form10q2010qtr1.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549


FORM 10-Q


(Mark One)
  
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended June 30, 2010

OR

[   ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _____ to _____


Commission file number 1-5153

Marathon Oil Corporation
(Exact name of registrant as specified in its charter)

Delaware
25-0996816
State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
5555 San Felipe Road, Houston, TX  77056-2723
(Address of principal executive offices)

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


 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.                          Yes x  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 x  No o

 
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   x
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 x  No o

 
There were 709,668,991 shares of Marathon Oil Corporation common stock outstanding as of July 30, 2010.
 



 
 
 
 


MARATHON OIL CORPORATION
 
Form 10-Q
 
Quarter Ended June 30, 2010


   
 
Page
PART I - FINANCIAL INFORMATION
Item 1.
  
 
2
 
3
 
4
 
5
 
6
Item 2.
22
Item 3.
35
Item 4.
35
 
36
PART II - OTHER INFORMATION
Item 1.
39
Item 1A.
39
Item 2.
41
Item 6.
42
 
43

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

1
 

 
Part I - Financial Information
 
Item 1. Financial Statements

MARATHON OIL CORPORATION
 
 
 

 
  
 
    
 
    
 
    
 
  
 
  
Three Months Ended
    
Six Months Ended
  
 
  
June 30,
    
June 30,
  
(In millions, except per share data)
  
2010
    
2009
    
2010
    
2009
  
Revenues and other income:
  
 
    
 
    
 
    
 
  
 
  
 
    
 
    
 
    
 
  
   Sales and other operating revenues (including consumer excise taxes)
   $ 18,417     $ 13,018     $ 34,266     $ 23,174  
   Sales to related parties
     32       21       52       41  
   Income from equity method investments
     101       62       206       109  
   Net gain on disposal of assets
     12       191       825       195  
   Other income
     12       25       45       77  
 
                                
             Total revenues and other income
     18,574       13,317       35,394       23,596  
Costs and expenses:
                                
   Cost of revenues (excludes items below)
     14,292       9,760       27,173       17,117  
   Purchases from related parties
     141       110       274       205  
   Consumer excise taxes
     1,308       1,226       2,520       2,400  
   Depreciation, depletion and amortization
     658       683       1,307       1,343  
   Long-lived asset impairments
     33       15       467       15  
   Selling, general and administrative expenses
     336       321       634       612  
   Other taxes
     110       96       225       198  
   Exploration expenses
     125       64       223       126  
 
                                
            Total costs and expenses
     17,003       12,275       32,823       22,016  
 
                                
Income from operations
     1,571       1,042       2,571       1,580  
 
                                
   Net interest and other financing costs
     (18 )     (12 )     (48 )     (28 )
   Loss on early extinguishment of debt
     (92 )     -       (92 )     -  
 
                                
 
                                
Income from continuing operations before income taxes
     1,461       1,030       2,431       1,552  
 
                                
   Provision for income taxes
     752       702       1,265       959  
 
                                
Income from continuing operations
     709       328       1,166       593  
 
                                
Discontinued operations
     -       85       -       102  
 
                                
Net income
   $ 709     $ 413     $ 1,166     $ 695  
 
                                
Per Share Data
                                
 
                                
   Basic:
                                
 
                                
       Income from continuing operations
   $ 1.00     $ 0.46     $ 1.64     $ 0.84  
       Discontinued operations
   $ -     $ 0.12     $ -     $ 0.14  
       Net income per share
   $ 1.00     $ 0.58     $ 1.64     $ 0.98  
 
                                
   Diluted:
                                
 
                                
       Income from continuing operations
   $ 1.00     $ 0.46     $ 1.64     $ 0.84  
       Discontinued operations
   $ -     $ 0.12     $ -     $ 0.14  
       Net income per share
   $ 1.00     $ 0.58     $ 1.64     $ 0.98  
 
                                
   Dividends paid
   $ 0.25     $ 0.24     $ 0.49     $ 0.48  
 
 
The accompanying notes are an integral part of these consolidated financial statements.

