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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 1-5153
Marathon Oil Corporation
(Exact name of registrant as specified in its charter)
Delaware 25-0996816
(State of Incorporation) (I.R.S. Employer Identification No.)
5555 San Felipe Road, Houston, TX 77056-2723
(Address of principal executive offices)
Tel. No. (713) 629-6600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for at least the past 90 days. Yes [X] No [_]
There were 309,815,967 shares of Marathon Oil Corporation Common Stock
outstanding as of July 31, 2002.
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MARATHON OIL CORPORATION
SEC FORM 10-Q
QUARTER ENDED June 30, 2002
INDEX Page
----- ----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statement of Income 3
Consolidated Balance Sheet 5
Consolidated Statement of Cash Flows 7
Selected Notes to Consolidated
Financial Statements 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 23
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 38
Supplemental Statistics 43
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 46
Item 4. Submission of Matters to a Vote of Security Holders 46
Item 6. Exhibits and Reports on Form 8-K 47
2
Part I - Financial Information
MARATHON OIL CORPORATION
CONSOLIDATED STATEMENT OF INCOME (Unaudited)
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions) 2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------------------
REVENUES AND OTHER INCOME:
Revenues $8,083 $9,113 $14,492 $17,720
Dividend and investee income 36 39 65 72
Net gains on disposal of assets 3 14 11 28
Gain (loss) on ownership change in Marathon Ashland Petroleum LLC 2 (7) 4 (6)
Other income 3 9 9 76
------ ------ ------ ------
Total revenues and other income 8,127 9,168 14,581 17,890
------ ------ ------ ------
COSTS AND EXPENSES:
Cost of revenues (excludes items shown below) 5,985 6,194 10,744 12,415
Selling, general and administrative expenses 183 186 370 331
Depreciation, depletion and amortization 308 306 602 609
Taxes other than income taxes 1,151 1,203 2,211 2,325
Exploration expenses 44 26 101 49
Inventory market valuation credit (1) - (72) -
------ ------ ------ ------
Total costs and expenses 7,670 7,915 13,956 15,729
------ ------ ------ ------
INCOME FROM OPERATIONS 457 1,253 625 2,161
Net interest and other financial costs 76 42 140 84
Minority interest in income of Marathon Ashland
Petroleum LLC 82 320 93 427
------ ------ ------ ------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES 299 891 392 1,650
Provision for income taxes 105 311 144 569
------ ------ ------ ------
INCOME FROM CONTINUING OPERATIONS 194 580 248 1,081
DISCONTINUED OPERATIONS:
Loss from discontinued operations - (18) - -
Costs associated with disposition of United States Steel - (10) - (12)
------ ------ ------ ------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 194 552 248 1,069
Extraordinary loss from early extinguishment of debt (26) - (26) -
Cumulative effect of changes in accounting principles - - 13 (8)
------ ------ ------ ------
NET INCOME $168 $552 $235 $1,061
====== ====== ====== ======
Included in revenues and costs and expenses for the second quarter of 2002 and
2001 were $1,083 million and $1,132 million, respectively, representing consumer
excise taxes on petroleum products and merchandise. Similar amounts for the six
months of 2002 and 2001 were $2,079 million and $2,170 million, respectively.
The accompanying notes are an integral part of these consolidated financial
statements.
3
MARATHON OIL CORPORATION
CONSOLIDATED STATEMENT OF INCOME (Continued) (Unaudited)
INCOME PER COMMON SHARE
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions, except per share amounts) 2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------
MARATHON COMMON STOCK:
Income from continuing operations applicable
to Common Stock $ 194 $ 580 $ 248 $ 1,081
Net income applicable to Common Stock 168 582 235 1,082
Per Share Data:
Basic and diluted:
- Income from continuing operations .62 1.88 .80 3.50
- Net income .54 1.88 .76 3.50
Weighted average shares, in thousands
- Basic 309,807 309,101 309,689 308,928
- Diluted 310,071 309,627 309,939 309,338
STEEL STOCK:
Net loss applicable to Steel Stock $ -- $ (32) $ -- $ (25)
Per Share Data:
Basic and diluted
- Net loss -- (0.36) -- (0.28)
Weighted average shares, in thousands
- Basic and diluted -- 89,005 -- 88,906
See Note 4, for a description and computation of income per common share.
The accompanying notes are an integral part of these consolidated financial
statements.
4
MARATHON OIL CORPORATION
CONSOLIDATED BALANCE SHEET (Unaudited)
ASSETS
June 30 December 31
(Dollars in millions) 2002 2001
- -----------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 295 $ 657
Receivables, less allowance for doubtful
accounts of $5 and $4 2,074 1,708
Receivables from United States Steel 14 64
Inventories 2,077 1,851
Other current assets 190 131
------- -------
Total current assets 4,650 4,411
Investments and long-term receivables, less
allowance for doubtful accounts of $4 and $4 1,546 1,076
Receivables from United States Steel 551 551
Property, plant and equipment, less accumulated
depreciation, depletion and amortization of
$10,590 and $10,384 10,152 9,552
Prepaid pensions 211 207
Goodwill 272 88
Intangibles 55 61
Other noncurrent assets 206 183
------- -------
Total assets $17,643 $16,129
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
5
MARATHON OIL CORPORATION
CONSOLIDATED BALANCE SHEET (Continued) (Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30 December 31
(Dollars in millions) 2002 2001
- -------------------------------------------------------------------------------------------------------------------
LIABILITIES
Current liabilities:
Notes payable $ 47 $ -
Accounts payable 2,620 2,431
Payable to United States Steel 31 28
Payroll and benefits payable 153 243
Accrued taxes 328 171
Accrued interest 108 85
Obligations to repay preferred securities - 295
Long-term debt due within one year 72 215
------- -------
Total current liabilities 3,359 3,468
Long-term debt 4,731 3,432
Deferred income taxes 1,393 1,297
Employee benefits 720 677
Payable to United States Steel 5 8
Deferred credits and other liabilities 374 344
Minority interest in Marathon Ashland Petroleum LLC 2,062 1,963
STOCKHOLDERS' EQUITY
Common stock:
Common Stock issued - 312,165,978 shares at June 30, 2002 and December 31,
2001 (par value $1 per share, authorized 550,000,000 shares) 312 312
Common stock held in treasury - 2,350,011 shares at June 30, 2002 and
2,770,929 shares at December 31, 2001 (62) (74)
Additional paid-in capital 3,035 3,035
Retained earnings 1,736 1,643
Accumulated other comprehensive income (8) 34
Deferred compensation (14) (10)
------- -------
Total stockholders' equity 4,999 4,940
------- -------
Total liabilities and stockholders' equity $17,643 $16,129
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
6
MARATHON OIL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
Six Months Ended
June 30
(Dollars in millions) 2002 2001
- -----------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income $ 235 $ 1,061
Adjustments to reconcile to net cash provided
from operating activities:
Cumulative effect of changes in accounting principles (13) 8
Extraordinary loss from early extinguishment of debt 26 --
Discontinued operations -- 12
Minority interest in income of Marathon Ashland
Petroleum LLC 93 427
Depreciation, depletion and amortization 602 609
Inventory market valuation credits (72) --
Exploratory dry well costs 61 6
Deferred income taxes (22) (235)
Net gains on disposal of assets (11) (28)
Changes in:
Current receivables (326) 132
Receivable from United States Steel (4) --
Inventories (144) (140)
Current accounts payable and accrued expenses 346 (206)
All other - net (37) 143
------- -------
Net cash provided from continuing operations 734 1,789
Net cash provided from discontinued operations -- 234
------- -------
Net cash provided from operating activities 734 2,023
------- -------
INVESTING ACTIVITIES:
Capital expenditures (640) (628)
Acquisition of Equatorial Guinea interests (1,160) --
Acquisition of Pennaco Energy, Inc. -- (506)
Disposal of assets 31 106
Receivable from United States Steel 54 --
Restricted cash - withdrawals 30 23
- - deposits (25) (13)
Investees (96) 4
All other - net (4) (29)
------- -------
Net cash used in continuing operations (1,810) (1,043)
Net cash used in discontinued operations -- (122)
------- -------
Net cash used in investing activities (1,810) (1,165)
------- -------
The accompanying notes are an integral part of these consolidated financial
statements.
7
MARATHON OIL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued) (Unaudited)
Six Months Ended
June 30
(Dollars in millions) 2002 2001
- --------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Commercial paper and revolving credit arrangements - net (340) (277)
Other debt - borrowings 2,095 139
- repayments (608) (132)
Repayment of preferred securities (295) -
Common Stock - repurchased - (1)
Treasury Stock - reissued 2 3
Dividends paid - Marathon Common Stock (142) (142)
- Steel Stock - (31)
- Preferred Stock - (4)
Distributions to minority shareholder of
Marathon Ashland Petroleum LLC - (244)
------ ------
Net cash provided from (used in) financing activities 712 (689)
------ ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 2 (5)
------ ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (362) 164
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 657 559
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $295 $723
====== ======
Cash provided from (used in) operating activities included:
Interest and other financial costs paid (net of
amount capitalized) $(116) $(178)
Income taxes paid (25) (218)
The accompanying notes are an integral part of these consolidated financial
statements.
8
MARATHON OIL CORPORATION
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. These consolidated financial statements are unaudited but, in the opinion
of management, reflect all adjustments necessary for a fair presentation of
the results for the periods reported. All such adjustments are of a normal
recurring nature unless disclosed otherwise. These financial statements,
including selected notes, have been prepared in accordance with the
applicable rules of the Securities and Exchange Commission and do not
include all of the information and disclosures required by accounting
principles generally accepted in the United States of America for complete
financial statements. Certain reclassifications of prior year data have
been made to conform to 2002 classifications. These interim financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the 2001 Annual Report on Form
10-K of Marathon Oil Corporation (Marathon).
2. Prior to December 31, 2001, Marathon, formerly named USX Corporation, 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. On December 31, 2001, Marathon disposed of its steel business
through a tax-free distribution of 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
one-for-one basis (the Separation). At December 31, 2001, the net debt and
other financings of United States Steel was $54 million less than the net
debt and other financings attributable to the Steel Stock, adjusted for a
$900 million value transfer and certain one-time items related to the
Separation. On February 6, 2002, United States Steel made a payment to
Marathon of $54 million, plus applicable interest, to settle this
difference.
Marathon has accounted for the business of United States Steel as a
discontinued operation. The income from discontinued operations for the
periods ended June 30, 2001, represents the net income attributable to the
Steel Stock, 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 accounting principles
generally accepted in the United States. Because operating and investing
activities are separately identifiable to each of Marathon and United
States Steel, such amounts have been separately disclosed in the statement
of cash flows. Financing activities were managed on a centralized,
consolidated basis. Therefore they have been reflected on a consolidated
basis in the statement of cash flows.
3. Effective January 1, 2001, Marathon adopted Statement of Financial
Accounting Standards No. 133 "Accounting for Derivative Instruments and
Hedging Activities" (SFAS No. 133), as amended by SFAS Nos. 137 and 138.
