Exploration & Production | Quarterly / Earnings Reports | Second Quarter (2Q) Update
Marathon's U.S. Resource Plays Drive Growth in 2Q
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Marathon Oil Corporation reported second quarter of 2014 adjusted net income was $603 million, or $0.89 per diluted share, compared to adjusted net income in the second quarter of 2013 of $478 million, or $0.67 per diluted share.
During the quarter, Marathon Oil entered into an agreement to sell its Norway business, which is now reflected as discontinued operations. Adjusted income from continuing operations, which excludes Norway and Angola, for the second quarter of 2014 was $423 million, or $0.62 per diluted share, compared to adjusted income from continuing operations in the second quarter of 2013 of $293 million, or $0.41 per diluted share.
For the second quarter of 2014, net income was $540 million, or $0.80 per diluted share, compared to net income in the second quarter of 2013 of $426 million, or $0.60 per diluted share. Income from continuing operations, which excludes Norway and Angola, for the second quarter of 2014 was $360 million, or $0.53 per diluted share, compared to income from continuing operations in the second quarter of 2013 of $241 million, or $0.34 per diluted share.
Key Quarterly Highlights:
- Adjusted net income per diluted share increased to $0.89, up 33% from the year-ago quarter
- Adjusted income from continuing operations per diluted share was $0.62, an increase of 51% from the year-ago quarter - Three high-quality U.S. resource plays averaged net production of 170,000 boed, up 29% from the year-ago quarter, with liquids production up more than 30%. On track for greater than 30% production growth year-over-year as supported by:
- Pace of Eagle Ford wells to sales up 55% quarter-on-quarter, with 76 gross operated wells to sales
- Enhanced completion design in Eagle Ford delivering strong early results; wells with 180-day cumulative production yielding on average 25% improvement relative to modeled type curves
- Successful delineation of Austin Chalk/Upper Eagle Ford for co-development continues, with initial 15,500 net acres now delineated; three Austin Chalk/Upper Eagle Ford wells to sales during the quarter with nine additional wells being drilled, completed or awaiting first production
- Bakken wells to sales up 73% quarter-on-quarter, with 19 gross operated wells to sales
- Executed agreements to add approximately 30,000 net acres to Oklahoma resource position, increasing total acreage to more than 300,000 net acres
- Continued strong performance in SCOOP; one additional SCOOP XL well (extended-reach lateral of 7,000-10,000 feet) brought to sales, with 30-day IP rate of 2,000 boed - Recorded 98% average operational availability for Company-operated assets
- Reached definitive agreement to sell Norway business for total transaction value of $2.7 billion; expect to close in the fourth quarter
- Repurchased approximately 13 million common shares at a cost of $449 million, completing announced $1.5 billion buyback; $1.5 billion remaining on share repurchase authorization
- Increased quarterly dividend 11% to $0.21 per share
Lee M. Tillman, Marathon Oil's president and CEO, commented: "Continued strong production growth and crude oil and condensate price realizations across our U.S. resource plays helped Marathon Oil deliver another solid financial quarter. We've made significant progress on our three key business priorities for 2014: accelerated activity across the resource plays, portfolio optimization and increased share repurchases. As we look toward redeployment of proceeds from the Norway transaction, which is expected to close in the fourth quarter, organic growth will remain our first priority with the balance available for share repurchases and general corporate purposes. We will not deviate from our commitment to capital discipline and investing in opportunities that create long-term value for our shareholders.
"We have high confidence in Eagle Ford volumes growth as our well results continue to outperform modeled type curves and deliver strong economics. This quarter we brought 76 gross operated Eagle Ford wells to sales. We expect that momentum to carry forward, generating double-digit production growth quarter-on-quarter in the Eagle Ford for the remainder of 2014.
"We also had a strong second quarter in the Bakken, where production averaged 50,000 net barrels of oil equivalent per day, up 16 percent compared to the previous quarter. During the second half of 2014, greater than 50 percent of our planned Bakken wells will test enhanced completion designs. In the Oklahoma resource basins, we continue to delineate our strong acreage position and, with agreements executed in the second quarter, have grown our overall position to more than 300,000 net acres."
