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Slide 1: MARATHON OIL CORPORATION REPORTS SECOND QUARTER 2002 RESULTS HOUSTON, July 25 – Marathon Oil Corporation (NYSE: MRO) today reported second-quarter 2002 net income, adjusted for special items primarily related to the early extinguishment of debt, of $193 million or $.62 per diluted share, compared to net income, adjusted for special items related to the separation of United States Steel Corporation, of $593 million or $1.92 per diluted share in the second quarter of 2001. Earnings Highlights Quarter ended June 30 (Dollars in millions except per diluted share data) Net income adjusted for special items Adjustments for special items (After-tax): Extraordinary loss from early extinguishment of debt Inventory market valuation reserve adjustment Items related to disposition of United States Steel Net income Net income applicable to Marathon Oil Corporation common stock Net income adjusted for special items - per diluted share Net income - per diluted share Revenues and other income * Excludes loss applicable to USX-U.S. Steel common stock in the quarter ended September 30, 2001. 2002 $193 (26) 1 --$168 $168 $.62 $.54 $8,127 2001 $593 ----(41) $552 $582 $1.92 $1.88 $9,168 Second Quarter 2002 Highlights • 2002 second quarter performance improved over first quarter • Strengthened core areas through: - increased net acreage in Powder River Basin properties - acquisition of additional Equatorial Guinea interests - acquisition of additional Norwegian production licenses • Appraisal drilling success on Neptune discovery in Gulf of Mexico “Marathon’s second quarter results, while significantly improved over the last quarter, were lower than the record earnings reported in the same period last year primarily due to lower natural gas prices, partially offset by increased liquid hydrocarbon production, and continuing tight refining and marketing margins,” said Marathon President and CEO Clarence P. Cazalot, Jr. 1
Slide 2: In the exploration and production (upstream) sector, Marathon’s second-quarter oil and gas production averaged 424,000 barrels of oil equivalent per day (boepd) and is on pace to meet the company’s estimated 2002 production of approximately 420,000 boepd. During the second quarter Marathon continued to strengthen its exploration and production portfolio through strategic acquisitions in core areas. In May, Marathon exchanged oil and gas properties in east Texas and north Louisiana for XTO Energy, Inc. coalbed methane assets in northern Wyoming and southern Montana. As a result, Marathon has added more than 400 billion cubic feet (bcf) of Powder River Basin risked resource, including some 110 bcf of proven reserves, while also leveraging economies of scale in this core area. In addition, Marathon significantly enhanced its gas transportation position in this region by acquiring an additional 125 million cubic feet per day (mmcf/d) of firm capacity on the Trailblazer pipeline, giving the company long-term access to mid-continent markets at competitive prices. Marathon also strengthened its Equatorial Guinea core area through the acquisition of Globex Energy, Inc. for $148 million in June. This acquisition added 35 million barrels of oil equivalent (boe) in proven reserves in Equatorial Guinea, as well as 3 million boe in proven reserves offshore Australia. It is estimated an additional 12 million boe of Equatorial Guinea proven reserves will be added upon partner and governmental approvals of condensate and liquefied petroleum gas (LPG) expansion projects, expected in the third quarter of this year. With the approval of these expansion projects, Marathon’s Equatorial Guinea proven reserves will total approximately 300 million boe. The estimated full-cycle finding and development cost of these reserves, including the LPG processing plant and its associated expansion, is approximately $4.20 per boe. In Norway, Marathon recently completed the acquisition of Norsk Hydro’s interest in Production Licenses (PL) 150 and 203 and was granted operatorship of PL 203, which is the company’s first operatorship on the Norwegian continental shelf. Following this transaction, Marathon has interests in nine Norwegian production licenses, with working interests ranging from 10 to 65 percent. The acquisition enhances Marathon’s establishment of this new core area and brings the company’s total Norwegian net risked resources to approximately 135 million boe, which the