Document
false--12-31Q120192019-03-310000101778Large Accelerated Filer2183000000017669000000110000001200000001119250000001925000000937000000937000000002600000026000000000011800000011700000070.0055.0047.00


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
FORM 10-Q
(Mark One)
 
 
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the Quarterly Period Ended March 31, 2019
 
OR
[   ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from _____ to _____
 
Commission file number 1-5153
mro_logob19.jpg
Marathon Oil Corporation
(Exact name of registrant as specified in its charter)
Delaware
 
25-0996816
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
5555 San Felipe Street, Houston, TX  77056-2723
(Address of principal executive offices)
(713) 629-6600
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol
 
Name of each exchange on which registered
Common Stock, par value $1.00
 
MRO
 
New York Stock Exchange
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.       Yes þ No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes þ No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer þ
Accelerated filer o     
Non-accelerated filer o
 
 
Smaller reporting company o   
Emerging growth company o
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o    

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No þ
 
There were 817,916,151 shares of Marathon Oil Corporation common stock outstanding as of April 30, 2019.




MARATHON OIL CORPORATION
 
Unless the context otherwise indicates, references to “Marathon Oil,” “we,” “our,” or “us” in this Form 10-Q are references to Marathon Oil Corporation, including its wholly owned and majority-owned subsidiaries, and its ownership interests in equity method investees (corporate entities, partnerships, limited liability companies and other ventures over which Marathon Oil exerts significant influence by virtue of its ownership interest).
For certain industry specific terms used in this Form 10-Q, please see “Definitions” in our 2018 Annual Report on Form 10-K.

 
Table of Contents
 
 
 
Page
 
 
 
 
 
 
 

 
 
 
 


1



Part I – FINANCIAL INFORMATION
Item 1. Financial Statements

MARATHON OIL CORPORATION
Consolidated Statements of Income (Unaudited)
 
Three Months Ended
 
March 31,
(In millions, except per share data)
2019
 
2018
Revenues and other income:
 
 
 
Revenues from contracts with customers
$
1,200

 
$
1,537

Net loss on commodity derivatives
(91
)
 
(102
)
Income from equity method investments
11

 
37

Net gain on disposal of assets
42

 
257

Other income
35

 
4

Total revenues and other income
1,197

 
1,733

Costs and expenses:
 
 
 

Production
187

 
217

Shipping, handling and other operating
154

 
130

Exploration
59

 
52

Depreciation, depletion and amortization
554

 
590

Impairments
6

 
8

Taxes other than income
72

 
64

General and administrative
94

 
100

Total costs and expenses
1,126

 
1,161

Income from operations
71

 
572

Net interest and other
(49
)
 
(45
)
Other net periodic benefit costs
5

 
(3
)
Income before income taxes
27

 
524

Provision (benefit) for income taxes
(147
)
 
168

Net income
$
174

 
$
356

Net income per share:
 

 
 

Basic
$
0.21

 
$
0.42

Diluted
$
0.21

 
$
0.42

Weighted average common shares outstanding:
 

 
 

Basic
819

 
851

Diluted
820

 
852

 The accompanying notes are an integral part of these consolidated financial statements.

2



MARATHON OIL CORPORATION
Consolidated Statements of Comprehensive Income (Unaudited)
 
Three Months Ended
 
March 31,
(In millions)
2019
 
2018
Net income
$
174

 
$
356

Other comprehensive income (loss), net of tax
 

 
 

Change in actuarial loss in postretirement and postemployment plans
(4
)
 
4

Other comprehensive income (loss)
(4
)
 
4

Comprehensive income
$
170


$
360

 The accompanying notes are an integral part of these consolidated financial statements.


3




MARATHON OIL CORPORATION
Consolidated Balance Sheets (Unaudited)
 
March 31,
 
December 31,
(In millions, except par value and share amounts)
2019
 
2018
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,019

 
$
1,462

Receivables, less reserve of $12 and $11
1,086

 
1,079

Inventories
83

 
96

Other current assets
160

 
257

Current assets held for sale
428

 
27

Total current assets
2,776

 
2,921

Equity method investments
719

 
745

Property, plant and equipment, less accumulated depreciation,
depletion and amortization of $17,669 and $21,830
16,714

 
16,804

Goodwill
97

 
97

Other noncurrent assets
440

 
723

Noncurrent assets held for sale
664

 
31

Total assets
$
21,410

 
$
21,321

Liabilities
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
1,310

 
$
1,320

Payroll and benefits payable
76

 
154

Accrued taxes
149

 
181

Other current liabilities
220

 
170

Current liabilities held for sale
103

 
7

Total current liabilities
1,858

 
1,832

Long-term debt
5,501

 
5,499

Deferred tax liabilities
192

 
199

Defined benefit postretirement plan obligations
179

 
195

Asset retirement obligations
192

 
1,081

Deferred credits and other liabilities
317

 
279

Noncurrent liabilities held for sale
963

 
108

Total liabilities
9,202

 
9,193

Commitments and contingencies


 


Stockholders’ Equity
 

 
 