2
 

 
  
 
    
 
  
 
  
June 30,
    
December 31,
  
(In millions, except per share data)
  
2010
    
2009
  
Assets
  
 
    
 
  
Current assets:
  
 
    
 
  
    Cash and cash equivalents
   $ 2,062     $ 2,057  
    Receivables, less allowance for doubtful accounts of $17 and $14
     4,974       4,677  
    Receivables from related parties
     54       60  
    Inventories
     3,586       3,622  
    Other current assets
     584       221  
 
                
            Total current assets
     11,260       10,637  
 
                
Equity method investments
     1,868       1,970  
Property, plant and equipment, less accumulated depreciation,
                
   depletion and amortization of $18,310 and $17,185
     31,703       32,121  
Goodwill
     1,383       1,422  
Other noncurrent assets
     1,282       902  
 
                
            Total assets
   $ 47,496     $ 47,052  
Liabilities
                
Current liabilities:
                
    Accounts payable
   $ 6,790     $ 6,982  
    Payables to related parties
     42       64  
    Payroll and benefits payable
     312       399  
    Accrued taxes
     1,049       547  
    Deferred income taxes
     462       403  
    Other current liabilities
     546       566  
    Long-term debt due within one year
     101       96  
 
                
            Total current liabilities
     9,302       9,057  
 
                
Long-term debt
     7,829       8,436  
Deferred income taxes
     4,013       4,104  
Defined benefit postretirement plan obligations
     1,989       2,056  
Asset retirement obligations
     1,148       1,099  
Deferred credits and other liabilities
     374       390  
 
                
            Total liabilities
     24,655       25,142  
 
                
Commitments and contingencies
                
 
                
Stockholders’ Equity
                
Preferred stock – zero and 5 million shares issued, zero and 1 million shares
                
          outstanding (no par value, 26 million shares authorized)
     -       -  
Common stock:
                
     Issued – 770 million and 769 million shares (par value $1 per share,
                
          1.1 billion shares authorized)
     770       769  
     Securities exchangeable into common stock – zero and 5 million shares issued,
                
         zero and 1 million shares outstanding (no par value, 29 million authorized)
     -       -  
     Held in treasury, at cost – 61 million shares
     (2,687 )     (2,706 )
Additional paid-in capital
     6,754       6,738  
Retained earnings
     18,859       18,043  
Accumulated other comprehensive loss
     (855 )     (934 )
 
                
            Total stockholders' equity
     22,841       21,910  
 
                
            Total liabilities and stockholders' equity
   $ 47,496     $ 47,052  
 
 
The accompanying notes are an integral part of these consolidated financial statements.



3
 

 
  
 
    
 
  
 
  
Six Months Ended
  
 
  
June 30,
  
(In millions)
  
2010
    
2009
  
Increase (decrease) in cash and cash equivalents
  
 
    
 
  
Operating activities:
  
 
    
 
  
Net income
   $ 1,166     $ 695  
Adjustments to reconcile net income to net cash provided by operating activities:
                
    Loss on early extinguishment of debt
     92       -  
    Discontinued operations
     -       (102 )
    Deferred income taxes
     (114 )     338  
    Depreciation, depletion and amortization
     1,307       1,343  
    Long-lived asset impairments
     467       15  
    Pension and other postretirement benefits, net
     101       73  
    Exploratory dry well costs and unproved property impairments
     111       33  
    Net gain on disposal of assets
     (825 )     (195 )
    Equity method investments, net
     (26 )     11  
    Changes in:
                
          Current receivables
     (280 )     (792 )
          Inventories
     (303 )     6  
          Current accounts payable and accrued liabilities
     381       449  
    All other operating, net
     50       102  
               Net cash provided by continuing operations
     2,127       1,976  
               Net cash provided by discontinued operations
     -       61  
               Net cash provided by operating activities
     2,127       2,037  
Investing activities:
                
   Additions to property, plant and equipment
     (2,505 )     (3,207 )
   Disposal of assets
     1,361       402  
   Trusteed funds - withdrawals
     -       16  
   Investments - loans and advances
     (17 )     (10 )
   Investments - repayments of loans and return of capital
     56       45  
   Investing activities of discontinued operations
     -       (66 )
   All other investing, net
     (37 )     (86 )
               Net cash used in investing activities
     (1,142 )     (2,906 )
Financing activities:
                
