Marathon Oil Management Discusses Q2 2012 Results - Earnings Call Transcript

Marathon Oil (MRO)

Q2 2012 Earnings Call

August 01, 2012 2:00 pm ET


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

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

Lance Robertson - Regional Vice President of The South Texas/Eagle Ford

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

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


Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

Edward Westlake - Crédit Suisse AG, Research Division

Evan Calio - Morgan Stanley, Research Division

Scott Hanold - RBC Capital Markets, LLC, Research Division

Guy A. Baber - Simmons & Company International, Research Division

Blake Fernandez - Howard Weil Incorporated, Research Division

Paul Y. Cheng - Barclays Capital, Research Division

Paul Sankey - Deutsche Bank AG, Research Division

John Malone - Global Hunter Securities, LLC, Research Division

Eliot Javanmardi - Capital One Southcoast, Inc., Research Division

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



Welcome to the Marathon Oil Corporation Second Quarter 2012 Earnings Conference Call. My name is Christine, and I will be your operator for today's conference. [Operator Instructions] Please note, today's conference is being recorded.

I will now turn the call over to Howard Thill, Vice President, Investor Relations and Public Affairs. Please go ahead, sir.

Howard J. Thill

Welcome to Marathon Oil Corporation's second quarter 2012 earnings webcast and teleconference. The synchronized slides that accompany this call can be found on our website, On the call today are: Clarence Cazalot, Chairman, President and CEO; Janet Clark, Executive Vice President and CFO; Dave Roberts, Executive Vice President and COO; and Lance Robertson, Regional Vice President, South Texas/Eagle Ford.

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 Forms 10-Q and 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 to this presentation, there is a reconciliation of quarterly net income to adjusted net income for 2011 and 2012, balance sheet and cash flow information, third quarter and full year 2012 operating estimates and other data that you may find useful.

Moving to Slide 3. Our second quarter 2012 adjusted net income of $416 million was a 13% decrease from the first quarter of 2012, largely a result of higher income taxes driven by a change in the mix of production, with higher sales volumes in Libya and lower U.S. pretax earnings. This decrease was partially offset by higher international pretax income.

As shown on Slide 4, earnings before tax from the international portion of our E&P segment increased $76 million, driven by higher sales in Libya, while the domestic portion of that segment decreased $62 million, largely a result of higher exploration expenses. Pretax income for the Oil Sands Mining and Integrated Gas segments each increased $13 million over the previous quarter. Again, the change in production and income mix led to higher overall income taxes.

On Slide 5, we've included a comparison of the total Upstream second quarter versus the first quarter liquid hydrocarbon sales volumes, excluding Libya. In the appendix to this presentation, you will find a similar slide comparing actual second quarter to projected third quarter sales volumes to help you in modeling the company's third quarter. Again, this slide excludes Libya because of the unpredictability of those volumes.

As shown on Slide 6, the second quarter was a good operating quarter for the E&P segment, with higher sales volumes compared to the first quarter. However, this increase was more than offset by lower prices, higher segment income tax expense and higher absolute cost, although on a BOE basis, costs were relatively flat quarter-to-quarter.

Moving to Slide 7. Our U.S. liquid hydrocarbon sales volumes increased while gas volumes decreased, netting to a positive volume variance quarter-to-quarter. Both domestic liquid hydrocarbon and natural gas realizations were lower in the second quarter. On an absolute basis, DD&A was lower owing to our anticipated Alaska disposition.

As shown on Slide 8, total U.S. E&P costs per BOE remained flat with the previous 4 quarters. Excluding exploration expenses, costs per BOE were down $3.80 quarter-over-quarter, with the previously mentioned decrease in DD&A, lower production taxes and reduced field level controllable costs.

Slide 9 graphically demonstrates the Lower 48 onshore production growth we have realized over the past few quarters, with the production from the first to second quarter up almost 7%. Excluding our pending Paloma acquisition, we expect to reach between 120,000 and 130,000 BOED in the fourth quarter 2012, a 60% to 70% increase since the third quarter of 2011. You will also see this growth is weighted to liquids, with the largest increase coming from oil and condensate, followed by an increase in NGL.

Slide 10 shows the positive pretax impact from the previously discussed higher international sales volumes, more than offset by lower liquid hydrocarbon price realizations, higher costs and higher taxes related to the mix issue previously discussed.

Slide 11 compares the international E&P cost structure by category over the past 6 quarters. Compared to the first quarter of 2012, field level controllable cost, DD&A and other costs increased in the second quarter, partially offset by a decrease in exploration expenses.

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