company expects to appraise and develop over the next few years. “The high quality assets we have acquired in the Powder River Basin, Equatorial Guinea and Norway enhance the value of our operations in these core areas by providing expanded opportunities to commercialize significant natural gas and oil resources,” said Cazalot. “Through the projects we have undertaken during the past 18 months, we are positioned to increase our proven reserves by approximately 40 percent from 2001 to 2004, which equates to an average 190-percent reserve replacement per year. We also anticipate increasing production from the estimated 420,000 boepd during 2002, to an approximate range of 430,000 to 435,000 boepd by 2004. This increase is through defined projects and excludes any future exploration success or business development activities.” 2
Slide 3: In the Gulf of Mexico, Marathon holds a 30-percent interest in the recently announced successful appraisal well on the Neptune deepwater discovery. The Neptune-3 well is located in Atwater Valley Block 617 in 6,140 feet of water. The well encountered 150 net feet of oil pay in two zones, and Marathon is encouraged by the improved reservoir and crude oil quality of the Neptune-3 well compared to that found in the discovery and first appraisal wells. Further appraisal drilling is planned for later this year. In the fourth quarter of this year, Marathon expects to drill the Kansas Prospect, which is the next structure on-trend with Neptune along the Atwater Foldbelt. Marathon will hold a 33.3-percent interest in the Kansas Prospect and serve as operator. Marathon also recently completed appraisal drilling on the Ozona deepwater Gulf of Mexico prospect. Two appraisal sidetracks were drilled to delineate the original discovery made in October 2001 in which Marathon operates and has a 68-percent working interest. These two sidetracks, one of which was dry, indicate the reservoir is more complex and contains smaller reserve potential than originally anticipated. The appraisal well has been temporarily abandoned pending further analysis and the review of potential development options. In the North Sea, the Symphony natural gas pipeline project, another key component of the company’s integrated gas strategy, currently is conducting an open season for prospective shippers on this pipeline that is designed to transport gas from the UK and Norwegian North Sea to southern England. Based upon input from prospective shippers, Marathon is considering increasing the design capacity of the pipeline beyond the 1 billion cubic feet per day originally announced. Marathon estimates the pipeline could begin operations in 2005, assuming timely regulatory approval by applicable UK, Norwegian and European regulatory officials, satisfactory supply commitments and financing arrangements. In the refining, marketing and transportation (downstream) segment, Marathon Ashland Petroleum LLC’s (MAP) second quarter results improved substantially over last quarter. However, second quarter results were significantly lower when compared to the record results in the second quarter 2001, as refining crack spreads were less than half of what they were during the same quarter in 2001. Also, refining profitability continued to be adversely affected as a result of the continued narrow differential between sweet and sour crude oil prices. These narrow differentials make sour crude relatively more expensive than sweet crudes and decreases profitability for a complex refiner such as MAP. MAP’s profitability also increased from first quarter 2002 with higher merchandise sales and margins, as well as higher motor fuel margins at its Speedway SuperAmerica LLC retail outlets. Since the formation of Pilot Travel Centers LLC in September 2001, the former Speedway Fuel Centers included in the joint venture have been undergoing re-branding to Pilot Travel Centers. During the quarter these conversions were essentially completed. Pilot Travel Centers is the largest travel center network in the U.S. with more than 230 locations. Operational efficiencies already have been realized at the newly re-branded travel centers with the adoption of Pilot’s innovative management model. 3
