Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 2.57M
2: EX-31.1 Certification -- §302 - SOA'02 HTML 29K
3: EX-31.2 Certification -- §302 - SOA'02 HTML 29K
4: EX-32.1 Certification -- §906 - SOA'02 HTML 26K
5: EX-32.2 Certification -- §906 - SOA'02 HTML 26K
11: R1 Cover HTML 77K
12: R2 Consolidated Statements of Income (Unaudited) HTML 124K
13: R3 Consolidated Statements of Comprehensive Income HTML 55K
(Unaudited)
14: R4 Consolidated Balance Sheets (Unaudited) HTML 136K
15: R5 Consolidated Balance Sheets (Unaudited) HTML 45K
(Parenthetical)
16: R6 Consolidated Statements of Cash Flows (Unaudited) HTML 116K
17: R7 Consolidated Statements of Stockholders' Equity HTML 70K
(Unaudited)
18: R8 Consolidated Statements of Stockholders' Equity HTML 27K
(Unaudited) (Parenthetical)
19: R9 Basis of Presentation HTML 28K
20: R10 Accounting Standards HTML 36K
21: R11 Income and Dividends per Common Share HTML 48K
22: R12 Revenues HTML 125K
23: R13 Segment Information HTML 213K
24: R14 Income Taxes HTML 38K
25: R15 Credit Losses HTML 36K
26: R16 Inventories HTML 32K
27: R17 Property, Plant and Equipment HTML 34K
28: R18 Impairments HTML 49K
29: R19 Asset Retirement Obligations HTML 40K
30: R20 Leases HTML 114K
31: R21 Derivatives HTML 162K
32: R22 Fair Value Measurements HTML 96K
33: R23 Debt HTML 33K
34: R24 Stockholders' Equity HTML 32K
35: R25 Incentive Based Compensation HTML 43K
36: R26 Defined Benefit Postretirement Plans HTML 70K
37: R27 Reclassifications Out of Accumulated Other HTML 50K
Comprehensive Income (Loss)
38: R28 Supplemental Cash Flow Information HTML 35K
39: R29 Equity Method Investments HTML 48K
40: R30 Commitments and Contingencies HTML 36K
41: R31 Basis of Presentation (Policies) HTML 27K
42: R32 Income and Dividends per Common Share (Tables) HTML 47K
43: R33 Revenues (Tables) HTML 122K
44: R34 Segment Information (Tables) HTML 208K
45: R35 Income Taxes (Tables) HTML 31K
46: R36 Credit Losses (Tables) HTML 34K
47: R37 Inventories (Tables) HTML 32K
48: R38 Property, Plant and Equipment (Tables) HTML 32K
49: R39 Impairments (Tables) HTML 47K
50: R40 Asset Retirement Obligations (Tables) HTML 37K
51: R41 Leases (Tables) HTML 52K
52: R42 Derivatives (Tables) HTML 159K
53: R43 Fair Value Measurements (Tables) HTML 92K
54: R44 Incentive Based Compensation (Tables) HTML 41K
55: R45 Defined Benefit Postretirement Plans (Tables) HTML 66K
56: R46 Reclassifications Out of Accumulated Other HTML 49K
Comprehensive Income (Loss) (Tables)
57: R47 Supplemental Cash Flow Information (Tables) HTML 34K
58: R48 Equity Method Investments (Tables) HTML 47K
59: R49 Income and Dividends per Common Share (Details) HTML 64K
60: R50 Revenues - Narrative (Details) HTML 26K
61: R51 Revenues - Revenues from Contracts with Customers HTML 89K
by Product Type and Geographic Areas (Details)
62: R52 Segment Information (Details) HTML 178K
63: R53 Income Taxes (Details) HTML 28K
64: R54 Credit Losses (Details) HTML 34K
65: R55 Inventories (Details) HTML 30K
66: R56 Property, Plant and Equipment (Details) HTML 37K
67: R57 Impairments - Summary of Impaired Assets (Details) HTML 37K
68: R58 Impairments - Narrative (Details) HTML 38K
69: R59 Asset Retirement Obligations (Details) HTML 46K
70: R60 Leases - Supplemental Balance Sheet Information HTML 58K
(Details)
71: R61 Leases - Narrative (Details) HTML 34K
72: R62 Leases - Lease Payments to be Received (Details) HTML 39K
73: R63 Derivatives - Balance Sheet Components (Details) HTML 57K
74: R64 Derivatives - Outstanding Derivative Contracts HTML 67K
(Details)
75: R65 Derivatives - Schedule of mark-to-market impact HTML 32K
and commodity derivative settlements (Details)
76: R66 Derivatives - Narrative (Details) HTML 70K
77: R67 Derivatives - Schedule of Terminated Interest Rate HTML 34K
Swap Agreements (Details)
78: R68 Derivatives - Schedule of Interest Rate Swap HTML 31K
Agreements (Details)
79: R69 Fair Value Measurements - Fair Values - Recurring HTML 62K
(Details)
80: R70 Fair Value Measurements - Fair Values - Financial HTML 46K
