Marathon Oil Reports Third-Quarter 2005 Results

Upgrading Garyville, La., refinery

HOUSTON -- Marathon Oil Corp. has reported third-quarter 2005 net income of $770 million, or $2.09 per diluted share. Net income in third-quarter 2004 was $222 million, or 64 cents per diluted share. For third-quarter 2005, net income adjusted for special items was $797 million, or $2.16 per diluted share. For third-quarter of 2004, net income adjusted for special items was $297 million, or 85 cents per diluted share.

In the third quarter, we saw strong operational performance despite interruptions by two major Gulf of Mexico hurricanes, said Clarence [image-nocss] P. Cazalot Jr., Marathon president and CEO. Our upstream and downstream operations teams responded well to the challenges of the storms, resuming the majority of our oil and gas production within weeks and all of our refining operations within days of the storms. This quick response enabled Marathon to continue providing much needed crude oil, natural gas and refined products to the markets we serve. Our operations outside of the Gulf Coast area continued to perform extremely well throughout the quarter, and the company continues to make substantial capital investments in all business segments with more than $2 billion spent through the first nine months of 2005.

He added, While these historic storms continue to have a major impact on our industry, they have taken a much greater toll on the lives of hundreds of thousands of people along the Gulf Coast. Members of the Marathon family have responded during this crisis by providing humanitarian relief totaling more than $8 million. Thankfully, all of our employees are accounted for and none were injured.

Upstream segment income totaled $627 million in third-quarter 2005, compared to $351 million in third-quarter 2004. Reported sales volumes during the quarter averaged 291,500 barrels per day compared to production available for sale of 321,000 bpd.

U.S. upstream income was $397 million in third-quarter 2005, compared to $244 million in third-quarter 2004.

The cost of storm-related repairs in the Gulf of Mexico is not expected to be significant. Work continues to restore the remaining operated and nonoperated production. Current Gulf of Mexico production is more than 90% of pre-storm levels. Despite the negative effects of the hurricanes on third quarter production levels, Marathon estimates 2005 average daily production available for sale to be 340,000 to 350,000 bpd, excluding the impact of any acquisitions or dispositions.

Downstream segment income was $814 million in third-quarter 2005 compared to segment income of $391 million in third-quarter 2004.

The increase was primarily due to a higher refining and wholesale marketing margin realized in the third quarter due to the impact that Hurricanes Katrina and Rita had on refined product margins.

The company said that the extraordinary performance of employees allowed the Garyville, La., and Texas City, Texas, refineries to safely return to operation with a minimum amount of downtime. These refineries sustained minimal damage during these storms and were able to be brought back on-line within days after the hurricanes, thus allowing the company to meet the demand for transportation fuels during this period of reduced supply.

While spot market gasoline and distillate prices peaked at all time highs during the third quarter, downstream prices and realizations were constrained by competitive pricing at the wholesale and retail levels.

Refinery crude runs during the third-quarter 2005 averaged 979,600 bpd, with total throughput averaging 1,194,800 bpd. This record throughput was achieved despite the loss of approximately 40,000 bpd of refinery capacity due to the hurricanes. These rates are lower than what would have been achieved due to the temporary complete shutdown of the Garyville and Texas City refineries in preparation for Hurricanes Katrina and Rita, respectively. In addition, the company also experienced minor reductions in throughputs at some of its Midwest refineries due to the temporary closure of crude oil pipelines originating in the U.S. Gulf Coast after Hurricane Katrina. The repair cost associated with these hurricanes was not significant.

During the quarter, Speedway SuperAmerica (SSA) continued to achieve strong same-store merchandise sales, which increased approximately 11% compared to third-quarter 2004. This was the 11th consecutive quarter of greater than 9% same store merchandise sales growth for SSA. In addition, SSA increased its same store gasoline sales volume during the third quarter by approximately 5% compared to the same quarter last year.

The companys $300 million, 26,000-bpd Detroit refinery crude oil throughput expansion and Tier II low sulfur fuels project is in the final stages of completion. The refinery was shut down on September 29 to accommodate the installation and integration of key project components and other related work. The refinery is expected to restart in mid-November with a total crude processing capacity of 100,000 bpd. The expansion will add much needed capacity to help meet market demand, particularly for transportation fuels, in the upper Midwest. The expansion also will enable the Detroit refinery to produce the low sulfur gasoline and ultra-low sulfur diesel fuel required by the U.S. Environmental Protection Agency (EPA) in 2006.

In other company news, Marathon announced plans to pursue an expansion of its 245,000-bpd Garyville refinery. The project, currently estimated to cost about $2.2 billion, is expected to increase the refinerys crude throughput capacity by 180,000 bpd to 425,000 bpd, with completion possibly as early as fourth-quarter 2009. The initial phase of the expansion will include front-end engineering and design (FEED) work that could lead to the start of construction in 2007. The final investment decision is subject to completion of the FEED and the receipt of applicable permits.

The expansion of our Garyville refinery would provide an outstanding strategic fit to our existing refining network, including accessibility to numerous product transportation systems that serve key markets throughout the U.S., said Cazalot. This project also represents a continuation of the substantial capital investments we have been making in both our upstream and downstream operations, which are helping us meet the growing energy needs of consumers in the markets we serve, while providing significant value growth for our shareholders.

Anticipated project investments include the installation of a new crude distillation unit, hydrocracker, reformer, kerosene hydrotreater, delayed coker, additional sulfur recovery capacity and other infrastructure investments. The new facilities will incorporate the latest safety and environmental control technologies. The proposed refinery configuration also will be designed to provide maximum feedstock flexibility, enabling Marathon to process more heavy sour crude oils. Simultaneous with the FEED process, Marathon will commence acquiring permits and addressing other regulatory requirements which are required prior to the beginning of construction.

Marathon will essentially build an entirely new refinery at this site and leverage off the infrastructure already in place at Garyville, added Gary R. Heminger, executive vice president of Marathon and president of the companys refining, marketing and transportation operations. This planned investment in the Garyville refinery, which was built in 1976 and is the nations newest grass-roots refinery, shows our commitment to supplying additional fuels to the market. Once completed, this expansion will enable Marathon to supply the nation with nearly six million additional gallons per day of ultra-clean fuels, including gasoline and distillate.

Marathon is the fourth-largest U.S.-based fully integrated international energy company engaged in exploration and production; integrated gas; and refining, marketing and transportation operations. It is the fifth-largest U.S. refiner in with 948,000 bpd of crude processing capacity in its seven-refinery system. The companys retail marketing system comprises approximately 5,500 locations in 17 states; nearly three-quarters are Marathon brand locations. Marathon serves the Midwest and Southeast as a petroleum products marketer with 85 light product and asphalt terminals and access to approximately 7,700 miles of pipeline.