This Standard requires recognition of all derivatives as either assets or
liabilities at fair value. The transition adjustment related to adopting
SFAS No. 133 on January 1, 2001, was recognized as a cumulative effect of a
change in accounting principle. The unfavorable cumulative effect on net
income, net of a tax benefit of $5 million, was $8 million. The unfavorable
cumulative effect on other comprehensive income (OCI), net of a tax benefit
of $4 million, was $8 million.
9
MARATHON OIL CORPORATION
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
3. (Continued)
Since the issuance of SFAS No. 133, the Financial Accounting Standards
Board (FASB) has issued several interpretations. As a result, Marathon has
recognized in income beginning on January 1, 2002, the effect of changes in
the fair value of two long-term natural gas sales contracts in the United
Kingdom. As of January 1, 2002, Marathon recognized a favorable cumulative
effect of a change in accounting principle of $13 million, net of tax of $7
million. The favorable pretax change in the fair value of the gas contracts
during the first six months of 2002 was $12 million. The recorded
derivative assets will continue to be marked-to-market.
Effective January 1, 2002, Marathon adopted the following Statements of
Financial Accounting Standards:
o No. 141 "Business Combinations" (SFAS No. 141),
o No. 142 "Goodwill and Other Intangible Assets" (SFAS No. 142) and
o No. 144 "Accounting for Impairment or Disposal of Long-Lived
Assets" (SFAS No.144)
SFAS No. 141 requires that all business combinations initiated after June
30, 2001, be accounted for under the purchase method. The transitional
provisions of SFAS No. 141 required Marathon to reclassify $11 million from
identifiable intangible assets to goodwill at January 1, 2002.
SFAS No. 142 addresses the accounting for goodwill and other intangible
assets after an acquisition. Effective January 1, 2002, Marathon ceased
amortization of existing goodwill, which results in a favorable impact on
annual earnings of approximately $3 million, net of tax. Marathon has
completed the required transitional impairment test for existing goodwill
as of the date of adoption. No impairment of goodwill was indicated.
SFAS No. 144 establishes a single accounting model for long-lived assets to
be disposed of by sale and provides additional implementation guidance for
assets to be held and used and assets to be disposed of other than by sale.
For long-lived assets to be disposed of by sale, SFAS No. 144 broadens the
definition of those disposals that should be reported separately as
discontinued operations. The adoption of SFAS No. 144 had no initial effect
on Marathon's financial statements.
In June 2001, the FASB issued Statement of Financial Accounting Standard
No. 143 "Accounting for Asset Retirement Obligations" (SFAS No. 143).
Marathon will adopt this Statement effective January 1, 2003, as required.
The adoption of this Standard will result in a cumulative effect and be
reported as a change in accounting principle. At this time, Marathon cannot
reasonably estimate the effect of adoption on either its financial position
or results of operations.
10
MARATHON OIL CORPORATION
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
3. (Continued)
In April 2002, the FASB issued Statement of Financial Accounting Standard
No. 145 "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections" (SFAS No. 145). Extinguishment
of debt will be accounted for in accordance with Accounting Principles
Board Opinion No. 30 "Reporting the Results of Operations Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions". SFAS No. 145 has a
dual effective date. The provisions relating to accounting for leases were
applicable to transactions occurring after May 15, 2002. The provisions
relating to the early extinguishment of debt will be adopted by Marathon on
January 1, 2003. As a result, losses from the early extinguishment of debt
in 2002, which are currently reported as extraordinary items, will be
reported in income from continuing operations in comparative financial
statements subsequent to the adoption of SFAS No. 145.
In June 2002, the FASB issued Statement of Financial Accounting Standard
No. 146 "Accounting for Exit or Disposal Activities" (SFAS No. 146). SFAS
No. 146 will be effective for exit or disposal activities that are
initiated after December 31, 2002.
4. Basic net income per share is calculated by adjusting net income for
dividend requirements of preferred stock when applicable and is based on
the weighted average number of common shares outstanding.
Diluted net income per share assumes exercise of stock options, provided
the effect is not antidilutive.
11
MARATHON OIL CORPORATION
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
4. (Continued)- COMPUTATION OF INCOME PER COMMON SHARE
Second Quarter Ended
June 30
2002 2001
(Dollars in millions, except per share data) Basic Diluted Basic Diluted
- ----------------------------------------------------------------------------------------------------------------------------
Common Stock
- -------------
Income from continuing operations applicable to Common Stock $194 $194 $580 $580
Expenses included in income from continuing operations
applicable to Steel Stock - - 12 12
Costs associated with disposition of United States Steel - - (10) (10)
Extraordinary loss (26) (26) - -
------- ------- ------- -------
Net income applicable to Common Stock $168 $168 $582 $582
======= ======= ======= =======
Shares of common stock outstanding (thousands):
Average number of common shares outstanding 309,807 309,807 309,101 309,101
Effect of dilutive securities - stock options - 264 - 526
------- ------- ------- -------
Average common shares including dilutive effect 309,807 310,071 309,101 309,627
======= ======= ======= =======
Per share:
Income from continuing operations $.62 $.62 $1.88 $1.88
======= ======= ======= =======
Extraordinary loss $(.08) $(.08) - -
======= ======= ======= =======
Net income $.54 $.54 $1.88 $1.88
======= ======= ======= =======
Steel Stock
- -----------
Loss from discontinued operations - - $(18) $(18)
Expenses included in loss from continuing
operations applicable to Steel Stock - - (12) (12)
Preferred stock dividends - - (2) (2)
------ ------ ------ ------
Net loss applicable to Steel Stock - - $(32) $(32)
====== ====== ====== ======
Average common shares including dilutive effect (thousands) - - 89,005 89,005
====== ====== ====== ======
Per share:
Loss from discontinued operations - - $(.21) $(.21)
====== ====== ====== ======
Net loss - - $(.36) $(.36)
====== ====== ====== ======
12
MARATHON OIL CORPORATION
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
4. (Continued)- COMPUTATION OF INCOME PER COMMON SHARE
Six Month Ended
June 30
2002 2001
(Dollars in millions, except per share data) Basic Diluted Basic Diluted
- ----------------------------------------------------------------------------------------------------------------------------
Common Stock
- -------------
Income from continuing operations applicable
to Common Stock $248 $248 $1,081 $1,081
Expenses included in income from continuing
operations applicable to Steel Stock - - 21 21
Costs associated with disposition of
United States Steel - - (12) (12)
Extraordinary loss (26) (26) - -
Cumulative effect of changes in
accounting principles 13 13 (8) (8)
------- ------- ------- -------
Net income applicable to Common Stock $235 $235 $1,082 $1,082
======= ======= ======= =======
Shares of common stock outstanding (thousands):
Average number of common shares outstanding 309,689 309,689 308,928 308,928
Effect of dilutive securities - stock options - 250 - 410
------- ------- ------- -------
Average common shares including dilutive effect 309,689 309,939 308,928 309,338
======= ======= ======= =======
Per share:
Income from continuing operations $.80 $.80 $3.50 $3.50
======= ======= ======= =======
Extraordinary loss $(.08) $(.08) - -
======= ======= ======= =======
Cumulative effect of changes in
accounting principles $.04 $.04 $(.03) $(.03)
======= ======= ======= =======
Net income $.76 $.76 $3.50 $3.50
======= ======= ======= =======
Steel Stock
- -----------
Loss from discontinued operations - - $ - $ -
Expenses included in loss from continuing
operations applicable to Steel Stock - - (21) (21)
Preferred stock dividends - - (4) (4)
------ ------ ------ ------
Net loss applicable to Steel Stock - - $(25) $(25)
====== ====== ====== ======
Average common shares including dilutive effect (thousands) - - 88,906 88,906
====== ====== ====== ======
Per share:
Loss from discontinued operations - - $ - $ -
====== ====== ====== ======
Net loss - - $(.28) $(.28)
====== ====== ====== ======
13
MARATHON OIL CORPORATION
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
5. Marathon's operations consist of three operating segments: 1) Exploration
and Production (E&P) - explores for and produces crude oil and natural gas
on a worldwide basis; 2) Refining, Marketing and Transportation (RM&T) -
refines, markets and transports crude oil and petroleum products, primarily
in the Midwest and southeastern United States through Marathon Ashland
Petroleum LLC (MAP); and 3) Other Energy Related Businesses (OERB) -
markets and transports, primarily in the United States and Europe, its own
and third-party natural gas, crude oil and related products.
The results of segment operations are as follows:
Total
(In millions) E&P RM&T OERB Segments
- ---------------------------------------------------------------------------------------------------------------------------
SECOND QUARTER 2002
- -------------------
Revenues and other income:
Customer $851 $6,735 $497 $8,083
Intersegment (a) 174 40 23 237
Equity in earnings of unconsolidated investees 15 15 6 36
Other (2) 9 (1) 6
------ ------ ------ ------
Total revenues and other income $1,038 $6,799 $525 $8,362
====== ====== ====== ======
Segment income $262 $211 $20 $493
====== ====== ====== ======
SECOND QUARTER 2001
- ------------------
Revenues and other income:
Customer $1,067 $7,535 $511 $9,113
Intersegment (a) 179 7 19 205
United States Steel (a) 5 - 3 8
Equity in earnings of unconsolidated investees 17 9 6 32
Other 8 18 4 30
------ ------ ------ ------
Total revenues and other income $1,276 $7,569 $543 $9,388
====== ====== ====== ======
Segment income $443 $842 $26 $1,311
====== ====== ====== ======
(a) Management believes intersegment transactions and transactions with United
States Steel were conducted under terms comparable to those with unrelated
parties.
14
MARATHON OIL CORPORATION
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Total
(In millions) E&P RM&T OERB Segments
- --------------------------------------------------------------------------------------------------------------------------
Six Months 2002
- ---------------
Revenues and other income:
Customer $1,536 $12,022 $934 $14,492
Intersegment (a) 316 59 37 412
Equity in earnings of unconsolidated investees 24 23 17 64
Other (1) 23 (1) 21
------ ------ ------ ------
Total revenues and other income $1,875 $12,127 $987 $14,989
====== ====== ====== ======
Segment income $427 $160 $45 $632
====== ====== ====== ======
Six Months 2001
- ---------------
Revenues and other income:
Customer $2,243 $14,277 $1,200 $17,720
Intersegment (a) 359 13 45 417
United States Steel (a) 15 - 5 20
Equity in earnings of unconsolidated investees 37 15 10 62
Other 16 33 6 55
------ ------ ------ ------
Total revenues and other income $2,670 $14,338 $1,266 $18,274
====== ====== ====== ======
Segment income $1,043 $1,118 $34 $2,195
====== ====== ====== ======
(a) Management believes intersegment transactions and transactions with United
States Steel were conducted under terms comparable to those with unrelated
parties.
