Document


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, 2017
 
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
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=11869133&doc=12
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 þ No o

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 þ No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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   
Emerging growth company o
 
 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 849,663,522 shares of Marathon Oil Corporation common stock outstanding as of October 31, 2017.




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 2016 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)
2017
 
2016
 
2017
 
2016
Revenues and other income:
 
 
 
 
 
 
 
Sales and other operating revenues, including related party
$
1,114

 
$
781

 
$
3,026

 
$
2,032

Marketing revenues
48

 
80

 
117

 
202

Income from equity method investments
63

 
59

 
183

 
110

Net gain on disposal of assets
19

 
47

 
26

 
281

Other income
8

 
23

 
31

 
38

Total revenues and other income
1,252

 
990

 
3,383

 
2,663

Costs and expenses:
 

 
 

 
 
 
 

Production
194

 
160

 
521

 
532

Marketing, including purchases from related parties
49

 
80

 
121

 
201

Other operating
109

 
183

 
309

 
373

Exploration
294

 
83

 
352

 
289

Depreciation, depletion and amortization
641

 
522

 
1,789

 
1,583

Impairments
201

 
47

 
205

 
48

Taxes other than income
44

 
35

 
128

 
113

General and administrative
97

 
104

 
299

 
386

Total costs and expenses
1,629

 
1,214

 
3,724

 
3,525

Income (loss) from operations
(377
)
 
(224
)
 
(341
)
 
(862
)
Net interest and other
(35
)
 
(89
)
 
(199
)
 
(256
)
Loss on early extinguishment of debt
(46
)
 

 
(46
)
 

Income (loss) from continuing operations before income taxes
(458
)
 
(313
)
 
(586
)
 
(1,118
)
Provision (benefit) for income taxes
141

 
(107
)
 
216

 
(414
)
Income (loss) from continuing operations
(599
)
 
(206
)
 
(802
)
 
(704
)
Income (loss) from discontinued operations

 
14

 
(4,893
)
 
(65
)
Net income (loss)
$
(599
)
 
$
(192
)
 
$
(5,695
)
 
$
(769
)
Per basic share:
 

 
 

 
 

 
 

Income (loss) from continuing operations
$
(0.70
)
 
$
(0.24
)
 
$
(0.94
)
 
$
(0.87
)
Income (loss) from discontinued operations
$

 
$
0.01

 
$
(5.76
)
 
$
(0.08
)
Net income (loss)
$
(0.70
)
 
$
(0.23
)
 
$
(6.70
)
 
$
(0.95
)
Per diluted share:
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
(0.70
)
 
$
(0.24
)
 
$
(0.94
)
 
$
(0.87
)
Income (loss) from discontinued operations
$

 
$
0.01

 
$
(5.76
)
 
$
(0.08
)
Net income (loss)
$
(0.70
)
 
$
(0.23
)
 
$
(6.70
)
 
$
(0.95
)
Dividends per share
$
0.05

 
$
0.05

 
$
0.15

 
$
0.15

Weighted average common shares outstanding:
 

 
 

 
 

 
 

Basic
850

 
847

 
850

 
809

Diluted
850

 
847

 
850

 
809

 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)
2017
 
2016
 
2017
 
2016
Net income (loss)
$
(599
)
 
$
(192
)
 
$
(5,695
)
 
$
(769
)
Other comprehensive income (loss)
 
 
 

 
 

 
 

Postretirement and postemployment plans
 

 
 

 
 

 
 

Change in actuarial loss and other
5

 

 
17

 
(5
)
Income tax provision
19

 

 
19

 
2

Postretirement and postemployment plans, net of tax
24

 

 
36

 
(3
)
Derivative hedges
 
 
 
 
 
 
 
Net unrecognized gain (loss)

 
2

 
(13
)
 
2

Reclassification of gains on terminated derivative hedges
(46
)
 

 
(47
)
 

Income tax provision
21

 

 
21

 

Derivative hedges, net of tax
(25
)
 
2

 
(39
)
 
2

Foreign currency hedges
 

 
 

 
 

 
 

Net recognized loss reclassified to discontinued operations

 

 
34

 

Income tax provision (benefit)

 

 
(4
)
 

Foreign currency hedges, net of tax

 

 
30

 

Other, Net of Tax
1

 
1

 
2

 
(1
)
Other comprehensive income (loss)

 
3

 
29

 
(2
)
Comprehensive income (loss)
$
(599
)

$
(189
)

$
(5,666
)

$
(771
)
 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)
2017
 
2016
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,795

 
$
2,488

Receivables, less reserve of $7 and $6
945

 
748

Notes receivable
745

 

Inventories
132

 
136

Other current assets
62

 
66

Current assets held for sale
11

 
227

Total current assets
3,690

 
3,665

Equity method investments
836

 
931

Property, plant and equipment, less accumulated depreciation,
depletion and amortization of $21,669 and $20,255
17,645

 
16,727

Goodwill
115

 
115

Other noncurrent assets
607

 
558

Noncurrent assets held for sale
54

 
9,098

Total assets
$
22,947

 
$
31,094

Liabilities
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
1,313

 
$
967

Payroll and benefits payable
99

 
129

Accrued taxes
162

 
94

Other current liabilities
188

 
243

Long-term debt due within one year

 
686

Current liabilities held for sale

 
121

Total current liabilities
1,762

 
2,240

Long-term debt
6,488

 
6,581

Deferred tax liabilities
844

 
769

Defined benefit postretirement plan obligations
330

 
345

Asset retirement obligations
1,522

 
1,602

Deferred credits and other liabilities
217

 
225

Noncurrent liabilities held for sale
9

 
1,791

Total liabilities
11,172

 
13,553

Commitments and contingencies


 


Stockholders’ Equity
 

 
 

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

 

Common stock:
 

 
 

Issued – 937 million shares and 937 million shares (par value $1 per share,
1.1 billion shares authorized)
937

 
937

Securities exchangeable into common stock – no shares issued or
outstanding (no par value, 29 million shares authorized)

 

Held in treasury, at cost – 87 million and 90 million shares
(3,324
)
 
(3,431
)
Additional paid-in capital
7,367

 
7,446

Retained earnings
6,849

 
12,672

Accumulated other comprehensive loss
(54
)
 
(83
)
Total stockholders' equity
11,775

 
17,541

Total liabilities and stockholders' equity
$
22,947

 
$
31,094

 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)
2017
 
2016
Operating activities:
 

 
 

Net income (loss)
$
(5,695
)
 
$
(769
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 

 
 

Discontinued operations
4,893

 
65

Depreciation, depletion and amortization
1,789

 
1,583

Impairments
205

 
48

Exploratory dry well costs and unproved property impairments
294

 
196

Net (gain) loss on disposal of assets
(26
)
 
(281
)
Deferred income taxes
44

 
(476
)
Net (gain) loss on derivative instruments
(162
)
 
