MRO-2015.06.30-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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(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, 2015 |
OR
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| |
[ ] | 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)
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| | |
Delaware | | 25-0996816 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
5555 San Felipe Street, Houston, TX 77056-2723
(Address of principal executive offices)
(713) 629-6600
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes R No £
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes R No £
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer þ | Accelerated filer o |
Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
There were 677,184,913 shares of Marathon Oil Corporation common stock outstanding as of July 31, 2015.
MARATHON OIL CORPORATION
Unless the context otherwise indicates, references to “Marathon Oil,” “we,” “our,” or “us” in this Form 10-Q are references to Marathon Oil Corporation, including its wholly-owned and majority-owned subsidiaries, and its ownership interests in equity method investees (corporate entities, partnerships, limited liability companies and other ventures over which Marathon Oil exerts significant influence by virtue of its ownership interest).
Part I - Financial Information
Item 1. Financial Statements
MARATHON OIL CORPORATION
Consolidated Statements of Income (Unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, | | June 30, |
(In millions, except per share data) | 2015 | | 2014 | | 2015 | | 2014 |
Revenues and other income: | | | | | | | |
Sales and other operating revenues, including related party | $ | 1,307 |
| | $ | 2,270 |
| | $ | 2,587 |
| | $ | 4,419 |
|
Marketing revenues | 183 |
| | 618 |
| | 387 |
| | 1,159 |
|
Income from equity method investments | 26 |
| | 120 |
| | 62 |
| | 257 |
|
Net gain (loss) on disposal of assets | — |
| | (87 | ) | | 1 |
| | (85 | ) |
Other income | 15 |
| | 20 |
| | 26 |
| | 40 |
|
Total revenues and other income | 1,531 |
| | 2,941 |
| | 3,063 |
| | 5,790 |
|
Costs and expenses: | |
| | |
| | | | |
|
Production | 450 |
| | 562 |
| | 894 |
| | 1,104 |
|
Marketing, including purchases from related parties | 182 |
| | 614 |
| | 387 |
| | 1,156 |
|
Other operating | 81 |
| | 101 |
| | 188 |
| | 204 |
|
Exploration | 111 |
| | 145 |
| | 201 |
| | 218 |
|
Depreciation, depletion and amortization | 751 |
| | 680 |
| | 1,572 |
| | 1,323 |
|
Impairments | 44 |
| | 4 |
| | 44 |
| | 21 |
|
Taxes other than income | 78 |
| | 109 |
| | 145 |
| | 204 |
|
General and administrative | 168 |
| | 139 |
| | 339 |
| | 326 |
|
Total costs and expenses | 1,865 |
| | 2,354 |
| | 3,770 |
| | 4,556 |
|
Income (loss) from operations | (334 | ) | | 587 |
| | (707 | ) | | 1,234 |
|
Net interest and other | (58 | ) | | (76 | ) | | (105 | ) | | (125 | ) |
Income (loss) from continuing operations before income taxes | (392 | ) | | 511 |
| | (812 | ) | | 1,109 |
|
Provision (benefit) for income taxes | (6 | ) | | 151 |
| | (150 | ) | | 351 |
|
Income (loss) from continuing operations | (386 | ) | | 360 |
| | (662 | ) | | 758 |
|
Discontinued operations | — |
| | 180 |
| | — |
| | 931 |
|
Net income (loss) | $ | (386 | ) | | $ | 540 |
| | $ | (662 | ) | | $ | 1,689 |
|
Per basic share: | |
| | |
| | |
| | |
|
Income (loss) from continuing operations | $ | (0.57 | ) | | $ | 0.53 |
| | $ | (0.98 | ) | | $ | 1.11 |
|
Discontinued operations | $ | — |
| | $ | 0.27 |
| | $ | — |
| | $ | 1.36 |
|
Net income (loss) | $ | (0.57 | ) | | $ | 0.80 |
| | $ | (0.98 | ) | | $ | 2.47 |
|
Per diluted share: | | | | | | | |
Income (loss) from continuing operations | $ | (0.57 | ) | | $ | 0.53 |
| | $ | (0.98 | ) | | $ | 1.10 |
|
Discontinued operations | $ | — |
| | $ | 0.27 |
| | $ | — |
| | $ | 1.36 |
|
Net income (loss) | $ | (0.57 | ) | | $ | 0.80 |
| | $ | (0.98 | ) | | $ | 2.46 |
|
Dividends per share | $ | 0.21 |
| | $ | 0.19 |
| | $ | 0.42 |
| | $ | 0.38 |
|
Weighted average common shares outstanding: | |
| | |
| | |
| | |
|
Basic | 677 |
| | 676 |
| | 676 |
| | 684 |
|
Diluted | 677 |
| | 679 |
| | 676 |
| | 688 |
|
The accompanying notes are an integral part of these consolidated financial statements.
MARATHON OIL CORPORATION
Consolidated Statements of Comprehensive Income (Unaudited)
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| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, | | June 30, |
(In millions) | 2015 | | 2014 | | 2015 | | 2014 |
Net income (loss) | $ | (386 | ) | | $ | 540 |
| | $ | (662 | ) | | $ | 1,689 |
|
Other comprehensive income (loss) | |
| | |
| | |
| | |
|
Postretirement and postemployment plans | |
| | |
| | |
| | |
|
Change in actuarial loss and other | 86 |
| | (13 | ) | | 162 |
| | (43 | ) |
Income tax benefit (provision) | (30 | ) | | 5 |
| | (57 | ) | | 15 |
|
Postretirement and postemployment plans, net of tax | 56 |
| | (8 | ) | | 105 |
| | (28 | ) |
Comprehensive income (loss) | $ | (330 | ) | | $ | 532 |
| | $ | (557 | ) | | $ | 1,661 |
|
The accompanying notes are an integral part of these consolidated financial statements.