North America E&P
The North America E&P segment reported income of $302 million in the second quarter of 2014, compared to income of $221 million in the second quarter of 2013. The increase is primarily due to higher liquid hydrocarbon net sales volumes from the U.S. resource plays and higher commodity price realizations, partially offset by higher production expenses and depreciation, depletion and amortization (DD&A) associated with the higher volumes.
Marathon updated each of its U.S. onshore E&P activities, which can be accessed below:
Marathon's Enhanced Eagle Ford Completions Paying Off
Marathon Brings 19 Bakken Wells to Sales; Cuts Spud-to-TD Time
Marathon Bets on Diverse Oklahoma Strategy; Targets Multiple Horizons
Gulf of Mexico
A well on the Key Largo prospect, located on Walker Ridge Block 578, is anticipated to spud in the third quarter as the first well with a new-build deepwater drillship. Marathon Oil is operator and holds a 60 percent working interest in the prospect.
The second appraisal well on the outside-operated Shenandoah prospect was spud in late May and is still drilling. The well is located on Walker Ridge Block 52, in which Marathon Oil holds a 10 percent working interest.
An exploration well is anticipated to spud in the second half of 2014 on the Perseus prospect in Desoto Canyon Block 231. Marathon Oil holds a 30 percent non-operated working interest.
International E&P
The International E&P segment reported income of $160 million in the second quarter of 2014, compared to segment income of $170 million in the second quarter of 2013. The decrease is primarily a result of lower net sales volumes in Libya and lower commodity price realizations, partially offset by reduced taxes associated with the lower sales volumes. Exploration expense in the second quarter of 2014 included dry well costs for the Shimela-1 and Gardim-1 exploratory wells in Ethiopia and the Mangesh exploratory well in Kurdistan.
Equitorial Guinea
Production available for sale averaged 106,000 net boed in the second quarter of 2014, compared to 101,000 net boed in the second quarter of 2013. Volumes were impacted by a planned turnaround at the EG LNG facility in April 2013.
U.K.
Production available for sale averaged 14,000 net boed in the second quarter of 2014 compared to 22,000 net boed in the second quarter of 2013 primarily as a result of reliability issues at the outside-operated Foinaven field, as well as natural decline within the Brae fields and planned and unplanned maintenance activities that resulted in lower overall operating availability. Planned maintenance activities on the outside-operated Forties Pipeline System are expected to impact Brae production in the third quarter of 2014.
Kurdistan Region of Iraq
In June, Marathon Oil reached total depth on the Jisik-1 exploration well on the Company-operated Harir Block. Testing is under way. Following the successful 2013 Mirawa-1 discovery, the Mirawa-2 appraisal well is expected to spud in the third quarter of 2014. Marathon Oil holds a 45 percent working interest in the Harir Block.
On the outside-operated Sarsang block, the East Swara Tika-1 exploration well reached a total depth of approximately 13,000 feet in June and testing is under way. The co-venturers declared the Swara Tika discovery commercial in May and filed a field development plan in June. Marathon Oil holds a 20 percent working interest in the Sarsang Block.
On the outside-operated Atrush Block, the Chiya Khere-5 development well (formerly Atrush-5) was spud in May and reached a total depth of approximately 6,900 feet in late June, ahead of schedule and under budget. The well will be tested in early 2015 prior to final completion and tie-in to the phase one production facility as part of the previously approved Atrush development plan. Marathon Oil holds a 15 percent working interest in the Atrush Block with first oil expected in 2015.
Kenya
The Sala-1 exploration well, which was spud in February 2014 on the eastern side of Block 9, made a natural gas discovery during the second quarter. The well was drilled to a total depth of approximately 10,000 feet and analysis indicated three zones of interest over a 3,280-foot gross interval which were subsequently drill-stem tested. The Sala-2 appraisal well spud in the third quarter of 2014. Marathon Oil holds a 50 percent non-operated working interest in Block 9 with the option to operate any commercial development.
Gabon
In late October 2013, the Company was the high bidder as operator on the G13 deepwater block in the pre-salt play offshore Gabon. Negotiations toward a final production sharing contract are ongoing.
Sales and Production Volumes
Total Company sales volumes from continuing operations (excluding Libya) during the second quarter of 2014 averaged 394,000 net barrels of oil equivalent per day (boed) compared to 361,000 net boed for the second quarter of 2013.
