Marathon Consolidates Operations, Cuts Jobs

Marathon Oil's new President Clarence Cazalot last week followed through on consolidation plans announced earlier this summer. He said the company will consolidate parts of its U.S. upstream organization, resulting in an initial staff reduction of about 200 jobs. The changes are expected to save the company about $75 million/year.

"Our U.S. domestic operations are a core business for Marathon," said Cazalot. "We have a solid reputation as a low-cost producer, but in today's competitive marketplace, we need to ensure that our general and administrative costs are likewise competitive.

"Regrettably, consolidation into a more streamlined and profitable operation will mean job losses for some of our dedicated employees and a period of continuing uncertainty for others until we reposition the company," he added. "However, a stronger, more competitive Marathon is in the best long- term interest of employees and shareholders alike."

There are several components to the consolidation. Research and development, currently carried out at the company's Petroleum Technology Center in Littleton, CO, will be relocated, resulting in the closure of that facility. Upstream components will be streamlined and merged into a single Houston-based organization. Downstream activities will be integrated within Marathon Ashland Petroleum (MAP) at its Refining Analytical Department located in Catlettsburg, KY. Marathon's former Rocky Mountain and Central Regions will be merged into a single unit based in Oklahoma City. The company's former southern and Midcontinent regions will be merged into a single unit based in Midland. Certain accounting functions and business development activities, currently carried out at all regional offices will be centralized in Houston.

The plans are expected to be complete by year-end. In addition, a full review of the company's business processes is underway and additional efficiencies are expected to be identified, resulting in further job reductions. The total number of actual job losses will be determined later in the year when the work is complete, and the outcome of a voluntary early retirement program currently underway is known, the company said. Under the terms of the retirement program, 970 employees have until mid-October to retire. The company currently has 2,800 U.S. positions.

"We need to improve shareholder value. We've taken the view that now is really the best time to do this rather than when you are under price pressure in a falling market," said Marathon spokesman Roger Holliday. "I think there's no doubt in our mind and in the minds of the analysts who follow us that where our stock price is right now and where it should be are two entirely different places. There is a value gap, and this is focused on closing that gap while at the same time looking at opportunities to grow the business profitably.

"Downstream is doing really well; it's a top quartile business in its own peer group. Upstream really needs the focus," he said. "We have a good reputation and stack up well at the field level. What we are really trying to do is make our above-the-field administrative costs as competitive as our production costs."

J.P. Morgan analyst Jay Wilson lauded the plan. "This is the right thing for Marathon," said Wilson. "Marathon has a new CEO, Cazelot, formerly head of worldwide operations at Texaco. It's restructuring, and it's trying to improve its base operations and its return. Its share prices have been suffering as a result of lackluster results and returns, and the CEO is trying to get the company moving in the right direction again.

"Sure we're enjoying high oil and gas prices and refining margins, and that is clearly benefiting Marathon, but the shareholders want to know that the company is moving in the right direction, that they are showing good investment discipline, that they are working to improve on capital employed and grow earnings per share even at normalized oil and gas prices," said Wilson.

There also is some hope that the stock structure, in which Marathon is tied to affiliate U.S. Steel under a corporate umbrella, may be about to disappear. "We may actually get an independent Marathon," he said. "That would be a clear plus. Investors have a lot of opportunities to invest in the energy sector. There are enough of them out there that feel without a board of directors that has fiduciary responsibility to the Marathon shareholders than life is too short [to invest in the company]. It's just not worth it. Nobody likes the structure." Wilson predicts the company will be separated from U.S. Steel within the next 12 months.

Rocco Canonica

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