Marathon Oil Corp. CEO Clarence P. Cazalot Jr., who led the company’s restructuring last year to become a pure-play exploration and production (E&P) company on Wednesday said upstream production in 2011 rose 7% year/year on the “highest level of rig activity in many years.”

Including the one-time affects related to the spinoff of its refining and marketing arm, Marathon’s net income fell to $549 million (78 cents/share) in 4Q2011 from $706 million (99 cents) in 4Q2010. Not including the marketing income, adjusted profits from continuing operations were $552 million (78 cents/share) in 4Q2011, ahead of the year-ago profits of $494 million (70 cents). Full-year 2011 net income from continuing operations was $2.3 billion ($3.21/share), versus $1.9 billion ($2.66) in 2010.

“Marathon Oil begins 2012 as a strong independent E&P company,” said Cazalot. “Our base assets continue to generate significant cash flow and our well-positioned growth assets in liquids-rich U.S. resource plays are expected to drive 5-7% compound average production growth, 80% of which is estimated to be liquids, from 2010 to 2016. With a continued focus on capital discipline, we remain committed to delivering top quartile total shareholder returns.”

Marathon last year completed the spinoff of its downstream business into Marathon Petroleum Corp. (see Daily GPI, July 1, 2011). In addition to its global prospects, the producer has an extensive natural gas and oil leasehold across the United States. However, don’t expect it to pursue any domestic gas targets until prices strengthen, said COO David E. Roberts Jr.

“If I drill a dry gas well, I get in trouble,” he said laughing, during a conference call to discuss earnings. “We’re trying not to do that. The closest we have [to drilling gas] is in the Woodford [shale]. We’re just not directing any money to gas wells at all. We have no lease issues that we’re chasing in terms of pure, dry gas…”

Marathon now has six rigs running in the Woodford “and we’re monitoring that very closely,” said Roberts. Across its U.S. plays, “we have 35 to 40 rigs on contract in the frame of reference for this year with the ability to expand or contract as we need to.”

The Eagle Ford Shale in South Texas has moved to the top of Marathon’s global prospect list, Roberts said. The company is one of the top leaseholders in the play (see Daily GPI, June 2, 2011). In the last three months of 2011 the Eagle Ford wells were producing 14,000-15,000 b/d, “which is where we are today,”he said. “We have internal infrastructure designed and being constructed to match our growth plans on a go-forward basis” over the next five years, by which time the company expects to hit a flow rate of 100,000 b/d.

The Houston-based producer grew its total Lower 48 net production quarter/quarter by 20% to 91,000 boe/d from 76,000 boe/d. For the full year Marathon replaced 266% of its liquid hydrocarbons and 116% of natural gas production. It also increased its resource play holdings to more than one million net acres, compared with 600,000 net acres in 2010 — including the addition of 167,000 net acres in the Eagle Ford Shale.

Marathon spud 126 operated wells in 2011, more than double the 54 wells spud in 2010. And it recorded a 96% average operational availability for all of the major company-operated E&P properties, up from 94% in 2010.

The operated rig count in the Eagle Ford now stands at 14, with four more rigs expected to be added by the end of September. Four hydraulic fracturing crews are under contract for 2012, and eight wells now are awaiting completion.

Marathon’s 2011 exit rate in the Eagle Ford was lower than expected “largely because of stricter choke management and a number of wells being offline for the installation of production tubulars.” The company now is producing around 15,000 boe/d net and reaffirmed that it planned to double its production to 30,000 boe/d net by the end of the year.

In the Bakken Shale of North Dakota Marathon now has 406,000 net acres. In December the company achieved record average production of 24,000 boe/d net, which was 70% higher than the 14,000 boe/d net in December 2010. The company’s Bakken production is about 95% weighted to crude oil. As of Jan. 25, the company had 19 gross operated wells awaiting completion. It has six drilling rigs, plus one rig dedicated to completions, and it plans to add a seventh drilling rig in the second quarter.

Marathon last year added 247 million bbl to its net proved liquid hydrocarbon reserves, which included acquisitions totaling 89 bbl; it also produced 93 million bbl. The E&P segment added 242 million boe, which included dispositions of less than 1 million boe and production totaling 131 million boe. The net additions, which included 109 million boe that were acquired, primarily were in the Eagle Ford, Anadarko Woodford and Bakken shales, as well as in Equatorial Guinea and Norway.

The company has big plans this year to boost its liquids-weighted output. Total capital spending for 2012 is set at $4.8 billion, well above 2011’s $3.7 billion. Anticipated upstream reserve replacement in 2012 is forecast to be “150% or greater,” with 5% projected growth in upstream production year/year. The company also expects to ramp up about 35 operated drilling rigs in the United States by the third quarter. By the final quarter of 2012, Marathon is forecasting that Lower 48 onshore net production will be 30% higher than in 4Q2011 and will average 120,000-130,000 boe/d.

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