form10q2009sept30.htm





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 September 30, 2009
 

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 or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
5555 San Felipe Road, Houston, TX  77056-2723
(Address of principal executive offices)

(713) 629-6600
(Registrant’s telephone number, including area code)


 
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 period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.             Yes     Ö    No           
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of
 
Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes    Ö         No           

 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer    Ö     
Accelerated filer            
Non-accelerated filer               (Do not check if a smaller reporting company) 
Smaller reporting company           
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).         Yes            No    Ö     

 
There were 707,845,149 shares of Marathon Oil Corporation common stock outstanding as of October 30, 2009.
 




 
 
 
 


MARATHON OIL CORPORATION
 
Form 10-Q
 
Quarter Ended September 30, 2009


 
INDEX
 
 
Page
PART I - FINANCIAL INFORMATION
Item 1.
Financial Statements:
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
PART II - OTHER INFORMATION
Item 1.
Item 1A.
Item 2.
Item 6.
 

 
Unless the context otherwise indicates, references in this Form 10-Q to “Marathon,” “we,” “our,” or “us” are references to Marathon Oil Corporation, including its wholly-owned and majority-owned subsidiaries, and its ownership interests in equity method investees (corporate entities, partnerships, limited liability companies and other ventures over which Marathon exerts significant influence by virtue of its ownership interest).

1
 

 
Part I - Financial Information
 
Item 1. Financial Statements

MARATHON OIL CORPORATION
Consolidated Statements of Income (Unaudited)
 
 
 
 
 
Three Months Ended
   
Nine Months Ended
 
 
 
September 30,
   
September 30,
 
(In millions, except per share data)
 
2009
   
2008
   
2009
   
2008
 
Revenues and other income:
 
 
   
 
   
 
   
 
 
 
 
 
   
 
   
 
   
 
 
   Sales and other operating revenues (including
  $ 14,335     $ 22,332     $ 37,509     $ 60,641  
       consumer excise taxes)
                               
   Sales to related parties
    27       637       68       1,865  
   Income from equity method investments
    75       270       184       735  
   Net gain on disposal of assets
    5       15       200       37  
   Other income
    35       47       112       151  
 
                               
             Total revenues and other income
    14,477       23,301       38,073       63,429  
Costs and expenses:
                               
   Cost of revenues (excludes items below)
    10,963       16,978       28,080       49,342  
   Purchases from related parties
    133       244       338       609  
   Consumer excise taxes
    1,258       1,273       3,658       3,784  
   Depreciation, depletion and amortization
    630       584       1,988       1,513  
   Selling, general and administrative expenses
    323       349       935       1,008  
   Other taxes
    98       126       296       376  
   Exploration expenses
    55       108       181       367  
 
                               
            Total costs and expenses
    13,460       19,662       35,476       56,999  
 
                               
Income from operations
    1,017       3,639       2,597       6,430  
 
                               
   Net interest and other financing costs
    (35 )     (46 )     (63 )     (48 )
 
                               
Income from continuing operations before income taxes
    982       3,593       2,534       6,382  
 
                               
   Provision for income taxes
    590       1,601       1,549       2,949  
 
                               
Income from continuing operations
    392       1,992       985       3,433  
 
                               
Discontinued operations
    21       72       123       136  
 
                               
Net income
  $ 413     $ 2,064     $ 1,108     $ 3,569  
Per Share Data
                               
 
                               
   Basic:
                               
 
                               
       Income from continuing operations
  $ 0.55     $ 2.82     $ 1.39     $ 4.84  
       Discontinued operations
  $ 0.03     $ 0.10     $ 0.17     $ 0.19  
       Net income per share
  $ 0.58     $ 2.92     $ 1.56     $ 5.03  
 
                               
   Diluted:
                               
 
                               
       Income from continuing operations
  $ 0.55     $ 2.80     $ 1.39     $ 4.81  
       Discontinued operations
  $ 0.03     $ 0.10     $ 0.17     $ 0.19  
       Net income per share
  $ 0.58     $ 2.90     $ 1.56     $ 5.00  
 
                               
   Dividends paid
  $ 0.24     $ 0.24     $ 0.72     $ 0.72  
 
 
The accompanying notes are an integral part of these consolidated financial statements.

2
 

MARATHON OIL CORPORATION
Consolidated Balance Sheets (Unaudited)
 
 
 
September 30,
 
December 31,
 
(In millions, except per share data)
2009
 
2008
 
Assets
 
 
 
 
Current assets:
 
 
 
 
    Cash and cash equivalents
$   1,370   $ 1,285  
    Receivables, less allowance for doubtful accounts of $13 and $6
    4,288     3,094  
    Receivables from United States Steel
    24     23  
    Receivables from related parties
    56     33  
    Inventories
    3,680     3,507  
    Other current assets
    208     461  
 
             
            Total current assets
    9,626     8,403  
 
             
Equity method investments
    1,991     2,080  
Receivables from United States Steel
    453     469  
Property, plant and equipment, less accumulated depreciation,depletion and amortization of $16,631 and $15,581
    31,115     29,414  
Goodwill
    1,424     1,447  
Other noncurrent assets
    806     873  
 
             
            Total assets
$   45,415   $ 42,686  
Liabilities
             
Current liabilities:
             