Preferred stock – no shares issued or outstanding (no par value,
26 million shares authorized)
$

 
$

Common stock:
 

 
 

Issued – 937 million shares and 937 million shares (par value $1 per share,
1.925 billion shares authorized at March 31, 2019 and 1.925 billion shares authorized at December 31, 2018)
937

 
937

Held in treasury, at cost – 117 million shares and 118 million shares
(3,745
)
 
(3,816
)
Additional paid-in capital
7,149

 
7,238

Retained earnings
7,808

 
7,706

Accumulated other comprehensive income
59

 
63

Total stockholders' equity
12,208

 
12,128

Total liabilities and stockholders' equity
$
21,410

 
$
21,321

 The accompanying notes are an integral part of these consolidated financial statements.

4



MARATHON OIL CORPORATION
Consolidated Statements of Cash Flows (Unaudited)
 
Three Months Ended
 
March 31,
(In millions)
2019
 
2018
Increase (decrease) in cash and cash equivalents
 
 
 
Operating activities:
 

 
 

Net income
$
174

 
$
356

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation, depletion and amortization
554

 
590

Impairments
6

 
8

Exploratory dry well costs and unproved property impairments
49

 
42

Net gain on disposal of assets
(42
)
 
(257
)
Deferred income taxes
(31
)
 
(31
)
Net loss on derivative instruments
91

 
102

Net settlements of derivative instruments
22

 
(59
)
Pension and other post retirement benefits, net
(25
)
 
(34
)
Stock-based compensation
14

 
14

Equity method investments, net
14

 
32

Changes in:
 
 
 

Current receivables
(73
)
 
(130
)
Inventories
4

 
(9
)
Current accounts payable and accrued liabilities
(102
)
 
81

Other current assets and liabilities
14

 
(25
)
All other operating, net
(154
)
 
(31
)
Net cash provided by operating activities
515

 
649

Investing activities:
 

 
 

Additions to property, plant and equipment
(615
)
 
(662
)
Additions to other assets
14

 
(72
)
Acquisitions, net of cash acquired

 
(4
)
Disposal of assets, net of cash transferred to the buyer
13

 
1,180

Equity method investments - return of capital
12

 
9

All other investing, net
12

 
(2
)
Net cash provided by (used in) investing activities
(564
)
 
449

Financing activities:
 

 
 

Purchases of common stock
(30
)
 
(9
)
Dividends paid
(41
)
 
(42
)
All other financing, net
(1
)
 
2

Net cash used in financing activities
(72
)
 
(49
)
Effect of exchange rate on cash and cash equivalents
1

 
1

Net increase (decrease) in cash and cash equivalents
(120
)
 
1,050

Cash and cash equivalents at beginning of period
1,462

 
563

Cash and cash equivalents at end of period
$
1,342

 
$
1,613

 
 
 
 
Reconciliation of cash and cash equivalents
 
 
 
Cash and cash equivalents
$
1,019

 
$
1,613

Cash and cash equivalents included in current assets held for sale
323

 

Total cash and cash equivalents
$
1,342

 
$
1,613

The accompanying notes are an integral part of these consolidated financial statements.

5



MARATHON OIL CORPORATION
Consolidated Statements of Stockholders’ Equity (Unaudited)

 
 
Total Equity of Marathon Oil Stockholders
 
 
(In millions)
 
Preferred
Stock
 
Common
Stock
 
Treasury
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Equity
Three Months Ended March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017 Balance
 
$

 
$
937

 
$
(3,325
)
 
$
7,379

 
$
6,779

 
$
(62
)
 
$
11,708

Shares issued - stock-based compensation
 

 

 
158

 
(93
)
 

 

 
65

Shares repurchased
 

 

 
(8
)
 

 

 

 
(8
)
Stock-based compensation
 

 

 

 
(49
)
 

 

 
(49
)
Net income
 

 

 

 

 
356

 

 
356

Other comprehensive income (loss)
 

 

 

 

 

 
4

 
4

Dividends paid (per share amount of $0.05)
 

 

 

 

 
(42
)
 

 
(42
)
March 31, 2018 Balance
 
$

 
$
937

 
$
(3,175
)
 
$
7,237

 
$
7,093

 
$
(58
)
 
$
12,034

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018 Balance
 
$

 
$
937

 
$
(3,816
)
 
$
7,238

 
$
7,706

 
$
63

 
$
12,128

Cumulative-effect adjustment (Note 2)

 

 

 

 

 
(31
)
 

 
(31
)
Shares issued - stock-based compensation
 

 

 
101

 
(39
)
 

 

 
62

Shares repurchased
 

 

 
(30
)
 

 

 

 
(30
)
Stock-based compensation
 

 

 

 
(50
)
 

 

 
(50
)
Net income
 

 

 

 

 
174

 

 
174

Other comprehensive income (loss)
 

 

 

 

 

 
(4
)
 
(4
)
Dividends paid (per share amount of $0.05)
 

 

 

 

 
(41
)
 

 
(41
)
March 31, 2019 Balance
 
$

 
$
937

 
$
(3,745
)
 
$
7,149

 
$
7,808

 
$
59

 
$
12,208

The accompanying notes are an integral part of these consolidated financial statements.



