Citing market constraints and charges, Marathon Oil Co. said its quarterly income fell from a year ago, but the producer was able to beat Wall Street’s expectations. Still, Lehman Brothers downgraded the company, saying it was concerned about recent downward reserve revisions to Powder River Basin and Russian assets.

Marathon reported 4Q2004 income of $429 million ($1.23/share), compared with $485 million ($1.57) for 4Q2003. Excluding special items, Marathon earned $415 million ($1.19/share). Thomson First Call analysts had predicted earnings of 93 cents a share. Revenue rose to $14.2 billion from $11 billion in 4Q2003.

Income in the final quarter of 2004 fell because of $32 million in charges for unproved properties and $12 million for unsuccessful drilling on some Russian properties. Marathon also recorded a $111 million gain in the quarter from two long-term natural gas sales contracts accounted for as derivatives. It also recognized a $32 million expense for insurance premium payments.

“Marathon’s strong fourth quarter and full-year 2004 earnings demonstrate the ongoing progress we are making in focusing and executing on key business strategies that are fueling profitable growth,” said CEO Clarence P. Cazalot Jr. “2004 was marked by strong commodity prices, tight supplies of finished product due in part to constraints of the U.S. refining system, severe weather in the Gulf of Mexico, and an overall narrowing of the oil supply/demand balance in the face of growing worldwide demand for energy. While we were challenged by these market factors, each of the company’s three business segments improved profitability over 2003.”

Lehman analysts downgraded Marathon to “equal-weight” from “overweight,” citing the company’s move to lower projections on its Russian assets, as well as those in the Powder River Basin of the Rockies. Analysts said the new projections pose questions about Marathon’s “overall asset quality” and its capacity to execute its long-term strategy.

“Although the company continues to trade at a substantial discount to peers, the firm is losing their conviction in the company’s ability to successfully turn around its upstream portfolio and operations,” said Lehman. “Firm is also concerned about the substantial negative revisions surrounding its Russia and Powder River Basin assets.”

Earlier this week, Marathon announced that its net proved reserve revisions in 2004 totaled 81 MMboe, consisting of positive revisions in Equatorial Guinea, which were offset by reserve reductions of 46 MMboe in Russia and 35 MMboe in Powder River (see Daily GPI, Jan. 26).

Worldwide upstream segment income totaled $443 million in 4Q2004, and $1.696 billion for the year, compared with $372 million in 4Q2003 and $1.580 billion for 2003. U.S. upstream income was $238 million in quarter and $1.073 billion for the year, compared with $249 million and $1.155 billion in the same periods of 2003.

Net natural gas production in the United States fell to 585.5 MMcf/d in the final quarter from 737.3 MMcf/d a year earlier. For the year, gas production fell to 631.2 MMcf/d from 731.6 MMcf/d in 2003.

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