UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

For the transition period from            to           

Commission File Number: 1-5153

Marathon Oil Corporation

(Exact name of registrant as specified in its charter)

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   ý   No   o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes   ý   No   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   ý

There were 366,479,353 shares of Marathon Oil Corporation common stock outstanding as of September 30, 2005.

MARATHON OIL CORPORATION

Form 10-Q

Quarter Ended September 30, 2005

INDEX

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 investees (corporate entities, partnerships, limited liability companies and other ventures over which Marathon exerts significant influence by virtue of its ownership interest, typically between 20 and 50 percent).  On September 1, 2005, subsequent to the acquisition discussed on page 7, Marathon Ashland Petroleum LLC changed its name to Marathon Petroleum Company LLC. In this Form 10-Q, references to Marathon Petroleum Company LLC (“MPC”) are references to the entity formerly known as Marathon Ashland Petroleum LLC.

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Part I - Financial Information

Item 1.  Financial Statements

MARATHON OIL CORPORATION

Consolidated Statements of Income (Unaudited)

Income Per Share (Unaudited)

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

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 MARATHON OIL CORPORATION

Consolidated Balance Sheets (Unaudited)

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

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MARATHON OIL CORPORATION

Consolidated Statements of Cash Flows (Unaudited)

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

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MARATHON OIL CORPORATION

Notes to Consolidated Financial Statements (Unaudited)

1.              Basis of Presentation

These consolidated financial statements are unaudited but, in the opinion of management, reflect all adjustments necessary for a fair presentation of the results for the periods presented.  All such adjustments are of a normal recurring nature unless disclosed otherwise.  These consolidated financial statements, including selected notes, have been prepared in accordance with the applicable rules of the Securities and Exchange Commission and do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements.  Certain reclassifications of prior year data have been made to conform to 2005 classifications.  These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Marathon Oil Corporation (“Marathon”) 2004 Annual Report on Form 10-K.

2.              New Accounting Standards

Effective January 1, 2005, Marathon adopted FASB Staff Position (“FSP”) No. FAS 19-1, “Accounting for Suspended Well Costs,” which amended the guidance for suspended exploratory well costs in Statement of Financial Accounting Standards (“SFAS”) No. 19, “Financial Accounting and Reporting by Oil and Gas Producing Companies.”  SFAS No. 19 requires costs of drilling exploratory wells to be capitalized pending determination of whether the well has found proved reserves.  When a classification of proved reserves cannot yet be made, FSP No. FAS 19-1 allows exploratory well costs to continue to be capitalized when (a) the well has found a sufficient quantity of reserves to justify completion as a producing well and (b) the enterprise is making sufficient progress assessing the reserves and the economic and operating viability of the project.  Marathon’s accounting policy for suspended exploratory well costs was in accordance with FSP No. FAS 19-1 prior to its adoption. FSP No. FAS 19-1 also requires certain disclosures to be made regarding capitalized exploratory well costs which were included in the footnotes to Marathon’s consolidated financial statements in its 2004 Annual Report on Form 10-K.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets – an amendment of APB Opinion No. 29.”  This amendment eliminates the APB Opinion No. 29 exception for fair value recognition of nonmonetary exchanges of similar productive assets and replaces it with an exception for exchanges of nonmonetary assets that do not have commercial substance. Marathon adopted SFAS No. 153 on a prospective basis as of July 1, 2005.

3.              Information about United States Steel

The Separation – On December 31, 2001, in a tax-free distribution to holders of Marathon’s USX—U. S. Steel Group class of common stock (“Steel Stock”), Marathon exchanged the common stock of its wholly owned subsidiary United States Steel Corporation (“United States Steel”) for all outstanding shares of Steel Stock on a one-for-one basis (the “Separation”).

Amounts Receivable from or Payable to United States Steel Arising from the Separation – Marathon remains primarily obligated for certain financings for which United States Steel has assumed responsibility for repayment under the terms of the Separation. When United States Steel makes payments on the principal of these financings, both the receivable from United States Steel and the obligation are reduced.

Amounts receivable from and payable to United States Steel included in the consolidated balance sheet were as follows:

Marathon remains primarily obligated for $46 million of operating lease obligations assumed by United States Steel, of which $37 million has been assumed by third parties that purchased plants and operations divested by United States Steel.

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4.              Acquisition

On June 30, 2005, Marathon acquired the 38 percent ownership interest in Marathon Ashland Petroleum LLC (“MAP”) previously held by Ashland Inc. (“Ashland”). In addition, Marathon acquired a portion of Ashland’s Valvoline Instant Oil Change business, its maleic anhydride business, its interest in LOOP LLC, which owns and operates the only U.S. deepwater oil port, and its interest in LOCAP LLC, which owns a crude oil pipeline. As a result of the transactions (the “Acquisition”), MAP is now wholly owned by Marathon and its name was changed to Marathon Petroleum Company LLC (“MPC”) effective September 1, 2005. The Acquisition was accounted for under the purchase method of accounting and, as such, Marathon’s results of operations include the results of the acquired businesses from June 30, 2005.  The total consideration, including debt assumed, is as follows:

(a)    The MAP Limited Liability Company Agreement was amended to eliminate the requirement for MPC to make quarterly cash distributions to Marathon and Ashland between the date the principal transaction agreements were signed and the closing of the Acquisition.  Cash and MPC accounts receivable above include $509 million representing Ashland’s 38 percent of MPC’s estimated distributable cash as of June 30, 2005.