Instruments (Details)
81: R71 Debt - Revolving Credit Facility (Details) HTML 39K
82: R72 Debt - Debt Redemption (Details) HTML 32K
83: R73 Debt - Long-Term Debt (Details) HTML 33K
84: R74 Stockholders' Equity (Details) HTML 38K
85: R75 Incentive Based Compensation - Stock Options, HTML 74K
Restricted Stock Awards and Restricted Stock Units
(Details)
86: R76 Incentive Based Compensation - Narrative (Details) HTML 37K
87: R77 Defined Benefit Postretirement Plans (Details) HTML 65K
88: R78 Reclassifications Out of Accumulated Other HTML 63K
Comprehensive Income (Loss) (Details)
89: R79 Supplemental Cash Flow Information (Details) HTML 35K
90: R80 Equity Method Investments - Schedule of Equity HTML 37K
Method Investments (Details)
91: R81 Equity Method Investments - Summarized Financial HTML 53K
Information (Details)
92: R82 Equity Method Investments - Narrative (Details) HTML 43K
93: R83 Commitments and Contingencies (Details) HTML 44K
96: XML IDEA XML File -- Filing Summary XML 178K
94: XML XBRL Instance -- mro-20220630_htm XML 3.48M
95: EXCEL IDEA Workbook of Financial Reports XLSX 156K
7: EX-101.CAL XBRL Calculations -- mro-20220630_cal XML 188K
8: EX-101.DEF XBRL Definitions -- mro-20220630_def XML 604K
9: EX-101.LAB XBRL Labels -- mro-20220630_lab XML 1.61M
10: EX-101.PRE XBRL Presentations -- mro-20220630_pre XML 1.00M
6: EX-101.SCH XBRL Schema -- mro-20220630 XSD 173K
97: JSON XBRL Instance as JSON Data -- MetaLinks 442± 655K
98: ZIP XBRL Zipped Folder -- 0000101778-22-000168-xbrl Zip 486K
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 i1-1513
iMarathon
Oil Corporation
(Exact name of registrant as specified in its charter)
iDelaware
i25-0996816
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i990 Town and Country Boulevard,iHouston,iTexas
i77024-2217
(Address of principal executive offices)
i(713)i629-6600
(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
iCommon Stock, par value $1.00
iMRO
iNew
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. iYesþ 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). iYesþ 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.
iLarge
accelerated filer
þ
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
i☐
Emerging
growth company
i☐
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 i☐No þ
There were i677,583,502
shares of Marathon Oil Corporation common stock outstanding as of July 29, 2022.
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 2021 Annual Report on Form 10-K.
The
accompanying notes are an integral part of these consolidated financial statements.
6
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
1. iBasis
of Presentation
i
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 2021 Annual Report on Form 10-K. The results of operations for the second quarter and first six months of 2022 are not necessarily indicative of the results to be expected for the full year.
2. iAccounting
Standards
No accounting standards were adopted in the second quarter or first six months of 2022 that had a material impact on our consolidated financial statements.
3. iIncome and Dividends per Common Share
Basic income 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. iThe per share calculations below exclude ii2/
million of stock options for the three and six months ended June 30, 2022 and i4 million and i5
million of stock options for the three and six months ended June 30, 2021, respectively, that were antidilutive./
Three Months Ended June
30,
Six Months Ended June 30,
(In millions, except per share data)
2022
2021
2022
2021
Net income
$
i966
$
i16
$
i2,270
$
i113
Weighted
average common shares outstanding
i703
i789
i717
i790
Effect
of dilutive securities
i2
i—
i2
i1
Weighted
average common shares, diluted
i705
i789
i719
i791
Net
income per share:
Basic
$
i1.37
$
i0.02
$
i3.17
$
i0.14
Diluted
$
i1.37
$
i0.02
$
i3.16
$
i0.14
Dividends
per share
$
i0.08
$
i0.04
$
i0.15
$
i0.07
4. iRevenues
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 Equatorial Guinea.