15
MARATHON OIL CORPORATION
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
5. (Continued)
The following schedule reconciles segment revenues and income to amounts
reported in the financial statements:
Second Quarter
Ended
June 30
(In millions) 2002 2001
- ---------------------------------------------------------------------------------------------------------------------------
Revenues and other income:
Segment revenues and other income $8,362 $9,388
Items not allocated to segments:
Gain (loss) on ownership change in MAP 2 (7)
Elimination of intersegment revenues (237) (205)
Elimination of sales to United States Steel - (8)
------ ------
Total revenues and other income $8,127 $9,168
====== ======
Income:
Segment income $493 $1,311
Items not allocated to segments:
Administrative expenses (39) (51)
Inventory market valuation credit 1 -
Gain (loss) on ownership change in MAP 2 (7)
------ ------
Total income from operations $457 $1,253
====== ======
Six Months Ended
June 30
(In millions) 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------
Revenues and other income:
Segment revenues and other income $14,989 $18,274
Items not allocated to segments:
Gain (loss) on ownership change in MAP 4 (6)
Gain on lease resolution with U.S. Government - 59
Elimination of intersegment revenues (412) (417)
Elimination of sales to United States Steel - (20)
----- -----
Total revenues and other income $14,581 $17,890
====== ======
Income:
Segment income $632 $2,195
Items not allocated to segments:
Administrative expenses (83) (87)
Inventory market valuation credit 72 -
Gain (loss) on ownership change in MAP 4 (6)
Gain on lease resolution with U.S. Government - 59
------ ------
Total income from operations $625 $2,161
====== ======
16
MARATHON OIL CORPORATION
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
6. During 2002, in two separate transactions, Marathon acquired interests in
the Alba Field offshore Equatorial Guinea, West Africa, and certain other
related assets.
On January 3, 2002, Marathon acquired certain interests from CMS Energy
Corporation for $1,005 million. Marathon acquired three entities that own a
combined 52.4% working interest in the Alba Production Sharing Contract and
a net 43.2% interest in an onshore liquefied petroleum gas processing plant
through an equity method investee. Additionally, Marathon acquired a 45%
net interest in an onshore methanol production plant through an equity
method investee. Results of operations for the six months of 2002 include
the results of the interests acquired from CMS Energy from January 3, 2002.
On June 20, 2002, Marathon acquired 100% of the outstanding stock of Globex
Energy, Inc. (Globex) for $155 million. Globex owned an additional 10.9%
working interest in the Alba Production Sharing Contract and an additional
net 9.0% interest in the onshore liquefied petroleum gas processing plant.
Globex also held oil and gas interests offshore Australia.
The allocations of purchase price are preliminary. The allocations to
intangible assets are not expected to be significant. The goodwill arising
from the preliminary allocations was $176 million, which was assigned to
the E&P segment. Significant factors that resulted in the recognition of
goodwill include: the ability to acquire an established business with an
assembled workforce, a proven track record and the right to operatorship,
and a strategic acquisition in a core geographic area.
Additionally, the purchase price allocated to the equity method investments
is $224 million higher than the underlying net assets of the investees.
This excess will be amortized over the expected useful life of the
underlying assets except for $35 million of goodwill relating to the equity
investments.
The following table summarizes the preliminary allocation of the purchase
price to the assets acquired and liabilities assumed at the date of
acquisitions:
(In millions)
-------------
Receivables $ 33
Inventories 9
Investments and long-term receivables 454
Property, plant and equipment 661
Goodwill (none deductible for income tax purposes) 176
Other assets 4
------
Total assets acquired $1,337
------
Current liabilities $ (30)
Deferred income taxes (147)
------
Total liabilities assumed $ (177)
------
Net assets acquired $1,160
======
17
MARATHON OIL CORPORATION
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
6. (Continued)
In the first quarter 2001, Marathon acquired Pennaco Energy, Inc.
(Pennaco), a natural gas producer. Marathon acquired 87% of the outstanding
stock of Pennaco through a tender offer completed on February 7, 2001 at
$19 a share. On March 26, 2001, Pennaco was merged with a wholly owned
subsidiary of Marathon. Under the terms of the merger, each share not held
by Marathon was converted into the right to receive $19 in cash. The total
cash purchase price of Pennaco was $506 million. The acquisition was
accounted for under the purchase method of accounting. The goodwill totaled
$70 million. Goodwill amortization ceased upon adoption of SFAS No. 142 on
January 1, 2002. Results of operations for the six months of 2001 include
the results of Pennaco from February 7, 2001.
The following unaudited pro forma data for Marathon includes the results of
operations of the above acquisitions giving effect to them as if they had
been consummated at the beginning of the periods presented. The pro forma
data is based on historical information and does not necessarily reflect
the actual results that would have occurred nor is it necessarily
indicative of future results of operations.
Six Months Ended
June 30
(In millions, except per share amounts) 2002 2001
---------------------------------------
Revenues and other income $14,592 $17,936
Income from continuing operations 238 1,062
Net income 225 1,040
Per share amounts applicable to Common Stock
- Income from continuing operations
- basic and diluted .77 3.43
- Net income - basic and diluted .73 3.46
7. During the second quarter of 2002, Marathon acquired additional interests
in coalbed methane assets in the Powder River Basin of northern Wyoming and
southern Montana from XTO Energy, Inc. (XTO) in exchange for certain oil
and gas properties in eastern Texas and northern Louisiana. On July 1,
2002, Marathon completed this transaction by selling its production
interests in the San Juan Basin of New Mexico to XTO for $42 million.
Marathon will recognize a gain of $24 million in the third quarter related
to this transaction.
18
MARATHON OIL CORPORATION
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
8. Inventories are carried at lower of cost or market. Cost of inventories of
crude oil and refined products is determined under the last-in, first-out
(LIFO) method.
(In millions)
-----------------------
June 30 December 31
2002 2001
------- -----------
Crude oil and natural gas liquids $670 $693
Refined products and merchandise 1,308 1,143
Supplies and sundry items 99 87
------ ------
Total (at cost) 2,077 1,923
Less inventory market valuation reserve - 72
------ ------
Net inventory carrying value $2,077 $1,851
====== ======
Marathon has established an inventory market valuation (IMV) reserve to
adjust 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 include a credit to income from
operations of $72 million.
9. The following sets forth Marathon's comprehensive income for the periods
shown:
Second Quarter Six Months
Ended Ended
June 30 June 30
(In millions) 2002 2001 2002 2001
------------- ------ ------ ------ ------
Net income $168 $552 $235 $1,061
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments (2) - (3) (2)
Deferred gains (losses) on derivative instruments (8) 8 (39) 42
Pensions - 2 - 2
------ ------ ------ ------
Total comprehensive income $158 $562 $193 $1,103
====== ====== ====== ======
During the second quarter of 2002, $9 million of gains, net of tax, were
reclassified into earnings as a result of the discontinuance of cash flow
hedges because it is no longer probable the original forecasted
transactions will occur.
19
MARATHON OIL CORPORATION
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
10. The provision for income taxes for the periods reported is based on tax
rates and amounts which recognize management's best estimate of current and
deferred tax assets and liabilities.
The first six months of 2002 and 2001 tax provision amounts include a
foreign deferred tax benefit of $1 million and $9 million, respectively,
related to reductions in the statutory rate enacted in the Canadian
province of Alberta. Also, in the first six months of 2002 and 2001, the
provision for income taxes includes unfavorable adjustments of $4 million
and $5 million, respectively, related to prior years' taxes.
Interest and other financial costs in the six months of 2001 included a
favorable adjustment of $9 million related to certain prior years' taxes.
11. At June 30, 2002, Marathon had no borrowings against its $1,354 million
long-term revolving credit facility and no borrowings against its $451
million short-term revolving credit facility. In April 2002, Marathon
initiated a $1,350 million U.S. commercial paper program which is backed by
the long-term revolving credit facility of which $135 million was
outstanding at June 30, 2002.
Certain banks provide Marathon with uncommitted short-term lines of credit
totaling $200 million. At June 30, 2002, there were no borrowings against
these facilities.
At June 30, 2002, MAP had no borrowings against its $450 million revolving
credit agreements with banks and had $47 million outstanding against its
$190 million revolving credit agreement with Ashland, Inc., which was
amended and extended for one year to March 15, 2003.
At June 30, 2002, in the event of a change in control of Marathon, debt
obligations totaling $2,438 million and operating lease obligations of $100
million may be declared immediately due and payable. In such event,
Marathon may also be required to either repurchase the leased Fairfield
slab caster for $96 million or provide a letter of credit to secure the
remaining obligation.
12. In early June 2002, Marathon Global Funding Corporation, a 100%-owned
consolidated finance subsidiary of Marathon, issued notes of $400 million
due 2012, bearing interest at 6.000%. Marathon has fully and
unconditionally guaranteed the securities. Marathon used the net proceeds
to reduce outstanding commercial paper, to fund the purchase price and
associated costs of the June 2002 acquisition of Globex Energy, Inc. for
approximately $155 million and for other general corporate purposes.
In late May 2002, Marathon issued notes of $450 million due 2007, bearing
interest at 5.375%. Marathon used the net proceeds to improve the debt
portfolio by refinancing existing debt, including approximately $337
million aggregate principal amount of debt Marathon agreed to repurchase or
retire early. The debt repurchased and retired early had average terms to
maturity of between two and 21 years bearing interest at rates ranging from
8.125% to 9.375% per year, or a weighted average of 9.04% per year. The
retirement of $193 million in the second quarter resulted in a pre-tax
extraordinary loss of $41 million ($26 million net of taxes or $0.08 per
share). The remaining net proceeds were used to reduce outstanding
commercial paper issued to fund working capital requirements and for other
general corporate purposes.
20
MARATHON OIL CORPORATION
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
12. (Continued)
In early March 2002, Marathon issued notes of $450 million due 2012 and
$550 million due 2032, bearing interest at 6.125% and 6.8%, respectively.
Marathon used the net proceeds to repay amounts borrowed to fund the
purchase price and associated costs of the January 2002 acquisition of
interests in oil and gas properties and related assets in Equatorial
Guinea, West Africa. Marathon initially funded this acquisition through a
combination of borrowings under long-term and short-term revolving credit
facilities, borrowings under other short-term credit facilities and cash on
hand.
13. Marathon is the subject of, or party to, a number of pending or threatened
legal actions, contingencies and commitments involving a variety of
matters, including laws and regulations relating to the environment.
Certain of these matters are discussed below. The ultimate resolution of
these contingencies could, individually or in the aggregate, be material to
the consolidated financial statements. However, management believes that
Marathon will remain a viable and competitive enterprise even though it is
possible that these contingencies could be resolved unfavorably.
Marathon is subject to federal, state, local and foreign laws and
regulations relating to the environment. These laws generally provide for
control of pollutants released into the environment and require responsible
parties to undertake remediation of hazardous waste disposal sites.
Penalties may be imposed for noncompliance. At June 30, 2002 and December
31, 2001, accrued liabilities for remediation totaled $74 million and $77
million, respectively. It is not presently possible to estimate the
ultimate amount of all remediation costs that might be incurred or the
penalties that may be imposed. Receivables for recoverable costs from
certain states, under programs to assist companies in cleanup efforts
related to underground storage tanks at retail marketing outlets, were $57
million at June 30, 2002, and $60 million at December 31, 2001.
For a number of years, Marathon has made substantial capital expenditures
to bring existing facilities into compliance with various laws relating to
the environment. In the six months of 2002 and for the years 2001 and 2000,
such capital expenditures totaled $17 million, $67 million and $73 million,
respectively. Marathon anticipates making additional such expenditures in
the future; however, the exact amounts and timing of such expenditures are
uncertain because of the continuing evolution of specific regulatory
requirements.
At June 30, 2002 and December 31, 2001, accrued liabilities for platform
abandonment and dismantlement totaled $212 million and $193 million,
respectively.