MARATHON OIL CORPORATION
Consolidated Balance Sheets (Unaudited)
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| | | | | | | |
| June 30, | | December 31, |
(In millions, except per share data) | 2015 | | 2014 |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 1,572 |
| | $ | 2,398 |
|
Short-term investments | 925 |
| | — |
|
Receivables, less reserve of $4 and $3 | 1,195 |
| | 1,729 |
|
Inventories | 336 |
| | 357 |
|
Other current assets | 102 |
| | 109 |
|
Total current assets | 4,130 |
| | 4,593 |
|
Equity method investments | 1,045 |
| | 1,113 |
|
Property, plant and equipment, less accumulated depreciation, | |
| | |
|
depletion and amortization of $23,395 and $21,884 | 29,121 |
| | 29,040 |
|
Goodwill | 459 |
| | 459 |
|
Other noncurrent assets | 1,015 |
| | 806 |
|
Total assets | $ | 35,770 |
| | $ | 36,011 |
|
Liabilities | |
| | |
|
Current liabilities: | |
| | |
|
Accounts payable | $ | 1,507 |
| | $ | 2,545 |
|
Payroll and benefits payable | 119 |
| | 191 |
|
Accrued taxes | 156 |
| | 285 |
|
Other current liabilities | 235 |
| | 290 |
|
Long-term debt due within one year | 1,035 |
| | 1,068 |
|
Total current liabilities | 3,052 |
| | 4,379 |
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Long-term debt | 7,321 |
| | 5,323 |
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Deferred tax liabilities | 2,531 |
| | 2,486 |
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Defined benefit postretirement plan obligations | 438 |
| | 598 |
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Asset retirement obligations | 1,963 |
| | 1,917 |
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Deferred credits and other liabilities | 247 |
| | 288 |
|
Total liabilities | 15,552 |
| | 14,991 |
|
Commitments and contingencies |
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| |
|
|
Stockholders’ Equity | |
| | |
|
Preferred stock – no shares issued or outstanding (no par value, | | | |
26 million shares authorized) | — |
| | — |
|
Common stock: | |
| | |
|
Issued – 770 million shares (par value $1 per share, | | | |
1.1 billion shares authorized) | 770 |
| | 770 |
|
Securities exchangeable into common stock – no shares issued or | |
| | |
|
outstanding (no par value, 29 million shares authorized) | — |
| | — |
|
Held in treasury, at cost – 93 million and 95 million shares | (3,555 | ) | | (3,642 | ) |
Additional paid-in capital | 6,484 |
| | 6,531 |
|
Retained earnings | 16,691 |
| | 17,638 |
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Accumulated other comprehensive loss | (172 | ) | | (277 | ) |
Total stockholders' equity | 20,218 |
| | 21,020 |
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Total liabilities and stockholders' equity | $ | 35,770 |
| | $ | 36,011 |
|
The accompanying notes are an integral part of these consolidated financial statements.
MARATHON OIL CORPORATION
Consolidated Statements of Cash Flows (Unaudited) |
| | | | | | | |
| Six Months Ended |
| June 30, |
(In millions) | 2015 | | 2014 |
Increase (decrease) in cash and cash equivalents | | | |
Operating activities: | |
| | |
|
Net income (loss) | $ | (662 | ) | | $ | 1,689 |
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |
| | |
|
Discontinued operations | — |
| | (931 | ) |
Deferred income taxes | (185 | ) | | 173 |
|
Depreciation, depletion and amortization | 1,572 |
| | 1,323 |
|
Impairments | 44 |
| | 21 |
|
Pension and other postretirement benefits, net | 14 |
| | 26 |
|
Exploratory dry well costs and unproved property impairments | 148 |
| | 156 |
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Net (gain) loss on disposal of assets | (1 | ) | | 85 |
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Equity method investments, net | 37 |
| | (10 | ) |
Changes in: | | | |
|
Current receivables | 534 |
| | (266 | ) |
Inventories | 21 |
| | (58 | ) |
Current accounts payable and accrued liabilities | (770 | ) | | (31 | ) |
All other operating, net | (35 | ) | | (59 | ) |
Net cash provided by continuing operations | 717 |
| | 2,118 |
|
Net cash provided by discontinued operations | — |
| | 440 |
|
Net cash provided by operating activities | 717 |
| | 2,558 |
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Investing activities: | |
| | |
|
Additions to property, plant and equipment | (2,320 | ) | | (2,230 | ) |
Disposal of assets | 2 |
| | 2,232 |
|
Investments - return of capital | 31 |
| | 27 |
|
Purchases of short-term investments | (925 | ) | | — |
|
Investing activities of discontinued operations | — |
| | (233 | ) |
All other investing, net | (1 | ) | | — |
|
Net cash used in investing activities | (3,213 | ) | | (204 | ) |
Financing activities: | |
| | |
|
Commercial paper, net | — |
| | (135 | ) |
Borrowings | 1,996 |
| | — |
|
Debt issuance costs | (19 | ) | | — |
|
Debt repayments | (34 | ) | | (34 | ) |
Purchases of common stock | — |
| | (1,000 | ) |
Dividends paid | (285 | ) | | (260 | ) |
All other financing, net | 11 |
| | 86 |
|
Net cash provided by (used in) financing activities | 1,669 |
| | (1,343 | ) |
Effect of exchange rate on cash and cash equivalents: | | | |
Continuing operations | 1 |
| | — |
|
Discontinued operations | — |
| | (10 | ) |
Cash held for sale | — |
| | (96 | ) |
Net increase (decrease) in cash and cash equivalents | (826 | ) | | 905 |
|
Cash and cash equivalents at beginning of period | 2,398 |
| | 264 |
|
Cash and cash equivalents at end of period | $ | 1,572 |
| | $ | 1,169 |
|
The accompanying notes are an integral part of these consolidated financial statements.
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 ("SEC") and do not include all of the information and disclosures required by accounting principles generally accepted in the United States ("U.S. GAAP") for complete financial statements.
As a result of the sale of our Angola assets and our Norway business in 2014, both are reflected as discontinued operations. The disclosures in this report related to results of operations and cash flows are presented on the basis of continuing operations, unless otherwise noted.
These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Marathon Oil Corporation 2014 Annual Report on Form 10-K. The results of operations for the second quarter and first six months of 2015 are not necessarily indicative of the results to be expected for the full year.
2. Accounting Standards
Not Yet Adopted
In May 2015, the FASB issued an update that removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The amendment also removes certain disclosure requirements regarding all investments that are eligible to be measured using the net asset value per share practical expedient and only requires certain disclosures on those investments for which an entity elects to use the net asset value per share expedient. This standard is effective for us in the first quarter of 2016 and will be applied on a retrospective basis. Early adoption is permitted. This standard only modifies disclosure requirements; as such, there will be no impact on our consolidated results of operations, financial position or cash flows.
In April 2015, the FASB issued an update that requires debt issuance costs to be presented in the balance sheet as a direct reduction from the associated debt liability. This standard is effective for us in the first quarter of 2016 and will be applied on a retrospective basis. Early adoption is permitted, including in interim periods. We do not expect the adoption of this standard to have a significant impact on our consolidated results of operations, financial position or cash flows.
In February 2015, the FASB issued an amendment to the guidance for determining whether an entity is a variable interest entity ("VIE"). The standard does not add or remove any of the five characteristics that determine if an entity is a VIE. However, it does change the manner in which a reporting entity assesses one of the characteristics. In particular, when decision-making over the entity’s most significant activities has been outsourced, the standard changes how a reporting entity assesses if the equity holders at risk lack decision making rights. This standard is effective for us in the first quarter of 2016 and early adoption is permitted, including in interim periods. We do not expect the adoption of this standard to have a significant impact on our consolidated results of operations, financial position or cash flows.
In August 2014, the FASB issued an update that requires management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in United States ("U.S.") auditing standards. This standard is effective for us in the first quarter of 2017 and early adoption is permitted. We do not expect the adoption of this standard to have a significant impact on our consolidated results of operations, financial position or cash flows.
In May 2014, the FASB issued an update that supersedes the existing revenue recognition requirements. This standard includes a five-step revenue recognition model to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. Among other things, the standard also eliminates industry-specific revenue guidance, requires enhanced disclosures about revenue, provides guidance for transactions that were not previously addressed comprehensively, and improves guidance for multiple-element arrangements. This standard is effective for us in the first quarter of 2018 and should be applied retrospectively to each prior reporting period presented or with the cumulative effect of initially applying the update recognized at the date of initial application. Early adoption is permitted with an effective date no earlier than first quarter of 2017. We are evaluating the provisions of this accounting standards update and assessing the impact, if any, it may have on our consolidated results of operations, financial position or cash flows.