    Accounts payable
$   6,005   $ 4,712  
    Payables to related parties
    50     21  
    Payroll and benefits payable
    367     400  
    Accrued taxes
    593     1,133  
    Deferred income taxes
    611     561  
    Other current liabilities
    513     828  
    Long-term debt due within one year
    105     98  
 
             
            Total current liabilities
    8,244     7,753  
 
             
Long-term debt
    8,581     7,087  
Deferred income taxes
    3,725     3,330  
Defined benefit postretirement plan obligations
    1,395     1,609  
Asset retirement obligations
    965     963  
Payable to United States Steel
    4     4  
Deferred credits and other liabilities
    410     531  
 
             
            Total liabilities
    23,324     21,277  
 
             
Commitments and contingencies
             
 
             
Stockholders’ Equity
             
 Preferred stock – 5 million shares issued, 1 million and 3 million shares outstanding (no par value, 6 million shares authorized)      
    -     -  
Common stock:
             
      Issued – 769 million and 767 million shares (par value $1 per share,  1.1 billion shares authorized)  
    769      767
     Securities exchangeable into common stock – 5 million shares issued, 1 million and 3 million shares outstanding (no par value, unlimited shares authorized)   
    -     -  
     Held in treasury, at cost – 61 million and 61 million shares
    (2,711     (2,720 )
Additional paid-in capital
    6,730     6,696  
Retained earnings
    17,857     17,259  
Accumulated other comprehensive loss
    (554     (593 )
 
             
            Total stockholders' equity
    22,091     21,409  
 
             
            Total liabilities and stockholders' equity
$   45,415   $ 42,686  
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
3
 

MARATHON OIL CORPORATION
Consolidated Statements of Cash Flows (Unaudited)
 
 
 
 
 
Nine Months Ended
 
 
 
September 30,
 
(In millions)
 
2009
   
2008
 
Increase (decrease) in cash and cash equivalents
 
 
   
 
 
Operating activities:
 
 
   
 
 
Net income
  $ 1,108     $ 3,569  
Adjustments to reconcile net income to net cash provided by operating activities:
               
    Discontinued operations
    (123 )     (136 )
    Deferred income taxes
    726       309  
    Depreciation, depletion and amortization
    1,988       1,513  
    Pension and other postretirement benefits, net
    (159 )     118  
    Exploratory dry well costs and unproved property impairments
    48       154  
    Net gain on disposal of assets
    (200 )     (37 )
    Equity method investments, net
    42       (139 )
    Changes in the fair value of derivative instruments
    7       218  
    Changes in:
               
          Current receivables
    (1,241 )     (396 )
          Inventories
    (184 )     (1,124 )
          Current accounts payable and accrued liabilities
    742       595  
    All other operating, net
    71       (57 )
               Net cash provided by continuing operations
    2,825       4,587  
               Net cash provided by discontinued operations
    81       220  
               Net cash provided by operating activities
    2,906       4,807  
Investing activities:
               
Capital expenditures
    (4,350 )     (5,062 )
Disposal of assets
    573       68  
Trusteed funds - withdrawals
    16       402  
Investing activities of discontinued operations
    (66 )     (106 )
All other investing, net
    63       (102 )
               Net cash used in investing activities
    (3,764 )     (4,800 )
Financing activities:
               
Short term debt, net
    -       1,288  
Borrowings
    1,491       1,248  
Debt issuance costs
    (11 )     (7 )
Debt repayments
    (43 )     (1,331 )
Purchases of common stock
    -       (402 )
Dividends paid
    (510 )     (511 )
All other financing, net
    (1 )     17  
               Net cash provided by financing activities
    926       302  
Effect of exchange rate changes on cash:
               
     Continuing operations
    19       (19 )
     Discontinued operations
    (2 )     (10 )
Net increase in cash and cash equivalents
    85       280  
Cash and cash equivalents at beginning of period
    1,285       1,199  
Cash and cash equivalents at end of period
  $ 1,370     $ 1,479  
 
 
The accompanying notes are an integral part of these consolidated financial statements.
4
 

 
MARATHON OIL CORPORATION
 
Notes to Consolidated Financial Statements (Unaudited)
 

1.      Basis of Presentation
 
These consolidated financial statements are unaudited; however, in the opinion of management, reflect all adjustments necessary for a fair statement of the results for the periods reported.  All such adjustments are of a normal recurring nature unless disclosed otherwise.  These consolidated financial statements, including 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 2009 classifications.  Events and transactions subsequent to the balance sheet date have been evaluated through November 6, 2009, the date these consolidated financial statements were issued, for potential recognition or disclosure in the consolidated financial statements.
 
 
These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Marathon Oil Corporation (“Marathon”) 2008 Annual Report on Form 10-K.  The results of operations for the quarter and nine months ended September 30, 2009 are not necessarily indicative of the results to be expected for the full year.
 

2.      Accounting Standards
 
Recently Adopted
 
 
Subsequent events accounting standards were issued in May 2009 by the Financial Accounting Standards Board (“FASB”), which established the standards of accounting for and disclosing events that occur after the balance sheet date but before financial statements are issued or available to be issued.  This codifies into the accounting standards guidance that existed in the auditing standards and should not significantly change the subsequent events that we report.  We began applying these standards prospectively in the second quarter of 2009.  The disclosures required appear in Note 1.
 
