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Marathon Lifts Spending for E&P, Unconventional Shales

Marathon Oil Corp. reversed the losses it incurred a year earlier to post a strong profit in the final quarter of 2009, but with troubles in its refining and marketing (R&M) sector, the producer plans to divert more spending in 2010 to the upstream to concentrate on its unconventional gas and oil shale plays.

The fourth largest U.S.-based producer last week said it earned $355 million (50 cents/share) in 4Q2009, versus a prior-year loss of $41 million (minus 6 cents). Revenue jumped 10% to $16.1 billion. Earnings from the U.S. exploration and production (E&P) business soared to $116 million from a loss of $19 million a year earlier, but the R&M segment lost $18 million in the last three months of 2009.

"In the face of one of the most challenging economic environments in decades, Marathon successfully executed a substantial capital investment program designed to focus on profitable growth, while maintaining a solid balance sheet and strong financial position, ending 2009 with an estimated 23% net debt-to-capital ratio," said CEO Clarence Cazalot Jr. He and his management team discussed the company's quarterly and year-end earnings in a conference call last Tuesday.

With its eye on the future, Marathon slashed its 2010 capital spending budget by 17% to $5.1 billion and said it would cut R&M spending by $1 billion from a year ago. The E&P segment, however, saw its funding jump 24% for 2010 to $2.9 billion.

Marathon is training its focus on "the development of sanctioned projects, potentially significant exploration wells and advancing our growing resource plays," said Cazalot, which include unconventional gas shale prospects in the Marcellus, Haynesville and Woodford Cana shales, the Bakken oil shale, the Gulf of Mexico (GOM) and in Indonesia.

"We have good exposure in the gas shales and we believe it's time to move forward on a lot of things, but it depends on the current economics," David E. Roberts Jr., executive vice president of Upstream, told analysts during a conference call Tuesday. Marathon in late 2009 spudded a well in the Haynesville play and plans to do "possibly two, three wells" in 2010. "But we will be very judicious as we watch gas prices. We are very concerned about that."

Four wells were drilled in 4Q2009 in the Marcellus leasehold in West Virginia and this year will see "maybe a dozen more," said Roberts. "We will pursue that play very similarly to how we did the Bakken...Early indications we are seeing in the geology is that we like it...We feel very good about that."

The Woodford Cana play also will have "probably a dozen wells" drilled there over the course of this year. "The best well to date was just completed and was producing 10 MMcf/d," said Roberts. "We have substantial interest in that play and we'll continue to develop it..."

Asked if Marathon may consider adding to its portfolio, CFO Janet Clark said the company's priorities "are unchanged in terms of cash. We always are looking for opportunities to invest in the business. Given the financial instability we've seen and in the financial markets, we plan to maintain a very conservative balance sheet to give us flexibility going forward. We also look at the dividend quarterly with the board, and that continues to be the same general sequence of priorities in terms of cash."

Cazalot added that Marathon would "continue to look very selectively at building bigger positions in some of the key plays...that's really where our growth comes from, and we're certainly capable of increasing our exposure...where we have a cost advantage."

Marathon increased its year/year Bakken production by nearly 40% with a December 2009 production rate of more than 11,000 boe/d net, compared with 8,000 boe/d at the end of 2008.

In the GOM, the Droshky development in Green Canyon Block 244, in which Marathon has 100% working interest (WI), is under budget and on schedule for first production by midyear. The project now is expected to cost less than $1 billion, compared with the original $1.3 billion budget.

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