the remaining obligation.
14. MPC Receivables Purchase and Sale Facility
On July 1, 2005, MPC entered into a $200 million, three-year Receivables Purchase and Sale Agreement with certain purchasers. The program is structured to allow MPC to periodically sell a participating interest in pools of eligible accounts receivable. If any receivables are sold under the facility, MPC will not guarantee the transferred receivables and will have no obligations upon default. During the term of the agreement MPC is obligated to pay a facility fee of 0.12%. As of September 30, 2005 no receivables had been sold under this agreement.
15. Supplemental Cash Flow Information
|
|
Nine Months Ended |
|
||||||
(In millions) |
|
2005 |
|
2004 |
|
||||
Net cash provided from operating activities included: |
|
|
|
|
|
||||
Interest and other financing costs paid (net of amount capitalized) |
|
$ |
167 |
|
$ |
198 |
|
||
Income taxes paid to taxing authorities |
|
917 |
|
539 |
|
||||
Commercial paper and revolving credit arrangements - net: |
|
|
|
|
|
||||
Commercial paper |
issued |
|
$ |
3,863 |
|
$ |
|
|
|
|
repayments |
|
(3,578 |
) |
|
|
|||
Credit agreements |
borrowings |
|
10 |
|
|
|
|||
|
repayments |
|
(10 |
) |
|
|
|||
Ashland credit agreements |
borrowings |
|
|
|
653 |
|
|||
|
repayments |
|
|
|
(653 |
) |
|||
Total |
|
$ |
285 |
|
$ |
|
|
||
Noncash investing and financing activities: |
|
|
|
|
|
||||
Asset retirement costs capitalized |
|
$ |
12 |
|
$ |
17 |
|
||
Debt payments assumed by United States Steel |
|
8 |
|
13 |
|
||||
Disposal of assets: |
|
|
|
|
|
||||
Asset retirement obligations assumed by buyer |
|
3 |
|
|
|
||||
Acquisitions: |
|
|
|
|
|
||||
Debt and other liabilities assumed |
|
4,162 |
|
|
|
||||
Common stock issued to seller |
|
955 |
|
|
|
||||
Receivables transferred to seller |
|
913 |
|
|
|
||||
15
16. Sale of Minority Interests in EGHoldings
In connection with the formation of Equatorial Guinea LNG Holdings Limited (EGHoldings), Compania Nacional de Petroleos de Guinea Ecuatorial (GEPetrol) was given certain contractual rights that gave GEPetrol the option to purchase and resell a 13 percent interest in EGHoldings held by Marathon to a third party. On July 25, 2005, GEPetrol exercised these rights and reimbursed Marathon for its actual costs incurred up to the date of closing, plus an additional specified rate of return. Marathon and GEPetrol entered into agreements under which Mitsui & Co., Ltd. (Mitsui) and a subsidiary of Marubeni Corporation (Marubeni) acquired 8.5 percent and 6.5 percent interests, respectively, in EGHoldings. As part of these agreements, Marathon sold a 2 percent interest in EGHoldings to Mitsui for its actual costs incurred up to the date of closing, plus a specified rate of return, as well as a premium and future consideration based upon the performance of EGHoldings. Following the transaction, Marathon holds a 60 percent interest in EGHoldings, with GEPetrol holding a 25 percent interest and Mitsui and Marubeni holding the remaining interests.
During the quarter ended September 30, 2005, Marathon received net proceeds of $163 million in connection with the transactions and recorded a gain of $23 million, which is included in other income (loss) net.
17. Contingencies and Commitments
Marathon is the subject of, or party to, a number of pending or threatened legal actions, contingencies and commitments involving a variety of matters, including laws and regulations relating to the environment. Certain of these matters are discussed below. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to Marathons consolidated financial statements. However, management believes that Marathon will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably.