 
Interim disclosures about fair value of financial instruments were expanded by the FASB in April 2009.  Disclosures about fair value of financial instruments are now required in interim reporting periods for publicly traded companies.  This change was effective for the second quarter of 2009 and did not require disclosures for earlier periods presented for comparative purposes.  Adoption did not have an impact on our consolidated results of operations, financial position or cash flows.  The required disclosures are presented in Note 11.
 
 
Guidance for determining fair value when the volume and level of activity for the asset or liability have significantly decreased and guidance on identifying circumstances that indicate a transaction is not orderly was also issued in April 2009 by the FASB.  It was effective for the second quarter of 2009 and did not require disclosures for earlier periods presented for comparative purposes.  Adoption did not have a significant impact on our consolidated results of operations, financial position or cash flows.
 
 
Accounting considerations for equity method investments were ratified by the FASB in November 2008, which address the initial measurement, decreases in value and changes in the level of ownership of the equity method investment.  These were effective on a prospective basis on January 1, 2009 and for interim periods.  Early application by an entity that has previously adopted an alternative accounting policy is not permitted.  Since these were applied prospectively, adoption did not have a significant impact on our consolidated results of operations, financial position or cash flows.
 
 
Guidance for determining whether instruments granted in share-based payment transactions are participating securities was issued by the FASB in June 2008.  It provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and, therefore, need to be included in the earnings allocation in computing earnings per share (“EPS”) under the two-class method.  It was effective January 1, 2009 and all prior-period EPS data (including any amounts related to interim periods, summaries of earnings and selected financial data) were adjusted retrospectively to conform to its provisions. While our restricted stock awards meet this definition of participating securities, this application did not have a significant impact on our reported EPS.
 
 
Guidance for determining the useful life of intangible assets was issued in April 2008 by the FASB.  This guidance amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset.  The intent is to improve the consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset.   It was effective on January 1, 2009 and was applied prospectively to intangible assets acquired after the effective date, except
 

5
 

 
Notes to Consolidated Financial Statements (Unaudited)
 
 
for the disclosure requirements which must be applied prospectively to all intangible assets recognized as of, and subsequent to, the effective date.  Since this is applied prospectively, adoption did not have a significant impact on our consolidated results of operations, financial position or cash flows.
 
 
Disclosures requirements for derivative instruments and hedging activities were expanded by the FASB in March 2008 to provide information regarding (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedged items are accounted for and (iii) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows.  Requirements include qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts and gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements.  The amendments were effective January 1, 2009 and encouraged, but did not require, disclosures for earlier periods presented for comparative purposes at initial adoption.  The new disclosures required appear in Note 12.
 
 
Accounting for business combinations was revised by the FASB in December 2007.   This significantly changes the accounting for business combinations.  An acquiring entity will be required to recognize all the assets acquired, liabilities assumed and any noncontrolling interest in the acquiree at their acquisition-date fair value with limited exceptions. The definition of a business is expanded and is expected to be applicable to more transactions.  In addition, there are changes in the accounting treatment for changes in control, step acquisitions, transaction costs, acquired contingent liabilities, in-process research and development, restructuring costs, changes in deferred tax asset valuation allowances as a result of a business combination and changes in income tax uncertainties after the acquisition date.  Accounting for changes in valuation allowances for acquired deferred tax assets and the resolution of uncertain tax positions for prior business combinations will impact tax expense instead of impacting recorded goodwill.  Additional disclosures are also required.  In April 2009, the FASB issued guidance for accounting for assets acquired and liabilities assumed in a business combination that arise from contingencies.  Both the December 2007 revision and the April 2009 guidance were effective on January 1, 2009 for all new business combinations.  Because we had no business combinations in progress at January 1, 2009, adoption did not have a significant impact on our consolidated results of operations, financial position or cash flows.
 
 
Accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary were issued in December 2007 by the FASB.  Specifically, the standards clarified that a noncontrolling interest in a subsidiary (sometimes called a minority interest) is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements, but separate from the parent's equity.  It requires that the amount of consolidated net income attributable to the noncontrolling interest be clearly identified and presented on the face of the consolidated income statement.  It also clarifies that changes in a parent's ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest.  In addition, a parent must recognize a gain or loss in net income when a subsidiary is deconsolidated, based on the fair value of the noncontrolling equity investment on the deconsolidation date.  Additional disclosures are required that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners.  In January 2009, the FASB ratified implementation questions regarding the new accounting standards for noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary.  Both the new accounting standards and the implementation questions were effective January 1, 2009 and must be applied prospectively, except for the presentation and disclosure requirements which must be applied retrospectively for all periods presented in consolidated financial statements.  Adoption did not have a significant impact on our consolidated results of operations, financial position or cash flows.
 
 
Accounting and reporting standards for fair value measurements were issued in September 2006 by the FASB.  The standards define fair value, establish a framework for measuring fair value in generally accepted accounting principles and expand disclosures about fair value measurements.  The standards do not require any new fair value measurements but may require some entities to change their measurement practices.  We adopted these standards effective January 1, 2008 with respect to financial assets and liabilities and effective January 1, 2009 with respect to nonfinancial assets and liabilities.  Adoption did not have a significant effect on our consolidated results of operations, financial position or cash flows.
 
