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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

Commission file number 1-5153

Marathon Oil Corporation

(Exact name of registrant as specified in its charter)

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 þ     No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes þ     No ¨

There were 345,417,593 shares of Marathon Oil Corporation common stock outstanding as of April 23, 2004.

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MARATHON OIL CORPORATION

Form 10-Q

Quarter Ended March 31, 2004

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Part I—Financial Information

MARATHON OIL CORPORATION

Consolidated Statement of Income (Unaudited)

Income Per Share (Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

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MARATHON OIL CORPORATION

Consolidated Balance Sheet (Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

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MARATHON OIL CORPORATION

Consolidated Statement of Cash Flows (Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

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MARATHON OIL CORPORATION

Notes to Consolidated Financial Statements—(Unaudited)

1. Basis of Presentation

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 2004 classifications. These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the 2003 Annual Report on Form 10-K of Marathon Oil Corporation (“Marathon”).

2. Information about United States Steel

The Separation—On December 31, 2001, in a tax-free distribution to holders of Marathon’s USX—U. S. Steel Group class of common stock (“Steel Stock”), Marathon exchanged the common stock of its wholly owned subsidiary United States Steel Corporation (“United States Steel”) for all outstanding shares of Steel Stock on a one-for-one basis (the “Separation”).

Amounts Receivable from or Payable to United States Steel Arising from the Separation—Marathon remains primarily obligated for certain financings for which United States Steel has assumed responsibility for repayment under the terms of the Separation. When United States Steel makes payments on the principal of these financings, both the receivable and the obligation will be reduced.

Amounts receivable or payable to United States Steel were included in the balance sheet as follows:

Marathon remains primarily obligated for $61 million of operating lease obligations assumed by United States Steel, of which $45 million has been assumed by other third parties that had purchased plants and operations divested by United States Steel.

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3. Business Combinations

On May 12, 2003, Marathon acquired Khanty Mansiysk Oil Corporation (“KMOC”) for $285 million, including the assumption of $31 million in debt. KMOC is currently evaluating or developing nine oil fields in the Khanty-Mansiysk region of western Siberia in the Russian Federation. Results of operations for 2003 include the results of KMOC from May 12, 2003. The allocation of purchase price is preliminary, pending the finalization of certain contingencies. There was no goodwill associated with the purchase.

The following table summarizes the preliminary allocation of the purchase price to the assets acquired and liabilities assumed at the date of acquisition:

The following unaudited pro forma data for Marathon includes the results of operations of the above acquisition giving effect to the acquisition as if it had been consummated at the beginning of the three months ended March 31, 2003. 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.

4. Discontinued Operations

On October 1, 2003, Marathon sold its exploration and production operations in western Canada for $612 million. This divestiture decision was made as part of Marathon’s strategic plan to rationalize noncore oil and gas properties. The results of these operations have been reported separately as discontinued operations in Marathon’s Consolidated Statement of Income. The sale resulted in a gain of $278 million, including a tax benefit of $8 million, which has been reported in discontinued operations in the fourth quarter of 2003. Revenues applicable to the discontinued operations totaled $70 million for the first quarter of 2003. Pretax income from discontinued operations totaled $27 million for the first quarter of 2003.

5. Common Stock Issuance

On March 31, 2004, Marathon issued 34,500,000 shares of its common stock at the offering price of $30 per share and recorded net proceeds of $1.004 billion.

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6. Computation of Income Per Share

Basic net income per share 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.

7. Stock-Based Compensation Plans

The following net income and per share data illustrates the effect on net income and net income per share if the fair value method had been applied to all outstanding and unvested awards in each period:

8. Segment Information

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, upper Great Plains and southeastern United States through its 62 percent owned consolidated subsidiary, Marathon Ashland Petroleum LLC (“MAP”); and 3) Integrated Gas (“IG”)—markets and transports its own and third-party natural gas and products manufactured from natural gas, such as liquefied natural gas and methanol, primarily in the United States, Europe, and West Africa.