6

MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)


1.
Basis of Presentation
These consolidated financial statements are unaudited; however, in the opinion of management, these statements reflect all adjustments necessary for a fair statement of the results for the periods reported.  All such adjustments are of a normal recurring nature unless disclosed otherwise.  These consolidated financial statements, including notes, have been prepared in accordance with the applicable rules of the SEC and do not include all of the information and disclosures required by U.S. GAAP for complete financial statements.
These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our 2018 Annual Report on Form 10-K.  The results of operations for the first quarter of 2019 are not necessarily indicative of the results to be expected for the full year.
As a result of the announcement to sell our U.K. business in the first quarter of 2019, we have reflected these assets and liabilities as held for sale at March 31, 2019 in the consolidated balance sheet and the consolidated statement of cash flows. The related disclosures in this report exclude these held for sale amounts, unless otherwise noted. This divestiture is discussed in further detail in Note 4.

Reclassifications
We have reclassified certain prior year amounts between operating cash flow to present it on a basis comparable with the current year's presentation with no impact on net cash provided by operating activities.
2.    Accounting Standards
Not Yet Adopted
Goodwill standard
In January 2017, the FASB issued a new accounting standards update that eliminates the requirement to calculate the implied fair value of the goodwill (Step 2 of goodwill impairment test under the current guidance) to measure a goodwill impairment charge. We anticipate the standard to require entities to record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value (measure the charge based on Step 1 under the current guidance). This standard is effective for us in the first quarter of 2020 and shall be applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We plan to adopt the standard on a prospective basis, and do not expect a material impact on our consolidated results of operations, financial position or cash flows for prior periods.
Financial instruments – credit losses
In June 2016, the FASB issued a new accounting standards update that changes the impairment model for trade receivables, net investments in leases, debt securities, loans and certain other instruments. The standard requires the use of a forward-looking “expected loss” model as opposed to the current “incurred loss” model. This standard is effective for us in the first quarter of 2020 and will be adopted on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the adoption period. Early adoption is permitted starting January 2019. We are evaluating the provisions of this accounting standards update and assessing the impact, if any, it may have on our consolidated results of operations, financial position or cash flows.
Recently Adopted
Lease accounting standard
In February 2016, the FASB issued a new leasing accounting standard, which modified the definition of a lease and established comprehensive accounting and financial reporting requirements for leasing arrangements. It requires lessees to recognize a lease liability and a right-of-use ("ROU") asset for all leases, including operating leases, with a term of greater than 12 months on the balance sheet. On January 1, 2019, we adopted the new lease accounting standard using the modified retrospective method and applied to all leases that existed as of that date. It does not apply to leases to explore for or use minerals, oil, natural gas and similar non-regenerative resources, including the intangible right to explore for those natural resources and rights to use the land in which those natural resources are contained.



7

MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)

The new lease standard requires certain accounting policy decisions while also providing a number of optional practical expedients for transition accounting. Our accounting policies and the practical expedients utilized are summarized below:
Implemented an accounting policy to not recognize any right-of-use assets and lease liabilities related to short-term leases on the balance sheet.
Implemented an accounting policy to not separate the lease and nonlease components for all asset classes, except for vessels.
Elected the package of practical expedients which allows us to not reassess our prior conclusions regarding the lease identification and lease classification for contracts that commenced or expired prior to the effective date.
Elected the practical expedient pertaining to land easements which allows us to continue accounting for existing agreements under the previous accounting policies as nonlease transactions. Any modifications of existing contracts or new agreements will be assessed under the new lease accounting guidance and may become leases in the future.
As a result of the adoption, we recorded approximately $156 million of ROU assets and $160 million of lease liabilities on our consolidated balance sheet and a cumulative-effect adjustment to stockholders' equity on the date of adoption of $31 million. As of March 31, 2019, we have approximately $254 million of lease liabilities and $247 million of ROU assets on our consolidated balance sheet related to long-term leases further discussed in Note 12. The increase in ROU assets and liabilities during the quarter is due to new contracts signed in the first quarter of 2019. We continue presenting all prior comparative periods without any restatements.
Hedge accounting standard
In August 2017, the FASB issued a new accounting standards update that amends the hedge accounting model to enable entities to hedge certain financial and nonfinancial risk attributes previously not allowed. The amendment also reduces the overall complexity of documenting, assessing and measuring hedge effectiveness. This standard was effective for us in the first quarter of 2019. Adoption of this standard did not have a significant impact on our consolidated results of operations, financial position or cash flows.
3.
Income and Dividends per Common Share
Basic income (loss) per share is based on the weighted average number of common shares outstanding.  Diluted income per share assumes exercise of stock options in all periods, provided the effect is not antidilutive. The per share calculations below exclude 5 million and 8 million of stock options for the three months ended March 31, 2019 and 2018 that were antidilutive.
 