 
Application guidance to address fair value measurements for purposes of lease classification or measurement in accounting for leases was issued in February 2008 by the FASB.  This guidance removes certain leasing transactions from the scope of fair value accounting and adoption did not have a significant effect on our consolidated results of operations, financial position or cash flows.
 
 
Guidance for determining the fair value of a financial asset when the market for that asset is not active was issued by the FASB in October 2008.  It clarifies the application of fair value measurements in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active.  This guidance was effective upon issuance, including prior periods for which financial statements had not been issued, and any revisions resulting from a change in the valuation technique or its
6
 
 

 
Notes to Consolidated Financial Statements (Unaudited)
 
application were required to be accounted for as a change in accounting estimate.  Application of this new guidance did not cause us to change our fair value valuation techniques for assets and liabilities.
 
 
The fair value disclosures are presented in Note 11.
 
 
An employer’s disclosures about plan assets of defined benefit pension or other postretirement plans were expanded in December 2008 by the FASB.  Additional disclosures about investment policies and strategies, the reporting of fair value by asset category and other information about fair value measurements is required.  This was effective January 1, 2009 and early application is permitted.  Upon initial application, these new disclosures are not required for earlier periods that are presented for comparative purposes.  We will expand disclosures in our Annual Report on Form 10-K for the year ending December 31, 2009; however, the adoption of this standard is not expected to have an impact on our consolidated results of operations, financial position or cash flows.
 
 
Not Yet Adopted
 
 
Measuring liabilities at fair value, a FASB accounting standards update, was issued in August 2009.  This update provides clarification for circumstances in which a quoted price in an active market for the identical liability is not available.  In such circumstances, an entity is required to measure fair value that uses (1) the quoted price of the identical liability when traded as an asset, or (2) quoted prices for similar liabilities or similar liabilities when traded as assets, or (3) another valuation technique consistent with the fair value measurement principles such as an income approach or a market approach.  The new update for measuring liabilities at fair value is effective for the first reporting period (including interim periods) beginning after August 27, 2009 and is not expected to have a significant effect on our consolidated results of operations, financial position or cash flows.
 
 
Variable interest accounting standards were amended by the FASB in June 2009.  The new accounting standards replace the existing quantitative-based risks and rewards calculation for determining which enterprise has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity.  In addition, the concept of qualifying special-purpose entities has been eliminated and therefore, will now be evaluated for consolidation in accordance with the applicable consolidation guidance.  Ongoing assessments of whether an enterprise is the primary beneficiary of a variable interest entity are also required.  The amended variable interest accounting standard requires reconsideration for determining whether an entity is a variable interest entity when changes in facts and circumstances occur such that the holders of the equity investment at risk, as a group, lack the power from voting rights or similar rights to direct the activities of the entity.  Enhanced disclosures are required for any enterprise that holds a variable interest in a variable interest entity. Application will be prospective beginning in the first quarter of 2010, and for all interim and annual periods thereafter.  Earlier application is prohibited.  We are currently evaluating the provisions of this statement.
 
 
In December 2008, the SEC announced that it had approved revisions to its oil and gas reporting disclosures. The new disclosure requirements include provisions that:
 
 
 
·
Introduce a new definition of oil and gas producing activities. This new definition allows companies to include volumes in their reserve base from unconventional resources. Such unconventional resources include bitumen extracted from oil sands and oil and gas extracted from coal beds and shale formations.
 
 
·
Report oil and gas reserves using an unweighted average price using the prior 12-month period, based on the closing prices on the first day of each month, rather than year-end prices.
 
 
·
Permit companies to disclose their probable and possible reserves on a voluntary basis. Under current rules, proved reserves are the only reserves allowed in the disclosures.
 
 
·
Require companies to provide additional disclosure regarding the aging of proved undeveloped reserves.
 
 
·
Permit the use of reliable technologies to determine proved reserves if those technologies have been demonstrated empirically to lead to reliable conclusions about reserves volumes.
 
 
·
Replace the existing "certainty" test for areas beyond one offsetting drilling unit from a productive well with a "reasonable certainty" test.
 
 
·
Require additional disclosures regarding the qualifications of the chief technical person who oversees the company's overall reserve estimation process. Additionally, disclosures regarding internal controls surrounding reserve estimation, as well as a report addressing the independence and qualifications of its reserves preparer or auditor will be mandatory.
 
 
·
Require separate disclosure of reserves in foreign countries if they represent more than 15 percent of total proved reserves, based on barrels of oil equivalents.
 
7
 
 

 
Notes to Consolidated Financial Statements (Unaudited)
 
 
We expect to begin complying with the disclosure requirements in our Annual Report on Form 10-K for the year ending December 31, 2009. The new rules may not be applied to disclosures in quarterly reports prior to the first annual report in which the revised disclosures are required.
 
 
The FASB issued an exposure draft in September 2009 which aligns the FASB’s reporting requirements with the above SEC reporting requirements.  The exposure draft also addresses the impact of changes in the SEC’s rules and definitions on accounting for oil and gas producing activities.  Similar to the SEC requirements, the exposure draft requirements would be effective for periods ending on or after December 31, 2009.  We are currently in the process of evaluating the new requirements by the SEC and awaiting the final standard from the FASB.
 
 
3.      Income per Common Share
 
Basic income per share is based on the weighted average number of common shares outstanding, including securities exchangeable into common shares.  Diluted income per share includes exercise of stock options, provided the effect is not antidilutive.
 