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
Recently Adopted
In April 2014, the FASB issued an amendment to accounting standards that changes the criteria for reporting discontinued operations while enhancing related disclosures. Under the amendment, only disposals representing a strategic shift in operations should be presented as discontinued operations. Expanded disclosures about the assets, liabilities, income and expenses of discontinued operations are required. In addition, disclosure of the pretax income attributable to a disposal of a significant part of an organization that does not qualify for discontinued operations reporting will be made in order to provide users with information about the ongoing trends in an organization’s results from continuing operations. The amendments were effective for us in the first quarter of 2015 and apply to dispositions or classifications as held for sale thereafter. Adoption of this standard did not impact our consolidated results of operations, financial position or cash flows.
3. Variable Interest Entity
The owners of the Athabasca Oil Sands Project ("AOSP"), in which we hold a 20% undivided interest, contracted with a wholly owned subsidiary of a publicly traded Canadian limited partnership (“Corridor Pipeline”) to provide materials transportation capabilities among the Muskeg River and Jackpine mines, the Scotford upgrader and markets in Edmonton, Alberta, Canada. Costs under this contract are accrued and recorded on a monthly basis, with current liabilities of $2 million recorded at June 30, 2015 and $3 million at December 31, 2014. This contract qualifies as a variable interest contractual arrangement, and the Corridor Pipeline qualifies as a VIE. We hold a variable interest but are not the primary beneficiary because our shipments are only 20% of the total; therefore, the Corridor Pipeline is not consolidated by us. Our maximum exposure to loss as a result of our involvement with this VIE is the amount we expect to pay over the contract term, which was $508 million as of June 30, 2015. The liability on our books related to this contract at any given time will reflect amounts due for the immediately previous month’s activity, which is substantially less than the maximum exposure over the contract term.
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4. | Income (Loss) per Common Share |
Basic income (loss) per share is based on the weighted average number of common shares outstanding. Diluted income (loss) per share assumes exercise of stock options, provided the effect is not antidilutive. The per share calculations below exclude 13 million and 5 million stock options for the second quarters of 2015 and 2014 and 13 million and 4 million stock options for the first six months of 2015 and 2014 that were antidilutive. |
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(In millions, except per share data) | 2015 | | 2014 | | 2015 | | 2014 |
Income (loss) from continuing operations | $ | (386 | ) | | $ | 360 |
| | $ | (662 | ) | | $ | 758 |
|
Discontinued operations | — |
| | 180 |
| | — |
| | 931 |
|
Net income (loss) | $ | (386 | ) | | $ | 540 |
| | $ | (662 | ) | | $ | 1,689 |
|
| | | | | | | |
Weighted average common shares outstanding | 677 |
| | 676 |
| | 676 |
| | 684 |
|
Effect of dilutive securities | — |
| | 3 |
| | — |
| | 4 |
|
Weighted average common shares, diluted | 677 |
| | 679 |
| | 676 |
| | 688 |
|
Per basic share: | | | | | | | |
Income (loss) from continuing operations | $ | (0.57 | ) | | $ | 0.53 |
| | $ | (0.98 | ) | | $ | 1.11 |
|
Discontinued operations | $ | — |
| | $ | 0.27 |
| | $ | — |
| | $ | 1.36 |
|
Net income (loss) | $ | (0.57 | ) | | $ | 0.80 |
| | $ | (0.98 | ) | | $ | 2.47 |
|
Per diluted share: | | | | | | | |
Income (loss) from continuing operations | $ | (0.57 | ) | | $ | 0.53 |
| | $ | (0.98 | ) | | $ | 1.10 |
|
Discontinued operations | $ | — |
| | $ | 0.27 |
| | $ | — |
| | $ | 1.36 |
|
Net income (loss) | $ | (0.57 | ) | | $ | 0.80 |
| | $ | (0.98 | ) | | $ | 2.46 |
|
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
2015 - North America E&P Segment
In July 2015, we entered into an agreement to sell our East Texas/North Louisiana and Wilburton, Oklahoma natural gas assets for expected proceeds of $102 million, excluding closing adjustments. We expect the transaction to close during the third quarter of 2015.
2014 - North America E&P Segment
In June 2014, we closed the sale of non-core acreage located in the far northwest portion of Williston Basin for proceeds of $90 million. A pretax loss of $91 million was recorded in the second quarter of 2014.
2014 - International E&P Segment
In the second quarter of 2014, we entered into an agreement to sell our Norway business, including the operated Alvheim floating production, storage and offloading vessel, 10 operated licenses and a number of non-operated licenses on the Norwegian Continental Shelf in the North Sea. The transaction closed during the fourth quarter of 2014.
Our Norway business was reflected as discontinued operations in the consolidated statements of income and the consolidated statements of cash flows for 2014. Select amounts reported in discontinued operations follow:
|
| | | | | | | | |
| Three Months Ended June 30, | Six Months Ended June 30, |
(In millions) | | 2014 | | 2014 |
Revenues applicable to discontinued operations | | $ | 693 |
| | $ | 1,373 |
|
Pretax income from discontinued operations | | $ | 598 |
| | $ | 1,130 |
|
After-tax income from discontinued operations (a) | | $ | 180 |
| | $ | 322 |
|
(a) Includes a tax benefit of $26 million related to a decrease in the valuation allowance on U.S. foreign tax credits from the Norway operations.
In the first quarter of 2014, we closed the sales of our non-operated 10% working interests in the Production Sharing Contracts and Joint Operating Agreements for Angola Blocks 31 and 32 for aggregate proceeds of approximately $2 billion and recorded a $576 million after-tax gain on sale. Included in the after-tax gain is a deferred tax benefit reflecting our ability to utilize foreign tax credits that otherwise would have needed a valuation allowance.
Our Angola operations are reflected as discontinued operations in the consolidated statements of income and the consolidated statements of cash flows for the prior period. Select amounts reported in discontinued operations follow:
|
| | | |
| Six Months Ended June 30, |
(In millions) | 2014 |
Revenues applicable to discontinued operations | $ | 58 |
|
Pretax income from discontinued operations, before gain | $ | 51 |
|
Pretax gain on disposition of discontinued operations | $ | 470 |
|
After-tax income from discontinued operations | $ | 609 |
|
6. Segment Information
We are a global energy company with operations in North America, Europe and Africa. Each of our three reportable operating segments is organized and managed based upon both geographic location and the nature of the products and services it offers.
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• | North America E&P ("N.A. E&P") – explores for, produces and markets crude oil and condensate, natural gas liquids ("NGLs") and natural gas in North America; |
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• | International E&P ("Int'l E&P") – explores for, produces and markets crude oil and condensate, NGLs and natural gas outside of North America and produces and markets products manufactured from natural gas, such as liquefied natural gas ("LNG") and methanol, in Equatorial Guinea ("E.G."); and |
| |
• | Oil Sands Mining (“OSM”) – mines, extracts and transports bitumen from oil sands deposits in Alberta, Canada, and upgrades the bitumen to produce and market synthetic crude oil and vacuum gas oil. |
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
Information regarding assets by segment is not presented because it is not reviewed by the chief operating decision maker (“CODM”). Segment income represents income from continuing operations excluding certain items not allocated to segments, net of income taxes attributable to the operating segments. Our corporate and operations support general and administrative costs are not allocated to the operating segments. These costs primarily consist of employment costs (including pension effects), professional services, facilities and other costs associated with corporate and operations support activities. Gains or losses on dispositions, certain impairments, change in tax expense associated with a tax rate change, unrealized gains or losses on crude oil derivative instruments, or other items that affect comparability also are not allocated to operating segments.