48

Net cash received in settlement of derivative instruments
88

 
51

Stock based compensation
38

 
37

Equity method investments, net
46

 
26

Changes in:
 
 
 

Current receivables
(192
)
 
125

Inventories
4

 
69

Current accounts payable and accrued liabilities
189

 
(212
)
All other operating, net
(28
)
 
16

Net cash provided by operating activities from continuing operations
1,487

 
526

Investing activities:
 

 
 

Additions to property, plant and equipment
(1,305
)
 
(949
)
Acquisitions, net of cash acquired
(1,828
)
 
(902
)
Disposal of assets, net of cash transferred to buyer
1,757

 
837

Equity method investments - return of capital
49

 
47

All other investing, net
(26
)
 
2

Net cash used in investing activities from continuing operations
(1,353
)
 
(965
)
Financing activities:
 

 
 

Borrowings
988

 

Debt repayments
(1,764
)
 
(1
)
Debt extinguishment costs
(46
)
 

Common stock issuance

 
1,236

Purchases of common stock
(10
)
 
(5
)
Dividends paid
(128
)
 
(119
)
Net cash provided by (used in) financing activities
(960
)
 
1,111

Cash Flow from Discontinued Operations:
 
 
 
Operating activities
141

 
97

Investing activities
(13
)
 
(34
)
Changes in cash included in current assets held for sale
2

 
(63
)
Net increase in cash and cash equivalents of discontinued operations
130

 

Effect of exchange rate on cash and cash equivalents
3

 
(3
)
Net increase (decrease) in cash and cash equivalents
(693
)
 
669

Cash and cash equivalents at beginning of period
2,488

 
1,119

Cash and cash equivalents at end of period
$
1,795

 
$
1,788

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.
These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our 2016 Annual Report on Form 10-K.  The results of operations for the third quarter and first nine months of 2017 are not necessarily indicative of the results to be expected for the full year.
As a result of the announcement to divest of our Canadian business in the first quarter 2017 and its subsequent closing in the second quarter of 2017, we have reflected this business as discontinued operations in all periods presented. Assets and liabilities are presented as held for sale in the historical periods in the consolidated balance sheets. The disclosures in this report related to the results of operations and cash flows are presented on the basis of continuing operations, unless otherwise noted. The characteristics and composition of our North America E&P reporting segment remained unchanged and there was no effect on previously reported segment information. As all our remaining properties within the segment are located within the United States, we concluded that our North America E&P segment would be renamed United States E&P segment, effective June 30, 2017. During the first nine months, no changes occurred to our International E&P segment. See Note 6 for discussion of the divestiture in further detail and Note 7 for further information on our reportable segments.
During the first quarter of 2017, we adopted the accounting standards update issued by the FASB in March 2016 pertaining to share-based payment transactions. As a result of this adoption, all cash payments for withheld shares made to taxing authorities on the employees' behalf will be presented within the financing activities section instead of the operating activities section of the statement of cash flows. We have elected the retrospective method for adoption of this update and the change in the statement of cash flows is not material for nine months ended September 30, 2016. Excess tax benefits will be classified as an operating activity within the statement of cash flows on a prospective basis; as such, prior periods were not adjusted. See Note 2 for additional discussion.

2.   Accounting Standards
Not Yet Adopted
In May 2014 and August 2015, 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 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 shall be applied retrospectively to each prior reporting period presented (“full retrospective method”) or with the cumulative effect of initially applying the update recognized at the date of initial application (“modified retrospective method”). We will adopt this new standard in the first quarter of 2018 using the modified retrospective method. Based on our assessment to date, we do not expect the adoption of this ASU to have a material impact on our consolidated results of operations, financial position or cash flows. However, we do expect to change our presentation of future marketing revenues and marketing expenses from the current gross presentation to a net presentation for a portion of our international contracts. For the nine months ended September 30, 2017, we estimate this impact to be approximately $90 million in marketing revenue and expenses in our consolidated results of operations. We continue to evaluate the disclosure requirements, are developing accounting policies, and assessing changes to the relevant business processes and the control activities as a result of this standard.
In March 2017, the FASB issued a new accounting standards update that will change how employers that sponsor defined pension and/or other postretirement benefit plans present the net periodic benefit cost in the income statement. Employers will present the service cost component of net periodic benefit cost in the same income statement line item(s) as other employee compensation costs arising from services rendered during the period. Only the service cost component will be eligible for capitalization in assets. We will adopt this standard in the first quarter of 2018 on a retrospective basis. Early adoption is permitted. We are evaluating the provisions of this accounting standards update and assessing the impact it will have on our results of operations, financial position, or cash flows.

6

MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)



In August 2016, the FASB issued a new accounting standards update which seeks to reduce the existing diversity in practice in how certain transactions are classified in the statement of cash flows. This standard is effective for us in the first quarter of 2018 and shall be applied on a retrospective basis. Early adoption is permitted. We will adopt this standard in the first quarter of 2018 on a retrospective basis. We are evaluating the provisions of this accounting standards update and assessing the impact, if any, it may have on our consolidated statements of cash flows and related disclosures.
In November 2016, the FASB issued a new accounting standards update that requires entities to show the changes in the total of cash, cash equivalents and restricted cash in the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash in the statement of cash flows. When cash, cash equivalents, and restricted cash are presented in more than one line item on the balance sheet, the standard requires a reconciliation of the totals in the statement of cash flows to the related captions in the balance sheet. This reconciliation can be presented either on the face of the statement of cash flows or in the notes to the financial statements. We plan to adopt this standard in the first quarter of 2018 on a retrospective basis. We are evaluating the provisions of this accounting standards update and assessing the impact it may have on our consolidated statements of cash flows and related disclosures.
In February 2017, the FASB issued a new accounting standards update that clarifies the accounting for the sale or transfer of nonfinancial assets and in substance nonfinancial assets to noncustomers, including partial sales. The standard also clarifies that the derecognition of all businesses (except those related to conveyances of oil and gas mineral rights or contracts with customers) should be accounted for in accordance with the derecognition and deconsolidation guidance in Subtopic 810-10. This standard is effective for us in the first quarter of 2018 and will be applied using the modified retrospective approach. Early adoption is permitted. We plan to adopt this new standard in the first quarter of 2018 concurrently with the new revenue recognition standard. We are evaluating the provisions of this accounting standards update and assessing the impact it may have on our consolidated results of operations, financial position or cash flows.
In January 2017, the FASB issued a new accounting standards update that changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities constitutes a business. The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities would not represent a business. The guidance also requires a business to include at least one substantive process and narrows the definition of outputs by more closely aligning it with how outputs are described in the new revenue guidance. This standard is effective for us in the first quarter of 2018 and shall be applied on a prospective basis. Early adoption is permitted for certain transactions as described in the guidance. Since we will adopt the standard on a prospective basis, we do not expect an impact on our consolidated results of operations, financial position or cash flows for prior periods.
In January 2016, the FASB issued an accounting standards update that addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. We plan to adopt this standard in the first quarter of 2018 and 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 2016, the FASB issued a new lease accounting standard, which requires lessees to recognize most leases, including operating leases, on the balance sheet as a right of use asset and lease liability. Short-term leases can continue being accounted for off balance sheet based on a policy election. This standard does not apply to leases to explore for or use minerals, oil, natural gas and similar non-regenerative resources, including the intangible right to explore for those natural resources and rights to use the land in which those natural resources are contained. This standard is effective for us in the first quarter of 2019 and shall be applied using a modified retrospective approach at the beginning of the earliest period presented in the financial statements. Early adoption is permitted. While we will have to recognize a right of use asset and lease liability on the adoption date, we continue to evaluate the provisions of this accounting standards update and assessing the effects it will have on our consolidated results of operations, financial position or cash flows.
In August 2017, the FASB issued a new accounting standards update that amends the hedge accounting model to enable entities to hedge certain financial and nonfinancial risk attributes previously not allowed. The amendment also reduces the overall complexity of documenting, assessing and measuring hedge effectiveness. This standard is effective for us in the first quarter of 2019. Early adoption is permitted in any interim or annual period. The amendment mandates modified retrospective adoption when accounting for hedge relationships in effect as of the adoption date. We are evaluating the provisions of this accounting standards update, including transition requirements, and are assessing the impact it may have on our results of operations, financial position, or cash flows.