Marathon guaranteed certain obligations related to the business of United
States Steel. As of June 30, 2002 and December 31, 2001, the exposure for
all of these matters totaled $22 million and $28 million, respectively.
21
MARATHON OIL CORPORATION
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
13. (Continued)
United States Steel is the sole general partner of Clairton 1314B
Partnership, L.P., which owns certain cokemaking facilities formerly owned
by United States Steel. Marathon has guaranteed to the limited partners all
obligations of United States Steel under the partnership documents. United
States Steel may dissolve the partnership under certain circumstances,
including if it is required to fund accumulated cash shortfalls of the
partnership in excess of $150 million. In addition to the normal
commitments of a general partner, United States Steel has indemnified the
limited partners for certain income tax exposures. United States Steel
currently has no unpaid outstanding obligations to the limited partners.
At June 30, 2002, and December 31, 2001, Marathon's pro rata share of
obligations of LOOP LLC and various pipeline investees secured by
throughput and deficiency agreements totaled $167 million and $168 million,
respectively. Under the agreements, Marathon is required to advance funds
if the investees are unable to service debt. Any such advances are
prepayments of future transportation charges.
At June 30, 2002, and December 31, 2001, MAP had guaranteed the repayment
of $47 million and $35 million, respectively of the outstanding balance of
Centennial Pipeline LLC's Master Shelf Agreement.
At June 30, 2002, and December 31, 2001, Marathon's contract commitments to
acquire property, plant and equipment and long-term investments totaled
$500 million and $297 million, respectively.
22
MARATHON OIL CORPORATION AND SUBSIDIARY COMPANIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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. Management's Discussion and Analysis
should be read in conjunction with the Consolidated Financial Statements and
Notes to Consolidated Financial Statements. The discussion of the Consolidated
Statement of Income should be read in conjunction with the Supplemental
Statistics provided on page 43.
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. 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 one-for-one basis (the
Separation).
Certain sections of Management's Discussion and Analysis include
forward-looking statements concerning trends or events potentially affecting
Marathon. These statements typically contain words such as "anticipates",
"believes", "estimates", "expects" or similar words indicating that future
outcomes are uncertain. In accordance with "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995, these statements are
accompanied by 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. For
additional risk factors affecting the businesses of Marathon, see the
information preceding Part I in the Marathon 2001 Form 10-K and subsequent
filings.
New Accounting Standards
Since the issuance of Statement of Financial Accounting Standards No. 133
"Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133),
the FASB has issued several interpretations. As a result, Marathon has
recognized in income beginning on January 1, 2002, the effect of changes in the
fair value of two long-term natural gas sales contracts in the United Kingdom
(U.K.). As of January 1, 2002, Marathon recognized a favorable cumulative effect
of a change in accounting principle of $13 million, net of tax of $7 million.
The favorable pretax change in the fair value of the gas contracts during the
first six months of 2002 was $12 million. The recorded derivative assets will
continue to be marked-to-market. Marathon expects to experience some volatility
in earnings as a result of these interpretations.
Effective January 1, 2002, Marathon adopted the following Statements of
Financial Accounting Standards:
o No. 141 "Business Combinations" (SFAS No. 141),
o No. 142 "Goodwill and Other Intangible Assets" (SFAS No. 142) and
o No. 144 "Accounting for Impairment or Disposal of Long-Lived Assets"
(SFAS No. 144).
23
MARATHON OIL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SFAS No. 141 requires that all business combinations initiated after June
30, 2001, be accounted for under the purchase method. The transitional
provisions of SFAS No. 141 required Marathon to reclassify $11 million from
identifiable intangible assets to goodwill at January 1, 2002.
SFAS No. 142 addresses the accounting for goodwill and other intangible
assets after an acquisition. Effective January 1, 2002, Marathon ceased
amortization of all goodwill, which results in a favorable impact on annual
earnings of approximately $3 million, net of tax. Marathon has completed the
required transitional impairment test for existing goodwill as of the date of
adoption. No impairment of goodwill was indicated.
SFAS No. 144 establishes a single accounting model for long-lived assets to
be disposed of by sale and provides additional implementation guidance for
assets to be held and used and assets to be disposed of other than by sale. For
long-lived assets to be disposed of by sale, SFAS No. 144 broadens the
definition of those disposals that should be reported separately as discontinued
operations. The adoption of SFAS No. 144 had no initial effect on Marathon's
financial statements.
In June 2001, the FASB issued Statement of Financial Accounting Standard
No. 143 "Accounting for Asset Retirement Obligations" (SFAS No. 143). Marathon
will adopt this Statement effective January 1, 2003, as required. The adoption
of this Standard will result in a cumulative effect and be reported as a change
in accounting principle. At this time, Marathon cannot reasonably estimate the
effect of adoption on either its financial position or results of operations.
In April 2002, the FASB issued Statement of Financial Accounting Standard
No. 145 "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections" (SFAS No. 145). Extinguishment of
debt will be accounted for in accordance with Accounting Principles Board
Opinion No. 30 "Reporting the Results of Operations Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions". SFAS No. 145 has a dual effective date. The
provisions relating to accounting for leases were applicable to transactions
occurring after May 15, 2002. The provisions relating to the early
extinguishment of debt will be adopted by Marathon on January 1, 2003. As a
result, losses from the early extinguishment of debt in 2002, which are
currently reported as extraordinary items, will be reported in income from
continuing operations in comparative financial statements subsequent to the
adoption of SFAS No. 145.
In June 2002, the FASB issued Statement of Financial Accounting Standard
No. 146 "Accounting for Exit or Disposal Activities" (SFAS No. 146). SFAS No.
146 will be effective for exit or disposal activities that are initiated after
December 31, 2002.
24
MARATHON OIL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Revenues and other income for the second quarter and first six months of
2002 and 2001 are summarized in the following table:
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions) 2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------
Exploration & production $1,038 $1,276 $1,875 $2,670
Refining, marketing & transportation 6,799 7,569 12,127 14,338
Other energy related businesses 525 543 987 1,266
------ ------ ------ ------
Segment revenues and other income 8,362 9,388 14,989 18,274
Revenues and other income not allocated to segments:
Gain (loss) on ownership change in MAP 2 (7) 4 (6)
Gain on lease resolution with the
U.S. Government - - - 59
Elimination of intersegment revenues (237) (205) (412) (417)
Elimination of sales to United States Steel - (8) - (20)
----- ----- ------ ------
Total revenues and other income $8,127 $9,168 $14,581 $17,890
====== ====== ====== ======
Items included in both revenues and costs and expenses,
resulting in no effect on income:
Consumer excise taxes on petroleum
products and merchandise $1,083 $1,132 $2,079 $2,170
Matching crude oil, gas and refined product
buy/sell transactions settled in cash:
E&P 77 127 149 233
RM&T 1,056 904 1,889 1,897
------ ------ ------ ------
Total buy/sell transactions $1,133 $1,031 $2,038 $2,130
====== ====== ====== ======
E&P segment revenues decreased by $238 million in the second quarter of
2002 from the comparable prior-year period. For the first six months of 2002,
revenues decreased by $795 million from the prior-year period. The decrease in
both periods primarily reflected lower worldwide natural gas and liquid
hydrocarbon prices and lower gains from derivative activities, partially offset
by higher international liquid hydrocarbon volumes and higher domestic liquid
hydrocarbon prices in the second quarter of 2002.
25
MARATHON OIL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RM&T segment revenues decreased by $770 million in the second quarter of
2002 from the comparable prior-year period. For the first six months of 2002,
revenues decreased by $2,211 million from the prior-year period. The decrease in
both periods primarily reflected lower refined product prices.
OERB revenues decreased by $18 million in the second quarter of 2002 from
the comparable prior-year period. For the first six months of 2002, revenues
decreased by $279 million from the prior-year period. The decrease in the first
six months primarily reflected lower natural gas prices.
Income from operations for the second quarter and first six months of 2002
and 2001 is summarized in the following table:
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions) 2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------
E&P
Domestic $189 $358 $271 $800
International 73 85 156 243
------ ------ ------ ------
E&P segment income 262 443 427 1,043
RM&T 211 842 160 1,118
OERB 20 26 45 34
------ ------ ------ ------
Segment income 493 1,311 632 2,195
Items not allocated to segments:
Administrative expenses (39) (51) (83) (87)
Inventory Market Valuation 1 - 72 -
Gain (loss) on ownership change - MAP 2 (7) 4 (6)
Gain on lease resolution with U.S. Government - - - 59
------ ------ ------ ------
Total income from operations $457 $1,253 $625 $2,161
====== ====== ====== ======
In the second quarter of 2002 segment income decreased by $818 million from
last year's second quarter. Segment income in the first six months of 2002
decreased by $1,563 million from the first six months of 2001. The decrease in
both periods was due primarily to lower worldwide natural gas and liquid
hydrocarbon prices, lower refined product margins and lower worldwide natural
gas volumes. This was partially offset by higher liquid hydrocarbon volumes.
Worldwide E&P segment income in the second quarter of 2002 decreased by
$181 million from last year's second quarter, primarily due to the factors
discussed below.
Domestic E&P income in the second quarter of 2002 decreased by $169 million
from last year's second quarter. Results in the first six months of 2002
decreased by $529 million from the same period in 2001. These decreases were
mainly due to lower natural gas prices, lower liquid hydrocarbon and natural gas
volumes, partially offset by slightly higher liquid hydrocarbon prices in the
second quarter. Other factors included higher exploratory dry well expense and
decreases in derivative gains, partially offset by lower production taxes.
26
MARATHON OIL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
International E&P income in the second quarter of 2002 decreased by $12
million from last year's second quarter. Results in the first six months of 2002
decreased by $87 million from the same period in 2001. These decreases were
mainly due to lower natural gas and liquid hydrocarbon prices and higher
depreciation expense. This was partially offset by higher liquid hydrocarbon
volumes. The higher volumes and depreciation expense largely resulted from a
second quarter 2002 U.K. overlift versus a second quarter 2001 underlift. In
addition, the first six months of 2002 income includes a $12 million gain
related to changes in the fair value of natural gas sales contracts in the U.K.
See Note 3 to the Consolidated Financial Statements.
RM&T segment income in the second quarter of 2002 decreased by $631 million
from last year's second quarter. Results in the first six months of 2002
decreased by $958 million from the same period in 2001. The decrease in
downstream segment income was primarily due to a significantly lower refining
and wholesale marketing gross margin. The refining and wholesale marketing gross
margin was severely compressed in the first six months of 2002 as refined
product prices declined more quickly than crude oil and other raw material
costs. A narrowing of the price differential between sweet and sour crude oil in
the first six months of 2002 also negatively impacted the refining and wholesale
marketing gross margin.
OERB segment income in the second quarter of 2002 decreased by $6 million
from last year's second quarter. Results in the first six months of 2002
increased by $11 million from the same period in 2001. This decrease in the
second quarter was primarily due to a loss at the newly acquired AMPCO Methanol
Plant in Equatorial Guinea, in which Marathon holds a 45-percent interest. An
unplanned 62-day shutdown occurred during the second quarter. Also, earnings
from Marathon's equity investments in various pipelines decreased from the same
period in the prior year. The increase for the six months was primarily the net
result of marked-to-market valuation changes in derivatives used to support
gas marketing margins.
