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Marathon Books 4Q Loss, Plans to Keep Company Whole

Citing the current economic depression, Marathon Oil Corp. said it plans to continue its focus on noncore asset sales and has shelved its plans to divide its operations into two separate entities. Following the absorption of a noncash $1.4 billion impairment of goodwill related to its Oil Sands Mining segment, Marathon reported a 4Q2008 net loss of $41 million, or minus 6 cent/share, compared with net income in 4Q2007 of $668 million, or 94 cents/share.

Removing special items, Marathon reported 4Q2008 net income of $1.025 billion, or $1.44/share, compared with net income of $500 million, or 70 cents/share, for 4Q2007.

"Our upstream business delivered growth again in the fourth quarter with production available for sale increasing 3% over the third quarter 2008 and 14% over the fourth quarter 2007, resulting in one of the strongest production quarters in the history of the company," said Marathon CEO Clarence P. Cazalot Jr. "We were again able to capture solid operational profitability for the fourth quarter and full year through our fully integrated downstream system, including our seven refineries; extensive pipeline, barge and terminal network; and dual channel marketing assets. In particular, our results benefited from significant transportation operations and strong retail margins in this period of extreme commodity price volatility."

Full-year net income including special items also slumped when compared with full-year 2007 results. Marathon reported 2008 net income of $3.528 billion, or $4.95/share. Net income in 2007 was $3.956 billion, or $5.69/share. Without including special items, the company reported 2008 net income of $4.613 billion, or $6.47/share, compared with net income of $3.771 billion, or $5.43/share, for 2007.

"2008 was a year of extreme market volatility with record high crude prices at midyear, followed by a rapid and steep decline in crude prices," Cazalot added. "Through this cycle of volatility, Marathon delivered solid upstream production growth and continued high downstream operating reliability, resulting in income from our operating segments increasing 59% for the fourth quarter and 15% for the full year, compared to the fourth quarter and full year of 2007."

The chief executive added that the company's year-over-year production growth of more than 8% is "expected to rank us among the leaders in our peer group for 2008." During the year Marathon added proved reserves of 110 million boe, resulting in a reserve replacement rate of 80% for the year.

"We continue to maintain a strong balance sheet, with a year-end cash-adjusted debt-to-capital ratio of 22% and $4.3 billion in liquidity comprised of a $1.3 billion cash balance and $3 billion in available credit facility capacity," he said. "As we announced with our planned 2009 capital expenditures program, we are committed to maintaining our solid financial position while funding near-, medium- and long-term value-accretive projects that yield the highest rates of return for our shareholders. Furthermore, having announced asset sales with transaction values totaling $1.3 billion in 2008, we are on track to achieve our goal of $2-4 billion in noncore asset sales by midyear 2009," he said.

During a conference call, Cazalot said in the current economic environment, "we are going to focus on cash generation and enhancing our financial strength, and we'll do that by executing on the noncore asset sales. We intend to achieve high reliability and utilization of our major assets. We intend to control our expenses and we are working with our business partners across the globe to significantly reduce our overall costs of doing business."

Cazalot said that after assessing the potential separation of Marathon into two separate companies, one focused on Marathon's upstream, integrated gas and oil sands mining businesses, and the other focused on the downstream business, the company decided that a split was not in the best interest of shareholders at this time.

"During our evaluation the overall business environment has witnessed a period of unprecedented financial and commodity market uncertainty," he said. "Given this environment, we have concluded it is in the best interest of our shareholders to remain a fully integrated energy company."

During the conference call, the chief executive expanded on the company's decision. "The dramatic and rapid changes we've all witnessed over the last several months and a very uncertain outlook for 2009 and perhaps beyond, clearly illustrate the value of being a larger, more financially diverse and strong company."

Marathon has announced a $5.7 billion capital, investment and exploration budget for 2009, which represents a 24% decrease from 2008 capital spending of $7.6 billion. The company added that its 2008 capital spending was 5% less than the original $8 billion budget for the year.

"Marathon's 2009 capital program demonstrates a balanced approach that will maintain solid production performance, enhance our strong downstream business and provide necessary capital investments in profitable mid- and long-term growth projects," Cazalot said. "Our balanced approach to investing is designed to maintain our solid financial position, deliver a competitive dividend and enhance shareholder value."

The company said it expects the combined production for 2011 from its upstream and oil sands mining segments to be approximately 450,000 boe/d. This reflects a 7% compound average growth rate from Marathon's 2007 production level and a 4% growth from its 2008 level, both adjusted for announced asset sales.

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