7

MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)



In January 2017, the FASB issued a new accounting standards update that eliminates the requirement to calculate the implied fair value of the goodwill (i.e., Step 2 of goodwill impairment test under the current guidance) to measure a goodwill impairment charge. The standard will require entities to record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value (i.e., measure the charge based on Step 1 under the current guidance). This standard is effective for us in the first quarter of 2020 and shall be applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. Since we will adopt the standard on a prospective basis, we do not expect an impact on our consolidated results of operations, financial position or cash flows for prior periods.
In June 2016, the FASB issued a new accounting standards update that changes the impairment model for trade receivables, net investments in leases, debt securities, loans and certain other instruments. The standard requires the use of a forward-looking “expected loss” model as opposed to the current “incurred loss” model. This standard is effective for us in the first quarter of 2020 and will be adopted on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the adoption period. Early adoption is permitted starting January 2019. 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.
Recently Adopted
In March 2016, the FASB issued a new accounting standards update that changes several aspects of accounting for share-based payment transactions, including a requirement to recognize all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This standard was effective for us in the first quarter of 2017. The new standard requires a company to make a policy election on how it accounts for forfeitures; we elected to continue estimating forfeitures using the same methodology practiced prior to adoption of this standard. See Note 1 for the impact this standard has on the presentation of our financial statements.
In July 2015, the FASB issued an update that requires an entity to measure inventory at the lower of cost or net realizable value. This excludes inventory measured using LIFO or the retail inventory method. This standard was effective for us in the first quarter of 2017, and was applied prospectively. Adoption of this standard did not have a significant impact on our consolidated results of operations, financial position or cash flows.

3.   Variable Interest Entity
During the second quarter of 2017 we closed on the sale of our Canadian business, which included our 20% undivided interest in the Athabasca Oil Sands Project (AOSP). The owners of the AOSP 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.  This contract was transferred to the purchaser of our Canadian business upon closing of the sale in the second quarter of 2017. Historically, this contract qualified as a variable interest contractual arrangement, and the Corridor Pipeline qualified as a VIE.  Prior to the closing of the sale of our Canadian business, we held this variable interest but were not the primary beneficiary because our shipments were only 20% of the total; therefore, the Corridor Pipeline was not consolidated by us. See Note 6 for further discussion regarding dispositions.


8

MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)



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 in all years, provided the effect is not antidilutive. The per share calculations below exclude 10 million and 11 million stock options for the three and nine month periods ended September 30, 2017 and 13 million stock options for the three and nine month periods ended September 30, 2016 that were antidilutive.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In millions, except per share data)
2017
 
2016
 
2017
 
2016
Income (loss) from operations
$
(599
)
 
$
(206
)
 
$
(802
)
 
$
(704
)
Income (loss) from discontinued operations

 
14

 
(4,893
)
 
(65
)
Net income (loss)
$
(599
)
 
$
(192
)
 
$
(5,695
)
 
$
(769
)
 
 
 
 
 
 
 
 
Weighted average common shares outstanding
850

 
847

 
850

 
809

Per basic share:
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
(0.70
)
 
$
(0.24
)
 
$
(0.94
)
 
$
(0.87
)
Income (loss) from discontinued operations
$

 
$
0.01

 
$
(5.76
)
 
$
(0.08
)
Net income
$
(0.70
)
 
$
(0.23
)
 
$
(6.70
)
 
$
(0.95
)
Per diluted share:
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
(0.70
)
 
$
(0.24
)
 
$
(0.94
)
 
$
(0.87
)
Income (loss) from discontinued operations
$

 
$
0.01

 
$
(5.76
)
 
$
(0.08
)
Net income
$
(0.70
)
 
$
(0.23
)
 
$
(6.70
)
 
$
(0.95
)

5. Acquisitions
2017 - United States E&P
In October 2017, we executed a purchase agreement to acquire additional acreage in the Northern Delaware basin of New Mexico from a private seller for $63 million in cash, excluding closing adjustments. We expect the acquisition to close in the fourth quarter of 2017 with cash on hand.
In the second quarter of 2017, we closed on our acquisitions to acquire approximately 91,000 net acres in the Permian basin, including over 70,000 net acres in the Northern Delaware basin of New Mexico. On May 1, 2017, we closed on our acquisition with BC Operating, Inc. and other entities for $1.1 billion in cash, subject to post-closing adjustments, to acquire approximately 70,000 net surface acres and current production of approximately 5,000 net barrels of oil equivalent per day. On June 1, 2017, we closed on our acquisition with Black Mountain Oil & Gas and other private sellers for approximately $700 million in cash, subject to post-closing adjustments, to acquire approximately 21,000 net surface acres. The purchase price for these acquisitions was paid with cash on hand. We accounted for these transactions as asset acquisitions, with substantially all of the purchase price allocated to unproved property within property, plant and equipment. Although the purchase price allocation has not been finalized, we do not expect to record any material adjustments to the preliminary purchase price allocation.
2016 - United States E&P
On August 1, 2016, we closed on our acquisition of PayRock Energy Holdings, LLC (“PayRock”), a portfolio company of EnCap Investments, including approximately 61,000 net surface acres in the oil window of the Anadarko Basin STACK play in Oklahoma. The purchase price of $904 million, subject to closing adjustments, was paid with cash on hand. We accounted for this transaction as an asset acquisition, with a majority of the purchase price allocated to unproved property within property, plant and equipment.