Effective January 1, 2004, Marathon realigned its segment reporting to reflect a new business segment, Integrated Gas. This segment includes Marathon’s Alaska liquid natural gas (“LNG”) operations, Equatorial Guinea methanol operations, and certain other natural gas marketing and transportation activities, along with expenses related to the continued development of an integrated gas business. These activities were previously reported in the Other Energy Related Businesses (“OERB”) segment, which has been eliminated. Crude oil marketing and transportation activities and costs associated with a gas-to-liquids (“GTL”) demonstration plant, previously reported in OERB, are now reported in the E&P segment. Refined product transportation activities not included in MAP, also previously reported in OERB, are now reported in the RM&T segment. First quarter 2003 information has been restated to reflect the new segment structure.

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The following represents information by operating segment:

The following reconciles segment income to income from operations as reported in Marathon’s consolidated financial statement of income:

9. Pensions and Other Postretirement Benefits

The following summarizes the components of net periodic benefit costs:

Marathon expects to contribute $107 million to the MAP funded pension plan and $22 million to its foreign funded pension plans in 2004. As of March 31, 2004, $6 million of contributions have been made to the foreign plans. On April 14, 2004, MAP made a contribution of $42 million to its qualified pension plan. In addition, as of

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March 31, 2004 contributions made from the general assets of Marathon to cover current benefit payments related to the unfunded pension and other postretirement benefit plans were $11 million and $9 million.

During 2004, the FASB released Staff Position No. FAS 106-B ( the “proposed FSP”), Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“the Act”). The proposed FSP includes guidance on recognizing the effects of the new legislation under the various conditions surrounding the assessment of “actuarial equivalence”. Due to uncertainties as to the effect of the provisions of the the Act, measures of the net periodic benefit cost does not reflect any amount associated with the subsidy, because Marathon is unable to conclude at this present time whether the plans’ prescription drug benefits are actuarially equivalent to the Medicare “Part D” benefit under the Act.

10. Business Transformation

During the third quarter of 2003, Marathon implemented an organizational realignment plan and business process improvements to further enable Marathon to focus and execute on its core business strategies. This program includes streamlining Marathon’s business processes and services, realigning reporting relationships to reduce costs across all organizations, consolidating organizations in Houston and reducing the workforce.

The table below sets forth the significant components and activity in the business transformation program during the first quarter of 2004:

An additional charge of $12 million is expected to be incurred in the remainder of 2004 related to the 2003 business transformation program.

11. Comprehensive Income

The following sets forth Marathon’s comprehensive income for the periods shown:

During the first quarter of 2004 and 2003, less than $1 million and $2 million of losses, net of tax, were reclassified into net income as it was no longer probable the original forecasted transactions would occur.

12. Inventories

Inventories are carried at lower of cost or market. Cost of inventories of crude oil and refined products is determined primarily under the last-in, first-out (“LIFO”) method.

13. Debt

At March 31, 2004, Marathon had no borrowings against its $1.354 billion long-term revolving credit facility, no borrowings against its $575 million short-term revolving credit facility and no commercial paper outstanding under its U.S. commercial paper program that is backed by the long-term revolving credit facility. Certain banks provide Marathon with uncommitted short-term lines of credit totaling $200 million. At March 31, 2004, there were no borrowings against these facilities.

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MAP has a $190 million revolving credit agreement with Ashland Inc. (“Ashland”) that terminates in March 2005. At March 31, 2004, there were $76 million in borrowings against this facility.

At March 31, 2004, in the event of a change in control of Marathon, debt obligations totaling $1.584 billion may be declared immediately due and payable. In such event, Marathon may also be required to either repurchase certain equipment at United States Steel’s Fairfield Works for $93 million or provide a letter of credit to secure the remaining obligation.

14. Contingencies and Commitments

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 Marathon’s 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.

Environmental matters—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 March 31, 2004 and December 31, 2003, accrued liabilities for remediation totaled $114 million and $117 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 $82 million at March 31, 2004, and $86 million at December 31, 2003.

Guarantees—Marathon entered into a performance guarantee related to the sale of a pipeline during the first quarter of 2004. The guarantee stays in effect until certain contractual obligations have been fulfilled or have expired. The maximum potential amount of future payment under the guarantee is estimated to be $9 million.

Contract commitments—At March 31, 2004, Marathon’s contract commitments to acquire property, plant and equipment and long-term investments totaled $509 million. Included in these contract commitments is $100 million related to the approximately $300 million in refinery upgrade and expansion projects for its 74,000 bpd Detroit, Michigan refinery. Marathon will loan MAP the funds necessary for the Detroit, Michigan refinery upgrade and expansion projects. The MAP LLC Agreement has been amended to allow the Detroit refinery cash flows to be dedicated to service this debt. The Put/Call Agreement was amended to provide that, in the event Marathon exercises its call right, the Detroit refinery will not be valued at an amount less than the working capital related to the Detroit refinery, excluding working capital additions related to the expansion and clean fuels project.