   
Three Months Ended September 30,
 
   
2009
   
2008
 
(In millions, except per share data)
 
Basic
   
Diluted
   
Basic
   
Diluted
 
               
Income from continuing operations
  $ 392     $ 392     $ 1,992     $ 1,992  
Discontinued operations
    21       21       72       72  
Net income
  $ 413     $ 413     $ 2,064     $ 2,064  
                                 
Weighted average common shares outstanding
    709       709       707       707  
Effect of dilutive securities
    -       2       -       4  
Weighted average common shares, including
                               
     dilutive effect
    709       711       707       711  
                                 
Per share:
                               
    Income from continuing operations
  $ 0.55     $ 0.55     $ 2.82     $ 2.80  
    Discontinued operations
  $ 0.03     $ 0.03     $ 0.10     $ 0.10  
    Net income
  $ 0.58     $ 0.58     $ 2.92     $ 2.90  

   
Nine Months Ended September 30,
 
   
2009 
     
2008 
 
(In millions, except per share data)
 
Basic
   
Diluted
     
Basic
   
Diluted
 
         
Income from continuing operations
 
$
 985 
   
$
 985 
   
$
 3,433 
   
$
 3,433 
 
Discontinued operations
   
 123 
     
 123 
     
 136 
     
 136 
 
Net income
 
$
 1,108 
   
$
 1,108 
   
$
 3,569 
   
$
 3,569 
 
                                 
Weighted average common shares outstanding
   
 709 
     
 709 
     
 710 
     
710 
 
Effect of dilutive securities
   
 - 
     
 2 
     
 - 
     
 4 
 
Weighted average common shares, including
                               
     dilutive effect
   
 709 
     
 711 
     
710 
     
714 
 
                                 
Per share:
                               
    Income from continuing operations
 
$
1.39 
   
$
1.39 
   
$
4.84 
   
$
4.81 
 
    Discontinued operations
 
$
0.17 
   
$
0.17 
   
$
0.19 
   
$
0.19 
 
    Net income
 
$
1.56 
   
$
1.56 
   
$
5.03 
   
$
5.00 
 
 
The per share calculations above exclude 11 million stock options for the third quarter and 10 million stock options for the first nine months of 2009, as they were antidilutive.  Excluded in the third quarter and the first nine months of 2008 were 6 million and 5 million stock options.
 

8
 
 
Notes to Consolidated Financial Statements (Unaudited)
 

4.      Dispositions
 
During 2009, we have disposed of our exploration and production businesses in Ireland and certain producing assets in the Permian Basin of New Mexico and Texas.  At September 30, 2009, agreements are pending to dispose of our exploration and production business in Gabon and certain assets under development in Angola.  These dispositions all relate to our Exploration and Production (“E&P”) segment.  Our Irish and Gabonese exploration and production businesses have been reported as discontinued operations in the consolidated statements of income and the consolidated statements of cash flows for all periods presented.  Assets and liabilities related to the Gabonese business are classified as held for sale in the consolidated balance sheet as of September 30, 2009.
 
 
Discontinued operations - Revenues and pretax income associated with our discontinued Irish and Gabonese operations are shown in the following table:
 
 
 
 
Three Months Ended
   
Nine Months Ended
 
 
 
September 30,
   
September 30,
 
(In millions)
 
2009
   
2008
   
2009
   
2008
 
Revenues applicable to discontinued operations
  $ 65     $ 144     $ 188     $ 342  
Pretax income from discontinued operations
  $ 48     $ 109     $ 98     $ 202  
 
Net assets held for sale - As of September 30, 2009, assets and liabilities held for sale, which  primarily represented our  operated interests in Gabon, are shown in the following table:
 
 
(In millions)
     
Other current assets
  $ 10  
Other noncurrent assets
    46  
     Total assets
    56  
         
Other current liabilities
    12  
Deferred credits and other liabilities
    17  
     Total liabilities
    29  
          Net assets held for sale
  $ 27  
 
Pending Gabon disposition - In August 2009, we entered into an agreement to sell our operated fields offshore Gabon for $282 million, excluding any purchase price adjustments at closing, with an effective date of January 1, 2009.   We expect to close this transaction in the fourth quarter of 2009.
 
 
Pending Angola disposition - In July 2009, we entered into an agreement to sell an undivided 20 percent outside-operated interest in the Production Sharing Contract and Joint Operating Agreement in Block 32 offshore Angola for $1.3 billion, excluding any purchase price adjustments at closing, with an effective date of January 1, 2009.  We will retain a 10 percent outside-operated interest in Block 32.  As of September 30, 2009, the book value being sold was $481 million.  We expect to close the transaction by year end 2009, subject to government and regulatory approvals.
 
 
Permian Basin disposition - In June 2009, we closed sales of a portion of our operated and all of our outside-operated Permian Basin producing assets in New Mexico and west Texas for net proceeds after closing adjustments of $293 million.  A $196 million pretax gain on the sale was recorded.
 
 
Ireland dispositions - In April 2009, we closed the sale of our operated properties in Ireland for net proceeds of $84 million, after adjusting for cash held by the sold subsidiary.  A $158 million pretax gain on the sale was recorded.  As a result of this sale, we terminated our pension plan in Ireland, incurring a charge of $18 million.
 