Environmental matters Marathon is subject to federal, state, local and foreign laws and regulations relating to the environment. These laws generally provide for control of pollutants released into the environment and require responsible parties to undertake remediation of hazardous waste disposal sites. Penalties may be imposed for noncompliance. At September 30, 2005 and December 31, 2004, accrued liabilities for remediation totaled $109 million and $110 million. It is not presently possible to estimate the ultimate amount of all remediation costs that might be incurred or the penalties that may be imposed. Receivables for recoverable costs from certain states, under programs to assist companies in cleanup efforts related to underground storage tanks at retail marketing outlets, were $69 million at September 30, 2005, and $65 million at December 31, 2004.
Contract commitments At September 30, 2005, Marathons contract commitments to acquire property, plant and equipment and long-term investments totaled $1.026 billion.
Other Contingencies Marathon is a defendant along with many other refining companies in over forty cases in eleven states alleging methyl tertiary-butyl ether (MTBE) contamination in groundwater. The plaintiffs generally are water providers or governmental authorities and they allege that refiners, manufacturers and sellers of gasoline containing MTBE are liable for manufacturing a defective product and that owners and operators of retail gasoline sites have allowed MTBE to be discharged into the groundwater. Several of these lawsuits allege contamination that is outside of Marathons marketing area. A few of the cases seek approval as class actions. Many of the cases seek punitive damages or treble damages under a variety of statutes and theories. Marathon stopped producing MTBE at its refineries in October 2002. The potential impact of these recent cases and future potential similar cases is uncertain.
16
18. Accounting Standards Not Yet Adopted
In December 2004, the FASB issued SFAS No. 123(R) as a revision of SFAS No. 123, Accounting for Stock-Based Compensation. This statement requires entities to measure the cost of employee services received in exchange for an award of equity instruments based on the fair value of the award on the grant date. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award, usually the vesting period. In addition, awards classified as liabilities will be remeasured each reporting period. In 2003, Marathon adopted the fair value method for grants made, modified or settled on or after January 1, 2003. Accordingly, Marathon does not expect the adoption of SFAS No. 123(R) to have a material effect on its consolidated results of operations, financial position or cash flows. The statement provided for an effective date of July 1, 2005, for Marathon. However, in April 2005, the Securities and Exchange Commission adopted a rule that, for Marathon, defers the effective date until January 1, 2006. Marathon plans to adopt the provisions of this statement January 1, 2006.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs an amendment of ARB No. 43, Chapter 4. This statement requires that items such as idle facility expense, excessive spoilage, double freight, and re-handling costs be recognized as a current-period charge. Marathon is required to implement this statement in the first quarter of 2006. Marathon does not expect the adoption of SFAS No. 151 to have a material effect on its consolidated results of operations, financial position or cash flows.
In March 2005, the FASB issued FASB Interpretation (FIN) No. 47, Accounting for Conditional Asset Retirement Obligations an interpretation of FASB Statement No. 143. This interpretation clarifies that an entity is required to recognize a liability for a legal obligation to perform asset retirement activities when the retirement is conditional on a future event if the liabilitys fair value can be reasonably estimated. If the liabilitys fair value cannot be reasonably estimated, then the entity must disclose (a) a description of the obligation, (b) the fact that a liability has not been recognized because the fair value cannot be reasonably estimated, and (c) the reasons why the fair value cannot be reasonably estimated. FIN No. 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. Marathon is required to implement this interpretation no later than December 31, 2005 and is currently studying its provisions to determine the impact, if any, on its consolidated financial statements.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections. SFAS No. 154 requires companies to recognize (i) voluntary changes in accounting principle and (ii) changes required by a new accounting pronouncement when the pronouncement does not include specific transition provisions retrospectively to prior periods financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.
In September 2005, the FASB ratified the consensus reached by the Emerging Issues Task Force regarding Issue No. 04-13, Accounting for Purchases and Sales of Inventory with the Same Counterparty. The issue defines when a purchase and a sale of inventory with the same party that operates in the same line of business is recorded at fair value or considered a single nonmonetary transaction subject to the fair value exception of APB Opinion No. 29. The purchase and sale transactions may be pursuant to a single contractual arrangement or separate contractual arrangements and the inventory purchased or sold may be in the form of raw materials, work-in-process, or finished goods. In general, two or more transactions with the same party are treated as one if they are entered into in contemplation of each other. The rules apply to new arrangements entered into in reporting periods beginning after March 15, 2006. Marathon is currently studying the provisions of this consensus to determine the impact on its consolidated financial statements.