Slide 4: Segment Results Income for Marathon’s reportable segments was $493 million in second quarter 2002, compared with $1,311 million in second quarter 2001. Exploration and Production Upstream segment income totaled $262 million in second quarter 2002, compared to $443 million in second quarter 2001. United States upstream income was $189 million in second quarter 2002, compared to $358 million in second quarter 2001. The decrease was primarily due to lower natural gas prices and derivative activity. This decrease was partially offset by increased liquid hydrocarbon prices and lower depreciation expense due to lower production. Additionally, second quarter 2002 results included a $24 million net gain from derivative activities compared to a $78 million net derivative gain in second quarter 2001 primarily related to Powder River Basin coalbed methane production. International upstream income was $73 million in second quarter 2002, compared to $85 million in second quarter 2001. The decrease was primarily due to lower natural gas and liquid hydrocarbon prices and higher depreciation expense, partially offset by higher liquid hydrocarbon volumes. In the third quarter 2002, production is expected to average between 400,000 and 405,000 boepd. The anticipated decrease from reported production levels in the second quarter 2002 is primarily a result of the timing of liftings in the UK. Refining, Marketing and Transportation Downstream segment income was $211 million in second quarter 2002, versus segment income of $842 million in second quarter 2001. The decrease primarily reflects a significantly lower refining and wholesale marketing margin, partially offset by higher refined product sales volumes, and increased merchandise margins. Other Energy Related Businesses Other energy related businesses segment income was $20 million in second quarter 2002, compared with $26 million in second quarter 2001. The decrease in 2002 was primarily due to an unplanned 62day shutdown of the AMPCO Methanol Plant in Equatorial Guinea, in which Marathon holds a 45-percent interest, and lower earnings from Marathon’s equity investments in various pipelines. 4
Slide 5: Other Corporate and Administrative As part of an ongoing effort to strengthen its balance sheet, Marathon issued $850 million of 5 and 10 year notes at a weighted average yield of 5.78 percent, and retired $193 million face amount of public debt with weighted average coupons of 9.04 percent during the second quarter. This resulted in an extraordinary loss from the early extinguishment of debt of $26 million, net of tax. Prepayment notice also was given on $144 million of 9.05 percent private debt which will result in a third quarter extraordinary loss of approximately $7 million, net of tax. As a result of these transactions, Marathon's weighted average cost of fixed-rate debt has been reduced approximately 1 percentage point. -xxxThis release contains forward-looking statements with respect to the timing and levels of the Company’s worldwide liquid hydrocarbon and natural gas production, the planned construction of pipeline facilities, future drilling activity, future interests in drilling prospects and additional reserves. Some factors that could potentially affect worldwide liquid hydrocarbon and natural gas production and the exploration drilling program include acts of war or terrorist acts and the governmental or military response thereto, pricing, supply and demand for petroleum products, amount of capital available for exploration and development, occurrence of acquisitions/dispositions of oil and gas properties, regulatory constraints, timing of commencing production from new wells, drilling rig availability and other geological, operating and economic considerations. Some factors which could impact the North Sea pipeline and related facilities, include, but are not limited to, unforeseen difficulty in the negotiation of definitive agreements among project participants, identification of additional participants to reach optimum levels of participation, inability or delay in obtaining necessary government and third-party approvals, arranging sufficient project financing, unanticipated changes in market demand or supply, competition with similar projects and environmental and permitting issues. The forward-looking information related to the future interests in drilling prospects and reserve additions is based on certain assumptions, including, among others, presently known physical data concerning size and character of reservoirs, economic recoverability, technology development, future drilling success, production experience, industry economic conditions, levels of cash flow from operations and operating conditions. The foregoing