 
In June 2009 we entered into an agreement to sell the subsidiary holding our 19 percent outside-operated interest in the Corrib natural gas development offshore Ireland.  Total proceeds will range between $235 million and $400 million, subject to the timing of first commercial gas at Corrib and closing adjustments.  The fair value of the consideration for this asset was $311 million, which was less than its book value.  A $154 million impairment of the held for sale asset was recognized in discontinued operations in the second quarter of 2009 (see Note 11).  At closing on July 30, 2009, the initial $100 million payment plus closing adjustments was received.  Additional proceeds of $135 million to $300 million will be received on the earlier of first commercial gas or December 31, 2012.
 

9
 
 
Notes to Consolidated Financial Statements (Unaudited)
 
 
Existing guarantees of our subsidiaries’ performance issued to Irish government entities will remain in place after the sales until the purchasers issue similar guarantees to replace them.  The guarantees, related to asset retirement obligations and natural gas production levels, have been indemnified by the purchasers.  Our maximum potential undiscounted payments under these guarantees are $160 million.
 

5.      Segment Information
 
We have four reportable operating segments.  Each of these segments is organized and managed based upon the nature of the products and services they offer.
 
 
 
1)
Exploration and Production (“E&P”) – explores for, produces and markets liquid hydrocarbons and natural gas on a worldwide basis;
 
 
2)
Oil Sands Mining (“OSM”) – mines, extracts and transports bitumen from oil sands deposits in Alberta, Canada, and upgrades the bitumen to produce and market synthetic crude oil and by-products;
 
 
3)
Refining, Marketing and Transportation (“RM&T”) – refines, markets and transports crude oil and petroleum products, primarily in the Midwest, upper Great Plains, Gulf Coast and southeastern regions of the United States; and
 
 
4)
Integrated Gas (“IG”) – markets and transports products manufactured from natural gas, such as liquefied natural gas (“LNG”) and methanol, on a worldwide basis, and is developing other projects to link stranded natural gas resources with key demand areas.
 
As discussed in Note 4, our Irish and Gabonese businesses have been reported as discontinued operations. Segment information for all presented periods excludes amounts for these operations.

   
Three Months Ended September 30, 2009
 
(In millions)
 
E&P
   
OSM
   
RM&T
   
IG
   
Total
 
                               
Revenues:
                             
    Customer
  $ 1,816     $ 130     $ 12,387     $ 15     $ 14,348  
    Intersegment (a)
    148       37       8       -       193  
    Related parties
    15       -       12       -       27  
        Segment revenues
    1,979       167       12,407       15       14,568  
    Elimination of intersegment revenues
    (148 )     (37 )     (8 )     -       (193 )
    Loss on U.K. natural gas contracts(b)
    (13 )     -       -       -       (13 )
        Total revenues
  $ 1,818     $ 130     $ 12,399     $ 15     $ 14,362  
Segment income
  $ 491     $ 25     $ 158     $ 13     $ 687  
Income from equity method investments(c)
    40       -       14       21       75  
Depreciation, depletion and amortization (d)
    427       26       167       1       621  
Income tax provision (d)
    297       7       119       12       435  
Capital expenditures (e)
    516       267       634       -       1,417  
 
Management believes intersegment transactions were conducted under terms comparable to those with unrelated parties.
 
(b)
The U.K. natural gas contracts expired in September 2009.
 
(c)
Our investment in Pilot Travel Centers LLC, which was reported in our RM&T segment, was sold in the fourth quarter of 2008.
 
(d)
Differences between segment totals and our financial statement totals represent amounts related to corporate administrative activities and other unallocated items and are included in “Items not allocated to segments, net of income taxes” in reconciliation below.
 
(e)
Differences between segment totals and our financial statement totals represent amounts related to corporate administrative activities.
 
 
10
 
 
 
Notes to Consolidated Financial Statements (Unaudited)
 
 
   
Three Months Ended September 30, 2008
 
(In millions)
 
E&P
   
OSM
   
RM&T
   
IG
   
Total
 
                               
Revenues:
                             
    Customer
  $ 3,439     $ 532     $ 18,139     $ 24     $ 22,134  
    Intersegment (a)
    278       68       1       -       347  
    Related parties
    11       -       626       -       637  
        Segment revenues
    3,728       600       18,766       24       23,118  
    Elimination of intersegment revenues
    (278 )     (68 )     (1 )     -       (347 )
    Gain on U.K. natural gas contracts(b)
    198       -       -       -       198  
        Total revenues
  $ 3,648     $ 532     $ 18,765     $ 24     $ 22,969  
Segment income
  $ 869     $ 288     $ 771     $ 65     $ 1,993  
Income from equity method investments(c)
    65       -       115       90       270  
Depreciation, depletion and amortization (d)
    389       37       148       1       575  
Income tax provision(d)
    947       98       464       34       1,543  
Capital expenditures (e)
    686       271       765       3       1,725  

   
Nine Months Ended September 30, 2009
 
(In millions)
 
E&P
   
OSM
   
RM&T
   
IG
   
Total
 
                               
Revenues:
                             