Net interest and other financial costs for the second quarter and the first
six months of 2002 increased $34 million and $56 million, respectively, from the
comparable 2001 period. These increases were due to higher average debt levels
resulting from acquisitions and the Separation. Also, in the first six months of
2001, interest and other financial costs included a favorable adjustment of $9
million related to prior year taxes.
The minority interest in income of MAP, which represents Ashland's 38
percent ownership interest, decreased $238 million and $334 million in the
second quarter and the first six months of 2002, respectively, from the
comparable 2001 periods, due to lower RM&T segment income as discussed above.
The provision for income taxes in the second quarter and the first six
months of 2002 decreased by $206 million and $425 million from the comparable
2001 period primarily due to a decrease in income before income taxes. The first
six months of 2002 and 2001 tax provision amounts include a foreign deferred tax
benefit of $1 million and $9 million, respectively related to reductions in the
statutory rate enacted in the Canadian province of Alberta. Also, in the first
six months of 2002 and 2001, the provision for income taxes includes unfavorable
adjustments of $4 million and $5 million, respectively, related to prior years'
taxes.
27
MARATHON OIL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Discontinued operations in the first six months 2001 related to the
businesses of United States Steel.
Extraordinary loss from early extinguishment of debt in the second quarter
2002 was attributable to the $193 million of long-term debt retired, resulting
in a pre-tax extraordinary loss of $41 million ($26 million net of taxes or $.08
per share). In July 2002, Marathon retired an additional $144 million, resulting
in a pre-tax extraordinary loss of $12 million ($7 million net of taxes) which
will be recognized in the third quarter.
The cumulative effect of changes in accounting principles of $13 million,
net of a tax provision of $7 million in the first six months of 2002 represents
the adoption of recently issued interpretations by the FASB of SFAS No. 133 in
which Marathon must recognize in income the effect of changes in the fair value
of two long term natural gas contracts in the United Kingdom. The $8 million
loss, net of a tax benefit of $5 million, in the first six months of 2001 was an
unfavorable transition adjustment related to the adoption of SFAS No. 133. For
further discussion, see Note 3 to the Consolidated Financial Statements.
Net income for the second quarter and first six months decreased by $384
million and $826 million, respectively, in 2002 from 2001, primarily reflecting
the factors discussed above.
Dividends to Stockholders
On July 31, 2002, the Marathon Board of Directors (the Board) declared
dividends of 23 cents per share, payable September 10, 2002, to stockholders of
record at the close of business on August 21, 2002.
Cash Flows
Net cash provided from operating activities was $734 million in the first
six months of 2002, compared with $1,789 million (from continuing operations) in
the first six months of 2001. The $1,055 million decrease mainly reflects the
effects of lower refined product margins and lower prices for natural gas and
liquid hydrocarbons.
Capital expenditures in the first six months of 2002 totaled $640 million
excluding the acquisitions of Equatorial Guinea interests, compared with $628
million in the first six months of 2001. The $12 million increase mainly
reflected increased spending in the first six months of 2002 in the E&P segment
offset by decreased spending in the RM&T segment. For information regarding
capital expenditures by segment, refer to the Supplemental Statistics on page
43.
Acquisitions included cash payments of $1,160 million in the first six
months of 2002 for the two acquisitions of Equatorial Guinea interests and $506
million in the first six months of 2001 for Pennaco Energy, Inc. (Pennaco). For
further discussion of acquisitions, see Note 6 to the Consolidated Financial
Statements.
28
MARATHON OIL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cash from disposal of assets was $31 million in the first six months of
2002, compared with $106 million in the first six months of 2001. In 2002
proceeds were primarily from the disposition of certain Speedway SuperAmerica
LLC (SSA) stores. Proceeds in 2001 were mainly from the sale of various Canadian
oil fields, various domestic producing properties and certain SSA stores.
Net cash provided from financing activities was $712 million in the first
six months of 2002, compared with net cash used of $689 million in the first six
months 2001. The increase was due to the financing primarily associated with the
two acquisitions of Equatorial Guinea interests of approximately $1.2 billion.
This was partially offset by the early extinguishment of debt of $193 million
and the $295 million repayment of preferred securities which became redeemable
or were converted to a right to receive cash upon the Separation. In early
January 2002, Marathon paid $185 million to retire the 6.75% Convertible
Quarterly Income Preferred Securities and $110 million to retire the 6.50%
Cumulative Convertible Preferred Stock.
Significant non-cash activities in the first six months of 2002 included an
asset exchange with XTO Energy Inc. (XTO) whereby Marathon acquired additional
interests in coalbed methane assets in the Powder River Basin of northern
Wyoming and southern Montana in exchange for certain oil and gas properties in
eastern Texas and northern Louisiana. This exchange was part of a larger
transaction with XTO completed in the third quarter.
Derivative Instruments
See Quantitative and Qualitative Disclosure About Market Risk for
discussion of derivative instruments and associated market risk.
Debt Ratings
Marathon's senior unsecured debt is currently rated investment grade by
Standard and Poor's Corporation, Moody's Investor Services, Inc. and Fitch
Ratings with ratings of BBB+, Baa1, and BBB+, respectively.
Liquidity
Marathon's main sources of liquidity and capital resources are internally
generated cash flow from operations, committed and uncommitted credit
facilities, and access to both the debt and equity capital markets. Marathon's
ability to access the debt capital market is supported by its investment grade
credit ratings. Because of the liquidity and capital resource alternatives
available to Marathon, including internally generated cash flow, Marathon's
management believes that its short-term and long-term liquidity is adequate to
fund operations, including its capital spending program, repayment of debt
maturities for the years 2002, 2003, and 2004, and any amounts that may
ultimately be paid in connection with contingencies.
29
MARATHON OIL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Marathon has a committed $1,354 million long-term revolving credit facility
and a committed $451 million 364-day revolving credit facility. At June 30,
2002, there were no borrowings against these facilities. In April 2002, Marathon
initiated a $1,350 million U.S. commercial paper program which is backed by the
long-term revolving credit facility of which $135 million was outstanding at
June 30, 2002. Additionally, at June 30, 2002, Marathon had other uncommitted
short-term lines of credit totaling $200 million, of which no amounts were
drawn. MAP currently has a committed $350 million revolving credit facility. MAP
had an additional committed $100 million 364-day revolving credit facility which
expired in July 2002. As of June 30, 2002, MAP did not have any borrowings
against these facilities and had $47 million outstanding under its $190 million
revolving credit agreement with Ashland.
In early June 2002, Marathon Global Funding Corporation, a 100%-owned
consolidated finance subsidiary of Marathon, issued notes of $400 million due
2012, bearing interest at 6.0%. Marathon has fully and unconditionally
guaranteed the securities. Marathon used the net proceeds to reduce outstanding
commercial paper, to fund the purchase price and associated costs of the June
2002 acquisition of Globex Energy, Inc. for approximately $155 million and for
other general corporate purposes.
In late May 2002, Marathon issued notes of $450 million due 2007, bearing
interest at 5.375%. Marathon used the net proceeds to improve the debt portfolio
by refinancing existing debt, including approximately $337 million aggregate
principal amount of debt Marathon agreed to repurchase or retire early. The debt
repurchased and retired early had average terms to maturity of between two and
21 years bearing interest at rates ranging from 8.125% to 9.375% per year, or a
weighted average of 9.04% per year. The retirement of $193 million in the second
quarter resulted in a pre-tax extraordinary loss of $41 million ($26 million net
of taxes or $0.08 per share). In July 2002, Marathon retired an additional $144
million, resulting in a pre-tax extraordinary loss of $12 million ($7 million
net of taxes) which will be recognized in the third quarter. The remaining net
proceeds were used to reduce outstanding commercial paper issued to fund working
capital requirements and for other general corporate purposes.
In early March 2002, Marathon issued notes of $450 million due 2012 and
$550 million due 2032, bearing interest at 6.125% and 6.8%, respectively.
Marathon used the net proceeds to repay amounts borrowed to fund the purchase
price and associated costs of the January 2002 acquisition of interests in oil
and gas properties and related assets in Equatorial Guinea, West Africa.
Marathon initially funded this acquisition through a combination of borrowings
under long-term and short-term revolving credit facilities, borrowings under
other short-term credit facilities and cash on hand.
30
MARATHON OIL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Marathon is not dependent on off-balance sheet arrangements to meet its
liquidity and capital resource needs. Marathon has used and may use in the
future off-balance sheet arrangements to fund specific projects. For additional
details of off-balance sheet arrangements, see Liquidity and Capital Resources
on page 38 of the Annual Report on Form 10-K.
Contract commitments for property, plant and equipment acquisitions and
long-term investments at June 30, 2002, totaled $500 million compared with $297
million at December 31, 2001.
In April 2002, Marathon cancelled its common stock repurchase program and
reinstated its dividend reinvestment program and direct stock purchase plan for
first-time, non-employee purchasers of Marathon common stock. Since the stock
repurchase program was authorized, Marathon acquired 3,976,800 shares of common
stock at a cost of $106 million as Marathon's financial condition and market
conditions warranted.
Marathon management's opinion concerning liquidity and Marathon's ability
to avail itself in the future of the financing options mentioned in the above
forward-looking statements are based on currently available information. To the
extent that this information changes, future availability of financing may be
adversely affected. Factors that affect the availability of financing include
the performance of Marathon (as measured by various factors including cash
provided from operating activities), the state of worldwide debt and equity
markets, investor perceptions and expectations of past and future performance,
the global financial climate, and, in particular, with respect to borrowings,
the levels of Marathon's outstanding debt and credit ratings by rating agencies.
31
MARATHON OIL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Obligations Associated with the Separation of United States Steel
Marathon remains obligated (primarily or contingently) for certain debt and
other financial arrangements for which United States Steel has assumed
responsibility for repayment under the terms of the Separation. In the event of
United States Steel's failure to satisfy these obligations, Marathon would
become responsible for repayment. As of June 30, 2002, Marathon has identified
the following obligations totaling $691 million which have been assumed by
United States Steel:
o $470 million of industrial revenue bonds related to environmental
improvement projects for current and former United States Steel
facilities, with maturities ranging from 2009 through 2033. Accrued
interest payable on these bonds was $6 million at June 30, 2002.
o $84 million of sale-leaseback financing under a lease for equipment at
United States Steel's Fairfield Works, with a term extending to 2012,
subject to extensions. Accrued interest payable on this financing was
$5 million at June 30, 2002.
o $104 million of operating lease obligations, of which $89 million was
in turn assumed by purchasers of major equipment used in plants and
operations divested by United States Steel.
o A guarantee of United States Steel's $22 million contingent obligation
to repay certain distributions from its 50%-owned joint venture
PRO-TEC Coating Company.
o A guarantee of all obligations of United States Steel as general
partner of Clairton 1314B Partnership, L.P. to the limited partners.
United States Steel currently has no unpaid outstanding obligations to
the limited partners. For further discussion of the Clairton 1314B
guarantee, see Note 13 to the Consolidated Financial Statements.
Of the total $691 million, obligations of $565 million and corresponding
receivables from United States Steel were recorded on Marathon's consolidated
balance sheet (current portion - $14 million; long-term portion - $551 million).