   Borrowings
     -       1,491  
   Debt issuance costs
     -       (11 )
   Debt repayments
     (625 )     (40 )
   Dividends paid
     (350 )     (340 )
   All other financing, net
     5       (1 )
               Net cash provided by (used in) financing activities
     (970 )     1,099  
Effect of exchange rate changes on cash:
                
     Continuing operations
     (10 )     (17 )
     Discontinued operations
     -       (2 )
                 Total effect of exchange rate changes on cash
     (10 )     (19 )
Net increase in cash and cash equivalents
     5       211  
Cash and cash equivalents at beginning of period
     2,057       1,285  
Cash and cash equivalents at end of period
   $ 2,062     $ 1,496  
 
 
The accompanying notes are an integral part of these consolidated financial statements.

4
 

 
  
Three Months Ended
    
Six Months Ended
  
 
  
June 30,
    
June 30,
  
(In millions)
  
2010
    
2009
    
2010
    
2009
  
Net income
   $ 709     $ 413     $ 1,166     $ 695  
    Other comprehensive income (loss)
                                
 
                                
         Post-retirement and post-employment plans
                                
            Change in actuarial gain
     128       41       158       49  
             Income tax provision on post-retirement and post-employment plans
     (59 )     (22 )     (83 )     (31 )
                  Post-retirement and post-employment plans, net of tax
     69       19       75       18  
 
                                
         Derivative hedges
                                
            Net unrecognized gain
     1       30       3       3  
            Income tax benefit (provision) on derivatives
     -       (4 )     1       (7 )
                  Derivative hedges, net of tax
     1       26       4       (4 )
 
                                
         Foreign currency translation and other
                                
            Unrealized gain
     -       (1 )     -       1  
            Income tax provision on foreign currency translation and other
     -       1       -       -  
                  Foreign currency translation and other, net of tax
     -       -       -       1  
 
                                
Other comprehensive income (loss)
     70       45       79       15  
 
                                
Comprehensive income
   $ 779     $ 458     $ 1,245     $ 710  
 
 
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 Securities and Exchange Commission and do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements.  Certain reclassifications have been made to conform to current year presentation.
 
 
These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Marathon Oil Corporation (“Marathon”) 2009 Annual Report on Form 10-K.  The results of operations for the quarter and six months ended June 30, 2010 are not necessarily indicative of the results to be expected for the full year.
 

2.      Accounting Standards
 
Recently Adopted
 
 
Variable interest accounting standards were amended by the Financial Accounting Standards Board (“FASB”) in June 2009.  The new accounting standards replace the existing quantitative-based risks and rewards calculation for determining which enterprise has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity.  In addition, the concept of qualifying special-purpose entities has been eliminated.  Ongoing assessments of whether an enterprise is the primary beneficiary of a variable interest entity are also required.  The amended variable interest accounting standard requires reconsideration for determining whether an entity is a variable interest entity when changes in facts and circumstances occur such that the holders of the equity investment at risk, as a group, lack the power from voting rights or similar rights to direct the activities of the entity.  Enhanced disclosures are required for any enterprise that holds a variable interest in a variable interest entity. Prospective application of this standard in the first quarter of 2010 did not have significant impact on our consolidated results of operations, financial position or cash flows.  The required disclosures are presented in Note 3.
 
 
A standard to improve disclosures about fair value measurements was issued by the FASB in January 2010.  The additional disclosures required include: (1) the different classes of assets and liabilities measured at fair value, (2) the significant inputs and techniques used to measure Level 2 and Level 3 assets and liabilities for both recurring and nonrecurring fair value measurements, (3) the gross presentation of purchases, sales, issuances and settlements for the rollforward of Level 3 activity, and (4) the transfers in and out of Levels 1 and 2.  We adopted all aspects of this standard in the first quarter of 2010, including the gross presentation of the Level 3 activity rollforward, which could have been deferred until 2011.  This adoption did not have a significant impact on our consolidated results of operations, financial position or cash flows.  The required disclosures are presented in Note 11.
 