Three Months Ended March 31,
(In millions, except per share data)
2019
 
2018
Net income
$
174

 
$
356

 
 
 
 
Weighted average common shares outstanding
819

 
851

Effect of dilutive securities
1

 
1

Weighted average common shares, diluted
820

 
852

Net income per share:
 
 
 
Basic
$
0.21

 
$
0.42

Diluted
$
0.21

 
$
0.42

 
 
 
 
Dividends per share
$
0.05

 
$
0.05


4.
Dispositions
International Segment
In the first quarter of 2019, we entered into an agreement to sell our U.K. business, Marathon Oil U.K. LLC ("MOUK") and Marathon Oil West of Shetlands Limited ("MOWOS"). Subject to customary adjustments, the closing consideration payable to us will be approximately $140 million, which reflects the assumption by the buyer of the cash equivalent balance and working capital balance, which was approximately $350 million at December 31, 2018. These properties are classified as held for sale in the consolidated balance sheet at March 31, 2019, with total assets of $947 million and total liabilities of $997 million, including an asset retirement obligation of $960 million. For the three months ended March 31, 2019 and 2018, we had approximately $13 million and $52 million in income before income taxes relating to our U.K business. Though there are certain contractual

8

MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)

requirements that must be satisfied, the transaction is expected to close in the second half of 2019, with an effective date of January 1, 2019.
In the fourth quarter of 2018, we entered into an agreement to sell our subsidiary, Marathon Oil KDV B.V., which holds our 15% non-operated interest in the Atrush block in Kurdistan for proceeds of $63 million, before closing adjustments. This property is classified as held for sale in the consolidated balance sheet at March 31, 2019 and December 31, 2018, with total assets of $145 million and $58 million, and total liabilities of $69 million and $17 million. We expect the transaction to close in the second quarter of 2019.
In the first quarter of 2018, we closed on the sale of our subsidiary, Marathon Oil Libya Limited, which held our 16.33% non-operated interest in the Waha concessions in Libya, to a subsidiary of Total S.A. (Elf Aquitaine SAS) for proceeds of approximately $450 million, excluding closing adjustments, and recognized a pre-tax gain of $255 million.
5.
Revenues
The majority of our revenues are derived from the sale of crude oil and condensate, NGLs and natural gas under spot and term agreements with our customers in the United States and various international locations.
The following tables present our revenues from contracts with customers disaggregated by product type and geographic areas.
 
Three Months Ended March 31, 2019
United States
 
 
 
Northern
 
 
(In millions)
Eagle Ford
Bakken
Oklahoma
Delaware
Other U.S.
Total
Crude oil and condensate
$
318

$
372

$
77

$
64

$
28

$
859

Natural gas liquids
35

10

22

8

2

77

Natural gas
34

12

45

6

6

103

Other
2




21

23

Revenues from contracts with customers
$
389

$
394

$
144

$
78

$
57

$
1,062

 
Three Months Ended March 31, 2019
International
 
 
Other
 
(In millions)
E.G.
U.K.
International
Total
Crude oil and condensate
$
47

$
56

$
10

$
113

Natural gas liquids
1

1


2

Natural gas
7

8


15

Other

8


8

Revenues from contracts with customers
$
55

$
73

$
10

$
138

 
Three Months Ended March 31, 2018
United States
 
 
 
Northern
 
 
(In millions)
Eagle Ford
Bakken
Oklahoma
Delaware
Other U.S.
Total
Crude oil and condensate
$
366

$
330

$
115

$
55

$
53

$
919

Natural gas liquids
42

15

37

6

3

103

Natural gas
33

10

43

5

7

98

Other
2




3

5

Revenues from contracts with customers
$
443

$
355

$
195

$
66

$
66

$
1,125


9

MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)

 
Three Months Ended March 31, 2018
International
 
 
 
Other
 
(In millions)
E.G.
U.K.
Libya
International
Total
Crude oil and condensate
$
71

$
95

$
187

$
23

$
376

Natural gas liquids
1




1

Natural gas
9

8

9


26

Other

9



9

Revenues from contracts with customers
$
81

$
112

$
196

$
23

$
412



Contract receivables and liabilities
The following table provides information about receivables and contract assets (liabilities) from contracts with customers.
 (In millions)
March 31, 2019
January 1, 2019
Receivables from contracts with customers, included in receivables, less reserves
$
751

$
714

Contract asset (liability)
$

$
(1
)


The contract liability primarily relates to the advance consideration received from customers for crude oil sales and processing services in the U.K. A contract asset would represent crude oil delivered in the U.K. to a customer for which payment will be collected over time as it becomes due under the pricing terms stipulated in the sales agreement. As a practical expedient, when the balance of this U.K. customer is a contract asset, we do not adjust revenue for the effects of a significant financing element as the period between when crude oil is delivered to the customer and when payment is expected to be received is one year or less at contract inception.
Changes in the contract asset (liability) balance during the period are as follows.
 