As of June 30, 2022 and December 31, 2021, receivables from contracts with customers, included in receivables, net were $i1.3
billion and $i961 million, respectively.
7
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
i
The
following tables present our revenues from contracts with customers disaggregated by product type and geographic areas for the three and six months ended June 30:
Notes to Consolidated Financial Statements (Unaudited)
5. iSegment Information
We have iitwo/
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”) – produces and markets crude oil and condensate, NGLs and natural gas outside of the United States as well as produces and markets products manufactured from natural gas, such as LNG and methanol, in Equatorial Guinea (“E.G.”)
Segment income represents income that 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, impairments of proved and certain unproved properties, goodwill and equity method investments, changes in our valuation allowance, unrealized gains or losses on commodity and interest rate derivative instruments, effects of pension settlements and curtailments or other items (as determined by the chief operating decision maker (“CODM”)) are not allocated to operating segments.
(b)Unrealized loss on commodity derivative instruments (See Note 13).
(c)Includes impairments of $i24 million associated with central facilities in Eagle Ford (See Note
10) and $i22 million associated with decommissioning costs for non-producing long-lived assets in the Gulf of Mexico (‘GOM’) (See Note 10, Note 11 and Note
22).
(d)Includes a $i22 million loss on 2022 interest rate swaps and a $i31 million
gain on 2025 interest rate swaps, neither of which were designated as cash flow hedges as of June 30, 2021 (See Note 13).
(e)Represents costs related to a make-whole provision premium and the write off of unamortized discount and issuance costs related to the redemption of the 2022 Notes in April 2021.
10
MARATHON
OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
(b)Unrealized loss on commodity derivative instruments (SeeNote 14).
(c)Includes second quarter 2021 impairments of $i24 million associated with central facilities in Eagle Ford (See Note
10) and $i22 million associated with decommissioning costs for non-producing long-lived assets in GOM (See Note 10, Note 11 and Note
22).
(d)Includes $i13 million associated with the termination of an aircraft lease agreement and $i12
million arising from severance expenses associated with a workforce reduction.
(e)Includes a $i19 million gain on 2022 interest rate swaps and a $i31 million
gain on 2025 interest rate swaps, neither of which were designated as cash flow hedges as of June 30, 2021 (See Note 13).
(f)Represents costs related to a make-whole provision premium and the write off of unamortized discount and issuance costs related to the redemption of the 2022 Notes in April 2021.
12
MARATHON OIL CORPORATION
Notes
to Consolidated Financial Statements (Unaudited)
6. iIncome 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
5.
i
For the three and six months ended June 30, 2022 and 2021, our effective income tax rates were as follows:
•2022— Our effective income tax rate was different from our U.S. statutory tax rate of 21% for the six months ended June 30, 2022, due to the first quarter 2022 release of the valuation allowance on certain U.S. and state deferred tax assets resulting in a non-cash deferred tax benefit of $i685 million. As we previously disclosed in our 2021 Form 10-K, we maintained a full valuation allowance on our net federal
deferred tax assets and would continue to do so until there exists sufficient positive evidence to support a reversal of the allowance. In the first quarter, as a result of significant increases in commodity prices, corresponding increases in projections of our future taxable income, and the absence of objective negative evidence such as a cumulative loss in recent years, we determined we have sufficient positive evidence to release a majority of the federal valuation allowance. We retained a partial valuation allowance on certain U.S. deferred tax assets primarily as a result of volatility in commodity prices impacting assessed likelihood of future realizability.
•2021— Our effective income tax rate was different from our U.S. statutory tax rate of 21% for the three and six months ended June 30,
2021, as a result of the valuation allowance on net federal deferred tax assets in the U.S. which was in place at the time. In addition, the income mix of our U.S. and E.G. operations, including the income mix within E.G. between equity method investees and subsidiaries, contributed to the difference.
7. iCredit Losses
The
majority of our receivables are from purchasers of commodities or joint interest owners in properties we operate, both of which are recorded at estimated or invoiced amounts and do not bear interest. The majority of these receivables have payment terms of 30 days or less. At the end of each reporting period, we assess the collectability of our receivables and estimate the expected credit losses using historical data, current market conditions, reasonable and supportable forecasts of future economic conditions and other data as deemed appropriate.
i
Changes
in the allowance for doubtful accounts balance were as follows:
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.
