Marathon Oil Corporation - SEC Filing

10-Q


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, 2015
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 Street, 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 R 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 R 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     þ  
Accelerated filer             o
Non-accelerated filer       o        (Do not check if a smaller reporting company) 
Smaller reporting company        o   
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).         
Yes o No þ
 
There were 677,260,116 shares of Marathon Oil Corporation common stock outstanding as of October 31, 2015.




MARATHON OIL CORPORATION
 
Unless the context otherwise indicates, references to “Marathon Oil,” “we,” “our,” or “us” in this Form 10-Q 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 Oil exerts significant influence by virtue of its ownership interest).
For certain industry specific terms used in this Form 10-Q, please see "Definitions" in our 2014 Annual Report on Form 10-K.

 
Table of Contents
 
 
 
Page
 
 
 
 
 
 
 
 
 
 


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)
2015
 
2014
 
2015
 
2014
Revenues and other income:
 
 
 
 
 
 
 
Sales and other operating revenues, including related party
$
1,300

 
$
2,316

 
$
3,887

 
$
6,735

Marketing revenues
84

 
554

 
471

 
1,713

Income from equity method investments
36

 
89

 
98

 
346

Net loss on disposal of assets
(109
)
 
(3
)
 
(108
)
 
(88
)
Other income
12

 
15

 
38

 
55

Total revenues and other income
1,323

 
2,971

 
4,386

 
8,761

Costs and expenses:
 

 
 

 
 
 
 

Production
406

 
593

 
1,300

 
1,697

Marketing, including purchases from related parties
84

 
554

 
471

 
1,710

Other operating
93

 
99

 
281

 
303

Exploration
585

 
96

 
786

 
314

Depreciation, depletion and amortization
717

 
737

 
2,289

 
2,060

Impairments
337

 
109

 
381

 
130

Taxes other than income
46

 
115

 
191

 
319

General and administrative
125

 
160

 
464

 
486

Total costs and expenses
2,393

 
2,463

 
6,163

 
7,019

Income (loss) from operations
(1,070
)
 
508

 
(1,777
)
 
1,742

Net interest and other
(75
)
 
(55
)
 
(180
)
 
(180
)
Income (loss) from continuing operations before income taxes
(1,145
)
 
453

 
(1,957
)
 
1,562

Provision (benefit) for income taxes
(396
)
 
149

 
(546
)
 
500

Income (loss) from continuing operations
(749
)
 
304

 
(1,411
)
 
1,062

Discontinued operations

 
127

 

 
1,058

Net income (loss)
$
(749
)
 
$
431

 
$
(1,411
)
 
$
2,120

Per basic share:
 

 
 

 
 

 
 

Income (loss) from continuing operations
$
(1.11
)
 
$
0.45

 
$
(2.09
)
 
$
1.56

Discontinued operations
$

 
$
0.19

 
$

 
$
1.55

Net income (loss)
$
(1.11
)
 
$
0.64

 
$
(2.09
)
 
$
3.11

Per diluted share:
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
(1.11
)
 
$
0.45

 
$
(2.09
)
 
$
1.55

Discontinued operations
$

 
$
0.19

 
$

 
$
1.55

Net income (loss)
$
(1.11
)
 
$
0.64

 
$
(2.09
)
 
$
3.10

Dividends per share
$
0.21

 
$
0.21

 
$
0.63

 
$
0.59

Weighted average common shares outstanding:
 

 
 

 
 

 
 

Basic
677

 
675

 
677

 
681

Diluted
677

 
678

 
677

 
684

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

2



MARATHON OIL CORPORATION
Consolidated Statements of Comprehensive Income (Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(In millions)
2015
 
2014
 
2015
 
2014
Net income (loss)
$
(749
)
 
$
431

 
$
(1,411
)
 
$
2,120

Other comprehensive income (loss)
 

 
 

 
 

 
 

Postretirement and postemployment plans
 

 
 

 
 

 
 

Change in actuarial loss and other
(2
)
 
3

 
160

 
(40
)
Income tax benefit (provision)
(1
)
 
(2
)
 
(58
)
 
13

Postretirement and postemployment plans, net of tax
(3
)
 
1

 
102

 
(27
)
Comprehensive income (loss)
$
(752
)
 
$
432

 
$
(1,309
)
 
$
2,093

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


3



MARATHON OIL CORPORATION
Consolidated Balance Sheets (Unaudited)
 
September 30,
 
December 31,
(In millions, except per share data)
2015
 
2014
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,680

 
$
2,398

Short-term investments
700

 

Receivables, less reserve of $4 and $3
991

 
1,729

Inventories
324

 
357

Other current assets
163

 
109

Total current assets
3,858

 
4,593

Equity method investments
1,012

 
1,113

Property, plant and equipment, less accumulated depreciation,
 

 
 

depletion and amortization of $23,713 and $21,884
27,920

 
29,040

Goodwill
457

 
459

Other noncurrent assets
1,427

 
806

Total assets
$
34,674

 
$
36,011

Liabilities
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
1,246

 
$
2,545

Payroll and benefits payable
138

 
191

Accrued taxes
143

 
285

Other current liabilities
286

 
290

Long-term debt due within one year
1,035

 
1,068

Total current liabilities
2,848

 
4,379

Long-term debt
7,323

 
5,323

Deferred tax liabilities
2,542

 
2,486

Defined benefit postretirement plan obligations
436

 
598

Asset retirement obligations
1,965

 
1,917

Deferred credits and other liabilities
225

 
288

Total liabilities
15,339

 
14,991

Commitments and contingencies


 


Stockholders’ Equity
 

 
 

Preferred stock – no shares issued or outstanding (no par value,
 
 
 
26 million shares authorized)

 

Common stock:
 

 
 

Issued – 770 million shares (par value $1 per share,
 
 
 
1.1 billion shares authorized)
770

 
770

Securities exchangeable into common stock – no shares issued or
 

 
 

outstanding (no par value, 29 million shares authorized)

 

Held in treasury, at cost – 93 million and 95 million shares
(3,553
)
 
(3,642
)
Additional paid-in capital
6,493

 
6,531

Retained earnings
15,800

 
17,638

Accumulated other comprehensive loss
(175
)
 