17
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Marathon Oil Corporation is engaged in worldwide exploration and production of crude oil and natural gas; domestic refining, marketing and transportation of crude oil and petroleum products; and worldwide marketing and transportation of natural gas and products manufactured from natural gas. Managements Discussion and Analysis should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements. The discussion of the Consolidated Statements of Income should be read in conjunction with the Supplemental Statistics provided on page 33.
Certain sections of Managements Discussion and Analysis include forward-looking statements concerning trends or events potentially affecting Marathon. These statements typically contain words such as anticipates, believes, estimates, expects, targets, plans, projects, could, may, should, would or similar words indicating that future outcomes are uncertain. In accordance with safe harbor provisions of the Private Securities Litigation Reform Act of 1995, these statements are accompanied by cautionary language identifying important factors, though not necessarily all such factors, which could cause future outcomes to differ materially from those set forth in the forward-looking statements. For additional risk factors affecting our businesses, see the information preceding Part I in our 2004 Annual Report on Form 10-K and subsequent filings.
Unless specifically noted, amounts for MPC include the 38 percent interest held by Ashland prior to the Acquisition, and amounts for EGHoldings include the 25 percent interest held by GEPetrol and the cumulative 15 percent interest held by Mitsui and Marubeni subsequent to July 25, 2005.
Overview and Outlook
We acquired the 38 percent interest in MPC held by Ashland Inc. on June 30, 2005. For additional information on the Acquisition, see Note 4 to the Consolidated Financial Statements. Third quarter 2005 results benefited from full ownership of MPC. We believe the outlook for the refining and marketing business is attractive in our core areas of operation and expect the levels of demand to remain high for the foreseeable future. This acquisition increases our participation in the downstream business without the risks commonly associated with integrating a newly acquired business.
During the third quarter of 2005, our U.S. Gulf Coast operations were significantly impacted by Hurricanes Katrina and Rita. Operationally, our oil and natural gas production facilities in the Gulf of Mexico sustained only minimal damage from these storms, and we have nearly returned to our pre-storm production levels in the Gulf of Mexico. Our refining and transportation operations also sustained relatively minor damage and were able to resume operations within days after the storms, providing much needed transportation fuels to the markets we serve.
While these hurricanes disrupted our operations, resulting in a reduction in our third quarter upstream sales of approximately 20,000 barrels of oil equivalent per day (boepd) and a loss of approximately 40,000 barrels per day (bpd) of refinery throughput, we still had sound operating and financial performances during the quarter. The consistent performance of both our upstream and downstream businesses allowed us to capture the value of continued high commodity prices and strong refining margins.
Exploration and Production
Crude oil and natural gas sales during the quarter averaged 291,500 boepd. Production available for sale during the third quarter of 2005 averaged 321,000 boepd. The variance between actual sales volumes and production available for sale for the quarter is primarily a result of the timing of international crude oil liftings, primarily in the United Kingdom and Equatorial Guinea.
While our third quarter production results were negatively impacted by hurricanes in the Gulf of Mexico, other portions of our business continued to generate production increases, particularly in Equatorial Guinea and Russia. In Equatorial Guinea, we realized the benefits of strong condensate production and the full ramp-up of the recently completed liquefied petroleum gas (LPG) expansion project. During the third quarter, total liquids production available for sale in Equatorial Guinea averaged 45,000 net bpd. In addition, we continued development activities in the East Kamennoye field in Russia where we have an ongoing drilling program. These activities have driven total Russian production available for sale from an average of 14,000 net bpd during third quarter of 2004 to 28,000 net bpd during third quarter of 2005.
18
Our cost of storm-related repairs in the Gulf of Mexico is not expected to be significant. Work continues to restore our remaining operated and outside-operated production, with current Gulf of Mexico production at more than 95 percent of pre-storm levels of approximately 60,000 boepd. The restart of remaining oil and gas production is primarily dependent upon restoration of production from the outside-operated Ursa platform. Despite the negative effects of hurricanes on third quarter production levels, we estimate 2005 average daily production available for sale to be 340,000 to 350,000 boepd, excluding the impact of any acquisitions or dispositions. Daily production available for sale for the fourth quarter is estimated to be 350,000 to 370,000 boepd.