As discussed in Note 5, as a result of the sale of our Angola assets and our Norway business in 2014, both are reflected as discontinued operations and excluded from the International E&P segment for 2014.
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| | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2015 |
| | | Not Allocated | | |
(In millions) | N.A. E&P | | Int'l E&P | | OSM | | to Segments | | Total |
Sales and other operating revenues | $ | 993 |
| | $ | 211 |
| | $ | 147 |
| | $ | (44 | ) | (c) | $ | 1,307 |
|
Marketing revenues | 110 |
| | 30 |
| | 43 |
| | — |
| | 183 |
|
Total revenues | 1,103 |
| | 241 |
| | 190 |
| | (44 | ) | | 1,490 |
|
Income from equity method investments | — |
| | 26 |
| | — |
| | — |
| | 26 |
|
Net gain on disposal of assets and other income | 11 |
| | 4 |
| | — |
| | — |
| | 15 |
|
Less: | | | | | | | | | |
Production expenses | 179 |
| | 64 |
| | 207 |
| | — |
| | 450 |
|
Marketing costs | 112 |
| | 29 |
| | 41 |
| | — |
| | 182 |
|
Exploration expenses | 91 |
| | 20 |
| | — |
| | — |
| | 111 |
|
Depreciation, depletion and amortization | 634 |
| | 71 |
| | 35 |
| | 11 |
| | 751 |
|
Impairments | — |
| | — |
| | — |
| | 44 |
| (d) | 44 |
|
Other expenses (a) | 99 |
| | 19 |
| | 9 |
| | 122 |
| (e) | 249 |
|
Taxes other than income | 67 |
| | — |
| | 5 |
| | 6 |
| | 78 |
|
Net interest and other | — |
| | — |
| | — |
| | 58 |
| | 58 |
|
Income tax provision (benefit) | (23 | ) | | 27 |
| | (30 | ) | | 20 |
| (f) | (6 | ) |
Segment income (loss) /Loss from continuing operations | $ | (45 | ) | | $ | 41 |
| | $ | (77 | ) | | $ | (305 | ) | | $ | (386 | ) |
Capital expenditures (b) | $ | 551 |
| | $ | 99 |
| | $ | 16 |
| | $ | 12 |
| | $ | 678 |
|
| |
(a) | Includes other operating expenses and general and administrative expenses. |
| |
(c) | Unrealized loss on crude oil derivative instruments. |
| |
(d) | Proved property impairment (See Note 12). |
| |
(e) | Includes pension settlement loss of $64 million (see Note 7). |
| |
(f) | Includes $135 million of deferred tax expense related to Alberta provincial corporate tax rate increase (see Note 8). |
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2014 |
| | | Not Allocated | | |
(In millions) | N.A. E&P | | Int'l E&P | | OSM | | to Segments | | Total |
Sales and other operating revenues | $ | 1,540 |
| | $ | 347 |
| | $ | 383 |
| | $ | — |
| | $ | 2,270 |
|
Marketing revenues | 540 |
| | 61 |
| | 17 |
| | — |
| | 618 |
|
Total revenues | 2,080 |
| | 408 |
| | 400 |
| | — |
| | 2,888 |
|
Income from equity method investments | — |
| | 120 |
| | — |
| | — |
| | 120 |
|
Net gain (loss) on disposal of assets and other income | 15 |
| | 15 |
| | 1 |
| | (98 | ) | (c) | (67 | ) |
Less: | | | | | | | | | |
Production expenses | 217 |
| | 99 |
| | 246 |
| | — |
| | 562 |
|
Marketing costs | 537 |
| | 60 |
| | 17 |
| | — |
| | 614 |
|
Exploration expenses | 82 |
| | 63 |
| | — |
| | — |
| | 145 |
|
Depreciation, depletion and amortization | 550 |
| | 75 |
| | 45 |
| | 10 |
| | 680 |
|
Impairments | 4 |
| | — |
| | — |
| | — |
| | 4 |
|
Other expenses (a) | 126 |
| | 34 |
| | 13 |
| | 67 |
| (d) | 240 |
|
Taxes other than income | 102 |
| | — |
| | 6 |
| | 1 |
| | 109 |
|
Net interest and other | — |
| | — |
| | — |
| | 76 |
| | 76 |
|
Income tax provision (benefit) | 175 |
| | 52 |
| | 19 |
| | (95 | ) | | 151 |
|
Segment income/Income from continuing operations | $ | 302 |
| | $ | 160 |
| | $ | 55 |
| | $ | (157 | ) | | $ | 360 |
|
Capital expenditures (b) | $ | 1,102 |
| | $ | 115 |
| | $ | 55 |
| | $ | 10 |
| | $ | 1,282 |
|
| |
(a) | Includes other operating expenses and general and administrative expenses. |
| |
(c) | Primarily related to the sale of non-core acreage (see Note 5). |
| |
(d) | Includes pension settlement loss of $8 million (see Note 7). |
|
| | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2015 |
| | | Not Allocated | | |
(In millions) | N.A. E&P | | Int'l E&P | | OSM | | to Segments | | Total |
Sales and other operating revenues | $ | 1,843 |
| | $ | 393 |
| | $ | 372 |
| | $ | (21 | ) | (c) | $ | 2,587 |
|
Marketing revenues | 288 |
| | 56 |
| | 43 |
| | — |
| | 387 |
|
Total revenues | 2,131 |
| | 449 |
| | 415 |
| | (21 | ) | | 2,974 |
|
Income from equity method investments | — |
| | 62 |
| | — |
| | — |
| | 62 |
|
Net gain on disposal of assets and other income | 11 |
| | 14 |
| | 1 |
| | 1 |
| | 27 |
|
Less: | | | | | | | | | |
Production expenses | 381 |
| | 131 |
| | 382 |
| | — |
| | 894 |
|
Marketing costs | 292 |
| | 54 |
| | 41 |
| | — |
| | 387 |
|
Exploration expenses | 126 |
| | 75 |
| | — |
| | — |
| | 201 |
|
Depreciation, depletion and amortization | 1,317 |
| | 135 |
| | 97 |
| | 23 |
| | 1,572 |
|
Impairments | — |
| | — |
| | — |
| | 44 |
| (d) | 44 |
|
Other expenses (a) | 216 |
| | 42 |
| | 18 |
| | 251 |
| (e) | 527 |
|
Taxes other than income | 128 |
| | — |
| | 10 |
| | 7 |
| | 145 |
|
Net interest and other | — |
| | — |
| | — |
| | 105 |
| | 105 |
|
Income tax provision (benefit) | (112 | ) | | 24 |
| | (36 | ) | | (26 | ) | (f) | (150 | ) |
Segment income (loss) /Loss from continuing operations | $ | (206 | ) | | $ | 64 |
| | $ | (96 | ) | | $ | (424 | ) | | $ | (662 | ) |
Capital expenditures (b) | $ | 1,484 |
| | $ | 245 |
| | $ | 37 |
| | $ | 14 |
| | $ | 1,780 |
|
| |
(a) | Includes other operating expenses and general and administrative expenses. |
| |
(c) | Unrealized loss on crude oil derivative instruments. |
| |
(d) | Proved property impairment (See Note 12). |
| |
(e) | Includes $43 million of severance related expenses associated with a workforce reduction and a pension settlement loss of $81 million (see Note 7). |
| |
(f) | Includes $135 million of deferred tax expense related to Alberta provincial corporate tax rate increase (see Note 8). |