    Customer
  $ 4,952     $ 353     $ 32,099     $ 33     $ 37,437  
    Intersegment (a)
    390       91       25       -       506  
    Related parties
    44       -       24       -       68  
        Segment revenues
    5,386       444       32,148       33       38,011  
    Elimination of intersegment revenues
    (390 )     (91 )     (25 )     -       (506 )
    Gain on U.K. natural gas contracts(b)
    72       -       -       -       72  
        Total revenues
  $ 5,068     $ 353     $ 32,123     $ 33     $ 37,577  
Segment income
  $ 782     $ 3     $ 482     $ 53     $ 1,320  
Income from equity method investments(c)
    77       -       16       91       184  
Depreciation, depletion and amortization (d)
    1,391       97       476       3       1,967  
Income tax provision (benefit)(d)
    910       (1 )     329       27       1,265  
Capital expenditures (e)
    1,490       834       2,007       1       4,332  

   
Nine Months Ended September 30, 2008
 
(In millions)
 
E&P
   
OSM
   
RM&T
   
IG
   
Total
 
                               
Revenues:
                             
    Customer
  $ 9,244     $ 631     $ 50,739     $ 64     $ 60,678  
    Intersegment (a)
    663       184       203       -       1,050  
    Related parties
    40       -       1,825       -       1,865  
        Segment revenues
    9,947       815       52,767       64       63,593  
    Elimination of intersegment revenues
    (663 )     (184 )     (203 )     -       (1,050 )
    Loss on U.K. natural gas contracts(b)
    (37 )     -       -       -       (37 )
        Total revenues
  $ 9,247     $ 631     $ 52,564     $ 64     $ 62,506  
Segment income
  $ 2,316     $ 158     $ 854     $ 266     $ 3,594  
Income from equity method investments(c)
    204       -       186       345       735  
Depreciation, depletion and amortization (d)
    933       104       446       3       1,486  
Income tax provision (d)
    2,459       53       527       118       3,157  
Capital expenditures (e)
    2,281       781       1,978       4       5,044  
 
11
 
 
 
 
Notes to Consolidated Financial Statements (Unaudited)
 

         The following reconciles segment income to net income as reported in the consolidated statements of income:
 
                         
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
(In millions)
2009
   
2008
 
2009
 
2008
 
Segment income
  $ 687     $ 1,993     $ 1,320     $ 3,594  
Items not allocated to segments, net of income taxes:
                               
     Corporate and other unallocated items
    (159 )     (178 )     (299 )     (253 )
     Foreign currency remeasurement of taxes
    (114 )     76       (180 )     111  
     Gain (loss) on U.K. natural gas contracts
    (7 )     101       37       (19 )
     Gain (loss) on disposal of assets
    (15 )     -       107       -  
     Discontinued operations
    21       72       123       136  
          Net income
  $ 413     $ 2,064     $ 1,108     $ 3,569  

         The following reconciles total revenues to sales and other operating revenues (including consumer excise taxes) as reported in the consolidated statements of income:
 
                         
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
(In millions)
2009
   
2008
 
2009
 
2008
 
Total revenues
  $ 14,362     $ 22,969     $ 37,577     $ 62,506  
Less:  Sales to related parties
    27       637       68       1,865  
Sales and other operating revenues (including
                               
       consumer excise taxes)
  $ 14,335     $ 22,332     $ 37,509     $ 60,641  

6.      Defined Benefit Postretirement Plans
 
The following summarizes the components of net periodic benefit cost:
 

   
Three Months Ended September 30,
 
  
 
Pension Benefits
   
Other Benefits
 
(In millions)
 
2009
   
2008
   
2009
   
2008
 
Service cost
  $ 36     $ 37     $ 4     $ 5  
Interest cost
    42       40       11       11  
Expected return on plan assets
    (41 )     (42 )     -       -  
Amortization:
                               
    – prior service cost (credit)
    4       3       (1 )     (2 )
    – actuarial loss (gain)
    8       8       (2 )     -  
Net periodic benefit cost
  $ 49     $ 46     $ 12     $ 14  

 
Nine Months Ended September 30,
  
Pension Benefits
 
Other Benefits
(In millions)
2009 
 
2008 
 
2009 
 
2008 
Service cost
$
108 
 
$
110 
 
$
13 
 
$
14 
Interest cost
 
126 
   
120 
   
31 
   
33 
Expected return on plan assets
 
(121)
   
(126)
   
   
 - 
Amortization:
                     
    – prior service cost (credit)
 
11 
   
10 
   
(4)
   
(6)
    – actuarial loss (gain)
 
24 
   
23 
   
 (4)
   
 1 
    – net settlement/curtailment loss(a)
 
18 
   
   
   
Net periodic benefit cost
$
166 
 
$
137 
 
$
36 
 
$
42 
 
 
(a)   The curtailment and settlement is related to our discontinued operations in Ireland, as discussed in Note 4.  Pension expense relatedto Ireland was not material in any period presented.
 
 
12
 
 
 
Notes to Consolidated Financial Statements (Unaudited)
 
 
During the first nine months of 2009, we made contributions of $326 million to our funded pension plans.  We expect to make additional contributions up to an estimated $7 million to our funded pension plans over the remainder of 2009.  Current benefit payments related to unfunded pension and other postretirement benefit plans were $11 million and $25 million during the first nine months of 2009.
 