Oil and Gas Reserve Estimation and Disclosure standards were issued by the FASB in January 2010, which align the FASB’s reporting requirements with the Securities and Exchange Commission (“SEC”) requirements.  Similar to the SEC requirements, the FASB requirements were effective for periods ending on or after December 31, 2009.  The SEC introduced a new definition of oil and gas producing activities which allows companies to include volumes in their reserve base from unconventional resources.  The FASB also addresses the impact of changes in the SEC’s rules and definitions on accounting for oil and gas producing activities.  Initial adoption did not have an impact on our consolidated results of operations, financial position or cash flows.  The effect on depreciation, depletion and amortization expense in the first quarter of 2010, as compared to prior periods, was not significant.


 
3.      Variable Interest Entities
 
The Athabasca Oil Sands Project (“AOSP”), in which we hold a 20 percent 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 mine, the Scotford upgrader and markets in Edmonton.  The contract, originally signed in 1999 by a company we acquired, allows each holder of an undivided interest in the AOSP to ship materials in accordance with its undivided interest.  Costs under this contract are accrued and recorded on a monthly basis, with a $1 million current liability recorded at June 30, 2010.  Under this agreement, the AOSP absorbs all of the operating and capital costs of the pipeline.  Currently, no third-party shippers use the pipeline.  Should shipments be suspended, by choice or due to force majeure, we are responsible for the portion of the payment related to our undivided interest for all remaining periods.  The contract expires in 2029; however, the shippers can extend its term perpetually.  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 percent of

6
 

 
Notes to Consolidated Financial Statements (Unaudited)
 


the total; therefore, the Corridor Pipeline is not consolidated by Marathon.  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 $838 million as of June 30, 2010.  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.  We have not provided financial assistance to Corridor Pipeline and we do not have any guarantees of such assistance in the future.
 
 

4.      Income per Common Share
 
Basic income per share is based on the weighted average number of common shares outstanding.  Diluted income per share includes exercise of stock options and stock appreciation rights, provided the effect is not antidilutive.
 
   
Three Months Ended June 30,
  
   
2010
    
2009
  
(In millions, except per share data)
  
Basic
    
Diluted
    
Basic
    
Diluted
  
               
Income from continuing operations
   $ 709     $ 709     $ 328     $ 328  
Discontinued operations
     -       -       85       85  
Net income
   $ 709     $ 709     $ 413     $ 413  
                                 
Weighted average common shares outstanding
     710       710       709       709  
Effect of dilutive securities
     -       2       -       2  
 
                                
Weighted average common shares, including dilutive effect
     710       712       709       711  
                                 
Per share:
                                
    Income from continuing operations
   $ 1.00     $ 1.00     $ 0.46     $ 0.46  
    Discontinued operations
   $ -     $ -     $ 0.12     $ 0.12  
    Net income
   $ 1.00     $ 1.00     $ 0.58     $ 0.58  

   
Six Months Ended June 30,
  
   
2010
    
2009
  
(In millions, except per share data)
  
Basic
    
Diluted
    
Basic
    
Diluted
  
               
Income from continuing operations
   $ 1,166     $ 1,166     $ 593     $ 593  
Discontinued operations
     -       -       102       102  
Net income
   $ 1,166     $ 1,166     $ 695     $ 695  
                                 
Weighted average common shares outstanding
     709       709       709       709  
Effect of dilutive securities
     -       2       -       2  
 
                                
 Weighted average common shares, including dilutive effect
     709       711       709       711  
                                 
Per share:
                                
    Income from continuing operations
   $ 1.64     $ 1.64     $ 0.84     $ 0.84  
    Discontinued operations
   $ -     $ -     $ 0.14     $ 0.14  
    Net income
   $ 1.64     $ 1.64     $ 0.98     $ 0.98  
 
The per share calculations above exclude 12 million stock options and stock appreciation rights for the second quarter and the first six months of 2010, as they were antidilutive.  Excluded in the second quarter and the first six months of 2009 were 8 million stock options and stock appreciation rights.
 

