Marathon Oil Q1 2010 Earnings Call Transcript

Marathon Oil Q1 2010 Earnings Call Transcript
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Marathon Oil (MRO)

Q1 2010 Earnings Call

May 04, 2010 4:00 pm ET

Executives

Janet Clark - Chief Financial Officer, Executive Vice President and Member of Proxy Committee

Gary Heminger - Executive Vice President of Downstream

David Roberts - Executive Vice President of Upstream

Howard Thill - Vice President of Investor Relations & Public Affairs

Analysts

Blake Fernandez - Howard Weil

Pavel Molchanov - Raymond James & Associates

Mark Gilman - The Benchmark Company, LLC

Paul Cheng - Barclays Capital

Faisel Khan - Citigroup Inc

Douglas Leggate - BofA Merrill Lynch

Paul Sankey - Deutsche Bank AG

Presentation

Operator

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Good day and welcome to Marathon Oil's 2010 First Quarter Earnings Conference Call. [Operator Instructions] For opening remarks and introductions, I'd like to turn the call over to Mr. Howard Thill, Vice President of Investor Relations and Public Affairs. Please go ahead, sir.

Howard Thill

Thanks, James. I'd also like to welcome everyone to Marathon Oil Corporation's First Quarter 2010 Earnings Webcast and Teleconference. The synchronized slides that accompany this call can be found on our website at marathon.com. On the call today are Janet Clark, Executive Vice President and CFO; Gary Heminger, Executive Vice President, Downstream; Dave Roberts, Executive Vice President, Upstream; and Garry Peiffer, Senior Vice President of Finance and Commercial Services, Downstream.

Slide 2 contains the discussion of forward-looking statements and other information included in this presentation. Our remarks and answers to questions today will contain forward-looking statements subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. In accordance with Safe Harbor Provisions of the Privacy and Securities Litigation Reform Act of 1995, Marathon Oil Corporation has included in its annual report on Form 10-K for the year ended December 31, 2009, and subsequent Forms 8-K, cautionary language identifying important factors but not necessarily all factors that could cause future outcomes to differ materially from those set forth in the forward-looking statements.

Please note that in the appendix of this presentation is a reconciliation of quarterly net income to adjusted net income for 2009 and the first quarter of 2010, preliminary balance sheet information, second quarter and full year 2010 operating estimates and other data you may find useful.

Slide 3 shows the 38% increase in adjusted net income compared to the fourth quarter 2009 and 31% increase from the first quarter 2009, as well as its details, by quarter, since 2007.

Slide 4 shows the components of the 38% increase in adjusted net income compared to the fourth quarter of 2009. The increase from the fourth quarter was largely driven by higher commodity prices and lower income taxes, partially offset by lower refining and wholesale marketing gross margin and lower E&P production sold. Pretax earnings decreased in the RM&T, Oil Sands Mining and E&P segments. Income taxes decreased as a result of the lower pretax earnings and the adjustment for foreign currency re-measurement of deferred taxes. The fourth quarter included a $139 million loss on the re-measurement of deferred taxes denominated in foreign currency, while the just completed quarter saw a $33 million gain, netting to the $172 million FX swing shown on the waterfall chart. As explained on the February conference call, because we will make a one-time election to begin paying Canadian income tax in U.S. dollars, which is the largest portion of these fluctuations, the amount of FX on these Canadian balances was significantly reduced in the first quarter and will be eliminated after the second quarter. However, we will continue to have the potential for movements related to deferred tax balances other than Canada, but FX fluctuations should be significantly less than those experienced in the past because our deferred tax liabilities denominated in foreign currencies will be much smaller.

Slide 5 shows the 14% increase in E&P segment income from $439 million in the fourth quarter to $502 million in the first quarter. The largest impacts were the increase in liquid hydrocarbon and natural gas prices and lower income taxes, largely offset by reduced sales volumes as a result of an under lift in the UK, turnaround activity in Equatorial Guinea and our normal 6% to 8% per-annum production-decline rate.

Slide 6 shows our historical realizations and the $3.97 per BOE increase in our average realizations from $49.93 per BOE in the fourth quarter to $53.90 per BOE in the first quarter. Our liquid hydrocarbon realizations increased more than the NYMEX prompt WTI price, as about 60% of our global liquid hydrocarbon sales volumes are priced off of Brent, which outperformed WTI during the quarter.

Neither our E&P nor our Oil Sands Mining realizations include the gains and losses on our hedging position. Included in the E&P results were $51 million of net pretax gain on these E&P hedges, related to 65,000 bpd of crude-oil hedges, which all roll off at the end of June and $110 billion BTU per day, or approximately $110 million cubic feet per day, of natural gas hedges that run through the end of 2010. Complete details of our hedging positions are included in our 10-K.

Slide 7 shows the production. Volumes sold in the first quarter 2010 were down 13% compared to the fourth quarter of 2009 to 361,000 BOE per day, while production available for sale decreased 10% to 364,000 BOE per day, primarily driven by the planned turnaround in Equatorial Guinea. The difference in sales volumes and production available for sale was the result of an under lift for the quarter of approximately 220,000 BOE, again, primarily in the U.K.

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