The difference between production volumes available for sale and recorded sales for exploration and production (E&P) volumes was primarily due to the timing of international liftings.
Second quarter of 2014 production available for sale from continuing operations (excluding Libya) averaged 383,000 net boed, compared to the second quarter of 2013 average of 361,000 net boed. The increase in the second quarter of 2014 was driven by North America E&P's continued growth in the U.S. resource plays, partially offset by the shut-in of Powder River Basin operations and Gulf of Mexico decline.
International E&P production available for sale (excluding Libya and discontinued operations) for the second quarter of 2014 was lower compared to the second quarter of 2013 primarily as a result of significant unplanned downtime at the non-operated Foinaven field, natural decline within the Brae fields and planned and unplanned maintenance activities that lowered operational availability across the Brae complex, partially offset by increased volumes in Equatorial Guinea.
Oil Sands Mining (OSM) production available for sale for the second quarter of 2014 was essentially flat compared to the second quarter of 2013. Volumes in the second quarter of 2014 were slightly below previous guidance as a result of reliability issues at the mine.
Production available for sale for the Norway business averaged 71,000 net boed for the second quarter of 2014 compared to 85,000 net boed in the second quarter of 2013. The decrease was primarily the result of water breakthrough, as anticipated, at Volund, as well as natural decline in the remaining fields. Planned maintenance and system upgrades on the Alvheim floating production, storage and offloading vessel (FPSO) in the third quarter will impact production.
Libya's National Oil Corp. in early July rescinded force majeure associated with the third-party labor strikes at the Es Sider oil terminal. However, liftings have yet to resume. Marathon Oil has not included production from Libya in forecasts because of the uncertainty around future production levels.
As a result of the agreement to sell the Company's Norway business, which is now reflected as discontinued operations, Marathon Oil has excluded Norway production from its third quarter and revised full-year 2014 production guidance.
For the third quarter of 2014, the Company continues to expect growth in North America E&P production available for sale, driven by double-digit sequential quarter growth from the aggregate U.S. resource plays. International E&P production available for sale (excluding Libya) is expected to remain essentially flat in the third quarter, reflecting higher anticipated uptime at Foinaven, offset by reductions at Brae due to planned maintenance activities at the outside-operated Forties Pipeline System. Third quarter OSM production is expected to increase from second quarter volumes benefiting from higher beginning bitumen inventories and full operational availability of the upgrader.
As reflected in the table above, revised full-year guidance for production available for sale from the combined North America E&P and International E&P segments (excluding Libya) has been updated to 345,000 to 360,000 net boed. This guidance reflects a greater than 30 percent year-over-year growth rate in the U.S. resource plays. Full-year 2014 production guidance for the OSM segment has been lowered to 37,000 to 42,000 net barrels per day (bbld) of synthetic crude oil reflecting the first half of the year actual performance.
Segment Results
Total segment income was $517 million in the second quarter of 2014, compared to $411 million in the second quarter of 2013.
Oil Sands Mining
The OSM segment reported income of $55 million for the second quarter of 2014, compared to $20 million in the second quarter of 2013. The increase was primarily a result of improved price realizations and a planned turnaround at the non-operated Athabasca Oil Sands Project during the year-ago quarter.
Corporate and Other
In the second quarter of 2014, Marathon Oil repurchased approximately 13 million common shares at a cost of $449 million under the share repurchase program. The most-recent buyback completed the announced $1.5 billion of share repurchases. The Company now has $1.5 billion remaining on its share repurchase authorization.
In June, Marathon Oil announced that it had entered into a definitive agreement to sell its Norway business for a total transaction value of $2.7 billion, resulting in net proceeds of $2.1 billion at closing, which is expected in the fourth quarter. The effective date of the transaction is Jan. 1, 2014.
Discontinued operations in the second quarter of 2014 included a benefit of $26 million related to a decrease in the valuation allowance on U.S. foreign tax credits on Norway operations.
Special Items
In the second quarter of 2014, Marathon Oil sold non-core acreage located in the far northwest portion of the Williston Basin for cash proceeds of $90 million, which resulted in an after-tax loss of $58 million (pre-tax $91 million).
Marathon Oil recorded an after-tax settlement charge of $5 million ($8 million pre-tax) in the second quarter of 2014 in connection with the Company's U.S. pension plans.