The remaining $126 million was related to off-balance sheet arrangements and
contingent liabilities of United States Steel.
Each of Marathon and United States Steel, as members of the same
consolidated tax reporting group during taxable periods ended on or prior to
December 31, 2001, is jointly and severally liable for the federal income tax
liability of the entire consolidated tax reporting group for those periods.
Marathon and United States Steel have entered into a tax sharing agreement which
allocates tax liabilities relating to taxable periods ended on or prior to
December 31, 2001. To address the possibility that the taxing authorities may
seek to collect a tax liability from one party where the tax sharing agreement
allocates that liability to the other party, the agreement includes
indemnification provisions. United States Steel currently has no unpaid
outstanding obligations to Marathon under the tax sharing agreement.
United States Steel reported in its Form 10-Q for the quarterly period
ended June 30, 2002, that it has significant restrictive covenants related to
its indebtedness including cross-default and cross-acceleration clauses on
selected debt which could have an adverse effect on its financial position and
liquidity. However, United States Steel management believes that its liquidity
will be adequate to satisfy its obligations for the foreseeable future. If there
is a prolonged delay in the recovery of the manufacturing sector of the U.S.
economy, United States Steel believes that it can maintain adequate liquidity
through a combination of deferral of nonessential capital spending, sale of
non-strategic assets and other cash conservation measures.
32
MARATHON OIL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Environmental Matters, Contingencies and Commitments
Marathon has incurred and will continue to incur substantial capital,
operating and maintenance, and remediation expenditures as a result of
environmental laws and regulations. To the extent these expenditures, as with
all costs, are not ultimately reflected in the prices of Marathon's products and
services, operating results will be adversely affected. Marathon believes that
substantially all of its competitors are subject to similar environmental laws
and regulations. However, the specific impact on each competitor may vary
depending on a number of factors, including the age and location of its
operating facilities, marketing areas, production processes and whether or not
it is engaged in the petrochemical business or the marine transportation of
crude oil and refined products.
Marathon has been notified that it is a potentially responsible party (PRP)
at 12 waste sites under the Comprehensive Environmental Response, Compensation
and Liability Act (CERCLA) as of June 30, 2002. In addition, there are three
sites where Marathon has received information requests or other indications that
Marathon may be a PRP under CERCLA but where sufficient information is not
presently available to confirm the existence of liability. There are also 113
additional sites, excluding retail marketing outlets, related to Marathon where
remediation is being sought under other environmental statutes, both federal and
state, or where private parties are seeking remediation through discussions or
litigation. Of these sites, 13 were associated with properties conveyed to MAP
by Ashland for which Ashland has retained liability for all costs associated
with remediation. At many of these sites, Marathon is one of a number of parties
involved and the total cost of remediation, as well as Marathon's share thereof,
is frequently dependent upon the outcome of investigations and remedial studies.
Marathon accrues for environmental remediation activities when the
responsibility to remediate is probable and the amount of associated costs is
reasonably determinable. As environmental remediation matters proceed toward
ultimate resolution or as additional remediation obligations arise, charges in
excess of those previously accrued may be required. See Note 13 to the
Consolidated Financial Statements.
New or expanded environmental requirements, which could increase Marathon's
environmental costs, may arise in the future. Marathon intends to comply with
all legal requirements regarding the environment, but since many of them are not
fixed or presently determinable (even under existing legislation) and may be
affected by future legislation, it is not possible to predict accurately the
ultimate cost of compliance, including remediation costs which may be incurred
and penalties which may be imposed. However, based on presently available
information, and existing laws and regulations as currently implemented,
Marathon does not anticipate that environmental compliance expenditures
(including operating and maintenance and remediation) will materially increase
in 2002. Marathon's environmental capital expenditures are expected to be
approximately $130 million in 2002. Predictions beyond 2002 can only be
broad-based estimates, which have varied, and will continue to vary, due to the
ongoing evolution of specific regulatory requirements, the possible imposition
of more stringent requirements and the availability of new technologies, among
other matters. Based upon currently identified projects, Marathon anticipates
that environmental capital expenditures will be approximately $157 million in
2003; however, actual expenditures may vary as the number and scope of
environmental projects are revised as a result of improved technology or changes
in regulatory requirements and could increase if additional projects are
identified or additional requirements are imposed.
33
MARATHON OIL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Environmental Matters, Contingencies and Commitments - (Continued)
Marathon is the subject of, or a party to, a number of pending or
threatened legal actions, contingencies and commitments involving a variety of
matters, including laws and regulations relating to the environment. See Note 13
to the Consolidated Financial Statements for a discussion of certain of these
matters. The ultimate resolution of these contingencies could, individually or
in the aggregate, be material to Marathon. However, management believes that
Marathon will remain a viable and competitive enterprise even though it is
possible that these contingencies could be resolved unfavorably to Marathon. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity".
Credit Risk
Marathon is exposed to credit risk in the form of possible nonpayment by
customers and trading partners. A significant portion of this risk is
concentrated in energy related businesses. The creditworthiness of customers and
trading partners is subject to continuing review. When deemed appropriate,
Marathon requires prepayment or letters of credit to secure credit exposure.
Additionally, netting agreements are utilized to reduce exposures to firms with
both receivables and payables. Marathon has in the past and continues to conduct
business with the so-called "energy merchant" firms. Many of these firms have
seen their credit ratings deteriorate during 2002. As a result, Marathon has
reduced its exposure to these entities. In some cases security has been
requested and, in other cases, all business activity has been stopped. Marathon
estimates its aggregate net exposure to energy merchant companies to be less
than $25 million with no individual company exposure greater than $10 million.
Marathon has significant exposures to United States Steel arising from the
separation. Those exposures are discussed in "Obligations Associated with the
Separation of United States Steel".
Outlook
The outlook regarding Marathon's E&P segment revenues and income is largely
dependent upon future prices and volumes of liquid hydrocarbons and natural gas.
Prices have historically been volatile and have frequently been affected by
unpredictable changes in supply and demand resulting from fluctuations in
worldwide economic activity and political developments in the world's major oil
and gas producing and consuming regions. Any significant decline in prices could
have a material adverse effect on Marathon's results of operations. A prolonged
decline in such prices could also adversely affect the quantity of crude oil and
natural gas reserves that can be economically produced and the amount of capital
available for exploration and development.
In 2002, worldwide production is expected to average 420,000 barrels of oil
equivalent per day, split evenly between liquid hydrocarbons and natural gas,
including Marathon's proportionate share of equity investee's production.
Through the projects undertaken during the past 18 months, Marathon anticipates
increasing production to an approximate range of 430,000 to 435,000 boepd by
2004 and expects to increase proven reserves by approximately 40 percent from
2001 to 2004, which equates to an average 190-percent reserve replacement per
year.
In 2002, Marathon plans to drill, or complete drilling operations on, two
or three deepwater wells in the Gulf of Mexico.
34
MARATHON OIL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Outlook - (Continued)
Other major upstream projects, which are currently underway or under
evaluation, include:
o Norway, where Marathon has interests in nine licenses in the Norwegian
sector of the North Sea;
o Alaska, where Marathon had a natural gas discovery on the Ninilchik
Unit on the Kenai Peninsula with additional drilling planned in 2002;
o Angola, where Marathon is participating in the drilling of one
exploration well and expects to participate in the drilling of up to
two additional exploration wells during 2002;
o Eastern Canada, where Marathon has recently completed drilling the
Annapolis well; and
o Equatorial Guinea, where expansion plans to boost gas and condensate
production from 250 to approximately 800 mmcfd and increase condensate
production such that condensate and LPG exports total approximately
50,000 gross blpd by the third quarter of 2003.
Marathon recently acquired an additional 125 mmcfd of long term gas
transportation capacity out of the Rocky Mountain region into midcontinent gas
market hubs. The acquisition of this additional firm transportation provides
protection against lower local price differentials.
Marathon has proposed plans for a major liquefied natural gas (LNG)
re-gasification and power generation complex near Tijuana in the Mexican State
of Baja California. The proposed complex would consist of a LNG marine terminal,
an off-loading terminal, onshore LNG re-gasification facilities, and pipeline
infrastructure necessary to transport the natural gas. Additionally, a 1,000
megawatt natural gas-fired power generation plant would be constructed on the
site. Completion and potential start-up is projected for 2005.
In the North Sea, the Symphony natural gas pipeline project, another key
component of Marathon'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 U.K., Norwegian and European
regulatory officials, satisfactory supply commitments and financing
arrangements.
Marathon recently received the U.K. Department of Trade and Industry's
approval of the development plan for the Braemar Field and the Brae-Miller Link
Line in the UK North Sea. Braemar is a gas and condensate reservoir located in
the Central North Sea some 189 miles northeast of Aberdeen in approximately 413
feet of water. Gas and condensate will be produced from a single subsea wellhead
and transported in an insulated pipe-in-pipe flowline to the Marathon-operated
East Brae platform 7 miles away where the gas and liquids will be processed.
Liquids will be delivered from East Brae to the Forties pipeline system for
transportation onshore. First production is expected in the fourth quarter of
2003 at an initial rate of approximately 46 mmcfd and 4,000 barrels of
condensate.
35
MARATHON OIL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Outlook - (Continued)
In July 2002, the United Kingdom enacted a supplementary 10 percent tax on
profits from North Sea oil and gas production retroactively effective to April
17, 2002. Marathon has approximately 19 percent of current year production
originating from the U.K. It is anticipated that the U.K. tax law change will
add approximately 2 percentage points to Marathon's effective tax rate beginning
in the third quarter, excluding a one-time non-cash deferred tax adjustment. The
non-cash deferred tax adjustment to be recognized in third quarter 2002 results
is expected to increase the consolidated tax provision by approximately $60
million to $65 million.
On August 6, 2002, Marathon announced it will begin expensing the fair
value of employee stock options on January 1, 2003. Marathon will adopt
Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" (SFAS No. 123). Under this methodology, stock options will be
valued by using an option-pricing model, which expenses stock option grants over
the vesting period. Currently, Marathon accounts for stock options using the
principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB No. 25). Based upon this change, and assuming the
number of stock options granted in 2003 approximates the number of those granted
in 2002, the estimated impact on Marathon's 2003 earnings would not be
materially different than under APB No. 25.
On August 13, 2002, Marathon announced a gas discovery at the Annapolis
G-24 deepwater exploratory well offshore Nova Scotia. The Annapolis G-24 well is
located 215 miles south of Halifax in 5,500 feet of water. The well encountered
approximately 100 feet of net gas pay over several zones. The well will be
temporarily abandoned, allowing for re-entry at a later date. Marathon holds a
30 percent interest in the Annapolis prospect and serves as operator.
The above discussion includes forward-looking statements with respect to
the timing and levels of Marathon's worldwide liquid hydrocarbon and natural gas
production, the exploration drilling program, and the planned construction of
LNG and pipeline facilities. 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, 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 that could
affect the planned construction of the LNG re-gasification, power generation and
related facilities, as well as the North Sea pipeline transportation 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.
Additionally, the LNG project could be impacted by the availability or
construction of sufficient LNG vessels. The foregoing factors (among others)
could cause actual results to differ materially from those set forth in the
forward-looking statements.
