It was a frustrating day Tuesday for Marathon Oil Corp. investors, who questioned how the producer managed to make less money in the third quarter than a year earlier, despite record oil and natural gas prices. Marathon blamed asset sales, field declines, hurricanes and maintenance for its 21% tumble in income compared to the third quarter a year earlier. The company also said its production this year will be lower than previously expected.

Marathon’s U.S. natural gas production in the third quarter fell to 598 MMcf/d compared to 704.4 MMcf/d in 3Q2003. Its total oil and gas production worldwide fell to 306,800 boe/d from 372,200 boe/d.

The company posted 3Q income of $222 million (64 cents/share), compared with $281 million (90 cents) for the same period a year ago. Revenue climbed 19% to $12.32 billion from $10.33 billion. Marathon noted there were losses on UK long-term natural gas contracts of $74 million in the quarter, compared with a loss of $12 million in 3Q2003. Excluding the losses, Marathon earned $296 million, compared with $293 million a year ago.

“We were not able to fully capture the value of this high crude oil and natural gas price environment due to a number of factors, including the effect of hurricanes and unplanned downtime on our oil and gas production during the quarter,” said CEO Clarence P. Cazalot Jr. He said the company was continuing to make progress on efforts to execute some strategies and projects, which would position it “to continue to deliver long-term value growth.”

Investors and financial analysts expressed their disappointment in Marathon’s latest quarter, with one investor noting that “if you can’t show increasing profit in the oil industry in this environment, you’ll never show it.”

Fadel Gheit, a financial analyst with Oppenheimer & Co., said he had not been expecting a good quarter for Marathon. “They’re the one company that always falls short of expectations,” he said bluntly. “They always have an excuse for lower production. The production decline has to stop; otherwise, they’re hemorrhaging their credibility.”

Marathon’s exploration and production income declined 36% to $222 million on lower production volume. Its U.S. upstream income was $244 million, compared with $301 million in 3Q2003. The losses were due to lower liquid hydrocarbon and natural gas volumes that mostly resulted from base decline, weather-related downtime in the Gulf of Mexico and the sale of the Yates field, which were partially offset by higher liquid hydrocarbon and natural gas prices. In addition, the unit’s derivative losses ballooned to $58 million from $9 million.

Marathon expects production now to average about 325,000 boe/d in the fourth quarter and about 335,000 boe/d for full-year 2004, excluding acquisitions or sales. The output is lower than a July forecast, when Marathon estimated it would average 360,000 boe/d for 2004. The company said it also is still assessing damage to one offshore platform from Hurricane Ivan.

The integrated gas segment posted income of $18 million, compared with a loss of $22 million a year ago, on higher marketing margins, a change in the valuation of derivatives, higher income from liquefied natural gas operations and increased earnings from an investment in a methanol plant in Equatorial Guinea.

Administrative expenses climbed 48% to $90 million on a $24 million charge for compensation and costs related to outsourcing and a $10 million charge stemming from workforce reductions.

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