Marathon Oil’s new President Clarence Cazalot last week followedthrough on consolidation plans announced earlier this summer. Hesaid the company will consolidate parts of its U.S. upstreamorganization, resulting in an initial staff reduction of about 200jobs. The changes are expected to save the company about $75million/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 ourgeneral and administrative costs are likewise competitive.

“Regrettably, consolidation into a more streamlined andprofitable operation will mean job losses for some of our dedicatedemployees and a period of continuing uncertainty for others untilwe reposition the company,” he added. “However, a stronger, morecompetitive Marathon is in the best long- term interest ofemployees and shareholders alike.”

There are several components to the consolidation. Research anddevelopment, currently carried out at the company’s PetroleumTechnology Center in Littleton, CO, will be relocated, resulting inthe closure of that facility. Upstream components will bestreamlined and merged into a single Houston-based organization.Downstream activities will be integrated within Marathon AshlandPetroleum (MAP) at its Refining Analytical Department located inCatlettsburg, KY. Marathon’s former Rocky Mountain and CentralRegions will be merged into a single unit based in Oklahoma City.The company’s former southern and Midcontinent regions will bemerged into a single unit based in Midland. Certain accountingfunctions and business development activities, currently carriedout 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 andadditional efficiencies are expected to be identified, resulting infurther job reductions. The total number of actual job losses willbe determined later in the year when the work is complete, and theoutcome of a voluntary early retirement program currently underwayis known, the company said. Under the terms of the retirementprogram, 970 employees have until mid-October to retire. Thecompany currently has 2,800 U.S. positions.

“We need to improve shareholder value. We’ve taken the view thatnow is really the best time to do this rather than when you areunder price pressure in a falling market,” said Marathon spokesmanRoger Holliday. “I think there’s no doubt in our mind and in theminds of the analysts who follow us that where our stock price isright now and where it should be are two entirely different places.There is a value gap, and this is focused on closing that gap whileat the same time looking at opportunities to grow the businessprofitably.

“Downstream is doing really well; it’s a top quartile businessin 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-fieldadministrative costs as competitive as our production costs.”

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

“Sure we’re enjoying high oil and gas prices and refiningmargins, and that is clearly benefiting Marathon, but theshareholders want to know that the company is moving in the rightdirection, that they are showing good investment discipline, thatthey are working to improve on capital employed and grow earningsper share even at normalized oil and gas prices,” said Wilson.

There also is some hope that the stock structure, in whichMarathon is tied to affiliate U.S. Steel under a corporateumbrella, may be about to disappear. “We may actually get anindependent Marathon,” he said. “That would be a clear plus.Investors have a lot of opportunities to invest in the energysector. There are enough of them out there that feel without aboard of directors that has fiduciary responsibility to theMarathon shareholders than life is too short [to invest in thecompany]. It’s just not worth it. Nobody likes the structure.”Wilson predicts the company will be separated from U.S. Steelwithin the next 12 months.

Rocco Canonica

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