15. Proposed Acquisition

Marathon has entered into an agreement which would result in the acquisition of the 38 percent ownership interest in MAP currently held by Ashland. In addition, Marathon would acquire a portion of Ashland’s Valvoline Instant Oil Change business and its maleic anhydride business. As a result of the transaction, MAP will become a wholly owned subsidiary of Marathon.

As part of the transaction, Ashland will receive approximately $800 million in cash and accounts receivable to redeem a portion of its interest in MAP. Marathon will assume approximately $1.9 billion of debt, which is expected to be repaid at closing. Additionally, Ashland shareholders will receive $315 million in Marathon common stock. Ashland’s liabilities under certain existing environmental indemnification obligations related to MAP will be capped at $50 million. Marathon estimates the present value of the obligations that MAP will effectively assume, as a result of that cap, will be approximately $15 million.

The MAP Limited Liability Company Agreement has been amended to eliminate the requirement for MAP to make quarterly cash distributions to Marathon and Ashland between the date the principal transaction agreements were signed and the closing of the transaction. As a result, the redemption proceeds to Ashland will be increased by an amount equal to approximately 38 percent of the cash accumulated from MAP’s operations during that period. In addition, Ashland does not have the right to exercise its put right and Marathon does not have the right to exercise its call right under the Put/Call Agreement unless and until the acquisition agreement is terminated.

The completion of the acquisition is subject to a number of conditions, including a favorable tax ruling from the U.S. Internal Revenue Service as to the tax-free nature of the transaction, Ashland shareholder approval, Ashland public debt holder consents and the expiration or termination of any applicable waiting period under the Hart-Scott-Rodino Act.

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16. Accounting Standards Not Yet Adopted

On April 30, 3004, FASB Staff Position (“FSP”) Nos. FAS 141-1 and FAS 142-1, “Interaction of FASB Statement No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, and EITF Issue No. 04-2, “Whether Mineral Rights are Tangible or Intangible Assets” was issued. This FSP states for SFAS 141 that “certain use rights may have characteristics of assets other than intangible assets” and “use rights should be accounted for based on their substance”. This FSP removes from Statement of Financial Accounting Standard No. 142 “Goodwill and Other Intangible Assets” (“SFAS No. 142”), the parenthetical reference to “such mineral rights to depleting assets” as an example to which intangible assets may be related.

An issue currently on the EITF agenda, Issue No. 03-S “Applicability of FASB Statement No. 142, Goodwill and Other Intangible Assets, to Oil and Gas Companies,” will address how oil and gas companies should classify the costs of acquiring contractual mineral interests in oil and gas properties on the balance sheet. The EITF is considering an alternative interpretation of SFAS No. 142 that mineral or drilling rights or leases, concessions or other interests representing the right to extract oil or gas should be classified as intangible assets rather than oil and gas properties. The EITF has not yet discussed the effects of this FSP on Issue 03-5.

Management believes that our current balance sheet classification for these costs is appropriate under generally accepted accounting principles. If a reclassification is ultimately required, the estimated amount of the leasehold acquisition costs to be reclassified would be $2.2 billion and $2.3 billion at March 31, 2004 and December 31, 2003. Should such a change be required, there would be no impact on our previously filed income statements (or reported net income), statements of cash flow or statements of stockholders’ equity for prior periods. Additional disclosures related to intangible assets would also be required.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Marathon Oil 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 integrated gas. 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 28.

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”, “targets” 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, which 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 Marathon’s 2003 Form 10-K and subsequent filings.

Unless specifically noted, amounts for MAP do not reflect any reduction for the 38 percent interest held by Ashland.

Overview

Segment Realignment

In January 2004, Marathon changed its business segments to better reflect its integrated gas strategy. In the first quarter of 2004, Marathon realigned segment reporting and introduced a new business segment, Integrated Gas, and its OERB segment was eliminated. This new segment includes the Alaska LNG operations, Equatorial Guinea methanol operations, and certain other natural gas marketing and transportation activities, along with expenses related to the continued development of the integrated gas business. Crude oil marketing and transportation activities and costs associated with a GTL demonstration plant, previously reported in the OERB segment, are now reported in the E&P segment. Refined product transportation activities not included in MAP, also previously reported in the OERB segment, are now reported in our RM&T segment.