(277
)
Total stockholders' equity
19,335

 
21,020

Total liabilities and stockholders' equity
$
34,674

 
$
36,011

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

4



MARATHON OIL CORPORATION
Consolidated Statements of Cash Flows (Unaudited)
 
Nine Months Ended
 
September 30,
(In millions)
2015
 
2014
Increase (decrease) in cash and cash equivalents
 
 
 
Operating activities:
 

 
 

Net income (loss)
$
(1,411
)
 
$
2,120

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 

 
 

Discontinued operations

 
(1,058
)
Deferred income taxes
(590
)
 
337

Depreciation, depletion and amortization
2,289

 
2,060

Impairments
381

 
130

Pension and other postretirement benefits, net
9

 
(27
)
Exploratory dry well costs and unproved property impairments
708

 
220

Net loss on disposal of assets
108

 
88

Equity method investments, net
41

 
51

Changes in:
 
 
 

Current receivables
738

 
(270
)
Inventories
30

 
(32
)
Current accounts payable and accrued liabilities
(954
)
 
(115
)
All other operating, net
(136
)
 
(28
)
Net cash provided by continuing operations
1,213

 
3,476

Net cash provided by discontinued operations

 
856

Net cash provided by operating activities
1,213

 
4,332

Investing activities:
 

 
 

Acquisitions, net of cash acquired

 
(12
)
Additions to property, plant and equipment
(2,948
)
 
(3,639
)
Disposal of assets
105

 
2,237

Investments - return of capital
61

 
46

Purchases of short-term investments
(925
)
 

Maturities of short-term investments
225

 

Investing activities of discontinued operations

 
(356
)
All other investing, net
22

 
(24
)
Net cash used in investing activities
(3,460
)
 
(1,748
)
Financing activities:
 

 
 

Commercial paper, net

 
(135
)
Borrowings
1,996

 

Debt issuance costs
(19
)
 

Debt repayments
(34
)
 
(34
)
Purchases of common stock

 
(1,000
)
Dividends paid
(427
)
 
(401
)
All other financing, net
14

 
150

Net cash provided by (used in) financing activities
1,530

 
(1,420
)
Effect of exchange rate on cash and cash equivalents:
 
 
 
Continuing operations
(1
)
 
(1
)
Discontinued operations

 
(11
)
Cash held for sale

 
(655
)
Net increase (decrease) in cash and cash equivalents
(718
)
 
497

Cash and cash equivalents at beginning of period
2,398

 
264

Cash and cash equivalents at end of period
$
1,680

 
$
761

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

5


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, these statements 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 SEC and do not include all of the information and disclosures required by U.S. GAAP for complete financial statements.
As a result of the sale of our Angola assets and our Norway business in 2014, both are reflected as discontinued operations. The disclosures in this report related to results of operations and cash flows are presented on the basis of continuing operations, unless otherwise noted.
These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our 2014 Annual Report on Form 10-K.  The results of operations for the third quarter and first nine months of 2015 are not necessarily indicative of the results to be expected for the full year.
2.   Accounting Standards
Not Yet Adopted
In May 2015, the FASB issued an update that removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The amendment also removes certain disclosure requirements regarding all investments that are eligible to be measured using the net asset value per share practical expedient and only requires certain disclosures on those investments for which an entity elects to use the net asset value per share expedient. This standard is effective for us in the first quarter of 2016 and will be applied on a retrospective basis. Early adoption is permitted. This standard only modifies disclosure requirements; as such, there will be no impact on our consolidated results of operations, financial position or cash flows.
In April 2015, the FASB issued an update that requires debt issuance costs to be presented in the balance sheet as a direct reduction from the associated debt liability. This standard is effective for us in the first quarter of 2016 and will be applied on a retrospective basis. Early adoption is permitted. We do not expect the adoption of this standard to have a significant impact on our consolidated results of operations, financial position or cash flows.
In February 2015, the FASB issued an amendment to the guidance for determining whether an entity is a variable interest entity ("VIE"). The standard does not add or remove any of the five characteristics that determine if an entity is a VIE. However, it does change the manner by which a reporting entity assesses whether the equity holders at risk lack decision making rights if the decision-making over the subject entity’s most significant activities was outsourced. This standard is effective for us in the first quarter of 2016 and early adoption is permitted. We do not expect the adoption of this standard to have a significant impact on our consolidated results of operations, financial position or cash flows.
In August 2014, the FASB issued an update that requires management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in United States auditing standards.  This standard is effective for us in the first quarter of 2017 and early adoption is permitted. We do not expect the adoption of this standard to have a significant impact on our consolidated results of operations, financial position or cash flows.
In May 2014, the FASB issued an update that supersedes the existing revenue recognition requirements. This standard includes a five-step revenue recognition model to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. Among other things, the standard also eliminates industry-specific revenue guidance, requires enhanced disclosures about revenue, provides guidance for transactions that were not previously addressed comprehensively, and improves guidance for multiple-element arrangements. This standard is effective for us in the first quarter of 2018 and should be applied retrospectively to each prior reporting period presented or with the cumulative effect of initially applying the update recognized at the date of initial application. Early adoption is permitted with an effective date no earlier than first quarter of 2017. We are evaluating the provisions of this accounting standards update and assessing the impact, if any, it may have on our consolidated results of operations, financial position or cash flows.