As
of June 30, 2022 and December 31, 2021, we had $i34 million and $i80
million, respectively, of exploratory well costs capitalized greater than one year related to suspended wells. Management believes these wells exhibit sufficient quantities of hydrocarbons to justify potential development. The vast majority of the suspended wells require completion activities and installation of infrastructure in order to classify the reserves as proved.
10. iImpairments
iThe following table summarizes impairment charges of proved properties and their corresponding fair values.
•2021— During the second quarter of 2021, we recorded an impairment expense of $i24 million associated with itwo central
facilities located in Eagle Ford. Decommissioning activities commenced during the quarter, which included the re-routing of existing wells.
We also recognized an incremental $i22 million of impairment expense associated with an increase in the estimated future decommissioning costs of certain non-producing wells, pipelines and production facilities for previously divested offshore assets located in the Gulf of Mexico. In a prior reporting period, we recorded a $i7
million liability in our consolidated balance sheet associated with these assets, thereby increasing the total recognized asset retirement obligation to $i29 million as of June 30, 2021. See Note 11 and Note 22 for further information.
The
combined effects of these items were recorded within the Impairments line item within our consolidated statements of income.
14
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
11. iAsset
Retirement Obligations
i
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 were as follows:
June
30,
(In millions)
2022
2021
Beginning balance as of January 1
$
i316
$
i254
Incurred
liabilities, including acquisitions
i8
i6
Settled
liabilities, including dispositions
(i3)
(i2)
Accretion
expense (included in depreciation, depletion and amortization)
i7
i6
Revisions
of estimates
(i5)
i32
Ending
balance as of June 30, total
$
i323
$
i296
Ending
balance as of June 30, short-term
$
i46
$
i24
/
•2021— In the second quarter of 2021, we had a revision of estimate of $i29 million related to anticipated costs for decommissioning certain wells, pipelines and production facilities for previously divested offshore non-producing long-lived assets located in the Gulf of Mexico. As of June 30, 2021, $i14
million of this revision of estimate was classified as short-term. See Note 22 for further information. During the quarter, we recognized $i22 million of impairment expense associated with these non-producing long-lived assets within our consolidated statements of income. See Note 10
for further information.
12. iiiLeases//
Lessee
i
Balance
sheet information related to right-of-use (“ROU”) assets and lease liabilities was as follows:
Notes to Consolidated Financial Statements (Unaudited)
Operating Leases
We enter into various lease agreements to support our operations including drilling rigs, well fracturing equipment, compressors, buildings, vessels, vehicles and miscellaneous field equipment. We primarily act as a lessee in these transactions and the majority of our existing leases are classified as either short-term or long-term operating leases.
Finance Leases
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 initial lease term is ifive
years and commenced in late September 2021 after the new Houston office was ready for occupancy. In March 2022, we made our first cash lease payment. For the six months ended June 30, 2022, our cash lease payments were approximately $i2 million. At the end of the initial lease term, we can negotiate to extend the lease term for an additional ifive
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 i100% of the total acquisition and construction costs.
Lessor
Our wholly owned subsidiary, Marathon E.G. Production Limited, is a lessor for residential housing in E.G., 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 $i6 million per year. Our lease income is reported in other income in our consolidated statements of income for all periods presented. iThe
undiscounted cash flows to be received under this lease agreement are summarized below.
(In millions)
Operating Lease Future Cash Receipts
2022
$
i3
2023
i6
2024
i6
2025
i6
2026
i6
Thereafter
i48
Total
undiscounted cash flows
$
i75
13. iDerivatives
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.
i
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.