During the third quarter, we continued our exploration success offshore Angola with the Astraea and Hebe discoveries on Block 31. In addition, we have participated in an appraisal well on the Gengibre discovery on Block 32. Results of this well will be released upon partner and government approvals. We hold a 10 percent interest in outside-operated Block 31 and a 30 percent interest in outside-operated Block 32.
Marathon is currently participating in an appraisal well on the Plutao discovery in Angola Block 31, an exploration well on the Mostarda Prospect in Angola Block 32, a deep shelf exploration well on the Aquarius prospect in the Gulf of Mexico, an exploration well on the Davan prospect in the United Kingdom, and an appraisal well on the Gudrun discovery offshore Norway.
In Norway, the Alvheim/Vilje development project is 29 percent complete and progressing on schedule with first production projected in 2007.
The above discussion includes forward-looking statements with respect to the timing and levels of our worldwide liquid hydrocarbon, natural gas and condensate production, the possibility of developing Blocks 31 and 32 offshore Angola, the development of the Alvheim and Vilje fields and estimated costs of storm-related repairs. Some factors that could potentially affect this forward-looking information include pricing, supply and demand for petroleum products, the amount of capital available for exploration and development, acquisitions or dispositions of oil and gas properties, regulatory constraints, timing of commencing production from new wells, drilling rig availability, inability or delay in obtaining necessary government and third-party approvals and permits, unforeseen hazards such as weather conditions, acts of war or terrorist acts and the governmental or military response and other geological, operating and economic considerations. Other factors that could affect the development of Blocks 31 and 32 offshore Angola include presently known data concerning size and character of reservoirs, economic recoverability, future drilling success and production experience. Actual costs of storm-related repairs could be different than estimates as new information about the extent of damage inflicted by the storms becomes available. The foregoing factors (among others) could cause actual results to differ materially from those set forth in the forward-looking statements.
Refining, Marketing and Transportation
Our RM&T segment benefited from a higher refining and wholesale marketing margin in the third quarter due to the impact that Hurricanes Katrina and Rita had on refined product margins. Our Garyville, Louisiana and Texas City, Texas refineries returned to operation safely with a minimum amount of downtime. These refineries sustained minimal damage during these storms and were able to be brought back on-line within days after the hurricanes, allowing us to meet the demand for transportation fuels during this period of reduced supply. The repair cost associated with these hurricanes was not significant.
While spot market gasoline and distillate prices peaked at all time highs during the third quarter our RM&T prices and realizations were constrained by competitive pricing at the wholesale and retail levels.
Refinery crude runs during the third quarter of 2005 averaged 979,600 bpd, with total throughput averaging 1,194,800 bpd. This record throughput was achieved despite the loss of approximately 40,000 bpd of refinery capacity due to the hurricanes. In addition to the temporary complete shut-down of the Garyville and Texas City refineries, we experienced minor reductions in throughputs at some of our Midwest refineries due to the temporary closure of crude oil pipelines originating in the U.S. Gulf Coast after Hurricane Katrina.
We expect our average crude oil throughput for the total year 2005 to exceed the crude oil throughput record set in 2004.
Speedway SuperAmerica LLC (SSA) realized increased same-store merchandise sales of approximately 11 percent when compared to the third quarter of 2004. In addition, SSA also increased its same store gasoline sales volume during the third quarter by approximately 5 percent compared to the same quarter last year.
Our $300 million, 26,000 bpd Detroit, Michigan refinery crude oil throughput expansion and Tier II low sulfur fuels project is in the final stages of completion. The refinery was shut down on September 29, 2005 to accommodate the installation and integration of key project components and other related work. The refinery is expected to restart in
19
mid-November 2005 with a total crude processing capacity of 100,000 bpd. The expansion also will enable the refinery to meet the Federal Tier II low-sulfur fuels regulations which become fully effective in 2006.