6


MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)


Recently Adopted
In April 2014, the FASB issued an amendment to accounting standards that changes the criteria for reporting discontinued operations while enhancing related disclosures. Under the amendment, only disposals representing a strategic shift in operations should be presented as discontinued operations. Expanded disclosures about the assets, liabilities, income and expenses of discontinued operations are required.  In addition, disclosure of the pretax income attributable to a disposal of a significant part of an organization that does not qualify for discontinued operations reporting will be made in order to provide users with information about the ongoing trends in an organization’s results from continuing operations.  The amendments were effective for us in the first quarter of 2015 and apply to dispositions or classifications as held for sale thereafter. Adoption of this standard did not impact our consolidated results of operations, financial position or cash flows.
3.   Variable Interest Entity
The owners of the Athabasca Oil Sands Project, in which we hold a 20% undivided interest, contracted with a wholly owned subsidiary of a publicly traded Canadian limited partnership (“Corridor Pipeline”) to provide materials transportation capabilities among the Muskeg River and Jackpine mines, the Scotford upgrader and markets in Edmonton, Alberta, Canada.  Costs under this contract are accrued and recorded on a monthly basis, with current liabilities of $2 million recorded at September 30, 2015 and $3 million at December 31, 2014.  This contract qualifies as a variable interest contractual arrangement, and the Corridor Pipeline qualifies as a VIE.  We hold a variable interest but are not the primary beneficiary because our shipments are only 20% of the total; therefore, the Corridor Pipeline is not consolidated by us.  Our maximum exposure to loss as a result of our involvement with this VIE is the amount we expect to pay over the contract term, which was $471 million as of September 30, 2015.  The liability on our books related to this contract at any given time will reflect amounts due for the immediately previous month’s activity, which is substantially less than the maximum exposure over the contract term.
4.
Income (Loss) per Common Share
Basic income (loss) per share is based on the weighted average number of common shares outstanding.  Diluted income per share assumes exercise of stock options, provided the effect is not antidilutive. The per share calculations below exclude 13 million and 2 million stock options for the third quarters of 2015 and 2014 and 13 million and 4 million stock options for the first nine months of 2015 and 2014 that were antidilutive.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In millions, except per share data)
2015
 
2014
 
2015
 
2014
Income (loss) from continuing operations
$
(749
)
 
$
304

 
$
(1,411
)
 
$
1,062

Discontinued operations

 
127

 

 
1,058

Net income (loss)
$
(749
)
 
$
431

 
$
(1,411
)
 
$
2,120

 
 
 
 
 
 
 
 
Weighted average common shares outstanding
677

 
675

 
677

 
681

Effect of dilutive securities

 
3

 

 
3

Weighted average common shares, diluted
677

 
678

 
677

 
684

Per basic share:
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
(1.11
)
 
$
0.45

 
$
(2.09
)
 
$
1.56

Discontinued operations
$

 
$
0.19

 
$

 
$
1.55

Net income (loss)
$
(1.11
)
 
$
0.64

 
$
(2.09
)
 
$
3.11

Per diluted share:
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
(1.11
)
 
$
0.45

 
$
(2.09
)
 
$
1.55

Discontinued operations
$

 
$
0.19

 
$

 
$
1.55

Net income (loss)
$
(1.11
)
 
$
0.64

 
$
(2.09
)
 
$
3.10


7


MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)


5.
Acquisitions
2014 - North America E&P Segment
In the third quarter of 2014, we acquired acreage in the Oklahoma Resource Basins at a cost of $68 million after final settlement adjustments.
6.
Dispositions
2015 - North America E&P Segment
In August 2015, we closed the sale of our East Texas, North Louisiana and Wilburton, Oklahoma natural gas assets for proceeds of approximately $100 million and recorded a pretax loss of $1 million. During the second quarter of 2015, we recorded a non-cash impairment charge of $44 million related to these assets (See Note 15).
2015 - International E&P Segment
In September 2015, we entered into an agreement to sell our East Africa exploration acreage in Ethiopia and Kenya. A pretax loss of $109 million was recorded in the third quarter of 2015. This transaction is expected to close during the fourth quarter of 2015.
2014 - North America E&P Segment
In the second quarter of 2014, we closed the sale of non-core acreage located in the far northwest portion of Williston Basin for proceeds of $90 million and recorded a pretax loss of $91 million.
2014 - International E&P Segment
In the second quarter of 2014, we entered into an agreement to sell our Norway business, including the operated Alvheim floating production, storage and offloading vessel, 10 operated licenses and a number of non-operated licenses on the Norwegian Continental Shelf in the North Sea.  The transaction closed during the fourth quarter of 2014.
Our Norway business was reflected as discontinued operations in the consolidated statements of income and the consolidated statements of cash flows for 2014. Select amounts reported in discontinued operations were as follows:
 
Three Months Ended September 30,
Nine Months Ended September 30,
 
(In millions)
 
2014
 
2014
 
Revenues applicable to discontinued operations
 
$
528

 
$
1,901

 
Pretax income from discontinued operations
 
$
487

 
$
1,617

 
After-tax income from discontinued operations
 
$
127

 
$
449

(a) 
(a)    Includes a tax benefit of $26 million related to a decrease in the valuation allowance on U.S. foreign tax credits from the Norway operations.
 
 
In the first quarter of 2014, we closed the sales of our non-operated 10% working interests in the Production Sharing Contracts and Joint Operating Agreements for Angola Blocks 31 and 32 for aggregate proceeds of approximately $2 billion and recorded a $576 million after-tax gain on sale. Included in the after-tax gain is a deferred tax benefit reflecting our ability to utilize foreign tax credits that otherwise would have needed a valuation allowance.
Our Angola operations are reflected as discontinued operations in the consolidated statements of income and the consolidated statements of cash flows for the prior period. Select amounts reported in discontinued operations were as follows:
 
Nine Months Ended September 30,
(In millions)
2014
Revenues applicable to discontinued operations
$
58

Pretax income from discontinued operations, before gain
$
51

Pretax gain on disposition of discontinued operations
$
470

After-tax income from discontinued operations
$
609

 
 

8


MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)


7.    Segment Information
  We are a global energy company with operations in North America, Europe and Africa. Each of our three reportable operating segments is organized and managed based upon both geographic location and the nature of the products and services it offers.
N.A. E&P – explores for, produces and markets crude oil and condensate, NGLs and natural gas in North America;
Int'l E&P – explores for, produces and markets crude oil and condensate, NGLs and natural gas outside of North America and produces and markets products manufactured from natural gas, such as LNG and methanol, in E.G.; and
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 vacuum gas oil.
Information regarding assets by segment is not presented because it is not reviewed by the chief operating decision maker (“CODM”).  Segment income represents income from continuing operations excluding certain items not allocated to segments, net of income taxes attributable to the operating segments. Our corporate and operations support general and administrative costs are not allocated to the operating segments. These costs primarily consist of employment costs (including pension effects), professional services, facilities and other costs associated with corporate and operations support activities. Gains or losses on dispositions, certain impairments, change in tax expense associated with a tax rate change, unrealized gains or losses on crude oil derivative instruments, or other items that affect comparability also are not allocated to operating segments.
As discussed in Note 6, as a result of the sale of our Angola assets and our Norway business in 2014, both are reflected as discontinued operations and excluded from the Int'l E&P segment for 2014.
 