9

MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)



6.
Dispositions
Oil Sands Mining Segment
On May 31, 2017 we closed on the sale of our Canadian business, which included our 20% non-operated interest in the AOSP to Shell and Canadian Natural Resources Limited (“CNRL”) for $2.5 billion, excluding closing adjustments. Under the terms of the agreement, $1.8 billion was paid to us upon closing and the remaining proceeds will be paid in the first quarter of 2018. At closing we received two notes receivable for the remaining proceeds, each with a face value of $375 million. We initially recorded these notes receivable at fair value and, in subsequent periods, will report them at amortized cost. See Note 14 for fair value measurements. Our notes receivable are with 10084751 Canada Limited (“Canada Limited”), an affiliate of Shell Canada Limited, and CNRL. The Canada Limited note receivable is guaranteed by Shell Canada Limited and the CNRL note receivable is guaranteed by Toronto Dominion Bank. In the first quarter of 2017, we recorded an after-tax non-cash impairment charge of $4.96 billion primarily related to the property, plant and equipment of our Canadian business. As the effective date of the transaction is January 1, 2017, we recorded a loss on sale of $43 million during the second quarter of 2017 due to second quarter results of operations from our Canadian business that were recorded in our financial statements but transferred to the buyer upon closing.
Our Canadian business is reflected as discontinued operations in the consolidated statements of income and the consolidated statements of cash flows for all periods presented. The following table contains select amounts reported in our consolidated statements of income as discontinued operations:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In millions)
 
2017
 
2016
 
2017
 
2016
Total sales and other revenues and other income
 
$

 
$
239

 
$
431

 
$
598

Net gain (loss) on disposal of assets
 

 

 
(43
)
 

Total revenues and other income
 

 
239

 
388

 
598

Costs and expenses:
 
 
 
 
 
 
 
 
Production expenses
 

 
135

 
254

 
441

Depreciation, depletion and amortization
 

 
72

 
40

 
181

Impairments
 

 

 
6,636

 

Other
 

 
9

 
25

 
69

Total costs and expenses
 

 
216

 
6,955

 
691

Pretax income (loss) from discontinued operations
 

 
23

 
(6,567
)
 
(93
)
Provision (benefit) for income taxes
 

 
9

 
(1,674
)
 
(28
)
Income (loss) from discontinued operations
 
$

 
$
14

 
$
(4,893
)
 
$
(65
)

10

MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)



The following table presents the carrying value of the major categories of assets and liabilities of our Canadian business reported as discontinued operations and assets and liabilities from continuing operations, that are reflected as held for sale on our consolidated balance sheets at September 30, 2017 and December 31, 2016:
 
 
September 30,
 
December 31,
(In millions)
 
2017
 
2016
Assets held for sale
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$

 
$
2

Accounts receivables
 

 
129

Inventories
 

 
91

Other
 

 
4

Total current assets held for sale—discontinued operations
 

 
226

Total current assets held for sale—continuing operations
 
11

 
1

Total current assets held for sale
 
$
11

 
$
227

 
 
 
 
 
Noncurrent assets:
 
 
 
 
Property, plant and equipment, net
 
$

 
$
8,991

Other
 

 
106

Total noncurrent assets held for sale—discontinued operations
 

 
9,097

Total noncurrent assets held for sale—continuing operations
 
54

 
1

Total noncurrent assets held for sale
 
$
54

 
$
9,098

 
 
 
 
 
Liabilities associated with assets held for sale
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$

 
$
111

Other
 

 
10

Total current liabilities held for sale—discontinued operations
 

 
121

Total current liabilities held for sale—continuing operations
 

 

Total current liabilities held for sale
 
$

 
$
121

 
 
 
 
 
Noncurrent liabilities:
 
 
 
 
Asset retirement obligations
 
$

 
$
95

Deferred tax liabilities
 

 
1,669

Other
 

 
20

Total noncurrent liabilities held for sale—discontinued operations
 

 
1,784

Total noncurrent liabilities held for sale—continuing operations
 
9

 
7

Total noncurrent liabilities held for sale
 
$
9

 
$
1,791

United States E&P Segment
As disclosed above, we closed on the sale of our Canadian business in May of 2017. This sale included interests in our exploration stage in-situ leases which were included within our historically named North America E&P Segment. See Note 1 for further detail. These interests have been reflected as discontinued operations and are included within the disclosure above.
In July 2017, we entered into an agreement to sell certain conventional assets in Oklahoma. We closed on the sale in September 2017 for proceeds of $25 million, subject to closing adjustments, and recognized a pre-tax gain of $21 million.

11

MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)



In September 2016, we entered into an agreement to sell certain non-operated CO2 and waterflood assets in West Texas and New Mexico. The sale closed in late October for proceeds of $235 million, and we recognized a total pre-tax gain of $63 million. During the third quarter 2016, we sold certain non-operated assets primarily in West Texas and New Mexico to multiple purchasers for combined proceeds of approximately $67 million, and recognized a total pre-tax gain of $55 million.
In April 2016, we announced the sale of our Wyoming upstream and midstream assets. During the second quarter 2016, we received proceeds of approximately $690 million and recorded a pre-tax gain of $266 million with the remaining asset sales closing in November 2016 for proceeds of $155 million, excluding closing adjustments. A pre-tax gain of $38 million was recognized in the fourth quarter 2016.
In March and April 2016, we entered into separate agreements to sell our 10% working interest in the outside-operated Shenandoah discovery in the Gulf of Mexico, operated natural gas assets in the Piceance basin in Colorado and certain undeveloped acreage in West Texas and New Mexico, for a combined total of approximately $80 million in proceeds. We closed on certain of the asset sales and recognized a net pre-tax loss on sale of $48 million in the second quarter of 2016. In October 2017 we closed on the remaining Piceance basin asset sale and expect to recognize a pre-tax gain of approximately $30 million in the fourth quarter of 2017.
International E&P Segment
In the third quarter of 2017, we entered into separate agreements to sell certain non-core properties in our International E&P segment for combined proceeds of $53 million, before closing adjustments. Certain of these assets are classified as held for sale in the consolidated balance sheet as of September 30, 2017, with total assets of $63 million and total liabilities of $2 million. We expect these transactions to close within one year. See Note 13 for further detail on impairment expenses recognized concurrently with these agreements.