We plan to pursue an expansion of our 245,000 bpd Garyville, Louisiana, refinery. The project, estimated to cost approximately $2.2 billion, is expected to increase the refinerys crude throughput capacity by 180,000 bpd to 425,000 bpd, with completion possibly as early as the fourth quarter of 2009. The initial phase of the expansion will include front-end engineering and design (FEED) work that could lead to the start of construction in 2007. Anticipated project investments include the installation of a new crude distillation unit, hydrocracker, reformer, kerosene hydrotreater, delayed coker, additional sulfur recovery capacity and other infrastructure investments. The new facilities will incorporate the latest safety and environmental control technologies. The proposed refinery configuration also will be designed to provide maximum feedstock flexibility, enabling us to process more heavy sour crude oils.
The above discussion includes forward-looking statements with respect to refinery throughputs, the Detroit capital project and the planned expansion of the Garyville refinery. Some factors that could potentially cause the actual results from the Detroit construction project to be different than expected include availability of materials and labor, unforeseen hazards such as weather conditions, and other risks customarily associated with construction projects. Some factors that could affect refinery throughputs include unexpected downtime due to operating problems, weather conditions, and labor issues. Some factors that could affect the Garyville expansion include satisfactory results of the FEED work, Marathon board and necessary regulatory approvals, crude oil supply and transportation logistics, necessary permits, a continued favorable investment climate, availability of materials and labor, unforeseen hazards such as weather conditions, and other risks customarily associated with construction projects. These factors (among others) could cause actual results to differ materially from those set forth in the forward-looking statements.
Integrated Gas
Our Equatorial Guinea LNG train 1 project made continued progress during the quarter and remains on-track to begin first shipment of LNG in 2007. The project was 58 percent complete on an engineering, procurement and construction basis and expenditures totaled $1 billion of the total gross estimated project cost of $1.4 billion as of September 30, 2005. Also, the Equatorial Guinea LNG project partners continue to explore the feasibility of adding a second LNG train in an effort to create a regional gas hub that would commercialize stranded gas from various sources in the surrounding Gulf of Guinea region.
We sold minority interests totaling 15 percent in EGHoldings and recorded a gain of $23 million. Following the closing of the transaction on July 25, 2005, we now hold a 60 percent interest in this consolidated subsidiary.
The above discussion contains forward-looking statements with respect to the estimated construction cost and startup dates of a LNG liquefaction plant and related facilities and the possible expansion thereof. Factors that could affect the estimated construction cost and startup dates of the LNG liquefaction plant and related facilities include, without limitation, unforeseen problems arising from construction, inability or delay in obtaining necessary government and third-party approvals, unanticipated changes in market demand or supply, environmental issues, availability or construction of sufficient LNG vessels, and unforeseen hazards such as weather conditions. In addition to these factors, other factors that could affect the possible expansion of the current LNG project and the development of additional LNG capacity through additional projects include partner approvals, access to sufficient gas volumes through exploration or commercial negotiations with other resource owners and access to sufficient regasification capacity. The foregoing factors (among others) could cause actual results to differ materially from those set forth in the forward-looking statements.