factors (among others) could cause actual results to differ materially from those set forth in the forward-looking statements. In accordance with the "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, 2001 and subsequent forms 10-Q and 8-K, cautionary language identifying important factors, though not necessarily all such factors, that could cause future outcomes to differ materially from those set forth in the forward- looking statements. The company will conduct a conference call on second quarter earnings on July 25, at 11 a.m. EDT. To listen to the webcast of the conference call, visit the Marathon website at www.marathon.com and click on the conference call button. Replays of the webcast will be available through August 9. Media Contacts: Paul Weeditz Susan Richardson Investor Relations: Ken Matheny Howard Thill 713-296-3910 713-296-3915 713-296-4114 713-296-4140 5
Slide 6: Marathon Oil Corporation Consolidated Statement of Income (Unaudited) Second Quarter Ended June 30 (Dollars in millions except per share amounts) Revenues and Other Income: Revenues Dividend and investee income Net gains on disposal of assets Other income Total revenues and other income Costs and Expenses: Cost of revenues (excludes items shown below) Selling, general and administrative expenses Depreciation, depletion and amortization Taxes other than income taxes Exploration expenses Inventory market valuation credit Total costs and expenses Income From Operations Net interest and other financial costs Minority interest in income of Marathon Ashland Petroleum LLC Income From Continuing Operations Before Income Taxes Provision for income taxes Income From Continuing Operations Discontinued Operations: Loss from discontinued operations Costs associated with disposition of United States Steel Income Before Extraordinary Loss and Cumulative Effect of Changes in Accounting Principles Extraordinary loss on early extinguishment of debt Cumulative effect of changes in accounting principles Net Income Dividends on preferred stock NET INCOME APPLICABLE TO COMMON STOCK(S) The following notes are an integral part of this Consolidated Statement of Income. Six Months Ended June 30 2002 2001 2002 2001 $8,083 36 8 8,127 $9,113 39 7 9 9,168 $14,492 65 24 14,581 $17,720 72 22 76 17,890 5,985 183 308 1,151 44 (1) 7,670 457 76 82 299 105 194 6,194 186 306 1,203 26 7,915 1,253 42 320 891 311 580 10,744 370 602 2,211 101 (72) 13,956 625 140 93 392 144 248 12,415 331 609 2,325 49 15,729 2,161 84 427 1,650 569 1,081 - (18) (10) - (12) 194 (26) 168 $168 552 552 2 $550 248 (26) 13 235 $235 1,069 (8) 1,061 4 $1,057 6
Slide 7: Marathon Oil Corporation Consolidated Statement of Income (Continued) (Unaudited) Second Quarter Ended June 30 (Dollars in millions except per share amounts) Applicable to Marathon Oil Corporation Common Stock: Income from continuing operations - Per share – basic and diluted Net income - Per share – basic and diluted Dividends paid per share Weighted average shares, in thousands - Basic - Diluted Applicable to Steel Stock: Net loss - Per share – basic - Per share – diluted Dividends paid per share Weighted average shares, in thousands - Basic and diluted The following notes are an integral part of this Consolidated Statement of Income. Six Months Ended June 30 2002 2001 2002 2001 $194 .63 168 .54 .23 $580 1.88 582 1.88 .23 $248 .80 235 .76 .46 $1,081 3.50 1,082 3.50 .46 309,807 310,071 309,101 309,627 309,689 309,939 308,928 309,338 $- $(32) (0.36) (0.36) .10 $- $(25) (0.28) (0.28) .35 - 89,005 - 88,906 7
Slide 8: Marathon Oil Corporation Selected Notes to Financial Statement 1. Marathon Oil Corporation (Marathon), formerly USX Corporation, 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 subsidiary, Marathon Ashland Petroleum LLC; and other energy related businesses. Prior to December 31, 2001, Marathon had two outstanding classes of common stock: USX–Marathon Group common stock (Marathon Stock), which was intended to reflect the performance of Marathon’s energy business, and USX–U. S. Steel Group common stock (Steel Stock), which was intended to reflect the performance of Marathon’s steel business. As described further in Note 2, on December 31, 2001, Marathon disposed of its steel business by distributing the common stock of its wholly owned subsidiary United States Steel Corporation (United States Steel) to holders of Steel Stock in exchange for all outstanding shares of Steel Stock on a onefor-one basis (the Separation). 