7
 


 
Notes to Consolidated Financial Statements (Unaudited)
 

5.      Dispositions
 
Assets Held For Sale
 
 
In May 2010, we entered into a non-binding letter of intent to sell our RM&T segment's St. Paul Park, Minnesota,  refinery (including associated terminal, tankage and pipeline investments) and 166 Speedway SuperAmerica retail outlets, plus related inventories.  A final agreement is being negotiated and the sale is anticipated to close by year end 2010.  Based on the estimated fair value of the consideration at June 30, 2010, any gain to be recognized at closing is not expected to be significant.
 
 
As of June 30, 2010, the Minnesota assets and liabilities held for sale are reported in the consolidated balance sheet as follows:
 
(In millions)
      
Other current assets
   $ 329  
Other noncurrent assets
     494  
     Total assets
     823  
         
Deferred credits and other liabilities
     3  
     Total liabilities
   $ 3  
 
2010 Disposition
 
 
During the first quarter 2010, we closed the sale of a 20 percent outside-operated interest in our E&P segment’s Production Sharing Contract and Joint Operating Agreement in Block 32 offshore Angola.  We received net proceeds of $1.3 billion and recorded a pretax gain on the sale in the amount of $811 million.  We retained a 10 percent outside-operated interest in Block 32.
 
 
2009 Dispositions
 
 
In April 2009, we closed the sale of our operated properties in Ireland for net proceeds of $84 million, after adjusting for cash held by the sold subsidiary.  A $158 million pretax gain on the sale was recorded.  As a result of this sale, we terminated our pension plan in Ireland, incurring a charge of $18 million.  Activities related to our operated properties in Ireland had been reported in our Exploration and Production (E&P) segment.
 
 
On June 24, 2009 we entered into an agreement to sell the subsidiary holding our 19 percent outside-operated interest in the Corrib natural gas development offshore Ireland.  An initial $100 million payment was made at closing.  Additional fixed proceeds of $135 million will be received on the earlier of first commercial gas or December 31, 2012.  Including contingent consideration, the fair value of $311 million at June 30, 2009, was less than book value.  An impairment of $154 million was recognized in the second quarter of 2009 and reported as part of the loss on disposal of discontinued operations.
 
 
Existing guarantees of our subsidiaries’ performance issued to Irish government entities remain in place after the sales until the purchasers issue similar guarantees to replace them.  The guarantees, related to asset retirement obligations and natural gas production levels, have been indemnified by the purchasers.  The fair value of these guarantees is not significant.
 
 
In December 2009, we closed the sale of our operated fields offshore Gabon, receiving net proceeds of $269 million, after closing adjustments.  A $232 million pretax gain on this disposition was reported in discontinued operations in the fourth quarter of 2009.
 
 
Our Irish businesses and our Gabonese businesses, which had been reported in our E&P segment, have been reported as discontinued operations in the consolidated statements of income and the consolidated statements of cash flows for the three and six months ended June 30, 2009.  Revenues, pretax income and the net pretax loss on these dispositions are shown on the table below.
 
 
  
Three Months Ended
  
Six Months Ended
  
 
  
June 30,
  
June 30,
  
(In millions)
2009
  
2009
  
Revenues applicable to discontinued operations
   $ 43     $ 121  
Pretax income from discontinued operations
     20       50  
Pretax loss on disposal of discontinued operations
   $ 14     $ 14  

8
 
 
 
Notes to Consolidated Financial Statements (Unaudited)
 



 
In June 2009, we closed sales of a portion of our operated and all of our outside-operated Permian Basin producing assets in New Mexico and west Texas for net proceeds after closing adjustments of $293 million.  A $196 million pretax gain on the sale was recorded.
 


6.      Segment Information
 
We have four reportable operating segments.  Each of these segments is organized and managed based upon the nature of the products and services they offer.
 