7.    Segment Information
  We have two reportable operating segments. Both of these segments are organized and managed based upon geographic location and the nature of the products and services offered.
U.S. E&P – explores for, produces and markets crude oil and condensate, NGLs and natural gas in the United States
Int’l E&P – explores for, produces and markets crude oil and condensate, NGLs and natural gas outside of the United States and produces and markets products manufactured from natural gas, such as LNG and methanol, in Equatorial Guinea (“E.G.”)
Information regarding assets by segment is not presented because it is not reviewed by the chief operating decision maker (“CODM”).  Segment income (loss) represents income (loss) which excludes certain items not allocated to segments, net of income taxes, attributable to the operating segments. A portion of our corporate and operations support general and administrative costs are not allocated to the operating segments. These unallocated costs primarily consist of employment costs (including pension effects), professional services, facilities and other costs associated with corporate and operations support activities. Additionally, items which affect comparability such as: gains or losses on dispositions, certain impairments, unrealized gains or losses on commodity derivative instruments, pension settlement losses or other items (as determined by the CODM) are not allocated to operating segments.
As discussed in Note 6, we closed on the sale of our Canadian business, which includes our Oil Sands Mining segment and exploration stage in-situ leases, in the second quarter of 2017. The Canadian business is reflected as discontinued operations and is excluded from segment information in all periods presented. Additionally, we have renamed our North America E&P segment to United States E&P segment effective June 30, 2017 in all periods presented. See Note 1 for further information.

12

MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)



 
Three Months Ended September 30, 2017
 
 
Not Allocated
 
 
(In millions)
U.S. E&P
 
Int'l E&P
 
to Segments
 
Total
Sales and other operating revenues
$
806

 
$
364

 
$
(56
)
(c) 
$
1,114

Marketing revenues
12

 
36

 

 
48

Total revenues
818

 
400

 
(56
)
 
1,162

Income from equity method investments

 
63

 

 
63

Net gain on disposal of assets and other income
4

 

 
23

(d) 
27

Less:
 
 
 
 
 
 
 
Production expenses
121

 
73

 

 
194

Marketing costs
14

 
35

 

 
49

Exploration expenses
41

 
3

 
250

(e) 
294

Depreciation, depletion and amortization
531

 
102

 
8

 
641

Impairments

 

 
201

(f) 
201

Other expenses (a)
109

 
40

 
57

(g) 
206

Taxes other than income
44

 

 

 
44

Net interest and other

 

 
35

(h) 
35

Loss on early extinguishment of debt

 

 
46

(i) 
46

Income tax provision (benefit)

 
106

 
35

 
141

Segment income (loss) / Income (loss) from continuing operations
$
(38
)
 
$
104

 
$
(665
)
 
$
(599
)
Capital expenditures (b)
$
541

 
$
4

 
$
9

 
$
554

(a) 
Includes other operating expenses and general and administrative expenses.
(b) 
Includes accruals.
(c) 
Unrealized loss on commodity derivative instruments.
(d) 
Primarily related to the sale of certain conventional assets in Oklahoma. (See Note 6.)
(e) 
Primarily related to unproved property impairments associated with certain non-core properties within our International E&P segment. (See Note 13.)
(f) 
Primarily related to proved property impairments associated with certain non-core properties within our International E&P segment. (See Note 13.)
(g) 
Includes pension settlement loss of $8 million. (See Note 8.)
(h) 
Includes a gain of $47 million resulting from the termination of our forward starting interest rate swaps. (See Note 15.)
(i) 
Primarily related to the make-whole call provisions paid upon redemption of our senior unsecured notes. (See Note 17.)

13

MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)



 
Three Months Ended September 30, 2016
 
 
Not Allocated
 
 
(In millions)
U.S. E&P
 
Int'l E&P
 
to Segments
 
Total
Sales and other operating revenues
$
604

 
$
152

 
$
25

(c) 
$
781

Marketing revenues
44

 
36

 

 
80

Total revenues
648

 
188

 
25

 
861

Income from equity method investments

 
59

 

 
59

Net gain on disposal of assets and other income
19

 
7

 
44

(d) 
70

Less:
 
 
 
 
 
 
 
Production expenses
113

 
47

 

 
160

Marketing costs
45

 
35

 

 
80

Exploration expenses
35

 
10

 
38

 
83

Depreciation, depletion and amortization
443

 
66

 
13

 
522

Impairments

 

 
47

(e) 
47

Other expenses (a)
85

 
18

 
184

(f) 
287

Taxes other than income
35

 

 

 
35

Net interest and other

 

 
89

 
89

Income tax provision (benefit)
(30
)
 
19

 
(96
)
 
(107
)
Segment income (loss) / Income (loss) from continuing operations
$
(59
)
 
$
59

 
$
(206
)
 
$
(206
)
Capital expenditures (b)
$
216

 
$
18

 
$
3

 
$
237

(a) 
Includes other operating expenses and general and administrative expenses.
(b) 
Includes accruals.
(c) 
Unrealized gain on commodity derivative instruments.
(d) 
Primarily related to certain non-operated assets in West Texas and New Mexico. (See Note 6.)
(e) 
Proved property impairments. (See Note 13.)
(f) 
Includes termination payment on our Gulf of Mexico deepwater drilling rig contract of $113 million and pension settlement loss of $14 million. (See Note 8.)


14

MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)



 
Nine Months Ended September 30, 2017
 
 
Not Allocated
 
 
(In millions)
U.S. E&P
 
Int'l E&P
 
to Segments
 
Total
Sales and other operating revenues
$
2,175

 
$
787

 
$
64

(c) 
$
3,026

Marketing revenues
25

 
92

 

 
117

Total revenues
2,200

 
879

 
64

 
3,143

Income from equity method investments

 
183

 

 
183

Net gain on disposal of assets and other income
11

 
14

 
32

(d) 
57

Less:
 
 
 
 
 
 
 
Production expenses
348

 
173

 

 
521

Marketing costs
30

 
91

 

 
121

Exploration expenses
97

 
5

 
250

(e) 
352

Depreciation, depletion and amortization
1,498

 
266

 
25

 
1,789

Impairments
4

 

 
201

(f) 
205

Other expenses (a)
342

 
83

 
183

(g) 
608

Taxes other than income
116

 

 
12

 
128

Net interest and other

 

 
199

(h) 
199

Loss on early extinguishment of debt

 

 
46

(i) 
46

Income tax provision (benefit)

 
202

 
14

 
216

Segment income (loss) / Income (loss) from continuing operations
$
(224
)
 
$
256

 
$
(834
)
 
$
(802
)
Capital expenditures (b)
$
1,465

 
$
27

 
$
20

 
$
1,512

(a) 
Includes other operating expenses and general and administrative expenses.
(b) 
Includes accruals.
(c) 
Unrealized gain on commodity derivative instruments.
(d) 
Primarily related to the sale of certain conventional assets in Oklahoma. (See Note 6.)
(e) 
Primarily related to unproved property impairments associated with certain non-core properties within our International E&P segment. (See Note 13.)
(f) 
Primarily related to proved property impairments associated with certain non-core properties within our International E&P segment. (See Note 13.)
(g) 
Includes pension settlement loss of $25 million. (See Note 8.)
(h) 
Includes a gain of $47 million resulting from the termination of our forward starting interest rate swaps. (See Note 15.)
(i) 
Primarily related to the make-whole call provisions paid upon redemption of our senior unsecured notes. (See Note 17.)