Proposed Acquisition of Minority Interest in MAP

On March 18, 2004, Marathon entered into an agreement with Ashland to acquire Ashland’s 38 percent interest in MAP. This transaction will increase Marathon’s ownership in a high performing downstream business without the common risks associated with integrating a newly acquired business. Marathon believes that its acquisition of the minority interest in MAP should provide the financial and strategic flexibility to capture and fund many growth opportunities across the value chain. Marathon believes that it is well positioned for profitable growth with a high quality portfolio of ongoing exploration successes, expanding new core areas, attractive integrated gas projects, downstream opportunities and several high impact strategic options, such as the planned reentry into Libya. For additional information see Note 15 to the Consolidated Financial Statements.

Exploration Success

During the first quarter, Marathon continued its exploration success with discoveries in Norway, Angola, and the Gulf of Mexico.

In Norway, Marathon’s 2004 exploration program had a successful start with the Hamsun discovery. The discovery well and three sidetracks encountered oil and gas. The well is located in production license (PL) 150, which is approximately 136 miles from Stavanger, Norway, in 403 feet of water on the Norwegian continental shelf and approximately six miles south of the Alvheim area. The Hamsun well builds upon Marathon’s successful 2003 Norwegian drilling program, which resulted in three discoveries. Well results are being used to evaluate a reservoir management strategy for the Hamsun accumulation. Marathon is the operator of PL150, holding a 65 percent working interest.

Offshore Angola, Marathon participated in the second oil discovery on Block 32. The Canela discovery announced in April 2004 is the fifth success in Marathon’s deepwater Angola exploration program on Blocks 31 and 32. Marathon holds a 30 percent interest in Block 32.

The Venus well offshore Angola, has reached total depth and is awaiting government approval to announce the results. The Venus well is located near the Plutao, Saturno and Marte discoveries on Block 31 in which Marathon holds a 10 percent interest.

Currently, Marathon and its partners in the Neptune Unit in the Gulf of Mexico are evaluating results from the recently completed Neptune 7 appraisal well and integrating the results into field development studies. The well

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encountered a net oil column of approximately 114 feet. Neptune 7 was drilled in 6,257 feet of water and reached a total depth of 18,714 feet. Marathon holds a 30 percent interest in the Neptune Unit.

Advanced Integrated Gas Strategy

During the first quarter of 2004, Marathon continued to make progress on its Phase 3 LNG expansion project in Equatorial Guinea. Marathon, along with the Government of Equatorial Guinea and GEPetrol, the National Oil Company of Equatorial Guinea, and upstream partners, signed agreements at the end of March 2004 for the upstream gas supply, the LNG processing and marketing (concession) agreement setting forth fiscal terms and authorizing the project, and the shareholder agreement for the newly formed holding company.

Strengthened MAP Assets

The Catlettsburg refinery multi-year improvement project was completed during the first quarter of 2004. At a cost of approximately $440 million, the project improves product yields and lowers overall refinery costs while making gasoline with less than 30 parts per million of sulfur, which allows MAP to meet Tier 2 gasoline regulations, that became effective on January 1, 2004.

MAP increased its overall crude oil refining capacity during the first quarter of 2004 from 935,000 bpd to 948,000 bpd after completing a planned turnaround and expansion project at the Garyville, Louisiana refinery where its total crude oil capacity increased from 232,000 bpd to 245,000 bpd. This is the first increase in crude refining capacity since MAP was formed in 1998.

Outlook

Exploration and Production

The outlook regarding Marathon’s upstream 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 areas. 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.

Marathon continues to estimate its 2004 production will average 365,000 BOEPD, excluding the effect of any acquisitions or dispositions.

Exploration

Major exploration activities, which are currently underway or under evaluation, include:

Production

In Equatorial Guinea, Marathon’s Phase 2A condensate expansion project is on-stream, ramping up and expected to reach full capacity near the end of May 2004. Phase 2A is expected to increase total liquids production from approximately 20,000 gross bpd to approximately 57,000 gross bpd (32,000 bpd net to Marathon). This project also has eliminated the need to flare gas, preserving the resource while reducing emissions associated with flaring.