Three Months Ended
  (In millions)
March 31, 2019
Contract asset (liability) balance as of January 1, 2019
$
(1
)
Revenue recognized as performance obligations are satisfied
24

Amounts invoiced to customers
(23
)
Contract asset (liability) balance as of March 31, 2019
$


6.
Segment Information
We have two reportable operating segments. Both of these segments are organized and managed based upon geographic location and the nature of the products and services offered.
United States ("U.S.") – explores for, produces and markets crude oil and condensate, NGLs and natural gas in the United States
International ("Int’l") – explores for, produces and markets crude oil and condensate, NGLs and natural gas outside of the United States and produces and markets products manufactured from natural gas, such as LNG and methanol, in Equatorial Guinea (“E.G.”)
Information regarding assets by segment is not presented because it is not reviewed by the chief operating decision maker (“CODM”).  Segment income represents income which excludes certain items not allocated to our operating segments, net of income taxes. A portion of our corporate and operations general and administrative support costs are not allocated to the operating segments. These unallocated costs primarily consist of employment costs (including pension effects), professional services, facilities and other costs associated with corporate and operations support activities. Additionally, items which affect comparability such as: gains or losses on dispositions, proved property impairments, change in tax associated with a tax legislation change, unrealized gains or losses on commodity derivative instruments, pension settlement losses or other items (as determined by the CODM) are not allocated to operating segments.

10

MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)

 
Three Months Ended March 31, 2019
 
 
Not Allocated
 
 
(In millions)
U.S.
 
Int'l
 
to Segments
 
Total
Revenues from contracts with customers
$
1,062

 
$
138

 
$

 
$
1,200

Net gain (loss) on commodity derivatives
22

 

 
(113
)
(b) 
(91
)
Income from equity method investments

 
11

 

 
11

Net gain on disposal of assets

 

 
42

(c) 
42

Other income
1

 
3

 
31

(d) 
35

Less costs and expenses:

 

 

 

Production
139

 
50

 
(2
)
 
187

Shipping, handling and other operating
140

 
13

 
1

 
154

Exploration
59

 

 

 
59

Depreciation, depletion and amortization
514

 
34

 
6


554

Impairments

 

 
6

(e) 
6

Taxes other than income
74

 

 
(2
)
 
72

General and administrative
29

 
7

 
58

 
94

Net interest and other

 

 
49

 
49

Other net periodic benefit costs

 
(2
)
 
(3
)

(5
)
Income tax benefit
(2
)
 
(11
)
 
(134
)
(f) 
(147
)
Segment income
$
132

 
$
61

 
$
(19
)
 
$
174

Capital expenditures(a)
$
606

 
$
5

 
$
3

 
$
614

(a) 
Includes accruals.
(b) 
Unrealized loss on commodity derivative instruments (See Note 13).
(c) 
Primarily related to the sale of our working interest in the Droshky field (Gulf of Mexico), which closed during the first quarter of 2019.
(d) 
Primarily related to the indemnification of certain tax liabilities in connection with the 2010-2011 Federal Tax Audit with the IRS (See Note 7).
(e) 
Due to the anticipated sale of our non-operated interest in the Atrush block in Kurdistan (See Note 10).
(f) 
Primarily relates to the settlement of the 2010-2011 Federal Tax Audit with the IRS (See Note 7).





11

MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)

 
Three Months Ended March 31, 2018
 
 
Not Allocated
 
 
(In millions)
U.S.
 
Int'l
 
to Segments
 
Total
Revenue from contracts with customers
$
1,125

 
$
412

 
$

 
$
1,537

Net loss on commodity derivatives
(59
)
 

 
(43
)
(b) 
(102
)
Income from equity method investments

 
37

 

 
37

Net gain on disposal of assets

 

 
257

(c) 
257

Other income
3

 
1

 

 
4

Less costs and expenses:
 
 
 
 
 
 
 
Production
151

 
67

 
(1
)
 
217

Shipping, handling and other operating
111

 
19

 

 
130

Exploration
51

 
1

 

 
52

Depreciation, depletion and amortization
528

 
54

 
8

 
590

Impairments

 

 
8

 
8

Taxes other than income
64

 

 

 
64

General and administrative
36

 
9

 
55

 
100

Net interest and other

 

 
45

 
45

Other net periodic benefit costs

 
(2
)
 
5

(d) 
3

Income tax provision (benefit)
3

 
170

 
(5
)
 
168

Segment income
$
125

 
$
132

 
$
99

 
$
356

Capital expenditures(a)
$
611

 
$
6

 
$
5

 
$
622

(a) 
Includes accruals.
(b) 
Unrealized loss on commodity derivative instruments (See Note 13).
(c) 
Primarily related to the gain on the sale of our Libya subsidiary (See Note 4).
(d) 
Includes pension settlement loss of $4 million (See Note 18).