15

MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)



 
Nine Months Ended September 30, 2016
 
 
Not Allocated
 
 
(In millions)
U.S. E&P
 
Int'l E&P
 
to Segments
 
Total
Sales and other operating revenues
$
1,714

 
$
407

 
$
(89
)
(c) 
$
2,032

Marketing revenues
128

 
74

 

 
202

Total revenues
1,842

 
481

 
(89
)
 
2,234

Income from equity method investments

 
110

 

 
110

Net gain on disposal of assets and other income
22

 
20

 
277

(d) 
319

Less:
 
 
 
 
 
 
 
Production expenses
376

 
156

 

 
532

Marketing costs
129

 
72

 

 
201

Exploration expenses
90

 
20

 
179

(e) 
289

Depreciation, depletion and amortization
1,363

 
184

 
36

 
1,583

Impairments
1

 

 
47

(f) 
48

Other expenses (a)
300

 
56

 
403

(g) 
759

Taxes other than income
112

 

 
1

 
113

Net interest and other

 

 
256

 
256

Income tax provision (benefit)
(183
)
 
5

 
(236
)
 
(414
)
Segment income (loss) / Income (loss) from continuing operations
$
(324
)
 
$
118

 
$
(498
)
 
$
(704
)
Capital expenditures (b)
$
684

 
$
62

 
$
11

 
$
757

(a) 
Includes other operating expenses and general and administrative expenses.
(b) 
Includes accruals.
(c) 
Unrealized loss on commodity derivative instruments.
(d) 
Primarily related to net gain on disposal of assets. (See Note 6.)
(e) 
Impairments primarily associated with decision to not drill remaining Gulf of Mexico undeveloped leases. (See Note 13.)
(f) 
Proved property impairments. (See Note 13.)
(g) 
Includes termination payment on our Gulf of Mexico deepwater drilling rig contract of $113 million and pension settlement loss of $93 million and severance related expenses associated with workforce reductions of $8 million. (See Note 8.)


16

MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)



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)
2017
 
2016
 
2017
 
2016
Service cost
$
5

 
$
6

 
$

 
$
1

Interest cost
7

 
9

 
2

 
3

Expected return on plan assets
(10
)
 
(12
)
 

 

Amortization:
 

 
 

 
 

 
 

– prior service cost (credit)
(3
)
 
(2
)
 
(2
)
 
(1
)
– actuarial loss
3

 
4

 

 

Net settlement loss (a)
8

 
14

 

 

Net periodic benefit cost
$
10

 
$
19

 
$

 
$
3

 
Nine Months Ended September 30,
  
Pension Benefits
 
Other Benefits
(In millions)
2017
 
2016
 
2017
 
2016
Service cost
$
16

 
$
18

 
$
1

 
$
3

Interest cost
22

 
30

 
6

 
8

Expected return on plan assets
(32
)
 
(40
)
 

 

Amortization:
 
 
 

 
 

 
 

– prior service cost (credit)
(7
)
 
(7
)
 
(5
)
 
(3
)
– actuarial loss
7

 
11

 

 

Net settlement loss (a)
25

 
93

 

 

Net periodic benefit cost
$
31


$
105


$
2


$
8

(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.

During the first nine months of 2017, we recorded the effects of settlements of our U.S. and U.K. 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 2017, we made contributions of $45 million to our funded pension plans and we expect to make additional contributions up to an estimated $8 million over the remainder of 2017.  During the first nine months of 2017, we made payments of $10 million and $16 million related to unfunded pension plans and other postretirement benefit plans, respectively.


17

MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)



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 and the sum of the amounts allocated to segments is reported in the “Not Allocated to Segments” column of the tables in Note 7. For the third quarter and first nine months of 2017 and 2016, our effective income tax rates on continuing operations were as follows:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In millions)
 
2017
 
2016
 
2017
 
2016
Total pre-tax income (loss) from continuing operations
 
$
(458
)
 
$
(313
)
 
$
(586
)
 
$
(1,118
)
Total income tax expense (benefit)
 
$
141

 
$
(107
)
 
$
216

 
$
(414
)
Effective income tax expense (benefit) rate on continuing operations
 
31
%
 
(34
)%
 
37
%
 
(37
)%
 
 
 
 
 
 
 
 
 
Income taxes at the statutory tax rate of 35%
 
$
(160
)
 
$
(109
)
 
$
(205
)
 
$
(390
)
Effects of foreign operations
 
31

 
(8
)
 
29

 
(39
)
Adjustments to valuation allowances
 
228

 
11

 
361

 
17

State income taxes
 

 
(2
)
 
(13
)
 
(4
)
Other federal tax effects
 
42

 
1

 
44

 
2

Income tax expense (benefit) on continuing operations
 
$
141

 
$
(107
)
 
$
216

 
$
(414
)

Income tax expense for the third quarter and first nine months of 2017 was impacted by a full valuation allowance on our net federal deferred tax assets generated in 2017 and increased sales volumes in our Libyan operations where the statutory income tax rate is in excess of 90%. Our Libya income tax expense was $102 million in the third quarter and $179 million in the first nine months of 2017 compared to a benefit of $16 million and $39 million for the same periods last year. Additionally, for the third quarter and first nine months of 2017, income tax expense was impacted by a onetime, non-cash deferred tax charge of $41 million related to a reclassification of the valuation allowance on our net federal deferred tax assets between other comprehensive income and income from continuing operations.
In the first nine months of 2017 we settled our 2011-2013 Alaska income tax audit, which resulted in the recognition of a tax benefit totaling $13 million. As of September 30, 2017 there are no uncertain tax positions for which it is reasonably possible that the amount would significantly increase or decrease in the next twelve months.  However, as discussed in Note 21, we may be required to adjust the timing of our tax deduction for decommissioning costs and make a payment to the U.K. tax authorities of approximately $130 million in the next twelve months, which would be recovered as future decommissioning activities are performed and deductions claimed. We estimate that any revisions to current and deferred tax liabilities, if we do not prevail, would have no cumulative adverse earnings impact in our consolidated results of operations.  While we believe that it is more likely than not that we will prevail in the Tribunal, if we do not, we have the option to seek appeal. 
The effective tax rate change between years for the third quarter and first nine months of 2017 and 2016, was driven by the full valuation allowance on our net federal deferred tax assets generated in 2017, and the impacts of foreign operations which includes the tax effects associated with increased sales volumes in Libya.
The impact of foreign operations for the third quarter and first nine months of 2017 totaled tax expense of $31 million for three months ended September 30, 2017 and $29 million for the first nine months of 2017 due to income tax rate differentials from the U.S. statutory rate of 35% associated with foreign operations in Libya, E.G. and the U.K. This was offset by deferred tax benefits being generated in the U.K. related to future tax refunds associated with abandonment costs.
In Libya, reliable estimates of 2017 and 2016 annual ordinary income from our Libyan operations could not be made, and the range of possible scenarios in the worldwide annual effective tax rate calculation demonstrates significant variability. Thus, the tax impacts applicable to Libyan ordinary income (loss) were recorded as a discrete item in the third quarter and the first nine months of 2017 and 2016.  For the third quarter and the first nine months of 2017 and 2016, estimated annual effective tax rates were calculated excluding Libya and applied to consolidated ordinary income (loss). Excluding Libya, the effective income tax expense and benefit rates would be an expense of 7% and benefit of 31% for the third quarter of 2017 and 2016. Excluding Libya, the effective income tax expense and benefit rates would be an expense of 5% and a benefit of 35% for the first nine months of 2017 and 2016.