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
|
| | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2014 |
| | | Not Allocated | | |
(In millions) | N.A. E&P | | Int'l E&P | | OSM | | to Segments | | Total |
Sales and other operating revenues | $ | 2,932 |
| | $ | 727 |
| | $ | 760 |
| | $ | — |
| | $ | 4,419 |
|
Marketing revenues | 980 |
| | 131 |
| | 48 |
| | — |
| | 1,159 |
|
Total revenues | 3,912 |
| | 858 |
| | 808 |
| | — |
| | 5,578 |
|
Income from equity method investments | — |
| | 257 |
| | — |
| | — |
| | 257 |
|
Net gain (loss) on disposal of assets and other income | 18 |
| | 32 |
| | 3 |
| | (98 | ) | (c) | (45 | ) |
Less: | | | | | | | | | |
Production expenses | 428 |
| | 199 |
| | 477 |
| | — |
| | 1,104 |
|
Marketing costs | 977 |
| | 131 |
| | 48 |
| | — |
| | 1,156 |
|
Exploration expenses | 139 |
| | 79 |
| | — |
| | — |
| | 218 |
|
Depreciation, depletion and amortization | 1,065 |
| | 146 |
| | 90 |
| | 22 |
| | 1,323 |
|
Impairments | 21 |
| | — |
| | — |
| | — |
| | 21 |
|
Other expenses (a) | 236 |
| | 72 |
| | 26 |
| | 196 |
| (d) | 530 |
|
Taxes other than income | 192 |
| | — |
| | 11 |
| | 1 |
| | 204 |
|
Net interest and other | — |
| | — |
| | — |
| | 125 |
| | 125 |
|
Income tax provision (benefit) | 328 |
| | 139 |
| | 40 |
| | (156 | ) | | 351 |
|
Segment income /Income from continuing operations | $ | 544 |
| | $ | 381 |
| | $ | 119 |
| | $ | (286 | ) | | $ | 758 |
|
Capital expenditures (b) | $ | 1,969 |
| | $ | 220 |
| | $ | 123 |
| | $ | 13 |
| | $ | 2,325 |
|
| |
(a) | Includes other operating expenses and general and administrative expenses. |
| |
(c) | Primarily related to the sale of non-core acreage (see Note 5). |
| |
(d) | Includes pension settlement loss of $71 million (see Note 7). |
7. Defined Benefit Postretirement Plans
The following summarizes the components of net periodic benefit cost (credit):
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, |
| Pension Benefits | | Other Benefits |
(In millions) | 2015 | | 2014 | | 2015 | | 2014 |
Service cost | $ | 12 |
| | $ | 11 |
| | $ | 1 |
| | $ | 1 |
|
Interest cost | 13 |
| | 15 |
| | 2 |
| | 3 |
|
Expected return on plan assets | (17 | ) | | (14 | ) | | — |
| | — |
|
Amortization: | |
| | |
| | |
| | |
|
– prior service cost (credit) | (2 | ) | | 2 |
| | (1 | ) | | (1 | ) |
– actuarial loss | 7 |
| | 10 |
| | — |
| | — |
|
Net settlement loss (a) | 64 |
| | 8 |
| | — |
| | — |
|
Net curtailment loss (b) | — |
| | — |
| | 2 |
| | — |
|
Net periodic benefit cost | $ | 77 |
| | $ | 32 |
| | $ | 4 |
| | $ | 3 |
|
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
|
| | | | | | | | | | | | | | | |
| Six Months Ended June 30, |
| Pension Benefits | | Other Benefits |
(In millions) | 2015 | | 2014 | | 2015 | | 2014 |
Service cost | 24 |
| | 23 |
| | 2 |
| | 2 |
|
Interest cost | 27 |
| | 31 |
| | 5 |
| | 6 |
|
Expected return on plan assets | (36 | ) | | (32 | ) | | — |
| | — |
|
Amortization: | |
| | |
| | |
| | |
|
– prior service cost (credit) | (1 | ) | | 3 |
| | (2 | ) | | (2 | ) |
– actuarial loss | 14 |
| | 16 |
| | — |
| | — |
|
Net settlement loss(a) | 81 |
| | 71 |
| | — |
| | — |
|
Net curtailment loss (gain) (b) | 1 |
| | — |
| | (4 | ) | | — |
|
Net periodic benefit cost | $ | 110 |
|
| $ | 112 |
|
| $ | 1 |
|
| $ | 6 |
|
| |
(a) | Settlements are recognized as they occur, once it is probable that lump sum payments from a plan for a given year will exceed the plan's total service and interest cost for that year. |
| |
(b) | Related to the workforce reduction, which reduced the future expected years of service for employees participating in the plans. |
During the first six months of 2015, we recorded the effects of a workforce reduction and a pension plan amendment. The pension plan amendment freezes the final average pay used to calculate the formula benefit and is effective July 6, 2015. Additionally, during the first six months of 2015 and 2014, we recorded the effects of partial settlements of our U.S. pension plans. As required, we remeasured the plans' assets and liabilities as of the applicable balance sheet dates. The cumulative effects of these events are included in the remeasurement and reflected in both the pension liability and net periodic benefit cost (credit).
During the first six months of 2015, we made contributions of $46 million to our funded pension plans. We expect to make additional contributions up to an estimated $42 million to our funded pension plans over the remainder of 2015. During the first six months of 2015, we made payments of $42 million and $8 million related to unfunded pension plans and other postretirement benefit plans, respectively.
8. Income Taxes
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 (benefits) and the sum of the amounts allocated to segments is reported in the “Not Allocated to Segments” column of the tables in Note 6.
Our effective income tax rates on continuing operations for the first six months of 2015 and 2014 were 18% and 32%. The tax provision (benefit) applicable to Libyan ordinary income (loss) was recorded as a discrete item in the first six months of 2015 and 2014. Excluding Libya, the effective tax rates on continuing operations, would be 15% and 34% for the first six months of 2015 and 2014. In Libya, uncertainty remains around the timing of future production and sales levels. Reliable estimates of 2015 and 2014 Libyan annual ordinary income from our operations could not be made and the range of possible scenarios in the worldwide annual effective tax rate calculation demonstrates significant variability. Thus, for the first six months of 2015 and 2014, estimated annual effective tax rates were calculated excluding Libya and applied to consolidated ordinary income (loss).