12

MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)

7.    Income Taxes
Effective Tax Rate
The effective income tax rate is influenced by a variety of factors including the geographic and functional sources of income and the relative magnitude of these sources of income. The difference between the total provision and the sum of the amounts allocated to segments is reported in the “Not Allocated to Segments” column of the tables in Note 6.
For the three months ended March 31, 2019 and 2018, our effective income tax rates were as follows:
 
Three Months Ended March 31,
 
2019
 
2018
Effective income tax expense (benefit) rate(a)
(544
)%
 
32
%

(a) 
In all periods presented, we maintained our valuation allowance on our net federal deferred tax assets in the U.S.
The following items caused the effective income tax rates to be different from our U.S. statutory tax rate of 21% for 2019 and 2018:
During the three months ended March 31, 2019, we settled the 2010-2011 U.S. Federal Tax Audit ("IRS Audit") resulting in a tax benefit of $126 million. Additionally, we recorded a non-cash deferred tax benefit of $18 million in the U.K. related to an internal restructuring. These two items are discrete to the first quarter of 2019. Excluding these discrete adjustments, the effective income tax rate for the quarter was a benefit of 8%.
During the three months ended March 31, 2018, we incurred tax expense in Libya of $162 million. Excluding Libya, the effective income tax rate for the three months ended March 31, 2018, was an expense of 2%.

As a result of the IRS Audit settlement, the uncertain tax positions previously established are now effectively settled. The release of the accrued uncertain tax positions resulted in a $126 million tax benefit, primarily related to the additional alternative minimum tax (“AMT”) credits, see Note 22 for further detail.

Pursuant to the Tax Sharing Agreement we entered into with Marathon Petroleum Corporation (“MPC”) in connection with the 2011 spin-off transaction, MPC agreed to indemnify us for certain liabilities. In addition to the benefit from the settlement of the IRS Audit in the first quarter of 2019, we recorded a current receivable and other income of $42 million for indemnity payments due from MPC for tax expense and interest we had previously recognized. The indemnity relates to tax and interest allocable to MPC as a result of the IRS Audit. During the second quarter of 2019, we paid the IRS, and were subsequently reimbursed by MPC which settled their indemnity obligation.

During the three months ended March 31, 2019, we withdrew our appeal related to the Brae area decommissioning costs in the U.K, thus the uncertain tax positions previously established are now considered effectively settled with no tax expense or benefit impact in the first quarter of 2019.

8.    Inventories
Crude oil and natural gas are recorded at weighted average cost and carried at the lower of cost or net realizable value. Supplies and other items consist principally of tubular goods and equipment which are valued at weighted average cost and reviewed periodically for obsolescence or impairment when market conditions indicate.
 
March 31,
 
December 31,
(In millions)
2019
 
2018
Crude oil and natural gas
$
12

 
$
11

Supplies and other items
71

 
85

Inventories
$
83

 
$
96




13

MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)

9.    Property, Plant and Equipment
 
March 31,
 
December 31,
(In millions)
2019
 
2018
United States
$
16,068

 
$
16,011

International
566

 
710

Corporate
80

 
83

Net property, plant and equipment
$
16,714


$
16,804


We had no exploratory well costs capitalized greater than one year as of March 31, 2019 and December 31, 2018.
10.    Impairments
The following table summarizes impairment charges of proved properties. Additionally, it presents the values of assets, by major category, measured at fair value on a nonrecurring basis in periods subsequent to their initial recognition.
 
 
 
 
 
 
 
 
 
Three Months Ended March 31,
 
2019
 
2018
(In millions)
Fair Value
 
Impairment
 
Fair Value
 
Impairment
Long-lived assets held for use
$
37

 
$
6

 
$
50

 
$
8

2019 – During the three months ended March 31, 2019, we recorded a property impairment charge of $6 million, as a result of the anticipated sale of our subsidiary, Marathon Oil KDV B.V., in our International segment to a fair value of $37 million. The related fair value was measured using the market approach, based upon anticipated sales proceeds less costs to sell which resulted in a Level 2 classification. See Note 4 for discussion of the divestiture in further detail.
2018 – During the three months ended March 31, 2018, we recorded a proved property impairment of $8 million, to a fair value of $50 million, as a result of anticipated sales proceeds in our non-operated Sarsang block in Kurdistan. The Sarsang block is included in our International segment. The fair value was measured using the market approach, based upon anticipated sales proceeds less costs to sell, which resulted in a Level 2 classification.
The following table summarizes impairment charges of unproved properties included as a component of exploration expense:
 
Three Months Ended March 31,
(In millions)
2019
 
2018
Exploration Expenses
 
 
 
Unproved property impairments
$
44

 
$
40

Dry well costs
5

 
2

Geological and geophysical
6

 
6

Other
4

 
4

Total exploration expenses
$
59

 
$
52





14

MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)

11.    Asset Retirement Obligations
Asset retirement obligations primarily consist of estimated costs to remove, dismantle and restore land or seabed at the end of oil and gas production operations. Changes in asset retirement obligations for the three months ended were as follows:
 
 
 
 
 
March 31,
(In millions)
2019
 
2018
Beginning balance
$
1,145

 
$
1,483

Incurred liabilities, including acquisitions
12

 
4

Settled liabilities, including dispositions
(109
)
 
(8
)
Accretion expense (included in depreciation, depletion and amortization)
13

 
18

Revisions of estimates
11

 

Held for sale
(862
)
 

Ending balance
$
210

 
$
1,497



March 31, 2019
Settled liabilities is primarily related to the sale of our working interest in the Droshky field (Gulf of Mexico), which closed during the first quarter of 2019.
Held for sale include the asset retirement obligations associated with the sale of our U.K. business, which was partially offset by settled liabilities for dispositions primarily related to the Droshky field in the first quarter of 2019. See Note 4 for discussion of the divestitures in further detail.
Ending balance includes $18 million classified as short-term at March 31, 2019.
March 31, 2018
Ending balance includes $52 million classified as short-term at March 31, 2018.