7.      Income Taxes
 
The following is an analysis of the effective income tax rates for the periods presented:
 
   
Nine Months Ended September 30,
 
   
2009
   
2008
 
Statutory U.S. income tax rate
    35 %     35 %
Foreign taxes in excess of federal statutory rate
    25       11  
State and local income taxes, net of federal income tax effects
    1       1  
Other tax effects
    -       (1 )
        Effective income tax rate
    61 %     46 %

The effective income tax rate is influenced by a variety of factors including the geographic and functional sources of income, the relative magnitude of these sources of income, and foreign currency remeasurement effects.  The change in mix of liquid hydrocarbon and natural gas sales in 2009 from 2008 resulted in more income in jurisdictions with high tax rates.  Beginning in the third quarter of 2009, we are crediting certain foreign taxes that were previously treated as deductible for U.S. tax purposes.  We continue to assess the realizability of our deferred tax assets. Our assessments include estimates of our expected future taxable income and assumptions about matters that are dependent on future events. These future events include, but are not limited to, future operating and financial conditions.  The 2009 effective tax rate increased due to a change in judgment about the realizability of a portion our deferred tax asset related to U.S. foreign tax credits generated during the year.  These changes, as well as unfavorable foreign currency remeasurement effects, contributed to the increase in the effective income tax rate in the first nine months of 2009 as compared to the same period in 2008.
 
We are continuously undergoing examination of our U.S. federal income tax returns by the Internal Revenue Service.  Such audits have been completed through the 2005 tax year.  We believe adequate provision has been made for federal income taxes and interest which may become payable for years not yet settled.  Further, we are routinely involved in U.S. state income tax audits and foreign jurisdiction tax audits.  We believe all other audits will be resolved within the amounts paid and/or provided for these liabilities.  As of September 30, 2009, our income tax returns remain subject to examination in the following major tax jurisdictions for the tax years indicated.
 
United States (a)
2001 - 2008  
Canada
2000 - 2008  
Equatorial Guinea
2006 - 2008  
Libya
2006 - 2008  
Norway
2007 - 2008  
United Kingdom
2007 - 2008  
 
Includes federal and state jurisdictions.

13
 
 
Notes to Consolidated Financial Statements (Unaudited)
 

 
8.      Comprehensive Income
 
 
The following sets forth comprehensive income for the periods indicated:
 

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(In millions)
 
2009
   
2008
   
2009
   
2008
 
Net income
  $ 413     $ 2,064     $ 1,108     $ 3,569  
Other comprehensive income, net of taxes:
                               
     Defined benefit postretirement plans
    9       22       27       2  
     Derivatives
    15       (12 )     11       (8 )
     Other
    -       (14 )     1       (19 )
Comprehensive income
  $ 437     $ 2,060     $ 1,147     $ 3,544  

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

   
September 30,
   
December 31,
 
(In millions)
 
2009
   
2008
 
Liquid hydrocarbons, natural gas and bitumen
  $ 1,462     $ 1,376  
Refined products and merchandise
    1,841       1,797  
Supplies and sundry items
    377       334  
        Inventories, at cost
  $ 3,680     $ 3,507  


10.           Property, Plant and Equipment
 
Exploratory well costs capitalized greater than one year after completion of drilling were $371 million as of September 30, 2009, an increase of $317 million from December 31, 2008.  Our Angola Block 32 exploration project is now in this category because exploratory drilling ceased in the third quarter of 2008.   The $327 million of suspended costs for this project relate to 16 successful wells that have been drilled since 2002 in this license area.  We plan to drill an additional exploration well in the fourth quarter of 2009. As discussed in Note 4, we have agreed to sell an undivided 20 percent outside-operated interest in this Angola Block 32.
 
 
In addition, an exploration well drilled for $20 million in early 2008 on the Southwest Foinaven prospect in the U.K. Atlantic Margin was added in the first quarter of 2009.  It is being evaluated for combined development in conjunction with nearby prospects.  For the North Sea Gudrun field, $24 million was removed since engineering and design efforts commenced on its development during the second quarter of 2009.
 

14
 
 
Notes to Consolidated Financial Statements (Unaudited)
 

11.           Fair Value Measurements
 
Fair Values - Recurring
 
 
The following table presents the assets (liabilities) accounted for at fair value on a recurring basis as of September 30, 2009 and December 31, 2008:
 

 
September 30, 2009
 
(In millions)
 
Level 1
   
Level 2
   
Level 3
   
Total
 
     Derivative Instruments:
                       
          Commodity
  $ 27     $ 2     $ (5 )   $ 24  
          Interest rate
    -       -       3       3  
          Foreign currency
    -       3       1       4  
               Total derivative instruments
    27       5       (1 )     31  
      Other assets
    2       -       -       2  
               Total at fair value
  $ 29     $ 5     $ (1 )   $ 33  
                                 
                                 
 
December 31, 2008
 
(In millions)
 
Level 1
   
Level 2
   
Level 3
   
Total
 
     Derivative Instruments:
                               
          Commodity
  $ 107     $ 6     $ (55 )   $ 58  
          Interest rate
    -       -       29       29  
          Foreign currency
    -       (75 )     -       (75 )
               Total derivative instruments
    107       (69 )     (26 )     12  
      Other assets
    2       -       -       2  
               Total at fair value
  $ 109     $ (69 )   $ (26 )   $ 14  

 
Deposits of $25 million and $121 million in broker accounts covered by master netting agreements are netted against the values to arrive at the fair values of commodity derivatives as of September 30, 2009 and December 31, 2008.  Derivatives in Level 1 are exchange-traded contracts