Marathon Oil Corp., which has announced plans to spin off its integrated assets and become a stand-alone explorer, on Wednesday said it plans to increase its capital spending in 2011 to develop existing projects and exploit new resources, including onshore in North America.

The company last year "enhanced" its operations and has a "solid foundation" to prepare for future growth, CEO Clarence P. Cazalot Jr. said during a conference call. In North America Marathon expanded its Canadian oilsands mining capacity and added "considerably to the company's upstream portfolio, including expansion of our liquids-rich U.S. resource acreage by more than 60%...

"Along with our solid financial position, we are well positioned to further increase shareholder value with the delivery of two strong independent energy companies through the spin-off of our downstream operations into Marathon Petroleum Corp., which we anticipate will be effective June 30, 2011" (see Daily GPI, Jan. 14).

Marathon's exploration arm did itself considerable good last year in preparing to become a separate company.

In North America Marathon expanded its holdings in several unconventional U.S. resource plays: the Niobrara in southeast Wyoming/northern Colorado, Oklahoma's Anadarko Woodford Shale, the Eagle Ford Shale in South Texas and the Bakken Shale in western North Dakota. Marathon reached a year-end production rate in the Bakken play of close to 15,000 boe/d net. Overseas Marathon also added nine onshore exploration licenses with "shale gas potential" in Poland, bringing its total there to 11 licenses.

In the final quarter of 2010 Marathon entered the Eagle Ford Shale in the Texas counties of Wilson and Atascosa. Under terms of the transaction Marathon agreed to pay $10 million and drill and complete four wells to earn 17,000 acres. It has the option to purchase an additional 58,000 net acres in the two counties. If Marathon executes its option, the full 75,000 net acres, including the initial payment, carried well interest and lease extensions, will cost about $2,800/acre.

Marathon also upped its holdings within the Niobrara Shale in the Denver-Julesburg Basin of southeast Wyoming and northern Colorado by about 57,000 net acres; it held 172,000 net acres at year's end. In addition the company increased its holdings in Oklahoma's Anadarko Woodford Shale by 13,000 net acres to give it a total leasehold of about 86,000 net acres; pending acreage contracts are expected to increase its position to more than 100,000 net acres.

Marathon said it has about 391,000 net acres in the Bakken Shale, which is 40,000 net acres higher than at the end of 2009. "This reflects not only an increase in net acreage but also a high-grading of the company's portfolio as lower-value acreage was farmed out, sold or relinquished," it said.

The company recorded a 94% average operational availability for all major company-owned upstream assets, the CEO said. A reserve replacement ratio of 95% was achieved for the exploration and production (E&P) segment, and Marathon replaced 109% of liquid hydrocarbons. In addition, the company replaced 72% of its natural gas production, "reflecting reduced natural gas spending."

The U.S. E&P segment's reported income dropped drastically in the final three months of 2010 to $17 million versus $116 million in 4Q2009. Sales volumes and liquid hydrocarbon realizations rose in the latest quarter, but debt, depreciation and amortization expenses rose by $236 million, primarily from Gulf of Mexico production at the company's Droshky prospect.

Total E&P sales volumes in the fourth quarter averaged 417,000 boe/d, down slightly from 413,000 boe/d for the same period in 2009. Production available for sale averaged 420,000 boe/d in 4Q2010, versus 403,000 boe/d in the year-ago period.

Marathon said 2011 E&P production available for sale "will be essentially flat with 2010 volumes, with a range between 380,000 and 400,000 boe/d, excluding the effect of any future acquisitions or dispositions. Production increases in the company's U.S. conventional portfolio are expected to offset field declines elsewhere, largely in the North Sea."

The Houston-based producer reported that net income rose significantly in 4Q2010 from the year-ago period to $706 million (99 cents/share) from $355 million (50 cents). Adjusted for one-time items net income increased to $780 million ($1.09/share) versus $229 million (32 cents).

This year the company is budgeting $5.267 billion for its capital, investment and exploration budget, which it said is "consistent with prior guidance" and 9% higher than in 2010. Cazalot said "roughly two-thirds of our 2011 spending" is directed toward "company-operated activity, affording us greater control of outcomes and flexibility in changing conditions."

Total upstream spending is set at $3.7 billion, or 71% of the budget. Almost $1.9 billion is earmarked for "growth assets" that include North American unconventional plays. About $465 million is budgeted "specifically for impact exploration," said the CEO.

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