18

MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)



In the U.S. we expect to be in a cumulative loss position in 2017, and as a result we have placed a full valuation allowance on our net federal deferred tax assets. In the third quarter and first nine months of 2017 this valuation allowance was $228 million and $361 million. During 2017 we expect to realize no tax benefit on any net federal deferred tax assets generated. See Deferred Tax Assets section below for further detail.
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. The estimated realizability of the benefit of our deferred tax asset is assessed considering a preponderance of evidence. This assessment requires analysis of all available positive and negative evidence. Positive evidence includes reversals of temporary differences, forecasts of future taxable income, assessment of future business assumptions and applicable tax planning strategies. Negative evidence includes losses in recent years as well as the forecasts of future income (loss) in the realizable period. As of the fourth quarter of 2016, we expected to be in a cumulative loss position in 2017, which constitutes significant objective negative evidence as to the future realizability of the value of our federal deferred tax assets. Due to this negative evidence, we placed a full valuation allowance on our net federal deferred tax assets in the fourth quarter of 2016 and expect to realize no tax benefit on any net federal deferred tax assets generated in 2017.
10.   Inventories
 Crude oil and natural gas are recorded at weighted average cost and carried at the lower of cost or net realizable value. Supplies and other items consist principally of tubular goods and equipment which are valued at weighted average cost and reviewed periodically for obsolescence or impairment when market conditions indicate.
 
September 30,
 
December 31,
(In millions)
2017
 
2016
Crude oil and natural gas
$
9

 
$
6

Supplies and other items
123

 
130

Inventories
$
132

 
$
136


11.  Property, Plant and Equipment, net of Accumulated Depreciation, Depletion and Amortization
 
September 30,
 
December 31,
(In millions)
2017
 
2016
United States E&P
$
15,783

 
$
14,158

International E&P
1,772

 
2,470

Corporate
90

 
99

Net property, plant and equipment
$
17,645


$
16,727


Our Libya operations have been interrupted in recent years due to civil unrest. On September 14, 2016, Force Majeure was lifted and production resumed in October 2016 at our Waha concession. During December 2016, liftings resumed from the Es Sider crude oil terminal. Sales volumes and production continued during the first nine months of 2017, except for a brief interruption in March 2017 due to civil unrest.
As of September 30, 2017, our net property, plant and equipment investment in Libya is $764 million, and total proved reserves (unaudited) in Libya as of December 31, 2016 are 206 million barrels of oil equivalent (“mmboe”). 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 $764 million by a significant amount.
Exploratory well costs capitalized greater than one year after completion of drilling were $32 million and $118 million as of September 30, 2017 and December 31, 2016. The decrease in costs of $86 million during the first nine months of 2017 was primarily due to $64 million in exploratory well costs being expensed as a result of our agreement to sell our Diaba License G4-223 in the Republic of Gabon in August of 2017, see Note 6 for further information about the divestment of certain non-core properties in our International E&P segment. Additionally, in April 2017 we received approval by the host government in

19

MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)



E.G. to develop Block D offshore E.G. through unitization with the Alba field resulting in $22 million exploratory well costs associated with the Corona well no longer being deferred.

12. Asset Retirement Obligations
Asset retirement obligations primarily consist of estimated costs to remove, dismantle and restore land or seabed at the end of oil and gas production operations. Changes in asset retirement obligations for the nine months ended were as follows:
 
September 30,
 
September 30,
(In millions)
2017
 
2016
Beginning balance
$
1,653

 
$
1,544

Incurred liabilities, including acquisitions
19

 
5

Settled liabilities, including dispositions
(40
)
 
(61
)
Accretion expense (included in depreciation, depletion and amortization)
65

 
60

Revisions of estimates
(113
)
 
(2
)
Held for sale
(2
)
 
(13
)
Ending balance
$
1,582

 
$
1,533

September 30, 2017
Settled liabilities include dispositions, primarily related to the sale of certain conventional assets in Oklahoma as well as retirements in the U.K. and the Gulf of Mexico.
Revisions of estimates were primarily due to changes in U.K. estimated costs as well as timing of abandonment activities in the U.K.
Ending balance includes $60 million classified as short-term at September 30, 2017.
September 30, 2016
Settled liabilities include dispositions, primarily related to the Gulf of Mexico and Wyoming as well as retirements in the Gulf of Mexico.
Ending balance includes $21 million classified as short-term at September 30, 2016.

13. Impairments and Exploration Expenses
Impairments
As a result of our announced disposition of our Canadian business in the first quarter of 2017, we recorded a pre-tax non-cash impairment charge of $6.6 billion primarily related to property, plant and equipment. This impairment in our Canadian business is reflected as discontinued operations in the consolidated statements of income and the consolidated statements of cash flows for all periods presented.
The following table summarizes impairment charges of proved properties from continuing operations:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in millions)
2017
 
2016
 
2017
 
2016
Total impairments
$
201

 
$
47

 
$
205

 
$
48

2017 - Impairments for the three and nine months ended September 30, 2017 were primarily a result of lower forecasted long-term commodity prices and the anticipated sales of certain non-core proved properties in our International E&P segment of $136 million. Additionally, included in proved property impairments was $65 million relating to the Gulf of Mexico as a result of lower forecasted long-term commodity prices.
2016 - Impairments for the three and nine months ended September 30, 2016 consisted primarily of conventional non-core proved properties in Oklahoma as a result of lower forecasted long-term commodity prices.
See Note 6 for relevant detail regarding dispositions, Note 7 for further detail regarding segment presentation and Note 14 for fair value measurements related to impairments of proved properties and long-lived assets.