2. On December 31, 2001, in a tax-free distribution to holders of Steel Stock, Marathon exchanged the common stock of United States Steel for all outstanding shares of Steel Stock on a one-for-one basis. The net assets of United States Steel were approximately the same as the net assets attributable to Steel Stock at the time of the Separation, except for a value transfer of $900 million in the form of additional net debt and other financings retained by Marathon. The income from discontinued operations for the periods ended June 30, 2001, represents the net income attributable to the Steel Stock for the periods presented, except for certain limitations on the amounts of corporate administrative expenses and interest expense (net of income tax effects) allocated to discontinued operations as required by generally accepted accounting principles in the United States. The financial results of United States Steel have been reclassified as discontinued operations for the second quarter and six months ended June 30, 2001, in the Statement of Income and are summarized as follows: Second Quarter Ended June 30 (In Millions) Revenues and other income Costs and expenses Loss from operations Net interest and other financial costs Loss before income taxes Provision (credit) for estimated income taxes Net loss 2001 $1,737 1,756 (19) 43 (62) (44) $(18) Six Months Ended June 30 2001 $3,301 3,415 (114) 24 (138) (138) $- 8
Slide 9: Marathon Oil Corporation Selected Notes to Financial Statement (Continued) 2. (Continued) The following is a reconciliation of income from continuing operations to net income applicable to Marathon Oil Corporation Common Stock: Third Quarter Ended September 30 (In Millions) Income from continuing operations applicable to Marathon Oil Corporation Common Stock Costs associated with disposition of United States Steel Cumulative effect of accounting principle Amounts included above attributable to Steel Stock: - Selling, general and administrative expenses - Net interest and other financial costs - Provision for income taxes - Costs related to separation included in loss on disposition of United States Steel net of tax Net income applicable to Marathon Oil Corporation Common Stock 2001 Nine Months Ended September 30 2001 $580 (10) -- $1,081 (12) (8) 8 4 (5) 5 $582 14 11 (9) 5 $1,082 3. On January 3, 2002, Marathon acquired certain interests in Equatorial Guinea, Africa from CMS Energy Corporation for $1,005 million net of cash acquired. The acquisition includes oil and gas producing assets, exploration interests and certain processing facilities. Marathon utilized unused lines of credit to fund this acquisition until permanent financing was obtained. Results of operations for the six months of 2002 include the results of Equatorial Guinea from January 3, 2002. On June 26, 2002, Marathon acquired Globex Energy, Inc. (Globex), a natural gas producer with major interest in Equatorial Guinea, West Africa. Marathon acquired 100% of the outstanding stock of Globex for $148 million net of cash acquired. 4. Marathon has established an inventory market valuation (IMV) reserve to reduce the cost basis of its inventories to current market value. Quarterly adjustments to the IMV reserve result in noncash charges or credits to income from operations. Decreases in market prices below the cost basis result in charges to income from operations. Once a reserve has been established, subsequent inventory turnover and increases in prices (up to the cost basis) result in credits to income from operations. Six months ended June 30, 2002, results of operations includes credits to income from operations of $72 million. 5. During the second quarter of 2002 Marathon retired $193 million of long-term debt resulting in a pretax extraordinary loss of $41 million ($26 million net of taxes or $.08 per share.) 9