 
 
1)
Exploration and Production (“E&P”) – explores for, produces and markets liquid hydrocarbons and natural gas on a worldwide basis;
 
 
 
2)
Oil Sands Mining (“OSM”) – mines, extracts and transports bitumen from oil sands deposits in Alberta, Canada, and upgrades the bitumen to produce and market synthetic crude oil and vacuum gas oil;
 
 
 
3)
Integrated Gas (“IG”) – markets and transports products manufactured from natural gas, such as liquefied natural gas (“LNG”) and methanol, on a worldwide basis; and
 
 
 
4)
Refining, Marketing and Transportation (“RM&T”) – refines, markets and transports crude oil and petroleum products, primarily in the Midwest, upper Great Plains, Gulf Coast and southeastern regions of the United States.
 
As discussed in Note 5, our Irish and Gabonese businesses were sold in 2009 and have been reported as discontinued operations.  Segment information for all presented periods of 2009 excludes amounts for these operations.

   
Three Months Ended June 30, 2010
  
(In millions)
  
E&P
    
OSM
    
IG
    
RM&T
    
Total
  
                               
Revenues:
                              
    Customer
  $ 2,464     $ 158     $ 33     $ 15,762     $ 18,417  
    Intersegment (a)
     152       21       -       15       188  
    Related parties
    14       -       -       18       32  
        Segment revenues
    2,630       179       33       15,795       18,637  
    Elimination of intersegment revenues
     (152 )     (21 )     -       (15 )     (188 )
        Total revenues
  $ 2,478     $ 158     $ 33     $ 15,780     $ 18,449  
Segment income (loss)
   $ 432     $ (60 )   $ 24     $ 421     $ 817  
Income from equity method investments
     40       -       43       18       101  
Depreciation, depletion and amortization (b)
     391       16       1       241       649  
Income tax provision (benefit)(c)
     624       (10 )     12       257       883  
Capital expenditures (b)(d)
     585       243       -       256       1,084  

   
Three Months Ended June 30, 2009
  
(In millions)
  
E&P
    
OSM
    
IG
    
RM&T
    
Total
  
                               
Revenues:
                              
    Customer
  $ 1,830     $ 126     $ 7     $ 11,052     $ 13,015  
    Intersegment (a)
     123       29       -       8       160  
    Related parties
    14       -       -       7       21  
        Segment revenues
    1,967       155       7       11,067       13,196  
    Elimination of intersegment revenues
     (123 )     (29 )     -       (8 )     (160 )
    Gain on U.K. natural gas contracts(e)
     3       -       -       -       3  
        Total revenues
  $ 1,847     $ 126     $ 7     $ 11,059     $ 13,039  
Segment income
   $ 208     $ 2     $ 13     $ 165     $ 388  
Income from equity method investments
     26       -       28       8       62  
Depreciation, depletion and amortization (b)
     484       34       1       157       676  
Income tax provision(c)
     435       -       2       104       541  
Capital expenditures (b)(d)
     609       281       1       713       1,604  


 
Notes to Consolidated Financial Statements (Unaudited)
 

 
   
Six Months Ended June 30, 2010
  
(In millions)
  
E&P
    
OSM
    
IG
    
RM&T
    
Total
  
                               
Revenues:
                              
    Customer
  $ 4,801     $ 305     $ 60     $ 29,100     $ 34,266  
    Intersegment (a)
     324       39       -       31       394  
    Related parties
    26       -       -       26       52  
        Segment revenues
    5,151       344       60       29,157       34,712  
    Elimination of intersegment revenues
     (324 )     (39 )     -       (31 )     (394 )
        Total revenues
  $ 4,827     $ 305     $ 60     $ 29,126     $ 34,318  
Segment income (loss)
   $ 934     $ (77 )   $ 68     $ 184     $ 1,109  
Income from equity method investments
     77       -       91       38       206  
Depreciation, depletion and amortization (b)
     788       39       2       461       1,290  
Income tax provision (benefit)(c)
     1,162       (17 )     35       104       1,284  
Capital expenditures (b)(d)
     1,188       508       1       566       2,263  

   
Six Months Ended June 30, 2009
  
(In millions)
  
E&P
    
OSM
    
IG
    
RM&T
    
Total
  
                               
Revenues:
                              