Three Months Ended September 30, 2015
 
 
 
Not Allocated
 
 
(In millions)
N.A. E&P
 
Int'l E&P
 
OSM
 
to Segments
 
Total
Sales and other operating revenues
$
796

 
$
182

 
$
242

 
$
80

(c) 
$
1,300

Marketing revenues
57

 
25

 
2

 

 
84

Total revenues
853

 
207

 
244

 
80

 
1,384

Income (loss) from equity method investments

 
48

 

 
(12
)
(d) 
36

Net gain (loss) on disposal of assets and other income
6

 
6

 

 
(109
)
(e) 
(97
)
Less:
 
 
 
 
 
 
 
 
 
Production expenses
179

 
61

 
166

 

 
406

Marketing costs
56

 
25

 
3

 

 
84

Exploration expenses
22

 
10

 

 
553

(f) 
585

Depreciation, depletion and amortization
549

 
79

 
76

 
13

 
717

Impairments

 

 
4

 
333

(g) 
337

Other expenses (a)
106

 
25

 
8

 
79

(h) 
218

Taxes other than income
42

 

 
5

 
(1
)
 
46

Net interest and other

 

 

 
75

 
75

Income tax provision (benefit)
(34
)
 
32

 
(7
)
 
(387
)
 
(396
)
Segment income (loss) /Loss from continuing operations
$
(61
)
 
$
29

 
$
(11
)
 
$
(706
)
 
$
(749
)
Capital expenditures (b)
$
564

 
$
30

 
$
(11
)
 
$
12

 
$
595

(a) 
Includes other operating expenses and general and administrative expenses.
(b) 
Includes accruals.
(c) 
Unrealized gain on crude oil derivative instruments.
(d) 
Partial impairment of investment in equity method investee (See Note 15).
(e) 
Includes loss on sale of East Africa exploration acreage (See Note 6).
(f) 
Unproved property impairments associated with lower forecasted commodity prices and change in conventional exploration strategy (See Note 14).
(g) 
Proved property impairments (See Note 14).
(h) 
Includes pension settlement loss of $18 million and severance related expenses associated with workforce reductions of $4 million (See Note 8).


9


MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)


 
Three Months Ended September 30, 2014
 
 
 
Not Allocated
 
 
(In millions)
N.A. E&P
 
Int'l E&P
 
OSM
 
to Segments
 
Total
Sales and other operating revenues
$
1,586

 
$
273

 
$
457

 
$

 
$
2,316

Marketing revenues
506

 
46

 
2

 

 
554

Total revenues
2,092

 
319

 
459

 

 
2,870

Income from equity method investments

 
89

 

 

 
89

Net gain (loss) on disposal of assets and other income
(1
)
 
12

 

 
1

 
12

Less:
 
 
 
 
 
 
 
 
 
Production expenses
233

 
108

 
252

 

 
593

Marketing costs
507

 
45

 
2

 

 
554

Exploration expenses
55

 
41

 

 

 
96

Depreciation, depletion and amortization
609

 
55

 
62

 
11

 
737

Impairments

 

 

 
109

(c) 
109

Other expenses (a)
118

 
26

 
14

 
101

(d) 
259

Taxes other than income
109

 

 
5

 
1

 
115

Net interest and other

 

 

 
55

 
55

Income tax provision (benefit)
168

 
39

 
31

 
(89
)
 
149

Segment income/Income from continuing operations
$
292

 
$
106

 
$
93

 
$
(187
)
 
$
304

Capital expenditures (b)
$
1,277

 
$
166

 
$
49

 
$
16

 
$
1,508

(a) 
Includes other operating expenses and general and administrative expenses.
(b) 
Includes accruals.
(c) 
Proved property impairment (See Note 14).
(d) 
Includes pension settlement loss of $22 million (See Note 8).
 
Nine Months Ended September 30, 2015
 
 
 
Not Allocated
 
 
(In millions)
N.A. E&P
 
Int'l E&P
 
OSM
 
to Segments
 
Total
Sales and other operating revenues
$
2,639

 
$
575

 
$
614

 
$
59

(c) 
$
3,887

Marketing revenues
345

 
81

 
45

 

 
471

Total revenues
2,984

 
656

 
659

 
59

 
4,358

Income (loss) from equity method investments

 
110

 

 
(12
)
(d) 
98

Net gain (loss) on disposal of assets and other income
17

 
20

 
1

 
(108
)
(e) 
(70
)
Less:
 
 
 
 
 
 
 
 
 
Production expenses
560

 
192

 
548

 

 
1,300

Marketing costs
348

 
79

 
44

 

 
471

Exploration expenses
148

 
85

 

 
553

(f) 
786

Depreciation, depletion and amortization
1,866

 
214

 
173

 
36

 
2,289

Impairments

 

 
4

 
377

(g) 
381

Other expenses (a)
322

 
67

 
26

 
330

(h) 
745

Taxes other than income
170

 

 
15

 
6

 
191

Net interest and other

 

 

 
180

 
180

Income tax provision (benefit)
(146
)
 
56

 
(43
)
 
(413
)
(i) 
(546
)
Segment income (loss) /Loss from continuing operations
$
(267
)
 
$
93

 
$
(107
)
 
$
(1,130
)
 
$
(1,411
)
Capital expenditures (b)
$
2,048

 
$
275

 
$
26

 
$
26

 
$
2,375

(a) 
Includes other operating expenses and general and administrative expenses.
(b) 
Includes accruals.
(c) 
Unrealized gain on crude oil derivative instruments.
(d) 
Partial impairment of investment in equity-method investee (See Note 15).
(e) 
Includes loss on sale of East Africa exploration acreage (See Note 6).
(f) 
Unproved property impairments associated with lower forecasted commodity prices and change in conventional exploration strategy (See Note 14).
(g) 
Proved property impairments (See Note 14).
(h) 
Includes pension settlement loss of $99 million and severance related expenses associated with workforce reductions of $47 million (See Note 8).
(i) 
Includes $135 million of deferred tax expense related to Alberta provincial corporate tax rate increase (See Note 9).