Slide 10: Marathon Oil Corporation Preliminary Supplemental Statistics (Unaudited) Second Quarter Ended June 30 (Dollars in millions) Income (Loss) From Operations Exploration & Production United States International Income For E&P Reportable Segment Refining, Marketing & Transportation (a) Other Energy Related Businesses (b) Income For Reportable Segments Items Not Allocated To Segments: Administrative Expenses Inventory Market Valuation Credit Gain on lease resolution with U.S. Government Gain (Loss) on Ownership Change - MAP Income From Operations Capital Expenditures Exploration & Production Refining, Marketing & Transportation Other (c) Total Exploration Expense United States International Total Operating Statistics Net Liquid Hydrocarbon Production(d) United States U.S. Equity Investee (MKM) Total United States Europe Other International West Africa International Equity Investee (CLAM) Total International Worldwide Net Natural Gas Production (e)(f) United States Europe Other International West Africa International Equity Investee (CLAM) Total International Worldwide Total production (MBOEPD) 2002 2001 Six Months Ended June 30 2002 2001 $189 73 262 211 20 $493 (39) 1 2 $457 $220 113 15 $348 $32 12 $44 $358 85 443 842 26 $1,311 (51) (7) $1,253 $217 115 20 $352 $12 14 $26 $271 156 427 160 45 $632 (83) 72 4 $625 $438 182 20 $640 $81 20 $101 $800 243 1,043 1,118 34 $2,195 (87) 59 (6) $2,161 $374 212 42 $628 $25 24 $49 119.0 8.3 127.3 68.3 4.5 22.7 95.5 222.8 734.4 321.0 107.5 23.1 22.4 474.0 1,208.4 424.2 126.3 9.4 135.7 34.7 13.1 19.1 .1 67.0 202.7 773.7 319.6 127.2 33.8 480.6 1,254.3 411.7 120.5 8.6 129.1 56.9 4.3 24.1 85.3 214.4 760.3 328.3 106.5 36.1 27.0 497.9 1,258.2 424.1 125.4 9.8 135.2 44.2 13.9 19.3 .1 77.5 212.7 781.3 332.5 128.7 34.2 495.4 1,276.7 425.5 10
Slide 11: Marathon Oil Corporation Preliminary Supplemental Statistics (Unaudited) Second Quarter Ended June 30 (Dollars in millions) Operating Statistics Average Sales Prices (excluding derivative gains and losses) Liquids Hydrocarbons United States U.S. Equity Investee (MKM) Total United States Europe Other International West Africa International Equity Investees (CLAM) Total International Worldwide Natural Gas (g) United States Europe Other International West Africa International Equity Investees (CLAM) Total International Worldwide Average Sales Prices (including derivative gains and losses) Liquids Hydrocarbons United States U.S. Equity Investee (MKM) Total United States Europe Other International West Africa International Equity Investees (CLAM) Total International Worldwide Natural Gas (g) United States Europe Other International West Africa International Equity Investees (CLAM) Total International Worldwide Map: Crude Oil Refined(d) Consolidated Refined Products Sold (d) Matching buy/sell volumes included in refinedproducts sold(d) Refining and Wholesale Marketing Margin (h)(i) Number of SSA retail outlets (k) SSA Gasoline and Distillate Sales (j)(k) SSA Gasoline and Distillate Gross Margin (h)(k) SSA Merchandise Sales (k) SSA Merchandise Gross Margin (k) 2002 2001 Six Months Ended June 30 2002 2001 $22.31 25.00 22.49 23.60 22.56 23.72 23.59 $22.96 $2.99 2.33 2.57 .25 3.01 2.31 $2.72 $21.70 24.59 21.90 27.37 19.83 28.18 10.45 26.10 $23.29 $4.14 2.69 3.76 3.71 3.05 $3.73 $20.13 22.47 20.29 22.31 20.58 22.21 22.18 $21.04 $2.66 2.63 2.23 .25 3.03 2.39 $2.55 $22.82 25.10 22.99 26.16 20.97 26.57 23.49 25.33 $23.84 $4.94 2.83 4.92 3.52 3.43 $4.36 $22.25 25.00 22.43 23.60 22.56 23.72 23.59 $22.93 $3.35 2.18 2.57 .25 3.01 2.21 $2.90 972.9 1,351.2 80.3 $.0518 2,081 911 $.1116 $612 $156 $21.70 24.59 21.90 27.37 19.83 28.18 10.45 26.10 $23.29 $5.05 2.69 3.77 3.71 3.06 $4.29 958.2 1,303.1 35.3 $.1839 2,177 893 $.1280 $574 $136 $19.35 22.47 19.56 22.31 20.58 22.21 22.18 $20.60 $2.89 2.84 2.23 .25 3.03 2.53 $2.74 932.2 1,289.9 67.3 $.0350 1,763 $.0977 $1,152 $286 $22.82 25.10 22.99 26.16 20.97 26.57 23.49 25.33 $23.84 $5.26 2.83 4.92 3.52 3.43 $4.56 914.3 1,278.2 44.3 $.1364 1,741 $.1177 $1,062 $250 11
Slide 12: Marathon Oil Corporation Preliminary Supplemental Statistics (Unaudited) (a) Includes MAP at 100%. RM&T income for reportable segments includes Ashland’s 38% interest in MAP of $82 million, $ 320 million, $66 million and $428 million in the second quarter and six month year-to-date 2002 and 2001, respectively. (b) Includes domestic natural gas and crude oil marketing and transportation, and power generation. (c) Includes other energy related businesses and corporate capital expenditures. (d) Thousands of barrels per day (e) Millions of cubic feet per day (f) Includes gas acquired for injection and subsequent resale of 5.4, 9.0, 4.6, and 9.1 mmcfd in the second quarter and six month year-to-date 2002 and 2001, respectively. (g) Prices exclude gas acquired for injection and subsequent resale. (h) Per gallon (i) Sales revenue less cost of refinery inputs, purchased products and manufacturing expenses, including depreciation. (j) Millions of gallons (k) Excludes travel centers contributed to Pilot Travel Centers LLC. Periods prior to September 1, 2001 have been restated. 12