On June 29, 2015, the Alberta government enacted legislation to increase the provincial corporate tax rate from 10% to 12%. As a result of this legislation, we recorded additional non-cash deferred tax expense of $135 million in the second quarter of 2015.
In the second quarter of 2015, we reviewed our operations and concluded that we do not have the same level of capital needs outside the U.S. as previously expected. Therefore, we no longer intend for previously unremitted foreign earnings of approximately $1 billion associated with our Canadian operations to be permanently reinvested outside the U.S. As such, none of Marathon Oil’s foreign earnings remain permanently reinvested abroad. We anticipate foreign tax credits associated with these Canadian earnings would be sufficient to offset any incremental U.S. tax liabilities, and therefore, no additional net deferred taxes have been recorded in the second quarter of 2015.
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
9. Short-term Investments
As of June 30, 2015, our short-term investments are comprised of bank time deposits with original maturities of greater than three months and remaining maturities of less than twelve months. The maturity dates range from September 2015 to October 2015. These short-term investments are classified as held-to-maturity investments, which are recorded at amortized cost. The carrying values of our short-term investments approximate fair value.
10. Inventories
Inventories of liquid hydrocarbons, natural gas and bitumen are carried at the lower of cost or market value. Materials and supplies are valued at weighted average cost and reviewed for obsolescence or impairment when market conditions indicate.
|
| | | | | | | |
| June 30, | | December 31, |
(In millions) | 2015 | | 2014 |
Liquid hydrocarbons, natural gas and bitumen | $ | 50 |
| | $ | 58 |
|
Supplies and other items | 286 |
| | 299 |
|
Inventories, at cost | $ | 336 |
| | $ | 357 |
|
11. Property, Plant and Equipment, net of Accumulated Depreciation, Depletion and Amortization
|
| | | | | | | |
| June 30, | | December 31, |
(In millions) | 2015 | | 2014 |
North America E&P | $ | 16,757 |
| | $ | 16,717 |
|
International E&P | 2,848 |
| | 2,741 |
|
Oil Sands Mining | 9,401 |
| | 9,455 |
|
Corporate | 115 |
| | 127 |
|
Net property, plant and equipment | $ | 29,121 |
|
| $ | 29,040 |
|
Our Libya operations continue to be impacted by civil unrest and, in December 2014, Libya’s National Oil Corporation once again declared force majeure at the Es Sider oil terminal, as disruptions from civil unrest continue. Considerable uncertainty remains around the timing of future production and sales levels.
As of June 30, 2015, our net property, plant and equipment investment in Libya is $775 million, and total proved reserves (unaudited) in Libya as of December 31, 2014 are 243 million barrels of oil equivalent ("mmboe"). We and our partners in the Waha concessions continue to assess the situation and the condition of our assets in Libya. Our periodic assessment of the carrying value of our net property, plant and equipment in Libya specifically considers the net investment in the assets, the duration of our concessions and the reserves anticipated to be recoverable in future periods. The undiscounted cash flows related to our Libya assets continues to exceed the carrying value of $775 million by a material amount.
Exploratory well costs capitalized greater than one year after completion of drilling were $88 million and $126 million as of June 30, 2015 and December 31, 2014. This $38 million net decrease was associated with our Canadian in-situ assets at Birchwood. After further evaluation of the estimated recoverable resources and our development plans, we withdrew our regulatory application for the proposed steam assisted gravity drainage ("SAGD") demonstration project.
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
12. Fair Value Measurements
Fair Values - Recurring
The following tables present assets and liabilities accounted for at fair value on a recurring basis as of June 30, 2015 and December 31, 2014 by fair value hierarchy level.
|
| | | | | | | | | | | | | | | |
| June 30, 2015 |
(In millions) | Level 1 | | Level 2 | | Level 3 | | Total |
Derivative instruments, assets | | | | | | | |
Commodity (a) | $ | — |
| | $ | 5 |
| | $ | — |
| | $ | 5 |
|
Interest rate | — |
| | 11 |
| | — |
| | 11 |
|
Derivative instruments, assets | $ | — |
| | $ | 16 |
| | $ | — |
| | $ | 16 |
|
Derivative instruments, liabilities | | | | | | | |
Commodity (a) | $ | — |
| | $ | 26 |
| | $ | — |
| | $ | 26 |
|
Derivative instruments, liabilities | $ | — |
| | $ | 26 |
| | $ | — |
| | $ | 26 |
|
| |
(a) | Derivative instruments are recorded on a net basis in the company's balance sheet (see Note 13). |
|
| | | | | | | | | | | | | | | |
| December 31, 2014 |
(In millions) | Level 1 | | Level 2 | | Level 3 | | Total |
Derivative instruments, assets | | | | | | | |
Interest rate | $ | — |
| | $ | 8 |
| | $ | — |
| | $ | 8 |
|
Derivative instruments, assets | $ | — |
| | $ | 8 |
| | $ | — |
| | $ | 8 |
|
Commodity derivatives include three-way collars, swaptions, extendable three-way collars and call options. These instruments are measured at fair value using either the Black-Scholes Model or Black Model. Inputs to both models include prices, interest rates, and implied volatility. The inputs to these models are categorized as Level 2 because predominantly all assumptions and inputs are observable in active markets throughout the term of the instruments.
Interest rate swaps are measured at fair value with a market approach using actionable broker quotes, which are Level 2 inputs.
See Note 13 for additional discussion of the types of derivative instruments we use.
Fair Values - Nonrecurring
The following table shows the values of assets, by major category, measured at fair value on a nonrecurring basis in periods subsequent to their initial recognition.
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, |
| 2015 | | 2014 |
(In millions) | Fair Value | | Impairment | | Fair Value | | Impairment |
Long-lived assets held for use | $ | 17 |
| | $ | 44 |
| | $ | — |
| | $ | 4 |
|
|
| | | | | | | | | | | | | | | |
| Six Months Ended June 30, |
| 2015 | | 2014 |
(In millions) | Fair Value | | Impairment | | Fair Value | | Impairment |
Long-lived assets held for use | $ | 17 |
| | $ | 44 |
| | $ | — |
| | $ | 21 |
|
Commodity prices began declining in the second half of 2014 and remain substantially lower through 2015 as compared to the first six months of 2014. As this period of sustained reduced commodity prices continues, it could result in non-cash impairment charges related to long-lived assets in future periods.
All long-lived assets held for use that were impaired in the first six months of 2015 and 2014 were held by our North America E&P segment.
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
In July 2015, we entered into an agreement to sell our East Texas/North Louisiana and Wilburton, Oklahoma natural gas assets. We expect the transaction to close during the third quarter of 2015. During the second quarter of 2015, we recorded a non-cash impairment charge of $44 million related to these assets as a result of the anticipated sale. The fair values were measured using a probability weighted income approach based on both the anticipated sales price and a held-for-use model. The held-for-use model contained internal estimates of future production levels, prices and discount rate. All such inputs were classified as Level 3.
The Ozona development in the Gulf of Mexico ceased producing in 2013, at which time those long-lived assets were fully impaired. In the first and second quarters of 2014, we recorded additional impairments of $17 million and $4 million as a result of estimated abandonment cost revisions. The fair value was measured using an income approach based upon forecasted future abandonment costs, which are Level 3 inputs.