    Customer
  $ 3,136     $ 223     $ 18     $ 19,712     $ 23,089  
    Intersegment (a)
     242       54       -       17       313  
    Related parties
    29       -       -       12       41  
        Segment revenues
    3,407       277       18       19,741       23,443  
    Elimination of intersegment revenues
     (242 )     (54 )     -       (17 )     (313 )
    Gain on U.K. natural gas contracts(e)
     85       -       -       -       85  
        Total revenues
  $ 3,250     $ 223     $ 18     $ 19,724     $ 23,215  
Segment income (loss)
   $ 291     $ (22 )   $ 40     $ 324     $ 633  
Income from equity method investments
     37       -       70       2       109  
Depreciation, depletion and amortization (b)
     949       71       2       309       1,331  
Income tax provision (benefit)(c)
     613       (8 )     15       210       830  
Capital expenditures (b)(d)
     974       567       1       1,373       2,915  
 
Management believes intersegment transactions were conducted under terms comparable to those with unrelated parties.
 
(b)
Differences between segment totals and our financial statement totals represent amounts related to corporate administrative activities.
 
(c)
Differences between segment totals and our financial statement totals represent amounts related to corporate administrative activities and other unallocated items and are included in “Items not allocated to segments, net of income taxes” in the reconciliation below.
 
(d)
Includes accruals.
 
(e)
The U.K. natural gas contracts expired in September 2009.


 
 
Notes to Consolidated Financial Statements (Unaudited)
 


The following reconciles segment income to net income as reported in the consolidated statements of income:
  
                         
   
Three Months Ended
    
Six Months Ended
  
   
June 30,
    
June 30,
  
(In millions)
  
2010
    
2009
    
2010
    
2009
  
Segment income
   $ 817     $ 388     $ 1,109     $ 633  
Items not allocated to segments, net of income taxes:
                                
     Corporate and other unallocated items
     (62 )     (90 )     (72 )     (140 )
     Foreign currency remeasurement of income taxes
     37       (94 )     70       (66 )
     Gain on dispositions(a)
     -       122       449       122  
     Impairments(b)
     (26 )     -       (288 )     -  
     Loss on early extinguishment of debt(c)
     (57 )     -       (57 )     -  
     Deferred income taxes - tax legislation changes(d)
     -       -       (45 )     -  
     Gain on U.K. natural gas contracts
     -       2       -       44  
     Discontinued operations
     -       85       -       102  
          Net income
  $ 709     $ 413     $ 1,166     $ 695  
 
(a)
Additional information on these gains can be found in Note 5.
 
(b)
Impairments include those based upon fair value measurements discussed in Note 11 and a $15 million pretax writeoff of the remaining portion of the contingent proceeds from the sale of the Corrib natural gas development which was taken based upon new public information regarding the pipeline that would transport gas from the Corrib development.
 
(c)
Additional information on debt retired early can be found in Note 13.
 
(d)
A discussion of the tax legislation changes can be found in Note 8.

 
 The following reconciles total revenues to sales and other operating revenues (including consumer excise taxes) as reported in the consolidated statements of income:
  
                         
 
Three Months Ended
  
Six Months Ended
  
 
June 30,
  
June 30,
  
(In millions)
2010
    
2009
  
2010
  
2009
  
Total revenues
   $ 18,449     $ 13,039     $ 34,318     $ 23,215  
Less:  Sales to related parties
     32       21       52       41  
Sales and other operating revenues (including
                                
       consumer excise taxes)
   $ 18,417     $ 13,018     $ 34,266     $ 23,174  


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

   
Three Months Ended June 30,
  
  
  
Pension Benefits
    
Other Benefits
  
(In millions)
  
2010
    
2009
    
2010
    
2009
  
Service cost
   $ 25     $ 37     $ 4     $ 4  
Interest cost
     42       42       9       9  
Expected return on plan assets
     (40 )     (40 )     -       -  
Amortization:
                                
    – prior service cost (credit)
     3       4       (1 )     (2 )
    – actuarial loss (gain)
     25       10       (1 )     (2 )
    – net settlement/curtailment loss(a)
     -       18       -       -  
Net periodic benefit cost
   $ 55     $ 71     $ 11     $ 9  


