Marathon Oil (MRO)

Ken Matheny  — Marathon Oil Corporation - VP of IR and Public Affairs

Thank you very much, Patty, and I too would like to welcome everyone to the third quarter 2005 earnings webcast and teleconference for Marathon Oil Corporation. Let me begin by reminding you that if you are listening via telephone, you can find the synchronized slides that accompany this call on our website at www.Marathon.com.

With me on the call today are Clarence Cazalot, President and CEO; Janet Clark, Senior Vice President and Chief Financial Officer; Phil Behrman, Senior Vice President of Worldwide Exploration; Steve Hinchman, Senior Vice President of Worldwide Production; and Gary Heminger, Executive Vice President and President of our Refining, Marketing and Transportation Organization; and Garry Peiffer, Senior Vice President of Finance and Commercial Services for our downstream organization. Approximately two hours after this call ends, these remarks and the slides will be placed on the Investor Relations portion of our website. It will remain on the site for one year.

Slide No. 2 contains the forward-looking statement and other information related to this presentation. Our remarks and answers to questions today will contain certain forward-looking statements that are 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 31st, 2004, and in subsequent Form 10-K and 8-K filings 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.

As shown on Slide No. 3, net income for the third quarter was $770 million, and included two special items totaling a negative $27 million after tax, resulting in net income adjusted for special items of $797 million. The two after-tax special items were a negative $48 million mark-to-market loss on our two long-term UK gas contracts, and a $21 million gain on the sale of a 15% interest in Equatorial Guinea LNG Holdings Limited.

Net income adjusted for special items of $797 million was $42 million more than the second quarter of this year, and 168% greater than the third quarter of last year. The sequential improvement as well as the improvement year-over-year was largely a result of the elimination of the minority interest in our downstream business, strong refining and marketing margins, along with record refinery throughput, and increased liquids and natural gas prices somewhat offset by lower upstream production sales. A reconciliation of net income adjusted for special items to net income is included on Slide 3. You can refer to Slide 2 for a discussion of the use of this non-GAAP measure.

Moving to Slide No. 4, net income adjusted for special items on a per share basis, equaled that of the second quarter at $2.16 per diluted share, but I will note that approximately 19 million more shares were outstanding this quarter. The additional shares outstanding were largely a result of the downstream minority interest acquisition we closed on June 30th.

As shown on Slide No. 5, third quarter segment income was $1.435 billion, $175 million less than the second quarter, but almost double that of the same quarter last year. A major factor in the decrease from the second quarter was lower upstream sales volumes, partially offset by higher liquid and natural gas prices in the upstream segment. Worldwide upstream sales volumes were down, largely as a result of liquid hydrocarbon underliftings in the United Kingdom, Equatorial Guinea and Gabon, and the four storms, two of which were major hurricanes that hit the Gulf of Mexico during the third quarter.

Upstream segment income of $627 million is shown on Slide No. 6. It was down $149 million quarter-over-quarter. Domestic upstream segment income of $397 million as shown on Slide No. 7, was relatively flat for the second quarter. Domestic liquid realizations were up over $10 while natural gas was up a less robust $0.80. Again, production sold was adversely affected by the significant storm activity during the quarter in the Gulf of Mexico.