We have entered into multiple crude oil and natural gas derivatives indexed to the respective indices as noted in the table below, related to a portion of our forecasted U.S. sales through 2023. These derivatives consist of three-way collars, two-way collars 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.
i
The
following table sets forth outstanding derivative contracts as of June 30, 2022, and the weighted average prices for those contracts:
2022
2023
Third
Quarter
Fourth Quarter
First Quarter
Crude Oil
NYMEX
WTI Three-Way Collars
Volume (Bbls/day)
i30,000
i30,000
i
Weighted
average price per Bbl:
Ceiling
$
i97.52
$
i97.52
i
Floor
$
i56.67
$
i56.67
i
Sold
put
$
i46.67
$
i46.67
i
NYMEX
Roll Basis Swaps
Volume (Bbls/day)
i60,000
i60,000
i
Weighted
average price per Bbl
$
i0.67
$
i0.67
i
Natural
Gas
Henry Hub (“HH”) Two-Way Collars
Volume
(MMBtu/day)
i50,000
i50,000
Weighted
average price per MMBtu:
Ceiling
$
i19.28
$
i19.28
Floor
$
i5.00
$
i5.00
Henry
Hub Three-Way Collars
Volume (MMBtu/day)
i100,000
i100,000
i
Weighted
average price per MMBtu:
Ceiling
$
i7.13
$
i7.13
i
Floor
$
i3.88
$
i3.88
i
Sold
Put
$
i2.88
$
i2.88
i
/
17
MARATHON
OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
The unrealized and realized gain (loss) impact of our commodity derivative instruments appears in the table below and is reflected in net gain (loss) on commodity derivatives in the consolidated statements of income.
Three Months
Ended June 30,
Six Months Ended June 30,
(In millions)
2022
2021
2022
2021
Unrealized gain (loss) on derivative instruments, net
$
i43
$
(i75)
$
(i71)
$
(i157)
Realized
gain (loss) on derivative instruments, net(a)
$
(i70)
$
(i91)
$
(i99)
$
(i162)
(a)During
the second quarter and first six months of 2022, net cash paid for settled derivative positions was $i61 million and $i89 million, respectively.
During the second quarter and first six months of 2021, net cash paid for settled derivative positions was $i84 million and $i95 million,
respectively.
Interest Rate Swaps
During 2020, we entered into forward starting interest rate swaps with a notional amount of $i350 million to hedge variations in cash flows arising from fluctuations in the LIBOR benchmark interest rate related to forecasted interest payments of a future debt issuance in 2025. The expected proceeds of the future debt issuance were intended to refinance the $i900 million
i3.85% Senior Notes due 2025 (“2025 Notes”). In September 2021, we fully redeemed these 2025 Notes. In March 2022, we closed these positions and settled the interest rate swaps for proceeds of $i44
million. During the six months ended June 30, 2022, we recorded a cumulative $ii17/ million
gain within net interest for these swaps.
During the second quarter of 2021, we de-designated $i25 million of the $i320 million Houston office cash
flow hedges (discussed further in the Derivatives Designated as Cash Flow Hedges section below), as the construction cost budget estimate was reduced. These interest rate swap contracts began to settle in January 2022. On June 10, 2022, we closed the $i25 million de-designated hedges, which resulted in cash proceeds of approximately $i2 million.
As of June 30, 2022, the remaining open interest rate swaps for the Houston office (with a notional amount of $i295 million) are still classified as cash flow hedges.
iThe
following table presents, by maturity date, information about our de-designated forward starting interest rate swap agreements. These positions were fully liquidated as of June 30, 2022.
During 2019, we entered into forward starting interest rate swaps with a total notional amount of $i320 million to hedge variations in cash flows related to the 1-month LIBOR component of future lease payments of our future Houston office. During the second quarter of 2021, we de-designated $i25 million
of these hedges as the construction cost budget estimate associated with the project was reduced (see discussion in preceding section). The notional amount of open interest rate swaps for the Houston office is $i295 million.
The Houston office lease commenced in September 2021, however our first cash lease payment for February 2022 rent was paid in March. The first settlement date for the interest rate swaps was in January 2022. The last swap will mature in September 2026. During the second quarter and first six months of2022, net cash paid for the settled interest rate swap positions was $i1 million and $i2 million, respectively.
As of June 30, 2022, we expect to reclassify $i5 million from accumulated other comprehensive income into the income statement over the next twelve months. See Note 12 for further details regarding the lease of the Houston office.
The following table presents, by
maturity date, information about our interest rate swap agreements, including the fixed weighted average LIBOR.
Notes to Consolidated Financial Statements (Unaudited)
14. iFair Value Measurements
Fair Values – Recurring
i
The
following tables present assets and liabilities accounted for at fair value on a recurring basis as of June 30, 2022 and December 31, 2021 by hierarchy level.