The Phase 2B liquefied petroleum gas (LPG) expansion project is expected to start-up late 2004 or early 2005. To date, all major equipment has been installed. Upon completion of Phase 2B, gross liquids production is expected to increase from approximately 57,000 bpd to approximately 79,000 bpd (44,500 bpd net to Marathon).

In Norway, Marathon is evaluating development options associated with the exploration success in Alvheim and Klegg. Marathon and its partners are evaluating several development scenarios for Alvheim, in which Marathon is operator and holds a 65 percent interest. Marathon expects to submit a plan of development and operation to the Norwegian authorities by midyear 2004. Marathon holds a 47 percent interest in Klegg and expects a plan of development and operation to be approved in the second half of 2004. Production from these combined developments is expected to reach more than 50,000 net bpd during 2007. In February 2004, Marathon and its Alvheim project partners

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signed a purchase and sale agreement to acquire a multipurpose shuttle tanker. The purchase is contingent upon the partners’ approval of the development of the Alvheim area and the subsequent approval of a plan of development and operation by the Norwegian authorities.

In the Gulf of Mexico, Marathon and its partners in the Neptune Unit are evaluating results from the recently completed Neptune 7 appraisal well. Pre-feasibility studies into the development of the Neptune resources are progressing and are expected to be completed by the end of this year. Marathon holds a 30 percent interest in the Neptune Unit.

During the first quarter of 2004, Marathon along with Syntroleum announced the first shipment of synthetic diesel fuel from the Port of Catoosa GTL plant to the U.S. Government for fleet vehicle demonstrations. The Catoosa GTL facility further supports the basis of design for Marathon’s proposed GTL and gas processing project in Qatar.

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, the Phase 2B LPG expansion project, and the possibility of an equipment purchase. Some factors that could potentially affect worldwide liquid hydrocarbon and natural gas production, the exploration drilling program include pricing, supply and demand for petroleum products, amount of capital available for exploration and development, occurrence of acquisitions or dispositions of oil and gas properties, regulatory constraints, timing of commencing production from new wells, drilling rig availability, achieving definitive agreements among project participants, inability or delay in obtaining necessary government and third party approvals and permits, unforeseen hazards such as weather conditions, acts of war or terrorist acts and the governmental or military response and other geological, operating and economic considerations. Factors that could affect the Phase 2B LPG expansion project include unforeseen problems arising from construction and unforeseen hazards such as weather conditions. Factors affecting the possibility of the equipment purchase include the partners’ approval of the development of the Alvheim area and the subsequent approval of a plan of development and operation by the Norwegian authorities. The foregoing factors (among others) could cause actual results to differ materially from those set forth in the forward-looking statements.

Refining, Marketing and Transportation

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, effects of commodity derivative instruments and manufacturing expenses. Refining and wholesale marketing margins have been historically volatile and vary from the impact of competition and with the level of economic activity in the various marketing areas, the regulatory and political 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 competition, 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, the impact of competition and the level of economic activity in the marketing area.

MAP is conducting approximately $300 million in new capital projects for its 74,000 bpd Detroit, Michigan refinery. One of the projects, a $110 million expansion project, is expected to raise the crude oil capacity at the refinery by 35 percent to 100,000 bpd. Other projects are expected to enable the refinery to produce new clean fuels and further control regulated air emissions. Completion of the projects are scheduled for the fourth quarter of 2005. Marathon will loan MAP the funds necessary for these upgrade and expansion projects.

MAP performed planned turnarounds at its Garyville, Louisiana, Catlettsburg, Kentucky, and Canton, Ohio, refineries during the first quarter. Because most of this planned turnaround work involved the crude units at these refineries, MAP’s crude oil throughputs averaged only 789,000 bpd in the first quarter of 2004. With the majority of the 2004 planned turnarounds now complete, MAP expects its average crude oil throughput for the total year 2004 to be at or above historical levels.

The above discussion includes forward-looking statements with respect to the Detroit capital projects. Some factors that could potentially cause the actual results from the Detroit construction projects to be different than expected include availability of materials and labor, permitting approvals, unforeseen hazards such as weather conditions, and other risks customarily associated with construction projects. These factors (among others) could cause actual results to differ materially from those set forth in the forward-looking statements.