10


MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)



 
Nine Months Ended September 30, 2014
 
 
 
Not Allocated
 
 
(In millions)
N.A. E&P
 
Int'l E&P
 
OSM
 
to Segments
 
Total
Sales and other operating revenues
$
4,518

 
$
1,000

 
$
1,217

 
$

 
$
6,735

Marketing revenues
1,486

 
177

 
50

 

 
1,713

Total revenues
6,004

 
1,177

 
1,267

 

 
8,448

Income from equity method investments

 
346

 

 

 
346

Net gain (loss) on disposal of assets and other income
17

 
44

 
3

 
(97
)
(c) 
(33
)
Less:
 
 
 
 
 
 
 
 
 
Production expenses
661

 
307

 
729

 

 
1,697

Marketing costs
1,484

 
176

 
50

 

 
1,710

Exploration expenses
194

 
120

 

 

 
314

Depreciation, depletion and amortization
1,674

 
201

 
152

 
33

 
2,060

Impairments
21

 

 

 
109

(d) 
130

Other expenses (a)
354

 
98

 
40

 
297

(e) 
789

Taxes other than income
301

 

 
16

 
2

 
319

Net interest and other

 

 

 
180

 
180

Income tax provision (benefit)
496

 
178

 
71

 
(245
)
 
500

Segment income /Income from continuing operations
$
836

 
$
487

 
$
212

 
$
(473
)
 
$
1,062

Capital expenditures (b)
$
3,246

 
$
386

 
$
172

 
$
29

 
$
3,833

(a) 
Includes other operating expenses and general and administrative expenses.
(b) 
Includes accruals.
(c) 
Primarily related to the sale of non-core acreage (See Note 6).
(d) 
Proved property impairments (See Note 14).
(e) 
Includes pension settlement loss of $93 million (See Note 8).
8.    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)
2015
 
2014
 
2015
 
2014
Service cost
$
11

 
$
12

 
$

 
$

Interest cost
12

 
15

 
3

 
4

Expected return on plan assets
(17
)
 
(16
)
 

 

Amortization:
 

 
 

 
 

 
 

– prior service cost (credit)
(3
)
 
1

 
(1
)
 
(1
)
– actuarial loss
5

 
7

 
1

 

Net settlement loss (a)
18

 
22

 

 

Net curtailment loss (b)
4

 

 

 

Net periodic benefit cost
$
30

 
$
41

 
$
3

 
$
3


11


MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)


 
Nine Months Ended September 30,
  
Pension Benefits
 
Other Benefits
(In millions)
2015
 
2014
 
2015
 
2014
Service cost
$
35

 
$
35

 
$
2

 
$
2

Interest cost
39

 
46

 
8

 
10

Expected return on plan assets
(53
)
 
(48
)
 

 

Amortization:
 

 
 

 
 

 
 

– prior service cost (credit)
(4
)
 
4

 
(3
)
 
(3
)
– actuarial loss
19

 
23

 
1

 

Net settlement loss(a)
99

 
93

 

 

Net curtailment loss (gain) (b)
5

 

 
(4
)
 

Net periodic benefit cost
$
140


$
153


$
4


$
9

(a) 
Settlements are recognized as they occur, once it is probable that lump sum payments from a plan for a given year will exceed the plan's total service and interest cost for that year.
(b) 
Related to workforce reductions, which reduced the future expected years of service for employees participating in the plans and the impact of discontinuing accruals for future benefits under the U.K. pension plan effective December 31, 2015.
During the first nine months of 2015, we recorded the effects of a workforce reduction, a U.S. pension plan amendment and the discontinuation of accruals for future benefits under the U.K. pension plan. The U.S. pension plan amendment freezes the final average pay used to calculate the benefit under the legacy final average pay formula and was effective July 6, 2015. For the U.K. pension plan, a final decision was reached with the plan trustees to close the plan to future benefit accruals effective December 31, 2015. Additionally, during the first nine months of 2015 and 2014, we recorded the effects of settlements of our U.S. pension plans. As required, we remeasured the plans' assets and liabilities as of the applicable balance sheet dates. The cumulative effects of these events are included in the remeasurement and reflected in both the pension liability and net periodic benefit cost.
During the first nine months of 2015, we made contributions of $65 million to our funded pension plans.  We expect to make additional contributions up to an estimated $18 million to our funded pension plans over the remainder of 2015.  During the first nine months of 2015, we made payments of $57 million and $13 million related to unfunded pension plans and other postretirement benefit plans, respectively.
9.    Income Taxes
Effective Tax Rate
The effective income tax rate is influenced by a variety of factors including the geographic and functional sources of income and the relative magnitude of these sources of income. The difference between the total provision (benefit) and the sum of the amounts allocated to segments is reported in the “Not Allocated to Segments” column of the tables in Note 7.
Our effective income tax rates on continuing operations for the first nine months of 2015 and 2014 were 28% and 32%.  The tax provision (benefit) applicable to Libyan ordinary income (loss) was recorded as a discrete item in the first nine months of 2015 and 2014.  Excluding Libya, the effective tax rates on continuing operations, would be 27% and 32% for the first nine months of 2015 and 2014. In Libya, uncertainty remains around the timing of future production and sales levels. Reliable estimates of 2015 and 2014 Libyan annual ordinary income from our operations could not be made and the range of possible scenarios in the worldwide annual effective tax rate calculation demonstrates significant variability.  Thus, for the first nine months of 2015 and 2014, estimated annual effective tax rates were calculated excluding Libya and applied to consolidated ordinary income (loss).
Change in Tax Law
On June 29, 2015, the Alberta government enacted legislation to increase the provincial corporate tax rate from 10% to 12%. As a result of this legislation, we recorded additional non-cash deferred tax expense of $135 million in the second quarter of 2015.
Indefinite Reinvestment Assertion
In the second quarter of 2015, we reviewed our operations and concluded that we do not have the same level of capital needs outside the U.S. as previously expected. Therefore, we no longer intend for previously unremitted foreign earnings of

12


MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)


approximately $1 billion associated with our Canadian operations to be permanently reinvested outside the U.S. As such, none of Marathon Oil’s foreign earnings remain permanently reinvested abroad. We anticipate foreign tax credits associated with these Canadian earnings would be sufficient to offset any incremental U.S. tax liabilities, and therefore, no additional net deferred taxes were recorded in the second quarter of 2015.
Deferred Tax Assets
In connection with our assessment of the realizability of our deferred tax assets, we consider whether it is more likely than not that some portion or all of our deferred tax assets will not be realized.  In the event it is more likely than not that some portion or all of our deferred taxes will not be realized, such assets are reduced by a valuation allowance. Future increases to our valuation allowance are possible if our estimates and assumptions (particularly as they relate to downward revisions of our long-term commodity price forecast) are revised such that they reduce estimates of future taxable income during the carryforward period.