12. Leases
Supplemental balance sheet information related to leases was as follows:
(In millions)
 
March 31, 2019
Operating Leases:
Balance Sheet Location:
 
ROU asset
Other noncurrent assets
$
247

Current portion of long-term lease liability
Other current liabilities
$
92

Long-term lease liability
Deferred credits and other liabilities
$
162


In determining our ROU assets and long-term lease liabilities, the new lease standard requires certain accounting policy decisions, while also providing a number of optional practical expedients for transition accounting. Our accounting policies and the practical expedients utilized are summarized below:
Implemented an accounting policy to not recognize any right-of-use assets and lease liabilities related to short-term leases on the balance sheet.
Implemented an accounting policy to not separate the lease and nonlease components for all asset classes, except for vessels.
Elected the package of practical expedients which allows us to not reassess our prior conclusions regarding the lease identification and lease classification for contracts that commenced or expired prior to the effective date.
Elected the practical expedient pertaining to land easements which allows us to continue accounting for existing agreements under the previous accounting policies as nonlease transactions. Any modifications of existing contracts or new agreements will be assessed under the new lease accounting guidance and may become leases in the future.
We enter into various lease agreements to support our operations including drilling rigs, well fracturing equipment, compressors, buildings, aircraft, vessels, vehicles and miscellaneous field equipment. We primarily act as a lessee in these transactions and all of our existing leases are classified as either short-term or long-term operating leases.
The majority of the drilling rig agreements and all of fracturing equipment agreements are classified as short-term leases based on the noncancellable period for which we have the right to use the equipment and assessment of options present in each agreement. We also incur variable lease costs under these agreements primarily related to chemicals and sand used in fracturing operations or various additional on-demand equipment and labor. The lease costs associated with the drilling rigs and fracturing equipment are primarily capitalized as part of the well costs.
Our long-term leases are comprised of compressors, buildings, drilling rigs, aircraft, vessels, vehicles and miscellaneous field equipment. Our lease agreements may require both fixed and variable payments; none of the variable payments are rate or index-based, therefore only fixed payments were considered for recognizing lease liabilities and ROU assets related to long-term leases. Also, based on our election not to separate the lease and nonlease components, fixed payments related to equipment, crew and other nonlease components are included in the initial measurement of lease liabilities and ROU assets for all asset classes, except for vessels. For vessels, the contractual consideration was allocated between lease and nonlease components based on estimates provided by service providers.
Our leased assets may be used in joint oil and gas operations with other working interest owners. We recognize lease liabilities and ROU assets only when we are the signatory to a contract as an operator of joint properties. Such lease liabilities and ROU assets are determined based on gross contractual obligations. As we use the leased assets for joint operations, we have the contractual right to recover the other working interest owners’ share of lease costs. As a result, our lease costs are presented on a net basis, reduced for any costs recoverable from other working interest owners. The table below presents our net lease costs as of March 31, 2019 with the majority of operating lease costs expensed as incurred, while the majority of the short-term and variable term lease costs are capitalized into property, plant and equipment.
(In millions)
Three Months Ended March 31, 2019
Lease costs:
 
Operating lease costs(a)
$
21

Short-term lease costs(b)
81

Variable lease costs(c)
60

Total lease costs
$
162

 
 
Other information:
 
ROU assets obtained in exchange for new operating lease liabilities(d)
$
268


(a) 
Represents our net share of the ROU asset amortization and the interest expense.
(b) 
Represents our net share of lease costs arising from leases of less than 1 year but longer than one month that were not included in the lease liability.
(c) 
Represents our net share of variable lease payments that were not included in the lease liability.
(d) 
Represents the cumulative value of ROU assets recognized at lease inception during the quarter.  This amount is then amortized as we utilize the ROU asset, the net effect of which is the ending ROU asset of $247 million (first table above).
We use our periodic internal borrowing rate to discount future contractual payments to their present values. The weighted average lease term and the discount rate relevant to long-term leases were three years and 4% as of March 31, 2019. The remaining annual undiscounted cash flows associated with long-term leases and the reconciliation of these cash flows to the lease liabilities recognized on the consolidated balance sheet is summarized below.
(In millions)
Operating Lease Obligations
2019
$
80