20
Results of Operations
Revenues for the third quarter and first nine months of 2005 and 2004 are summarized in the following table:
|
|
Third Quarter Ended |
|
Nine Months Ended |
|
||||||||
(In millions) |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
||||
E&P |
|
$ |
1,507 |
|
$ |
1,211 |
|
$ |
4,438 |
|
$ |
3,691 |
|
RM&T |
|
15,460 |
|
10,899 |
|
41,139 |
|
31,114 |
|
||||
IG |
|
517 |
|
447 |
|
1,440 |
|
1,290 |
|
||||
Segment revenues |
|
17,484 |
|
12,557 |
|
47,017 |
|
36,095 |
|
||||
Elimination of intersegment revenues |
|
(228 |
) |
(179 |
) |
(586 |
) |
(470 |
) |
||||
Loss on long-term U.K. gas contracts |
|
(82 |
) |
(129 |
) |
(306 |
) |
(210 |
) |
||||
Total revenues |
|
$ |
17,174 |
|
$ |
12,249 |
|
$ |
46,125 |
|
$ |
35,415 |
|
Items included in both revenues and costs and expenses: |
|
|
|
|
|
|
|
|
|
||||
Consumer excise taxes on petroleum products and merchandise |
|
$ |
1,217 |
|
$ |
1,137 |
|
$ |
3,511 |
|
$ |
3,327 |
|
|
|
|
|
|
|
|
|
|
|
||||
Matching crude oil, gas and refined product buy/sell transactions settled in cash: |
|
|
|
|
|
|
|
|
|
||||
E&P |
|
$ |
30 |
|
$ |
45 |
|
$ |
100 |
|
$ |
127 |
|
RM&T |
|
3,403 |
|
2,218 |
|
9,707 |
|
6,587 |
|
||||
Total buy/sell transactions |
|
$ |
3,433 |
|
$ |
2,263 |
|
$ |
9,807 |
|
$ |
6,714 |
|
E&P segment revenues increased by $296 million in the third quarter of 2005 from the comparable prior-year period. For the first nine months of 2005, revenues increased by $747 million from the prior-year period. These increases were primarily due to higher worldwide liquid hydrocarbon and natural gas prices and international liquid hydrocarbon sales volumes partially offset by lower domestic natural gas and liquid hydrocarbon sales volumes. Derivative losses totaled $9 million and $11 million in the third quarter and the first nine months of 2005, compared to losses of $75 million and $128 million in the third quarter and first nine months of 2004. Matching buy/sell transactions decreased by $15 million and $27 million in the third quarter and first nine months of 2005 from the comparable prior-year periods due to decreased crude oil buy/sell transactions, partially offset by higher domestic liquid hydrocarbon prices.
Excluded from the E&P segment revenues were losses of $82 million and $306 million for the third quarter and the first nine months of 2005 and losses of $129 million and $210 million for the third quarter and the first nine months of 2004 on long-term gas contracts in the United Kingdom that are accounted for as derivative instruments.
RM&T segment revenues increased by $4.561 billion in the third quarter of 2005 from the comparable prior-year period. For the first nine months of 2005, revenues increased by $10.025 billion from the prior-year period. The increases primarily reflected higher refined product and crude oil prices and increased refined product sales volumes, partially offset by decreased crude oil sales volumes. Matching buy/sell transaction revenues increased by $1.185 billion and $3.120 billion in the third quarter and first nine months of 2005 from the comparable prior-year periods primarily due to increased crude oil prices and volumes and increased refined product prices, partially offset by decreased refined product sales volumes.
IG segment revenues increased by $70 million in the third quarter of 2005 from the comparable prior-year period. For the first nine months of 2005, revenues increased by $150 million from the comparable prior-year period. These increases primarily reflected higher natural gas marketing prices. Derivative losses totaled $13 million and $9 million in the third quarter and the first nine months of 2005, compared to gains of $4 million and $14 million in the third quarter and first nine months of 2004.
For additional information on segment results, see Results of Operations by Segment on page 23.
Cost of revenues for the third quarter of 2005 increased by $3.134 billion from the comparable prior-year period. For the first nine months of 2005, cost of revenues increased by $6.114 billion from the comparable prior-year period. The increases in the RM&T segment primarily reflected higher acquisition costs for crude oil, other refinery charge and blend stocks and refined products and higher manufacturing expenses. This was partially offset by decreases in E&P as a result of lower crude oil marketing activity.
21
Purchases related to matching buy/sell transactions for the third quarter and first nine months of 2005 increased by $841 million and $2.724 billion from the comparable prior-year periods. The increases are primarily due to increased crude oil and refined product prices and increased crude oil purchase volumes, partially offset by decreased refined product purchase volumes. Differences between revenues from matching buy/sell transactions and purchases related to matching buy/sell transactions for the third quarter and first nine months of 2005 are primarily due to timing differences between the delivery and receipt of certain matching transaction volumes. There is no effect on income as a result these timing differences.
Selling, general and administrative expenses for the third quarter and the first nine months of 2005 increased by $64 million and $90 million from the comparable prior-year periods. The increase in the third quarter of 2005 was primarily due to increased stock-based compensation expense, employee benefit expenses and other employee related costs as well as contributions to hurricane relief efforts. The increase in the first nine months of 2005 was primarily a result of increased stock-based compensation expense partially offset by prior year severance and pension plan curtailment charges and start-up costs related to EGHoldings.