36
MARATHON OIL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Outlook - (Continued)
Marathon's RM&T segment income is largely dependent upon the refining and
wholesale marketing margin for refined products, the retail gross margin for
gasoline and distillates, and the gross margin on retail merchandise sales. The
refining and wholesale marketing margin reflects the difference between the
wholesale selling prices of refined products and the cost of raw materials
refined, purchased product costs and manufacturing expenses. Refining and
wholesale marketing margins have been historically volatile and vary with the
level of economic activity in the various marketing areas, the regulatory
climate, the seasonal pattern of certain product sales, crude oil costs,
manufacturing costs, the available supply of crude oil and refined products, and
logistical constraints. The retail gross margin for gasoline and distillates
reflects the difference between the retail selling prices of these products and
their wholesale cost, including secondary transportation. Retail gasoline and
distillate margins have also been historically volatile, but tend to be
countercyclical to the refining and wholesale marketing margin. Factors
affecting the retail gasoline and distillate margin include seasonal demand
fluctuations, the available wholesale supply, the level of economic activity in
the marketing areas and weather situations that impact driving conditions. The
gross margin on retail merchandise sales tends to be less volatile than the
retail gasoline and distillate margin. Factors affecting the gross margin on
retail merchandise sales include consumer demand for merchandise items and the
level of economic activity in the marketing area.
At its Catlettsburg, Kentucky refinery, MAP has initiated a multi-year
integrated investment program to upgrade product yield realizations and reduce
fixed and variable manufacturing expenses. This program involves the expansion,
conversion and retirement of certain refinery processing units which, in
addition to improving profitability, will reduce the refinery's total gasoline
pool sulfur below 30 ppm, thereby eliminating the need for low sulfur gasoline
compliance investments at the refinery. The project is expected to be completed
in 2004.
A MAP subsidiary, Ohio River Pipe Line LLC (ORPL), plans to build a
pipeline from Kenova, West Virginia to Columbus, Ohio. ORPL is a common carrier
pipeline company and the pipeline will be an interstate common carrier pipeline.
The pipeline is currently known as Cardinal Products Pipe Line and is expected
to initially move about 50,000 barrels per day of refined petroleum into the
central Ohio region. As of June 2002, ORPL had secured all of the rights-of-way
required to build the pipeline, and on August 2, 2002, the final permits
required to build the pipeline were approved. Construction is currently planned
for the second half of 2002, with start-up of the pipeline expected to follow in
the first half of 2003.
The above discussion includes forward-looking statements with respect to
the Catlettsburg refinery and the Cardinal Products Pipe Line system. Some
factors that could potentially cause the actual results from the Catlettsburg
investment program to differ materially from current expectations include the
price of petroleum products, levels of cash flows from operations, unforeseen
hazards such as weather conditions and regulatory approval constraints. A factor
that could impact the Cardinal Products Pipe Line is completion of construction.
These factors (among others) could cause actual results to differ materially
from those set forth in the forward-looking statements.
37
MARATHON OIL CORPORATION
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Management Opinion Concerning Derivative Instruments
Management has authorized the use of futures, forwards, swaps and options
to manage exposure to market fluctuations related to commodities, interest
rates, and foreign currency.
Marathon uses commodity-based derivatives to manage price risk related to
the purchase, production or sale of crude oil, natural gas, and refined
products. To a lesser extent, Marathon is exposed to the risk of price
fluctuations on natural gas liquids and on petroleum feedstocks used as raw
materials. When it is deemed to be advantageous, E&P segment may lock-in market
prices on portions of its production. Marathon's RM&T segment generally uses
derivative commodity instruments to mitigate the price risk associated with
crude oil and other feedstocks, to protect carrying values of inventories and to
protect margins on fixed-price sales of refined products. Marathon's other
energy related businesses are exposed to market risk associated with the
purchase and subsequent resale of natural gas. Marathon uses derivative
instruments to mitigate the price risk on purchased volumes and anticipated
sales volumes. As market conditions change, Marathon evaluates its risk
management program and could enter into strategies that assume market risk
whereby cash settlement of commodity-based derivatives will be based on market
prices.
From time to time Marathon enters into financial instrument hedging
activities involving the economic hedging of interest rate exposures. As
derivative positions are entered into, assessments are made as to the
qualification of each transaction for hedge accounting under SFAS No. 133.
Management believes that use of derivative instruments along with risk
assessment procedures and internal controls does not expose Marathon to material
risk. However, the use of derivative instruments could materially affect
Marathon's results of operations in particular quarterly or annual periods.
Management believes that use of these instruments will not have a material
adverse effect on financial position or liquidity.
Commodity Price Risk and Related Risks
Marathon's strategy has generally been to obtain competitive prices for its
products and allow operating results to reflect market price movements dictated
by supply and demand. As part of achieving Marathon's strategy, certain
fixed-priced physical contracts are hedged using derivative instruments that
assume market risk. Marathon will use a variety of derivative instruments,
including option combinations, as part of the overall risk management program to
manage commodity price risk within its different businesses.
38
MARATHON OIL CORPORATION
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Commodity Price Risk and Related Risks - (Continued)
Sensitivity analysis of the incremental effects on pretax income of
hypothetical 10 percent and 25 percent changes in commodity prices for open
derivative commodity instruments are provided in the following table(a):
Incremental Decrease in
Income Before Income Taxes
Assuming a Hypothetical
Price Change of:(a)
(Dollars in millions) 10% 25%
- -----------------------------------------------------------------------------
Derivative Commodity Instruments(b)(c)
Crude oil(d) $ 1.7(e) $40.6(e)
Natural gas(d) 22.3(e) 68.1(e)
Refined products(d) 2.5(e) 8.5(e)
(a) Amounts adjusted to reflect Marathon's 62 percent ownership of MAP.
Marathon remains at risk for possible changes in the market value of
derivative instruments; however, such risk should be mitigated by
price changes in the underlying hedged item. Effects of these offsets
are not reflected in the sensitivity analysis. Amounts reflect
hypothetical 10% and 25% changes in closing commodity prices for each
open contract position at June 30, 2002. Marathon management evaluates
its portfolio of derivative commodity instruments on an ongoing basis
and adds or revises strategies to reflect anticipated market
conditions and changes in risk profiles. Marathon is also exposed to
credit risk in the event of nonperformance by counterparties. The
creditworthiness of counterparties is subject to continuing review,
including the use of master netting agreements to the extent
practical. Changes to the portfolio subsequent to June 30, 2002, would
cause future pretax income effects to differ from those presented in
the table.
(b) Net open contracts for the combined E&P and OERB segments varied
throughout second quarter 2002, from a low of 29,614 contracts at
April 26, to a high of 39,867 contracts at June 14, and averaged
34,694 for the quarter. The number of net open contracts for the RM&T
segment varied throughout second quarter 2002, from a low of 26
contracts at June 14, to a high of 5,022 contracts at April 29, and
averaged 2,099 for the quarter. The net open contracts represent 100%
of MAP's positions. The derivative commodity instruments used and
hedging positions taken will vary and, because of these variations in
the composition of the portfolio over time, the number of open
contracts by itself cannot be used to predict future income effects.
(c) The calculation of sensitivity amounts for basis swaps assumes that
the physical and paper indices are perfectly correlated. Gains and
losses on options are based on changes in intrinsic value only.
(d) The direction of the price change used in calculating the sensitivity
amount for each commodity reflects that which would result in the
largest incremental decrease in pretax income when applied to the
derivative commodity instruments used to hedge that commodity.
(e) Price increase.
39
MARATHON OIL CORPORATION
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Commodity Price Risk and Related Risks - (Continued)
E&P Segment
Marathon uses derivative instruments in its E&P segment to mitigate the
price risk associated with equity production of crude oil and natural gas. As of
June 30, 2002, Marathon has hedged approximately 29% of its remaining 2002
worldwide equity liquids production through the use of zero-cost collar options.
These collars have been structured so that on average Marathon will receive the
following:
o When prices are below $19.34, market price plus $4 per barrel;
o $23.34 when prices are between $19.34 and $23.34;
o Market price when prices are between $23.34 and $29.35; and
o No participation in market price movements above $29.35.
The above-mentioned strategy is being marked-to-market and is reflected in
income for the period.
As of June 30, 2002, Marathon has hedged approximately 29% of its remaining
2002 worldwide equity natural gas production. Different hedging strategies have
been employed including the use of zero-cost collar options. In one of the more
significant hedges, Marathon has hedged 169 MMCFD at an average of $4.33 per MCF
for the balance of 2002 relating to the Powder River Basin area. A portion of
the above-mentioned strategy is being marked-to-market and is reflected in
income for the period. The balance qualifies for hedge accounting under SFAS
133. Marathon has also entered into a zero-cost collar on 200 MMCFD through
December 2002, whereby Marathon will receive up to $4.48 per MCF but no less
than $3.19 per MCF. The above-mentioned strategy is being marked-to-market and
is reflected in income for the period. Additionally, Marathon has also entered
into zero-cost collars on 145 MMCFD January through December 2003, whereby
Marathon will receive up to an average $4.64 per MCF but no less than an average
$3.64 per MCF.
Total net pretax derivative gains for the E&P segment were $47 million and
$45 million for the first six months of 2002 and 2001, respectively. Gains from
trading activity of $13 million for the first six months of 2002 are included in
the aforementioned amounts. These trading gains primarily result from the
discontinuance of cash flow hedges because it is no longer probable the original
forecasted transactions will occur.
RM&T Segment
Total net pretax derivative losses, net of the 38 percent minority interest
in MAP, were $29 million for the first six months 2002 compared with gains of
$42 million for the first six months 2001. RM&T's trading activity gains and
losses were not significant for the first six months 2002 and 2001.
OERB Segment
Marathon has sold forward a specified volume of natural gas. Marathon has
used derivatives to convert the fixed price in this contract to market prices.
The underlying physical contract matures in 2008. Marathon generally will use
derivative instruments to assume market risk on these contracts. In addition,
Marathon uses fixed-price physical contracts for portions of its purchase for
resale volumes to manage exposure to fluctuations in natural gas prices. Total
net pretax derivative losses were $3 million and $30 million for the first six
months of 2002 and 2001, respectively.
40
MARATHON OIL CORPORATION
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Other Commodity Related Risks
Marathon is subject to basis risk, caused by factors that affect the
relationship between commodity futures prices reflected in derivative commodity
instruments and the cash market price of the underlying commodity. Natural gas
transaction prices are frequently based on industry reference prices that may
vary from prices experienced in local markets. For example, New York Mercantile
Exchange (NYMEX) contracts for natural gas are priced at Louisiana's Henry Hub,
while the underlying quantities of natural gas may be produced and sold in the
Western United States at prices that do not move in strict correlation with
NYMEX prices. To the extent that commodity price changes in one region are not
reflected in other regions, derivative commodity instruments may no longer
provide the expected hedge, resulting in increased exposure to basis risk. These
regional price differences could yield favorable or unfavorable results. OTC
transactions are being used to manage exposure to a portion of basis risk.
Marathon is subject to liquidity risk, caused by timing delays in
liquidating contract positions due to a potential inability to identify a
counterparty willing to accept an offsetting position. Due to the large number
of active participants, liquidity risk exposure is relatively low for
exchange-traded transactions.