2020
94

2021
57

2022
34

2023
4

Thereafter
1

Total undiscounted lease payments
$
270

Less: Amount representing interest
16

Total operating lease liabilities
$
254

Current portion of long-term lease liability as of March 31, 2019
$
92

Long-term lease liability as of March 31, 2019
$
162



15

MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)


Our wholly-owned subsidiary, Marathon E.G. Production Limited, is a lessor for residential housing in Equatorial Guinea, which is occupied by EGHoldings, a related party equity method investee see Note 21.  The lease was classified as an operating lease and expires in 2024, with a lessee option to extend through 2034.  Lease payments are fixed for the entire duration of the agreement at approximately $6 million per year.  Our lease income is reported in other income in our consolidated statements of income for all periods presented. The undiscounted cash flows to be received under this lease agreement are summarized below.
(In millions)
Operating Lease Future Cash Receipts
2019
$
5

2020
6

2021
6

2022
6

2023
6

Thereafter
66

Total undiscounted cash flows
$
95


In 2018, we signed an agreement with an owner/lessor to construct and lease a new build-to-suit office building in Houston, Texas. The new Houston office location is expected to be completed in 2021.  The lessor and other participants are providing financing for up to $380 million, to fund the estimated project costs. As of March 31, 2019, project costs incurred totaled $47 million, primarily for land acquisition and initial design costs.  The initial lease term is five years and will commence once construction is substantially complete and the new Houston office is ready for occupancy. At the end of the initial lease term, we can negotiate to extend the lease term for an additional five years, subject to the approval of the participants; purchase the property subject to certain terms and conditions; or remarket the property to an unrelated third party.  The lease contains a residual value guarantee of approximately 89% of the total acquisition and construction costs.
13Derivatives
For further information regarding the fair value measurement of derivative instruments see Note 14. All of our commodity derivatives are subject to enforceable master netting arrangements or similar agreements under which we report net amounts. The following tables present the gross fair values of derivative instruments and the reported net amounts along with where they appear on the consolidated balance sheets.
 
March 31, 2019
 
 
(In millions)
Asset
 
Liability
 
Net Asset (Liability)
 
Balance Sheet Location
Not Designated as Hedges
 
 
 
 
 
 
 
     Commodity
$
18

 
$

 
$
18

 
Other current assets
     Commodity
1

 

 
1

 
Other noncurrent assets
     Commodity

 
1

 
(1
)
 
Other current liabilities
     Commodity

 
4

 
(4
)
 
Deferred credits and other liabilities
Total Not Designated as Hedges
$
19

 
$
5

 
$
14

 
 
 
December 31, 2018
 
 
(In millions)
Asset
 
Liability
 
Net Asset (Liability)
 
Balance Sheet Location
Not Designated as Hedges
 
 
 
 
 
 
 
     Commodity
$
131

 
$

 
$
131

 
Other current assets
     Commodity

 
4

 
(4
)
 
Deferred credits and other liabilities
Total Not Designated as Hedges
$
131

 
$
4

 
$
127

 
 



16

MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)

Commodity Derivatives
We have entered into multiple crude oil derivatives indexed to the respective indices as noted in the table below, related to a portion of our forecasted United States sales through 2021. These derivatives consist of three-way collars, basis swaps and NYMEX roll basis swaps. Three-way collars consist of a sold call (ceiling), a purchased put (floor) and a sold put. The ceiling price is the maximum we will receive for the contract volumes; the floor is the minimum price we will receive, unless the market price falls below the sold put strike price. In this case, we receive the NYMEX WTI price plus the difference between the floor and the sold put price. These commodity derivatives were not designated as hedges. The following table sets forth outstanding derivative contracts as of March 31, 2019, and the weighted average prices for those contracts:
 
 
2019
 
 
2020
 
 
2021
Crude Oil
 
Second Quarter
 
Third Quarter
 
Fourth Quarter
 
 
Full
Year
 
 
First Quarter
NYMEX WTI Three-Way Collars (a)
 
 
 
 
 
 
 
 
 
 
 
 
Volume (Bbls/day)
 
70,000

 
50,000

 
50,000

 
 

 
 

Weighted average price per Bbl:
 
 
 
 
 
 
 
 
 
 
 
 
Ceiling
 
$
71.21

 
$
75.88

 
$
75.88

 
 

 
 

Floor
 
$
55.86

 
$
57.80

 
$
57.80

 
 

 
 

Sold put
 
$
48.71

 
$
50.80

 
$
50.80

 
 

 
 

Basis Swaps - Argus WTI Midland (b)
 
 
 
 
 
 
 
 
 
 
 
 
Volume (Bbls/day)
 
10,000

 
15,000

 
15,000

 
 
15,000

 
 

Weighted average price per Bbl
 
$
(0.82
)
 
$
(1.40
)
 
$
(1.40
)
 
 
$
(0.94
)
 
 

Basis Swaps - Net Energy Clearbrook (c)
 
 
 
 
 
 
 
 
 
 
 
 
Volume (Bbls/day)
 
1,000

 
1,000

 
1,000

 
 

 
 

Weighted average price per Bbl
 
$
(3.50
)
 
$
(3.50
)
 
$
(