 
Notes to Consolidated Financial Statements (Unaudited)
 


   
Six Months Ended June 30,
  
  
  
Pension Benefits
    
Other Benefits
  
(In millions)
  
2010
    
2009
    
2010
    
2009
  
Service cost
   $ 54     $ 72     $ 9     $ 9  
Interest cost
     87       84       19       20  
Expected return on plan assets
     (80 )     (80 )     -       -  
Amortization:
                                
    – prior service cost (credit)
     6       7       (3 )     (3 )
    – actuarial loss (gain)
     50       16       (1 )     (2 )
    – net settlement/curtailment loss(a)
     -       18       -       -  
Net periodic benefit cost
   $ 117     $ 117     $ 24     $ 24  
 
(a)   The curtailment and settlement is related to our discontinued operations in Ireland, as discussed in Note 5.  Pension expense related to Ireland was not material in any period presented.
 
 
During the first six months of 2010, we made contributions of $12 million to our funded pension plans.  We expect to make additional contributions up to an estimated $230 million to our funded pension plans over the remainder of 2010.  Current benefit payments related to unfunded pension and other postretirement benefit plans were $13 million and $18 million during the first six months of 2010.
 

8.      Income Taxes
 
The following is an analysis of the effective income tax rates for the periods presented:
 
   
Six Months Ended June 30,
  
   
2010
    
2009
  
Statutory U.S. income tax rate
     35 %     35 %
Effects of foreign operations, including foreign tax credits
     16       26  
State and local income taxes, net of federal income tax effects
     -       1  
Legislation change
     2       -  
Other
     (1 )     -  
        Effective income tax rate for continuing operations
     52 %     62 %

 
The Patient Protection and Affordable Care Act (“PPACA”) and the Health Care and Education Reconciliation Act of 2010 (“HCERA”), (together, the “Acts”) were signed in to law in March 2010.  The “Acts” effectively change the tax treatment of federal subsidies paid to sponsors of retiree health benefit plans that provide prescription drug benefits that are at least actuarially equivalent to the corresponding benefits provided under Medicare Part D.  The federal subsidy paid to employers was introduced as part of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the “MPDIMA”).  Under the MPDIMA, the federal subsidy does not reduce our income tax deduction for the costs of providing such prescription drug plans nor is it subject to income tax individually.  Beginning in 2013, under the Acts, our income tax deduction for the costs of providing Medicare Part D-equivalent prescription drug benefits to retirees will be reduced by the amount of the federal subsidy.  Such a change in the tax law must be recognized in earnings in the period enacted regardless of the effective date.  As a result, we have recorded a charge of $45 million in the first quarter of 2010 for the write-off of deferred tax assets to reflect the change in the tax treatment of the federal subsidy.
 
 
The effective income tax rate is influenced by a variety of factors including the geographic and functional sources of income, the relative magnitude of these sources of income, and foreign currency remeasurement effects.  The provision for income taxes is allocated on a discrete, stand-alone basis to pretax segment income and to individual items not allocated to segments.  The difference between the total provision and the sum of the amounts allocated to segments and to individual items not allocated to segments is reported in the Corporate and other unallocated items line of the reconciliation shown in Note 6.
 


 
Notes to Consolidated Financial Statements (Unaudited)
 


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

   
June 30,
    
December 31,
  
(In millions)
  
2010
    
2009
  
Liquid hydrocarbons, natural gas and bitumen
   $ 1,393     $ 1,393  
Refined products and merchandise
     1,825       1,790  
Supplies and sundry items
     368       439  
        Inventories
   $ 3,586     $ 3,622  



10.           Property, Plant and Equipment

   
June 30,
    
December 31,
  
(In millions)
  
2010
    
2009
  
E&P
  
 
    
 
  
     U.S.
   $ 6,044     $ 6,005  
     International
     4,935       5,522  
          Total E&P
     10,979       11,527  
OSM
     8,938       8,531  
IG
     35       34  
RM&T