10.    Short-term Investments
As of September 30, 2015, our short-term investments are comprised of bank time deposits with original maturities of greater than three months and remaining maturities of less than twelve months. They are classified as held-to-maturity investments, which are recorded at amortized cost. The carrying values of our short-term investments approximate fair value. These short-term investments matured during October 2015.
11.   Inventories
 Inventories of liquid hydrocarbons, natural gas and bitumen are carried at the lower of cost or market value. Materials and supplies are valued at weighted average cost and reviewed for obsolescence or impairment when market conditions indicate.
 
September 30,
 
December 31,
(In millions)
2015
 
2014
Liquid hydrocarbons, natural gas and bitumen
$
39

 
$
58

Supplies and other items
285

 
299

Inventories, at cost
$
324

 
$
357

12.  Property, Plant and Equipment, net of Accumulated Depreciation, Depletion and Amortization
 
September 30,
 
December 31,
(In millions)
2015
 
2014
North America E&P
$
15,875

 
$
16,717

International E&P
2,604

 
2,741

Oil Sands Mining
9,334

 
9,455

Corporate
107

 
127

Net property, plant and equipment
$
27,920


$
29,040

Our Libya operations continue to be impacted by civil unrest and, in December 2014, Libya’s National Oil Corporation once again declared force majeure at the Es Sider oil terminal, as disruptions from civil unrest continue. Considerable uncertainty remains around the timing of future production and sales levels.
As of September 30, 2015, our net property, plant and equipment investment in Libya is $775 million, and total proved reserves (unaudited) in Libya as of December 31, 2014 are 243 million boe. We and our partners in the Waha concessions continue to assess the situation and the condition of our assets in Libya. Our periodic assessment of the carrying value of our net property, plant and equipment in Libya specifically considers the net investment in the assets, the duration of our concessions and the reserves anticipated to be recoverable in future periods. The undiscounted cash flows related to our Libya assets continue to exceed the carrying value of $775 million by a material amount.
Exploratory well costs capitalized greater than one year after completion of drilling were $88 million and $126 million as of September 30, 2015 and December 31, 2014. This $38 million net decrease was associated with a write-down of our Canadian in-situ assets at Birchwood in the second quarter of 2015. After further evaluation of the estimated recoverable

13


MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)


resources and our development plans, we withdrew our regulatory application for the proposed steam assisted gravity drainage demonstration project at Birchwood.
13. Other Noncurrent Assets
 
September 30,
 
December 31,
(in millions)
2015
 
2014
Deferred tax assets
$
1,115

 
$
525

Intangible assets
95

 
96

Other
217

 
185

Other noncurrent assets
$
1,427

 
$
806

14. Impairments and Exploration Expenses
The continued decline of commodity prices resulted in a downward revision of our long-term commodity price assumptions and was a triggering event which required us to reassess long-lived assets related to oil and gas producing properties for impairment as of September 30, 2015. Further changes in management's forecast assumptions may cause us to reassess our long-lived assets for impairment, and could result in non-cash impairment charges in the future.
The following table summarizes impairment charges of proved properties:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in millions)
2015
 
2014
 
2015
 
2014
Total impairments
$
337

 
$
109

 
$
381

 
$
130

Impairments for the three and nine months ended September 30, 2015 consisted primarily of proved properties in Colorado and the Gulf of Mexico as a result of lower forecasted commodity prices.
Impairments for the three and nine months ended September 30, 2014 consisted primarily of proved properties in the Gulf of Mexico, Texas and North Dakota as a result of revisions to estimated abandonment costs and lower forecasted commodity prices. See Note 7 for relevant detail regarding segment presentation and Note 15 for fair value measurements related to impairments of proved properties.
The following table summarizes the components of exploration expenses:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In millions)
2015
 
2014
 
2015
 
2014
Exploration Expenses
 
 
 
 
 
 
 
Unproved property impairments
$
563

 
$
39

 
$
612

 
$
140

Dry well costs
(3
)
 
25

 
96

 
80

Geological and geophysical
8

 
10

 
23

 
27

Other
17

 
22

 
55

 
67

Total exploration expenses
$
585

 
$
96

 
$
786

 
$
314

Included in the unproved property impairments for the three and nine months ended September 30, 2015 are non-cash charges of $553 million as a result of changes in our conventional exploration strategy (Gulf of Mexico and Harir block in the Kurdistan Region of Iraq) and lower forecasted commodity prices (Colorado).
Unproved property impairments for the three and nine months ended September 30, 2014 primarily consist of leases in Texas and North Dakota that either expired or we decided not to drill or extend. See Note 7 for relevant detail regarding segment presentation.

14


MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)


15.  Fair Value Measurements
 Fair Values - Recurring
The following tables present assets and liabilities accounted for at fair value on a recurring basis as of September 30, 2015 and December 31, 2014 by fair value hierarchy level.
 
September 30, 2015
(In millions)
Level 1
 
Level 2
 
Level 3
 
Total
Derivative instruments, assets
 
 
 
 
 
 
 
     Commodity (a)
$

 
$
61

 
$

 
$
61

     Interest rate

 
15

 

 
15

Derivative instruments, assets
$

 
$
76

 
$

 
$
76

Derivative instruments, liabilities
 
 
 
 
 
 
 
     Commodity (a)
$

 
$
3

 
$

 
$
3

Derivative instruments, liabilities
$

 
$
3

 
$

 
$
3

(a)  
Derivative instruments are recorded on a net basis in the company's balance sheet (see Note 16).
 