Interest Rate Risk
Sensitivity analysis of the incremental effects on the change in fair value
assuming a hypothetical 10 percent change in interest rates is provided in the
following table:
Incremental
(Dollars in millions) Fair Increase in
Value(c) Fair Value(a)
- ---------------------------------------------------------------------------
Financial liabilities:
Long-term debt(b) $4,995 $207
(a) For financial liabilities, this assumes a 10% decrease in the weighted
average yield to maturity of Marathon's long-term debt at June 30, 2002
(b) Includes amounts due within one year.
(c) Fair value was based on market prices where available, or current borrowing
rates for financings with similar terms and maturities.
At June 30, 2002, Marathon's portfolio of long-term debt was substantially
comprised of fixed-rate instruments. Therefore, the fair value of the portfolio
is relatively sensitive to effects of interest rate fluctuations. This
sensitivity is illustrated by the $207 million increase in the fair value of
long-term debt assuming a hypothetical 10 percent decrease in interest rates.
However, Marathon's sensitivity to interest rate declines and corresponding
increases in the fair value of its debt portfolio would unfavorably affect
Marathon's results and cash flows only to the extent that Marathon would elect
to repurchase or otherwise retire all or a portion of its fixed-rate debt
portfolio at prices above carrying value.
41
MARATHON OIL CORPORATION
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk - (Continued)
During the first six months of 2002, Marathon entered into U.S. Treasury
Rate lock agreements to hedge pending issuances of new debt. The U.S. Treasury
Rate lock agreements, which were designated and effective as cash flow hedges,
were settled for a net of $14 million concurrent with the issuance of the new
debt. The $9 million, net of tax, unrecognized loss is being reclassified from
accumulated other comprehensive loss to interest expense over the life of the
new debt.
Foreign Currency Exchange Rate Risk
As of June 30, 2002, the discussion of foreign currency exchange rate risk
has not changed materially from that presented in Quantitative and Qualitative
Disclosures About Market Risk included in Marathon's 2001 Form 10-K.
Safe Harbor
Marathon's quantitative and qualitative disclosures about market risk
include forward-looking statements with respect to management's opinion about
risks associated with the use of derivative instruments. These statements are
based on certain assumptions with respect to market prices and industry supply
and demand for crude oil, natural gas, and refined products. To the extent that
these assumptions prove to be inaccurate, future outcomes with respect to
Marathon's hedging programs may differ materially from those discussed in the
forward-looking statements.
42
MARATHON OIL CORPORATION
SUPPLEMENTAL STATISTICS (Unaudited)
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions) 2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS
Exploration & Production
United States $189 $358 $271 $800
International 73 85 156 243
----- ----- ----- -----
E&P Segment Income 262 443 427 1,043
Refining, Marketing & Transportation(a) 211 842 160 1,118
Other Energy Related Businesses(b) 20 26 45 34
----- ----- ----- -----
Segment Income $493 $1,311 $632 $2,195
Items Not Allocated To Segments:
Administrative Expenses (39) (51) (83) (87)
Inventory Market Valuation Credit 1 - 72 -
Gain on lease resolution with U.S. Government - - - 59
Gain (Loss) on Ownership Change - MAP 2 (7) 4 (6)
------ ------ ------ ------
Income From Operations $457 $1,253 $625 $2,161
CAPITAL EXPENDITURES
Exploration & Production $220 $217 $438 $374
Refining, Marketing & Transportation 113 115 182 212
Other(c) 15 20 20 42
----- ----- ----- -----
Total $348 $352 $640 $628
EXPLORATION EXPENSE
United States $32 $12 $81 $25
International 12 14 20 24
----- ----- ----- -----
Total $44 $26 $101 $49
OPERATING STATISTICS
Net Liquid Hydrocarbon Production(d)
United States 119.0 126.3 120.5 125.4
U.S. Equity Investee (MKM) 8.3 9.4 8.6 9.8
------ ------ ------ ------
Total United States 127.3 135.7 129.1 135.2
Europe 68.3 34.7 56.9 44.2
Other International 4.5 13.1 4.3 13.9
West Africa 22.7 19.1 24.1 19.3
International Equity Investee (CLAM) - .1 - .1
Total International 95.5 67.0 85.3 77.5
------ ------ ------ ------
Worldwide 222.8 202.7 214.4 212.7
Net Natural Gas Production(e)(f)
United States 734.4 773.7 760.3 781.3
Europe 321.0 319.6 328.3 332.5
Other International 107.5 127.2 106.5 128.7
West Africa 23.1 - 36.1 -
International Equity Investee (CLAM) 22.4 33.8 27.0 34.2
Total International 474.0 480.6 497.9 495.4
------ ------- ------- ------
Worldwide 1,208.4 1,254.3 1,258.2 1,276.7
Total production (MBOEPD) 424.2 411.7 424.1 425.5
43
MARATHON OIL CORPORATION
SUPPLEMENTAL STATISTICS (Unaudited)
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions) 2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------------------------
OPERATING STATISTICS
Average Sales Prices (excluding derivative gains and losses)
Liquids Hydrocarbons
United States $22.31 $21.70 $20.13 $22.82
U.S. Equity Investee (MKM) 25.00 24.59 22.47 25.10
Total United States 22.49 21.90 20.29 22.99
Europe 23.60 27.37 22.31 26.16
Other International 22.56 19.83 20.58 20.97
West Africa 23.72 28.18 22.21 26.57
International Equity Investees (CLAM) - 10.45 - 23.49
Total International 23.59 26.10 22.18 25.33
Worldwide $22.96 $23.29 $21.04 $23.84
Natural Gas(g)
United States $2.99 $4.14 $2.66 $4.94
Europe 2.33 2.69 2.63 2.83
Other International 2.57 3.76 2.23 4.92
West Africa 25 - 25 -
International Equity Investees (CLAM) 3.01 3.71 3.03 3.52
Total International 2.31 3.05 2.39 3.43
Worldwide $2.72 $3.73 $2.55 $4.36
Average Sales Prices (including derivative gains and losses)
Liquids Hydrocarbons
United States $22.25 $21.70 $19.35 $22.82
U.S. Equity Investee (MKM) 25.00 24.59 22.47 25.10
Total United States 22.43 21.90 19.56 22.99
Europe 23.60 27.37 22.31 26.16
Other International 22.56 19.83 20.58 20.97
West Africa 23.72 28.18 22.21 26.57
International Equity Investees (CLAM) -- 10.45 -- 23.49
Total International 23.59 26.10 22.18 25.33
Worldwide $22.93 $23.29 $20.60 $23.84
Natural Gas(g)
United States $3.35 $5.05 $2.89 $5.26
Europe 2.18 2.69 2.84 2.83
Other International 2.57 3.77 2.23 4.92
West Africa 25 - 25 -
International Equity Investees (CLAM) 3.01 3.71 3.03 3.52
Total International 2.21 3.06 2.53 3.43
Worldwide $2.90 $4.29 $2.74 $4.56
MAP:
Crude Oil Refined(d) 972.9 958.2 932.2 914.3
Consolidated Refined Products Sold(d) 1,351.2 1,303.1 1,289.9 1,278.2
Matching buy/sell volumes included in refined
products sold(d) 80.3 35.3 67.3 44.3
Refining and Wholesale Marketing Margin(h)(i) $.0518 $.1839 $.0350 $.1364
Number of SSA retail outlets(k) 2,081 2,177 - -
SSA Gasoline and Distillate Sales(j)(k) 911 893 1,763 1,741
SSA Gasoline and Distillate Gross Margin(h)(k) $.1116 $.1280 $.0977 $.1177
SSA Merchandise Sales(k) $612 $574 $1,152 $1,062
SSA Merchandise Gross Margin(k) $156 $136 $286 $250
44
MARATHON OIL CORPORATION
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.
45
Part II - Other Information:
Item 1. LEGAL PROCEEDINGS
Environmental Proceedings
On December 3, 2001, Illinois EPA (IEPA) issued a NOV to Marathon Ashland
Petroleum LLC (MAP) arising out of the sinking of a floating roof on a storage
tank at a Martinsville, Illinois facility. A heavy rainfall caused the floating
roof to sink. MAP believes it may have an Act of God/emergency defense. Based
upon recent discussions with IEPA, MAP expects the matter to be referred to the
Illinois Attorney General's office for enforcement proceedings.
In March, 2002, MAP attended a meeting with the Illinois EPA concerning MAP's
self reporting of possible emission exceedences and permitting issues related to
some storage tanks at MAP's Robinson, Illinois facility. In late April, MAP
submitted to IEPA a comprehensive settlement proposal which was rejected by
IEPA.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders was held April 24, 2002. In
connection with the meeting, proxies were solicited pursuant to the Securities
Exchange Act. The following are the voting results on proposals considered and
voted upon at the meeting, all of which were described in the proxy statement.
1. All nominees for director listed in the proxy statement were elected.
2. PricewaterhouseCoopers LLC was elected as the independent accountants for
2002. (For, 257,578,104; against, 11,181,873; abstained, 1,300,812).
3. Stockholder proposal for redemption or termination of Marathon's
shareholder rights plan: For, 168,159,468; against, 66,228,352; abstained,
3,153,846.
46
Part II - Other Information (Continued):
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
4.1 Senior Indenture dated June 14, 2002
among Marathon Global Funding
Corporation, Issuer, Marathon Oil
Corporation, Guarantor, and JPMorgan
Chase Bank, Trustee................... Incorporated by reference to
Exhibit 4.1 to Marathon Oil
Corporation's Form 8-K dated
June 18, 2002 (filed June 21, 2002).
10.1 Marathon Oil Corporation Non-Officer Restricted Stock Plan, As Amended and
Restated Effective January 2, 2002
12.1 Computation of Ratio of Earnings to Combined Fixed Charges and Preferred
Stock Dividends
12.2 Computation of Ratio of Earnings to Fixed Charges
99.1 Certification of President and Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) REPORTS ON FORM 8-K
Form 8-K dated April 23, 2002, as amended (filed April 26, 2002), reporting
under Item 9. Regulation FD Disclosure, Marathon Oil Corporation updated Outlook
section of its Form 10-K for the fiscal year ended December 31, 2001.
Form 8-K dated May 23, 2002 (filed May 29, 2002), reporting under Item 5.
Other Events, that Marathon Oil Corporation entered into an underwriting
agreement for the public offering of $450 million aggregate principal amount of
5.375% Notes due 2007.
Form 8-K dated June 18, 2002 (filed June 21, 2002), reporting under Item 5.
Other Events, that Marathon Oil Corporation and Marathon Global Funding
Corporation entered into an underwriting agreement for the public offering of
$400 million aggregate principal amount of 6.000% Notes due 2012.
Form 8-K dated August 13, 2002 (filed August 13, 2002), reporting under
Item 9. Regulation FD Disclosure, that Marathon Oil Corporation's President and
Chief Executive Officer and Chief Financial Officer submitted to the SEC
statements under oath regarding facts and circumstances relating to exchange act
filings.
47
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned chief accounting officer thereunto duly authorized.
MARATHON OIL CORPORATION
By /s/ A. G. Adkins
------------------------------
Albert G. Adkins
Vice President -
Accounting and Controller
August 13, 2002
48