Exploration expenses for the third quarter and the first nine months of 2005 increased by $18 million and $27 million, compared to the same periods in 2004. During the quarter ended September 30, 2005, $22 million of exploratory well costs related to the Annapolis project offshore Nova Scotia were written off. Sufficient progress toward an economically viable project had not been made since completion of drilling in this prospect in the third quarter of 2004. The subsea wellhead remains in place and could be tied back into a development in the future. We continue to evaluate further drilling in this area.
Net interest and other financing costs for the third quarter and the first nine months of 2005 decreased by $8 million and $30 million, compared to the same periods in 2004. The decrease in the third quarter is primarily due to increased capitalized interest partially offset by a decrease in interest income. The decrease in the first nine months of 2005 is primarily a result of increased interest income on investments and capitalized interest, partially offset by increased interest on potential tax deficiencies and higher foreign exchange losses.
Minority interest in income of MPC decreased $148 million and $1 million in the third quarter and the first nine months of 2005 from the comparable prior-year periods due to the completion of the acquisition of Ashlands 38 percent interest in MPC on June 30, 2005.
Provision for income taxes in the third quarter and the first nine months of 2005 increased by $336 million and $492 million from the comparable prior-year periods primarily due to increases of $884 million and $1.431 billion in income before income taxes.
In the first quarter of 2005, the state of Kentucky enacted legislation which causes limited liability companies to be subject to Kentuckys corporation income tax. Our provision for income taxes for the first nine months of 2005 includes $13 million related to the effects of this Kentucky income tax on deferred tax assets and liabilities as of January 1, 2005. The unfavorable effect on net income (after minority interest) was $6 million. In the second quarter of 2005, the state of Ohio enacted legislation which phases out Ohios income-based franchise taxes over a five-year period. Our provision for income taxes in the first nine months of 2005 includes a $15 million benefit related to the reversal of deferred income taxes as a result of this change in tax law. The state of Ohio replaced the income-based franchise tax with a commercial activity tax based on gross receipts which will be phased in over five years. The commercial activity tax will be reported in costs and expenses.
The effective tax rate for the first nine months of 2005 was 36.2 percent compared to 38.2 percent for the comparable period in 2004. The decrease in the rate is primarily related to the effects of foreign operations and the legislation discussed above.
Net income for the third quarter and the first nine months of 2005 increased by $548 million and $935 million from the comparable prior-year periods, primarily reflecting the elimination of the minority interest in our downstream business and the factors discussed above.
22
Results of Operations by Segment
Income from operations for the third quarter and the first nine months of 2005 and 2004 is summarized in the following table:
|
|
Third Quarter Ended |
|
Nine Months Ended |
|
||||||||
(In millions) |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
||||
E&P |
|
|
|
|
|
|
|
|
|
||||
Domestic |
|
$ |
397 |
|
$ |
244 |
|
$ |
1,096 |
|
$ |
835 |
|
International |
|
230 |
|
107 |
|
862 |
|
418 |
|
||||
E&P segment income |
|
627 |
|
351 |
|
1,958 |
|
1,253 |
|
||||
RM&T |
|
814 |
|
391 |
|
1,847 |
|
1,017 |
|
||||
IG |
|
(6 |
) |
18 |
|
12 |
|
25 |
|
||||
Segment income |
|
1,435 |
|
760 |
|
3,817 |
|
2,295 |
|
||||
Items not allocated to segments: |
|
|
|
|
|
|
|
|
|
||||
Administrative expenses |
|
(108 |
) |
(90 |
) |
(284 |
) |
(238 |
) |
||||
Loss on long-term U.K. gas contracts |
|
(82 |
) |
(129 |
) |
(306 |
) |
(210 |
) |
||||
Gain on ownership change in MPC |
|
|
|
1 |
|
|
|
2 |
|
||||
Gain on sale of minority interests in EGHoldings |
|
23 |
|
|
|
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