December 31, 2014
(In millions)
Level 1
 
Level 2
 
Level 3
 
Total
Derivative instruments, assets
 
 
 
 
 
 
 
Interest rate
$

 
$
8

 
$

 
$
8

Derivative instruments, assets
$

 
$
8

 
$

 
$
8

Commodity derivatives include three-way collars, swaptions, extendable three-way collars and call options. These instruments are measured at fair value using either the Black-Scholes Model or Black Model. Inputs to both models include prices, interest rates, and implied volatility. The inputs to these models are categorized as Level 2 because predominantly all assumptions and inputs are observable in active markets throughout the term of the instruments.
Interest rate swaps are measured at fair value with a market approach using actionable broker quotes, which are Level 2 inputs. See Note 16 for additional discussion of the types of derivative instruments we use.
Fair Values - Nonrecurring
The following table shows the values of assets, by major category, measured at fair value on a nonrecurring basis in periods subsequent to their initial recognition.
 
Three Months Ended September 30,
 
2015
 
2014
(In millions)
Fair Value
 
Impairment
 
Fair Value
 
Impairment
Long-lived assets held for use
$
41

 
$
337

 
$
43

 
$
109

 
Nine Months Ended September 30,
 
2015
 
2014
(In millions)
Fair Value
 
Impairment
 
Fair Value
 
Impairment
Long-lived assets held for use
$
58

 
$
381

 
$
43

 
$
130


Commodity prices began declining in the second half of 2014 and remain substantially lower through 2015. The prolonged decline in commodity prices, and the resulting change in management's future commodity price assumptions, was a triggering event which required us to reassess long-lived assets related to oil and gas producing properties for impairment as of September 30, 2015. Further changes in management's forecast assumptions may cause us to reassess our long-lived assets for impairment, and could result in non-cash impairment charges in the future. Long-lived assets held for use that were impaired are discussed below. The fair values of each were measured using an income approach based upon internal estimates of future production levels, prices and discount rate, all of which are Level 3 inputs, unless otherwise noted.  Inputs to the fair value measurement include reserve and production estimates made by our reservoir engineers, estimated future commodity prices

15


MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)


adjusted for quality and location differentials, and forecasted operating expenses for the remaining estimated life of the reservoir.
2015 - North America E&P
In the third quarter of 2015, impairments of $333 million were recorded primarily related to certain producing assets in Colorado and the Gulf of Mexico as a result of lower forecasted commodity prices, to an aggregate fair value of $41 million.
    During the second quarter of 2015, we recorded a non-cash impairment charge of $44 million related to our East Texas, North Louisiana and Wilburton, Oklahoma natural gas assets as a result of the anticipated sale (see Note 6). The fair values were measured using a probability weighted income approach based on both the anticipated sales price and a held-for-use model.
2015 - International E&P    
In the third quarter of 2015, a partial impairment of $12 million was recorded to an investment in an equity method investee as a result of lower forecasted commodity prices, to a fair value of $604 million. This impairment was reflected in income from equity method investments in our consolidated statements of income.
2014 - North America E&P
The Ozona development in the Gulf of Mexico ceased producing in 2013, at which time those long-lived assets were fully impaired. In the first nine months of 2014, we recorded additional impairments of $30 million as a result of estimated abandonment cost revisions.
In the third quarter of 2014, impairments of $53 million were recorded to certain other Gulf of Mexico properties as a result of estimated abandonment cost and other revisions, to an aggregate fair value of $19 million. In addition, two additional on-shore fields were impaired a total of $47 million to an aggregate fair value of $24 million primarily due to lower forecasted commodity prices.
Fair Values – Goodwill
Unlike long-lived assets, goodwill must be tested for impairment at least annually, or between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Goodwill is tested for impairment at the reporting unit level. After we performed our annual goodwill impairment test in April 2015, a triggering event (downward revision of forecasted commodity price assumptions) required us to reassess our goodwill for impairment as of September 30, 2015. Based on the results of this assessment, we concluded no impairment was required. The fair value of the North America E&P and International E&P reporting units exceeded their respective book values by a significant margin. Changes in management's forecast commodity price assumptions may cause us to reassess our goodwill for impairment, and could result in non-cash impairment charges in the future.
Fair Values – Financial Instruments
Our current assets and liabilities include financial instruments, the most significant of which are receivables, short-term investments, long-term debt due within one year, and payables. We believe the carrying values of our receivables, short-term investments and payables approximate fair value. Our fair value assessment incorporates a variety of considerations, including (1) the short-term duration of the instruments, (2) our investment-grade credit rating, and (3) our historical incurrence of and expected future insignificant bad debt expense, which includes an evaluation of counterparty credit risk.

16


MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)


The following table summarizes financial instruments, excluding receivables, short-term investments, payables and derivative financial instruments, and their reported fair value by individual balance sheet line item at September 30, 2015 and December 31, 2014.
 
September 30, 2015
 
December 31, 2014
 
Fair
 
Carrying
 
Fair
 
Carrying
(In millions)
Value
 
Amount
 
Value
 
Amount
Financial assets
 
 
 
 
 
 
 
Other noncurrent assets
$
109

 
$
116

 
$
132

 
$
129

Total financial assets  
109

 
116

 
132

 
129

Financial liabilities
 

 
 

 
 

 
 

     Other current liabilities
15

 
14

 
13

 
13

     Long-term debt, including current portion (a)
8,302

 
8,324

 
6,887

 
6,360

Deferred credits and other liabilities
69

 
64

 
69

 
68

Total financial liabilities  
$
8,386

 
$
8,402

 
$
6,969

 
$
6,441

(a)    Excludes capital leases.
Fair values of our financial assets included in other noncurrent assets, and of our financial liabilities included in other current liabilities and deferred credits and other liabilities, are measured using an income approach and most inputs are internally generated, which results in a Level 3 classification. Estimated future cash flows are discounted using a rate deemed appropriate to obtain the fair value.
Most of our long-term debt instruments are publicly-traded. A market approach, based upon quotes from major financial institutions, which are Level 2 inputs, is used to measure the fair value of such debt. The fair value of our debt that is not publicly-traded is measured using an income approach. The future debt service payments are discounted using the rate at which we currently expect to borrow. All inputs to this calculation are Level 3.
16. Derivatives
For further information regarding the fair value measurement of derivative instruments, see Note 15. All of our interest rate and commodity derivatives are subject to enforceable master netting arrangements or similar agreements under which we may report net amounts. The following tables present the gross fair values of derivative instruments and the reported net amounts where they appear on the consolidated balance sheets as of September 30, 2015 and December 31, 2014.
 