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Integrated Gas

In the Phase 3 expansion project in Equatorial Guinea, Marathon and GEPetrol plan to develop a 3.4 million metric tonnes per year LNG plant, with start up currently projected for late 2007. With essentially all the commercial agreements required for this project in place, final investment decision for the proposed project is expected in May 2004. Preparations for the construction of the first LNG train are progressing on schedule with site preparation, accommodation and equipment mobilization. Marathon and GEPetrol have also signed a letter of understanding (LOU) with a subsidiary of BG Group plc (“BGML”) under which BGML would purchase the LNG plant’s production for a period of 17 years on an FOB Bioko Island basis with pricing linked principally to the Henry Hub index. The LNG would be targeted primarily to a receiving terminal in Lake Charles, Louisiana, where it would be regasified and delivered into the Gulf Coast natural gas pipeline grid. Marathon, through its subsidiaries, currently holds a 75 percent interest in the LNG project.

Marathon will soon deliver the first of three contracted LNG cargos sourced from Trinidad, subject to terms of the Marathon’s Elba Island, Georgia, LNG terminal regasification agreement. Under the terms of the agreement, Marathon can supply up to 58 billion cubic feet of natural gas (as LNG) per year, for approximately 17 years, using Elba Island terminal facilities and pricing.

The above discussion contains forward-looking statements with respect to the estimated construction and startup dates of a LNG liquefaction plant and related facilities and the purchase of LNG by BGML. Factors that could affect the purchase of LNG by BGML and the estimated construction and startup dates of the LNG liquefaction plant and related facilities include, without limitation, conclusion of the definitive purchase and sale agreement with BGML, the satisfaction of remaining conditions necessary for final investment decision, inability or delay in obtaining necessary government and third-party approvals, unanticipated changes in market demand or supply, environmental issues, availability or construction of sufficient LNG vessels, and unforeseen hazards such as weather conditions. The foregoing factors (among others) could cause actual results to differ materially from those set forth in the forward-looking statements.

Corporate Matters

Marathon has announced organizational and business process changes to increase efficiency, profitability and shareholder value and to achieve projected annual pretax savings of more than $135 million, including $70 million related to MAP. It is anticipated that most of these changes will be completed during the second quarter of 2004, and will result in pretax charges of approximately $40 million ($10 million of which is related to MAP). Approximately $28 million of the estimated $40 million charges has been previously recorded, with the remainder to be recognized when incurred during the remainder of 2004. The $40 million estimate has been reduced from the December 31, 2003 reported estimate due to an expected settlement loss of $34 million for the Marathon qualified pension plan not being triggered.

Marathon expects that pension and other postretirement plan expense in 2004 will increase approximately $42 million from 2003 levels, of which approximately $16 million relates to MAP. The increase is primarily due to increased amortization of actuarial losses arising mostly from several years of lower than expected returns on plan assets, decrease in the discount rate and the effect of a curtailment gain in 2003.

The above discussion includes forward-looking statements with respect to projected annual cost savings from organizational and business process improvements, the projected completion time for implementation of the changes and pension and other postretirement plan expenses. Factors, but not necessarily all factors, that could adversely affect these expected results include possible delays in consolidating the U.S. production organization, future acquisitions or dispositions, technological developments, actions of government or other regulatory bodies in areas affected by these organizational changes, unforeseen hazards, regulatory impacts, and other economic or political considerations. The foregoing factors (among others) could cause actual results to differ materially from those set forth in the forward-looking statements.

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Results of Operations

Revenues for the first quarter of 2004 and 2003 are summarized in the following table:

E&P segment revenues decreased by $203 million in the first quarter of 2004 from the comparable prior-year period. The decrease was primarily due to lower domestic liquid hydrocarbon and natural gas volumes, domestic natural gas prices and international liquid hydrocarbon prices, partially offset by higher international liquid hydrocarbon volumes and natural gas prices. Derivative losses totaled $8 million in the first quarter of 2004, compared to $53 million in the first quarter of 2003. Derivatives included gains of $14 million in the first quarter of 2004, compared to losses of $2 million in the first quarter of 2003, related to long-term gas contracts in the United Kingdom that are accounted for as derivative instruments and marked-to-market.

RM&T segment revenues increased by $806 million in the first quarter of 2004 from the comparable prior-year period. The increase primarily reflected higher crude oil sales and higher refined product sales volumes and prices.