Fair Values – Financial Instruments
Our current assets and liabilities include financial instruments, the most significant of which are receivables, short-term investments, long-term debt due within one year, and payables. We believe the carrying values of our receivables, short-term investments and payables approximate fair value. Our fair value assessment incorporates a variety of considerations, including (1) the short-term duration of the instruments, (2) our investment-grade credit rating, and (3) our historical incurrence of and expected future insignificant bad debt expense, which includes an evaluation of counterparty credit risk.
The following table summarizes financial instruments, excluding receivables, short-term investments, payables and derivative financial instruments, and their reported fair value by individual balance sheet line item at June 30, 2015 and December 31, 2014.
|
| | | | | | | | | | | | | | | |
| June 30, 2015 | | December 31, 2014 |
| Fair | | Carrying | | Fair | | Carrying |
(In millions) | Value | | Amount | | Value | | Amount |
Financial assets | | | | | | | |
Other noncurrent assets | $ | 134 |
| | $ | 133 |
| | $ | 132 |
| | $ | 129 |
|
Total financial assets | 134 |
| | 133 |
| | 132 |
| | 129 |
|
Financial liabilities | |
| | |
| | |
| | |
|
Other current liabilities | 13 |
| | 13 |
| | 13 |
| | 13 |
|
Long-term debt, including current portion (a) | 8,720 |
| | 8,324 |
| | 6,887 |
| | 6,360 |
|
Deferred credits and other liabilities | 73 |
| | 67 |
| | 69 |
| | 68 |
|
Total financial liabilities | $ | 8,806 |
| | $ | 8,404 |
| | $ | 6,969 |
| | $ | 6,441 |
|
(a) Excludes capital leases.
Fair values of our financial assets included in other noncurrent assets, and of our financial liabilities included in other current liabilities and deferred credits and other liabilities, are measured using an income approach and most inputs are internally generated, which results in a Level 3 classification. Estimated future cash flows are discounted using a rate deemed appropriate to obtain the fair value.
Most of our long-term debt instruments are publicly-traded. A market approach, based upon quotes from major financial institutions, which are Level 2 inputs, is used to measure the fair value of such debt. The fair value of our debt that is not publicly-traded is measured using an income approach. The future debt service payments are discounted using the rate at which we currently expect to borrow. All inputs to this calculation are Level 3.
13. Derivatives
For further information regarding the fair value measurement of derivative instruments, see Note 12. All of our interest rate and commodity derivatives are subject to enforceable master netting arrangements or similar agreements under which we may report net amounts. The following tables present the gross fair values of derivative instruments and the reported net amounts where they appear on the consolidated balance sheets as of June 30, 2015 and December 31, 2014.
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
|
| | | | | | | | | | | | | |
| June 30, 2015 | | |
(In millions) | Asset | | Liability | | Net Asset | | Balance Sheet Location |
Fair Value Hedges | | | | | | | |
Interest rate | $ | 11 |
| | $ | — |
| | $ | 11 |
| | Other noncurrent assets |
Total | $ | 11 |
|
| $ | — |
|
| $ | 11 |
| | |
|
| | | | | | | | | | | | | |
| | | | | | | |
| June 30, 2015 | | |
(In millions) | Asset | | Liability | | Net Liability | | Balance Sheet Location |
Not Designated as Hedges | | | | | | | |
Commodity | $ | 5 |
| | $ | 17 |
| | $ | 12 |
| | Other current liabilities |
Commodity | — |
| | 9 |
| | 9 |
| | Other noncurrent liabilities |
Total | $ | 5 |
| | $ | 26 |
| | $ | 21 |
| | |
|
| | | | | | | | | | | | | |
| December 31, 2014 | | |
(In millions) | Asset | | Liability | | Net Asset | | Balance Sheet Location |
Fair Value Hedges | | | | | | | |
Interest rate | $ | 8 |
| | $ | — |
| | $ | 8 |
| | Other noncurrent assets |
Total | $ | 8 |
| | $ | — |
| | $ | 8 |
| | |
Derivatives Designated as Fair Value Hedges
The following table presents, by maturity date, information about our interest rate swap agreements as of June 30, 2015 and December 31, 2014, including the weighted average, London Interbank Offer Rate (“LIBOR”)-based, floating rate.
|
| | | | | | | | | | | |
| June 30, 2015 | | December 31, 2014 |
| Aggregate Notional Amount | Weighted Average, LIBOR-Based, | | Aggregate Notional Amount | Weighted Average, LIBOR-Based, |
Maturity Dates | (in millions) | Floating Rate | | (in millions) | Floating Rate |
October 1, 2017 | $ | 600 |
| 4.67 | % | | $ | 600 |
| 4.64 | % |
March 15, 2018 | $ | 300 |
| 4.52 | % | | $ | 300 |
| 4.49 | % |
The pretax effects of derivative instruments designated as hedges of fair value in our consolidated statements of income are summarized in the table below. The foreign currency forwards were used to hedge the current Norwegian tax liability of our Norway business that was sold in the fourth quarter of 2014. Those instruments outstanding were transferred to the purchaser of the Norway business upon closing of the sale. There is no ineffectiveness related to the fair value hedges.
|
| | | | | | | | | | | | | | | | |
| | Gain (Loss) |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
(In millions) | Income Statement Location | 2015 | | 2014 | | 2015 | | 2014 |
Derivative | | | | | | | | |
Interest rate | Net interest and other | $ | (2 | ) | | $ | 4 |
| | $ | 3 |
| | $ | 3 |
|
Foreign currency | Discontinued operations | $ | — |
| | $ | (14 | ) | | $ | — |
| | $ | (11 | ) |
Hedged Item | | |
| | |
| | |
| | |
|
Long-term debt | Net interest and other | $ | 2 |
| | $ | (4 | ) | | $ | (3 | ) | | $ | (3 | ) |
Accrued taxes | Discontinued operations | $ | — |
| | $ | 14 |
| | $ | — |
| | $ | 11 |
|
Derivatives not Designated as Hedges
During the first six months of 2015, we entered into multiple crude oil derivatives indexed to New York Mercantile Exchange ("NYMEX") West Texas Intermediate ("WTI"), related to a portion of our forecasted North America E&P sales through December 2016. These commodity derivatives primarily consist of call options and three way-collars which consist of a sold call (ceiling), a purchased put (floor) and a sold put. The ceiling price is the maximum we will receive for the contract crude oil volumes, the floor is the minimum price we will receive, unless the market price falls below the sold put strike price.
