Marathon Oil (MRO)

1. Summary of Principal Accounting Policies

Marathon is engaged in worldwide exploration and production of crude oil and natural gas; domestic refining, marketing and transportation of crude oil and petroleum products primarily through its 62 percent owned consolidated subsidiary Marathon Ashland Petroleum LLC (MAP); and integrated gas.

Principles applied in consolidation  –  These consolidated financial statements include the accounts of the businesses comprising Marathon.

        The assets and liabilities of MAP are consolidated in these financial statements and minority interest representing 38 percent of the carrying value of the net assets of MAP has been recognized. Under certain circumstances, the MAP Limited Liability Company Agreement requires unanimous approval of certain matters brought to the MAP Board of Managers. Marathon does not believe that the rights of the minority shareholder of MAP are substantive because the likelihood of those rights being triggered is remote.

        Investments in variable interest entities ("VIE") in which Marathon is the primary beneficiary are consolidated. Equatorial Guinea LNG Holdings Limited ("EGHoldings"), in which Marathon holds a 75 percent interest and Compania Nacional de Petroleos de Guinea Ecuatorial ("GEPetrol") holds a 25 percent interest, is a VIE and Marathon is its primary beneficiary. EGHoldings was formed for the purpose of constructing and operating a liquefied natural gas ("LNG") plant, and as of December 31, 2004, total expenditures of $551 million, including $524 million of capital expenditures, related to the LNG project have been incurred.

        Investments in unincorporated oil and gas joint ventures and undivided interests in certain pipelines, gas processing plants and LNG tankers are consolidated on a pro rata basis.

        Investments in entities over which Marathon has significant influence, but not control, are accounted for using the equity method of accounting and are carried at Marathon's share of net assets plus loans and advances. Differences in the basis of the investment and the separate net asset value of the investee, if any, are amortized into income in accordance with the remaining useful life of the underlying assets.

        Investments in companies whose stock is publicly traded are carried at market value. The difference between the cost of these investments and market value is recorded in other comprehensive income (net of tax). Investments in companies whose stock has no readily determinable fair value are carried at cost.

        Income from equity method investments represents Marathon's proportionate share of income from equity method investments. Other income includes dividend income from other investments. Dividend income is recognized when dividend payments are received.

        Gains or losses from a change in ownership of a consolidated subsidiary or an unconsolidated investee are recognized in the period of change.

Use of estimates  –  The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at year-end and the reported amounts of revenues and expenses during the year. Items subject to such estimates and assumptions include the carrying value of property, plant and equipment, goodwill, intangibles, equity method investments and non-exchange traded derivative contracts; valuation allowances for receivables, inventories and deferred income tax assets; environmental remediation liabilities; liabilities for potential tax deficiencies and potential litigation claims and settlements; assets and obligations related to employee benefits; and the classification of gains or losses on cash flow hedges of forecasted transactions. Actual results could differ from the estimates and assumptions used.

Income per common share  –  Basic net income per share is calculated based on the weighted average number of common shares outstanding. Diluted net income per share assumes exercise of stock options and warrants and conversion of convertible debt and preferred securities, provided the effect is not antidilutive.

Segment information  –  Marathon's operations consist of three reportable operating segments:

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Exploration and Production ("E&P") – explores for and produces crude oil and natural gas on a worldwide basis;

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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 through MAP; and

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Integrated Gas ("IG") – markets and transports natural gas and products manufactured from natural gas, such as LNG and methanol, on a worldwide basis.

        Management has determined that these are its operating segments because these are the components of Marathon (i) that engage in business activities from which revenues are earned and expenses are incurred, (ii) whose operating results are regularly reviewed by Marathon's chief operating decision maker to make decisions about resources to be allocated and assess performance and (iii) for which discrete financial information is available. The chief operating decision maker ("CODM") is responsible for allocating resources to and assessing performance of Marathon's operating segments. Information on assets by segment is not provided because it is not reviewed by the CODM. The CODM is also