(b)    Ashland shareholders received 17.539 million shares valued at $54.45 per share, which was Marathon’s average common stock price over the trading days between June 23 and June 29, 2005.  The exchange ratio was designed to provide an aggregate number of Marathon shares worth $915 million based on Marathon’s average common stock price for each of the 20 consecutive trading days ending with the third complete trading day prior to June 30, 2005.

(c)     Includes $9 million paid during the quarter ended September 30, 2005, for estimated tax obligations of Ashland under Internal Revenue Service Code Section 355(e).

(d)    Assumed debt was repaid on July 1, 2005.

(e)     Marathon is entitled to the tax deductions for Ashland’s future payments of certain contingent liabilities related to businesses previously owned by Ashland.  However, pursuant to the terms of the Tax Matters Agreement, Marathon has agreed to reimburse Ashland for a portion of these future payments.  This contingent consideration will be included in the purchase price as such payments are made to Ashland.

The primary reasons for the Acquisition and the principal factors that contributed to a purchase price that resulted in the recognition of goodwill are:

•                  Marathon believes the outlook for the refining and marketing business is attractive in MPC’s core areas of operation. Complete ownership of MPC provides Marathon the opportunity to leverage MPC’s access to premium U.S. markets where Marathon expects the levels of demand to remain high for the foreseeable future;

•                  The Acquisition increases Marathon’s participation in the downstream business without the risks commonly associated with integrating a newly acquired business;

•                  MPC provides Marathon with an increased source of cash flow which Marathon believes enhances the geographical balance in its overall risk portfolio;

•                  Marathon anticipates the transaction will be accretive to income per share;

•                  The Acquisition eliminated the timing and valuation uncertainties associated with the exercise of the Put/Call, Registration Rights and Standstill Agreement entered into with the formation of MPC in 1998, as well as the associated premium and discount; and

•                  The Acquisition eliminated the possibility that a misalignment of Ashland’s and Marathon’s interests, as co-owners of MPC, could adversely affect MPC’s future growth and financial performance.

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The allocation of the purchase price to specific assets and liabilities was based primarily on a third-party appraisal of the fair value of the acquired assets. The allocation of the purchase price is preliminary, pending the completion of that third-party valuation. The following table summarizes the preliminary purchase price allocation to the fair values of the assets acquired and liabilities assumed as of June 30, 2005:

The preliminary valuations and lives of acquired intangible assets are as follows:

The goodwill arising from the preliminary allocation was $694 million, which was assigned to the refining, marketing and transportation segment. None of the goodwill is deductible for tax purposes. The goodwill decreased $109 million from the initial estimated purchase price allocation as of June 30, 2005 primarily as a result of an $80 million reduction in the estimated additional consideration related to tax matters.

The purchase price allocated to equity method investments is $230 million higher than the underlying net assets of the investees.  This excess will be amortized over the expected useful life of the underlying assets except for goodwill related to the equity investments.

The following unaudited pro forma results of operations are as if the Acquisition had been consummated at the beginning of each period presented.  The pro forma data is based on historical information and does not reflect the actual results that would have occurred nor is it indicative of future results of operations.

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5.              Computation of Income Per Share

Basic net income per share is based on the weighted average number of common shares outstanding.  Diluted net income per share assumes exercise of stock options, provided the effect is not antidilutive.

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6.                                      Stock-Based Compensation Plans

The following presents the effect on net income and net income per share if the fair value method had been applied to all outstanding awards in each period:

Marathon records compensation cost over the stated vesting period for stock options that are subject to specific vesting conditions and specify (i) that an employee vests in the award upon becoming “retirement eligible” or (ii) that the employee will continue to vest in the award after retirement without providing any additional service.  Upon adoption of SFAS No. 123 (Revised 2004), “Share-Based Payment,” such compensation cost will be recognized immediately for awards granted to retirement-eligible employees or over the period from the grant date to the retirement eligibility date if retirement eligibility will be reached during the stated vesting period.  The compensation cost determined under these two approaches did not differ materially for the periods presented above.

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7.              Segment Information

Marathon’s operations consist of three operating segments: 1) Exploration and Production (“E&P”) - explores for and produces crude oil and natural gas on a worldwide basis; 2) Refining, Marketing and Transportation (“RM&T”) - refines, markets and transports crude oil and petroleum products, primarily in the Midwest, the upper Great Plains and southeastern United States; and 3) Integrated Gas (“IG”) – markets and transports natural gas and products manufactured from natural gas, such as liquefied natural gas (“LNG”) and methanol, on a worldwide basis.

The following presents information by operating segment:

(a)    Management believes intersegment transactions were conducted under terms comparable to those with unrelated parties.

(b)    Differences between segment totals and Marathon totals represent amounts related to corporate administrative activities and are included in administrative expenses in the reconciliation below.

(c)     Differences between segment totals and Marathon totals represent amounts related to corporate administrative activities.

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