September 30, 2015
 
 
(In millions)
Asset
 
Liability
 
Net Asset
 
Balance Sheet Location
Fair Value Hedges
 
 
 
 
 
 
 
     Interest rate
$
15

 
$

 
$
15

 
Other noncurrent assets
Total Designated Hedges
15

 

 
15

 
 
 
 
 
 
 
 
 
 
Not Designated as Hedges
 
 
 
 
 
 
 
     Commodity
55

 
2

 
53

 
Other current assets
     Commodity
6

 
1

 
5

 
Other noncurrent assets
Total Not Designated as Hedges
61

 
3

 
58

 
 
     Total
$
76


$
3


$
73

 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
 
 
(In millions)
Asset
 
Liability
 
Net Asset
 
Balance Sheet Location
Fair Value Hedges
 
 
 
 
 
 
 
     Interest rate
$
8

 
$

 
$
8

 
Other noncurrent assets
     Total
$
8

 
$

 
$
8

 
 

17


MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)


Derivatives Designated as Fair Value Hedges
The following table presents, by maturity date, information about our interest rate swap agreements as of September 30, 2015 and December 31, 2014, including the weighted average, London Interbank Offer Rate (“LIBOR”)-based, floating rate.
 
September 30, 2015
 
December 31, 2014
 
Aggregate Notional Amount
Weighted Average, LIBOR-Based,
 
Aggregate Notional Amount
Weighted Average, LIBOR-Based,
Maturity Dates
(in millions)
Floating Rate
 
(in millions)
Floating Rate
October 1, 2017
$
600

4.68
%
 
$
600

4.64
%
March 15, 2018
$
300

4.54
%
 
$
300

4.49
%
The pretax effects of derivative instruments designated as hedges of fair value in our consolidated statements of income are summarized in the table below. The foreign currency forwards were used to hedge the current Norwegian tax liability of our Norway business that was sold in the fourth quarter of 2014. Those instruments outstanding were transferred to the purchaser of the Norway business upon closing of the sale. There is no ineffectiveness related to the fair value hedges.
 
 
Gain (Loss)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In millions)
Income Statement Location
2015
 
2014
 
2015
 
2014
Derivative
 
 
 
 
 
 
 
 
Interest rate
Net interest and other
$
4

 
$
(6
)
 
$
7

 
$
(3
)
Foreign currency
Discontinued operations
$

 
$
(18
)
 
$

 
$
(29
)
Hedged Item
 
 

 
 

 
 

 
 

Long-term debt
Net interest and other
$
(4
)
 
$
6

 
$
(7
)
 
$
3

Accrued taxes
Discontinued operations
$

 
$
18

 
$

 
$
29

 Derivatives not Designated as Hedges
During the first nine months of 2015, we entered into multiple crude oil derivatives indexed to New York Mercantile Exchange ("NYMEX") WTI related to a portion of our forecasted North America E&P sales through December 2016. These commodity derivatives consist of three-way collars, extendable three-way collars and call options. Three way-collars consist of a sold call (ceiling), a purchased put (floor) and a sold put. The ceiling price is the maximum we will receive for the contract crude oil volumes, the floor is the minimum price we will receive, unless the market price falls below the sold put strike price. In this case, we receive the NYMEX WTI price plus the difference between the floor and the sold put price. These commodity derivatives were not designated as hedges and are shown in the table below:

18


MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)


Financial Instrument
Weighted Average Price
Barrels per day
Remaining Term
Three-Way Collars
 
 
 
Ceiling
$70.34
35,000
October- December 2015
Floor
$55.57
 
 
Sold put
$41.29
 
 
 
 
 
 
Ceiling
$60.00
2,000
October 2015- March 2016 (a)
Floor
$50.00
 
 
Sold put
$40.00
 
 
 
 
 
 
Ceiling
$71.84
12,000
       January- December 2016
Floor
$60.48
 
 
Sold put
$50.00
 
 
 
 
 
 
Ceiling
$73.13
2,000
January- June 2016 (b)
Floor
$65.00
 
 
Sold put
$50.00
 
 
Call Options 
$72.39
10,000
January- December 2016 (c)
(a) 
Counterparties have the option, exercisable on March 31, 2016, to extend these collars through September of 2016 at the same volume and weighted average price as the underlying three-way collars.
(b) 
Counterparty has the option, exercisable on June 30, 2016, to extend these collars through the remainder of 2016 at the same volume and weighted average price as the underlying three-way collars.
(c) 
Call options settle monthly.
The impact of these crude oil derivative instruments appears in sales and other operating revenues in our consolidated statements of income and was a net gain of $108 million and $91 million in the third quarter and first nine months 2015. There were no crude oil derivative instruments in the first nine months of 2014.
On June 1, 2015, we entered into Treasury rate locks, which expired on the same day, to hedge against timing differences as it related to our Notes offering (see Note 18). Following the execution of the Treasury locks, corresponding interest rates increased during the day of June 1. As a result, the settlement of the Treasury rate locks resulted in a gain of $6 million, which was recognized in net interest and other in our consolidated statements of income.
17.    Incentive Based Compensation
 Stock option and restricted stock awards
  The following table presents a summary of stock option and restricted stock award activity for the first nine months of 2015
 
Stock Options
 
Restricted Stock
 
Number of
Shares
 
Weighted
Average
Exercise Price
 
Awards
 
Weighted
Average Grant
Date Fair Value
Outstanding at December 31, 2014
13,427,836

 

$29.68

 
3,448,353

 

$34.04

Granted
724,082

(a) 

$29.06

 
2,674,987

 

$30.52

Options Exercised/Stock Vested
(549,926
)
 

$16.84

 
(1,135,635
)
 

$33.25