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
In this case, we receive the NYMEX WTI price plus the difference between the floor and the sold put price. These commodity derivatives were not designated as hedges and are shown in the table below:
|
| | | |
Financial Instrument | Weighted Average Price | Barrels per day | Remaining Term |
Three-Way Collars | | | |
Ceiling | $70.34 | 35,000 | July- December 2015 (a) |
Floor | $55.57 | | |
Sold put | $41.29 | | |
| | | |
Ceiling | $71.84 | 12,000 | January- December 2016 |
Floor | $60.48 | | |
Sold put | $50.00 | | |
| | | |
Ceiling | $73.13 | 2,000 | January- June 2016 (b) |
Floor | $65.00 | | |
Sold put | $50.00 | | |
Call Options | $72.39 | 10,000 | January- December 2016 (c) |
| |
(a) | Counterparties have the option to execute fixed-price swaps (swaptions) at a weighted average price of $71.67 per barrel indexed to NYMEX WTI, which is exercisable on October 30, 2015. If counterparties exercise, the term of the fixed price swaps would be for calendar year 2016 and, if all such are exercised, 25,000 barrels per day. |
| |
(b) | Counterparty has the option, exercisable on June 30, 2016, to extend these collars through the remainder of 2016 at the same volume and weighted average price as the underlying three-way collars. |
| |
(c) | Call options settle monthly. |
The impact of these crude oil derivative instruments appears in sales and other operating revenues in our consolidated statements of income and was a net loss of $43 million and $17 million in the second quarter and first six months of 2015. There were no crude oil derivative instruments in the first six months of 2014.
On June 1, 2015, we entered into Treasury rate locks, which expired on the same day, to hedge against timing differences as it related to our Notes offering (see Note 15). Following the execution of the Treasury locks, corresponding interest rates increased during the day of June 1. As a result, the settlement of the Treasury rate locks resulted in a gain of $6 million, which was recognized in net interest and other in our consolidated statements of income.
14. Incentive Based Compensation
Stock option and restricted stock awards
The following table presents a summary of stock option and restricted stock award activity for the first six months of 2015:
|
| | | | | | | | | | | | | |
| Stock Options | | Restricted Stock |
| Number of Shares | | Weighted Average Exercise Price | | Awards | | Weighted Average Grant Date Fair Value |
Outstanding at December 31, 2014 | 13,427,836 |
| |
| $29.68 |
| | 3,448,353 |
| |
| $34.04 |
|
Granted | 724,082 |
| (a) |
| $29.06 |
| | 2,668,357 |
| |
| $30.53 |
|
Options Exercised/Stock Vested | (480,458 | ) | |
| $16.47 |
| | (921,404 | ) | |
| $34.29 |
|
Canceled | (455,855 | ) | |
| $34.48 |
| | (491,739 | ) | |
| $33.70 |
|
Outstanding at June 30, 2015 | 13,215,605 |
| |
| $29.97 |
| | 4,703,567 |
| |
| $32.04 |
|
(a) The weighted average grant date fair value of stock option awards granted was $6.84 per share.
Stock-based performance unit awards
During the first six months of 2015, we granted 382,335 stock-based performance units to certain officers. The grant date fair value per unit was $31.77.
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
15. Debt
Revolving Credit Facility As of June 30, 2015, we had no borrowings against our revolving credit facility (as amended, the "Credit Facility"), as described below.
In May 2015, we amended our $2.5 billion unsecured Credit Facility to increase the facility size by $500 million to a total of $3 billion and extend the maturity date by an additional year such that the Credit Facility now matures in May 2020. The amendment additionally provides us the ability to request two one-year extensions to the maturity date and an option to increase the commitment amount by up to an additional $500 million, subject to the consent of any increasing lenders. The sub-facilities for swing-line loans and letters of credit remain unchanged allowing up to an aggregate amount of $100 million and $500 million, respectively. Fees on the unused commitment of each lender, as well as the borrowing options under the Credit Facility, remain unchanged.
The Credit Facility includes a covenant requiring that our ratio of total debt to total capitalization not exceed 65% as of the last day of each fiscal quarter. If an event of default occurs, the lenders holding more than half of the commitments may terminate the commitments under the Credit Facility and require the immediate repayment of all outstanding borrowings and the cash collateralization of all outstanding letters of credit under the Credit Facility. As of June 30, 2015, we were in compliance with this covenant with a debt-to-capitalization ratio of 29%.
Debt Issuance On June 10, 2015, we issued $2 billion aggregate principal amount of unsecured senior notes which consist of the following series:
•$600 million of 2.70% senior notes due June 1, 2020
•$900 million of 3.85% senior notes due June 1, 2025
•$500 million of 5.20% senior notes due June 1, 2045
Interest on each series of senior notes is payable semi-annually beginning December 1, 2015. We will use the aggregate net proceeds to repay our $1 billion 0.90% senior notes due 2015, which mature on November 1, 2015, and for general corporate purposes. We may redeem some or all of the senior notes at any time at the applicable redemption price, plus accrued interest, if any. As of June 30, 2015, we were in compliance with the covenants under the indenture governing the senior notes.
16. Reclassifications Out of Accumulated Other Comprehensive Income (Loss)
The following table presents a summary of amounts reclassified from accumulated other comprehensive income (loss) to income (loss) from continuing operations in their entirety:
|
| | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, | | |
(In millions) | 2015 | | 2014 | | 2015 | | 2014 | | Income Statement Line |
| | | |
Postretirement and postemployment plans | | | | | | | | |
Amortization of actuarial loss | $ | (7 | ) | | $ | (10 | ) | | $ | (14 | ) | | $ | (16 | ) | | General and administrative |
Net settlement loss | (64 | ) | | (8 | ) | | (81 | ) | | (71 | ) | | General and administrative |
Net curtailment gain (loss) | (2 | ) | | — |
| | 3 |
| | — |
| | General and administrative |
| (73 | ) | | (18 | ) | | (92 | ) | | (87 | ) | | Income (loss) from operations |
| 25 |
| | 7 |
| | 32 |
| | 30 |
| | Benefit for income taxes |
Other insignificant, net of tax | — |
| | — |
| | — |
| | (1 | ) | | |
Total reclassifications | $ | (48 | ) | | $ | (11 | ) | | $ | (60 | ) | | $ | (58 | ) | | Income (loss) from continuing operations |
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
17. Supplemental Cash Flow Information |
| | | | | | | |
| Six Months Ended June 30, |
(In millions) | 2015 | | 2014 |
Net cash used in operating activities: | | | |
Interest paid (net of amounts capitalized) | $ | (143 | ) | | $ | (149 | ) |
Income taxes paid to taxing authorities (a) | (165 | ) | | (1,336 | ) |
Net cash provided by (used in) financing activities: | | | |
Commercial paper, net: | |
| | |
|
Issuances | $ | — |
| | $ | 2,285 |
|
Repayments | — |
| | (2,420 | ) |
Commercial paper, net | $ | — |
| | $ | (135 | ) |
Noncash investing activities, related to continuing operations: | |
| | |
|
Asset retirement costs capitalized, net of revisions | $ | 6 |
| | $ | 42 |
|
Asset retirement obligations assumed by buyer | — |
| | 52 |
|
Receivable for disposal of assets | — |
| | 44 |
|
| |
(a) | The first six months of 2014 included $1.076 billion related to discontinued operations. |
18. Commitments and Contingencies
We are a defendant in a number of lawsuits arising in the ordinary course of business, including, but not limited to, royalty claims, contract claims and environmental claims. While the ultimate outcome and impact to us cannot be predicted with certainty, we believe the resolution of these proceedings will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
We are a global energy company with operations in North America, Europe and Africa. Each of our three reportable operating segments is organized and managed based upon both geographic location and the nature of the products and services it offers.
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• | North America E&P – explores for, produces and markets crude oil and condensate, NGLs and natural gas in North America; |