20

MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)




The following table summarizes the components of exploration expenses:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In millions)
2017
 
2016
 
2017
 
2016
Exploration Expenses
 
 
 
 
 
 
 
Unproved property impairments
$
172

 
$
28

 
$
217

 
$
172

Dry well costs
77

 
9

 
77

 
24

Geological and geophysical
2

 
1

 
3

 
1

Other
43

 
45

 
55

 
92

Total exploration expenses
$
294

 
$
83

 
$
352

 
$
289

Unproved property impairment and Dry well costs
2017 - As a result of lower forecasted long-term commodity prices and the anticipated sales of certain non-core properties in our International E&P segment, we recorded a non-cash charge of $159 million comprised of $95 million in unproved property impairments and $64 million in dry well costs related to our Diaba License G4-223 in the Republic of Gabon. Also, because of our decision not to develop the Tchicuate offshore Block in the Republic of Gabon, we recorded a non-cash impairment charge of $43 million to unproved property.
2016 - Unproved property impairments for the nine months ended September 30, 2016 primarily consist of non-cash charges of $118 million as a result of our decision to not drill any of our remaining Gulf of Mexico undeveloped leases.
See Note 6 for relevant detail regarding dispositions and Note 7 for further detail regarding segment presentation.

14.  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, 2017 and December 31, 2016 by fair value hierarchy level.
 
September 30, 2017
(In millions)
Level 1
 
Level 2
 
Level 3
 
Total
Derivative instruments, assets
 
 
 
 
 
 
 
     Commodity (a)
$

 
$
10

 
$

 
$
10

     Interest rate

 

 

 

Derivative instruments, assets
$

 
$
10

 
$

 
$
10

Derivative instruments, liabilities
 
 
 
 
 
 
 
     Commodity (a)
$
2

 
$
3

 
$

 
$
5

Derivative instruments, liabilities
$
2

 
$
3

 
$

 
$
5

(a)  
Derivative instruments are recorded on a net basis in our balance sheet. See Note 15.

 
December 31, 2016
(In millions)
Level 1
 
Level 2
 
Level 3
 
Total
Derivative instruments, assets
 
 
 
 
 
 
 
     Commodity (a)
$

 
$

 
$

 
$

Interest rate

 
68

 

 
68

Derivative instruments, assets
$

 
$
68

 
$

 
$
68

Derivative instruments, liabilities
 
 
 
 
 
 
 
     Commodity (a)
$

 
$
60

 
$

 
$
60

Derivative instruments, liabilities
$

 
$
60

 
$

 
$
60

(a)  
Derivative instruments are recorded on a net basis in our balance sheet. See Note 15.

21

MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)



Commodity derivatives include three-way collars, call options, swaps, swaptions, and basis swaps. These instruments are measured at fair value using either a Black-Scholes or a modified Black-Scholes Model. For swaps and basis swaps, inputs to the models include only commodity prices and are categorized as Level 1 because all assumptions and inputs are observable in active markets throughout the term of the instruments. For three-way collars, swaptions and call options, inputs to the models include commodity prices, and implied volatility and are categorized as Level 2 because predominantly all assumptions and inputs are observable in active markets throughout the term of the instruments.
Historically, both our interest rate swaps and forward starting interest rate swaps were measured at fair value with a market approach using actionable broker quotes, which are Level 2 inputs. See Note 15 for additional discussion of the types of derivative instruments we used.
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. As of September 30, 2017, we have $115 million of goodwill associated with our International E&P reporting unit. We estimate the fair value of our International E&P reporting unit using a combination of market and income approaches. The market approach referenced observable inputs specific to us and our industry, such as the price of our common equity, our enterprise value, and valuation multiples of us and our peers from the investor analyst community. The income approach utilized discounted cash flows, which were based on forecasted assumptions. Key assumptions to the income approach include future liquid hydrocarbon and natural gas pricing, estimated quantities of liquid hydrocarbons and natural gas proved and probable reserves, estimated timing of production, discount rates, future capital requirements, operating expenses and tax rates. The assumptions used in the income approach are consistent with those that management uses to make business decisions. These valuation methodologies represent Level 3 fair value measurements. We performed our annual impairment test in the second quarter of 2017 and concluded no impairment was required. As of the date of our last impairment assessment, the fair value of our International E&P reporting unit exceeded its book value by over 40%. While the fair value of our International E&P reporting unit exceeded the book value, subsequent variations in the above assumptions could result in materially different calculations of fair value and determinations of whether or not an impairment is indicated.
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,
 
2017
 
2016
(In millions)
Fair Value
 
Impairment
 
Fair Value
 
Impairment
Long-lived assets
$
169

 
$
201

 
$
15

 
$
47

 
Nine Months Ended September 30,
 
2017
 
2016
(In millions)
Fair Value
 
Impairment
 
Fair Value
 
Impairment
Long-lived assets
$
169

 
$
205

 
$
15

 
$
48

Long-lived assets that were impaired are discussed below. The fair values of each, unless otherwise noted, 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.  Inputs to the fair value measurement include reserve and production estimates made by our reservoir engineers, estimated future commodity prices adjusted for quality and location differentials and forecasted operating expenses for the remaining estimated life of the reservoir.
United States E&P
In the third quarter of 2017, impairments of $65 million were recorded consisting of certain proved properties in the Gulf of Mexico as a result of lower forecasted long-term commodity prices, to an aggregate fair value of $66 million.

22

MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)



In the third quarter of 2016, impairments of $47 million were recorded primarily consisting of conventional non-core proved properties in Oklahoma as a result of lower forecasted long-term commodity prices, to an aggregate fair value of $15 million.
International E&P
In the third quarter of 2017, we recorded proved property impairments of $136 million, to an aggregate fair value of $103 million, on certain non-core properties in our International E&P segment primarily as a result of lower forecasted long-term commodity prices and as a result of the anticipated sales of certain non-core international assets. The fair values were measured using the market approach, based upon either anticipated sales proceeds less costs to sell or a market comparable sales price per boe. This resulted in a Level 2 classification. See Note 6 for further information about the divestment of certain non-core properties in our International E&P segment.
Canadian discontinued operations
As a result of our announced disposition of our Canadian business in the first quarter of 2017, we recorded a pre-tax non-cash impairment charge of $6.6 billion primarily related to property, plant and equipment. This impairment was recorded for excess net book value over anticipated sales proceeds less costs to sell. Fair values of assets held for sale were determined based upon the anticipated sales proceeds less costs to sell, which resulted in a Level 2 classification. See Note 6 for relevant detail regarding dispositions.
Fair Values – Financial Instruments
Our current assets and liabilities include financial instruments, the most significant of which are receivables, long-term debt and payables. We believe the carrying values of our receivables 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 credit rating, and (3) our historical incurrence of and expected future insignificant bad debt expense, which includes an evaluation of counterparty credit risk.
The following table summarizes financial instruments, excluding receivables, payables and derivative financial instruments, and their reported fair values by individual balance sheet line item at September 30, 2017 and December 31, 2016.
 
September 30, 2017
 
December 31, 2016
 
Fair