Marathon Oil Management Discusses Q1 2012 Results - Earnings Call Transcript

Marathon Oil (MRO)

Q1 2012 Earnings Call

May 02, 2012 2:00 pm ET

Executives

Howard J. Thill - Vice President of Investor Relations & Public Affairs

David E. Roberts - Chief Operating officer and Executive Vice President

Clarence P. Cazalot - Chairman, Chief Executive officer, President and Member of Proxy Committee

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

Analysts

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

Arjun N. Murti - Goldman Sachs Group Inc., Research Division

Paul Sankey - Deutsche Bank AG, Research Division

Paul Y. Cheng - Barclays Capital, Research Division

Rakesh Advani - Crédit Suisse AG, Research Division

Unknown Analyst

Pavel Molchanov - Raymond James & Associates, Inc., Research Division

Faisel Khan - Citigroup Inc, Research Division

John P. Herrlin - Societe Generale Cross Asset Research

Presentation

Howard J. Thill

Welcome to Marathon Oil Corporation's First Quarter 2012 Earnings Webcast and Teleconference. The synchronized slide that accompany this call can be found on our website, marathonoil.com. On the call today are Clarence Cazalot, Chairman President and CEO; Janet Clark, Executive Vice President and CFO; and Dave Roberts, Executive Vice President and COO.

Slide 2 contains the forward-looking statement and other information related to 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 Private 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, 2011, and subsequent 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 for this presentation, there is a reconciliation of quarterly net income to adjusted net income for 2011 and 2012, balance sheet and cash flow information, second quarter and full year 2012 operating estimates and other data that you may find useful.

Moving to Slide 3, our first quarter 2012 adjusted net income of $478 million was a 13% decrease over the fourth quarter 2011, largely a result of higher income taxes, as I'll explain on the next slide.

As shown on Slide 4, earnings before tax for the international portion of our E&P segment increased $277 million, while the domestic portion of that segment decreased $30 million. With the Oil Sands Mining and Integrated Gas segments decreasing quarter-over-quarter as well, $26 million and $27 million, respectively.

To help us explain the change in our tax position from the fourth quarter to the first quarter, and given our present inability to predict activity in Libya with confidence, we've broken the $281 million increase in our consolidated tax expense into 2 categories. One for those income taxes related to the first quarter resumption sales from Libya and one for all other changes in income taxes.

As we often point out, our revenue from Libya is taxed at 93.5%, which resulted in a first quarter tax charge of $203 million. The $78 million increase in income taxes not related to our Libya operations is made up of $125 million for the E&P segment, partially offset by reductions in other segments and a corporate tax benefit for unallocated items.

Approximately 40% of the $125 million increase in income taxes for the E&P segment was a result of a shift to an excess foreign tax credit position. As you may recall, we pointed out this change in the third quarter of last year, as we increased our international price and production forecast for future years. And we had this built in to our previous income tax forecast for the full year 2012.

The other 60% of the change is largely a result of our revised expectation for an increase in our higher tax international jurisdiction as a percentage of 2012 pretax earnings. With this revised expectation in sales mix, we are now projecting an overall effective income tax rate for the full year 2012, excluding Libya, of between 60% and 65%. Remember, the actual effective income tax rate can vary quarter-to-quarter based on the expected annual level of sales by jurisdiction, as well as any discrete items.

On Slide 5, we've included the comparison of the total Upstream Q1 liquid hydrocarbon sales volumes, with the estimated liquid hydrocarbon sales volumes for Q2, as an aid in modeling the company's earnings with both periods excluding Libya. The timing of listings can vary based upon nominations yet to be finalized, which can affect the estimated sales volumes, as well as the percentage contributions.

As shown on Slide 6, the first quarter was a good operating quarter for the E&P segment, with higher sales volume and better prices compared to the fourth quarter. However, these increases were more than offset by higher segment income tax expense, as I just discussed, and higher DD&A and other expenses on an absolute basis because of increased activity. On a boe basis, E&P costs were essentially flat quarter-over-quarter.

Slide 7 shows that in the U.S., we increased sales volumes quarter-over-quarter reflecting our ongoing development programs, primarily in the Eagle Ford, Bakken and Woodford shale plays. Our U.S. price realizations were negatively impacted by lower domestic natural gas prices and by dislocations in the crude markets, creating wider differentials and lower crude realizations in the Bakken and across the Rocky Mountain region.

After the late January and February widening in differentials, they have returned to more normal levels, narrowing substantially in March and April. On an absolute basis, DD&A and operating costs were higher in the U.S., reflecting our increased activity in the resource plays.

Read the rest of this transcript for free on seekingalpha.com

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