Interest rate - not designated as cash flow hedges
$
i—
$
i27
$
i—
$
i27
Derivative
instruments, assets
$
i—
$
i27
$
i—
$
i27
Derivative
instruments, liabilities
Commodity(a)
$
(i2)
$
(i5)
$
i—
$
(i7)
Interest
rate - designated as cash flow hedges
i—
(i5)
i—
(i5)
Derivative
instruments, liabilities
$
(i2)
$
(i10)
$
i—
$
(i12)
Total
$
(i2)
$
i17
$
i—
$
i15
/
(a)Commodity
derivative instruments are recorded on a net basis in our consolidated balance sheet. See Note 13.
Commodity derivatives include three-way collars, two-way collars and NYMEX roll basis swaps. These instruments are measured at fair value using either a Black-Scholes or a modified Black-Scholes Model. For commodity swaps, inputs to the models include only commodity prices and interest rates and are categorized as Level 1 because all assumptions and inputs are observable in active markets throughout the term of the instruments. For three-way collars, inputs to the models include commodity prices and implied volatility and are categorized as Level 2 because predominantly all assumptions and inputs are observable in active markets throughout the term of the instruments.
The
forward starting interest rate swaps are measured at fair value with a market approach using actionable broker quotes, which are Level 2 inputs. See Note 13 for detail on the forward starting interest rate swaps.
Fair Values – Nonrecurring
See Note 10for detail on our fair values related to impairments.
Fair Values – Financial Instruments
Our current assets and liabilities include financial instruments, the most significant of which are receivables, the current portion of our long-term debt
and payables. We believe the carrying values of our receivables and payables approximate fair value. Our fair value assessment incorporates a variety of considerations, including (1) the short-term duration of the instruments, (2) our credit rating and (3) our historical incurrence of and expected future insignificant bad debt expense, which includes an evaluation of counterparty credit risk.
19
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
i
The
following table summarizes financial instruments, excluding receivables, payables and derivative financial instruments, and their reported fair values by individual balance sheet line item at June 30, 2022 and December 31, 2021.
Fair values of our financial assets included in other noncurrent assets, and of our financial liabilities included in other current liabilities and deferred credits and other liabilities, are measured using an income approach and most inputs are internally generated, which results in a Level 3 classification. Estimated future cash flows are discounted using a rate deemed appropriate to obtain the fair value.
All of our long-term debt instruments are publicly traded. A market approach, based upon quotes from major financial institutions, which are Level 2 inputs, is used to measure the fair value of our debt.
15. iDebt
Revolving
Credit Facility
As of June 30, 2022, we had ino borrowings against our $i3.1
billion unsecured revolving credit facility (“Credit Facility”).
On July 28, 2022, we executed the seventh amendment to our Credit Facility. The primary changes to the Credit Facility effected by this amendment were to (i) extend the maturity date of the Credit Facility by ithree years to July 28, 2027, (ii) decrease the size of the Credit Facility from $i3.1
billion to $i2.5 billion, (iii) replace the LIBOR interest rate benchmark with the secured overnight financing rate (“SOFR”) and (iv) implement certain revisions to the Pricing Schedule.
The Credit Facility includes a covenant requiring our total debt to total capitalization ratio not to exceed i65% as
of the last day of each fiscal quarter. In the event of a default, the lenders holding more than half of the commitments may terminate the commitments under the Credit Facility and require the immediate repayment of all outstanding borrowings and the cash collateralization of all outstanding letters of credit under the Credit Facility. As of June 30, 2022, we were in compliance with this covenant with a ratio of i19%.
Debt Redemption
In May 2022, we redeemed
the $i32 million i9.375% Senior Notes on the maturity date.
Long-term debt
At June 30,
2022, we had $i4.0 billion of total long-term debt outstanding, which includes $i273 million of long-term debt due within one year. Included in long-term debt due within
one year is $i200 million in i2.0% Bonds which feature a mandatory purchase on April 1, 2023. We currently intend to retire our outstanding long-term
debt as it matures. Refer to our 2021 Annual Report on Form 10-K for a listing of our long-term debt maturities.
20
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
16. iStockholders’
Equity
During the first six months of 2022, we repurchased approximately $i1.4 billion of shares of our common stock pursuant to the share repurchase program. On May 4, 2022, our Board of Directors increased our remaining share repurchase program to $i2.5 billion.
The total remaining share repurchase authorization was approximately $i2.0 billion at June 30, 2022. Purchases under the program are made at our discretion and may be in either open market transactions, including block purchases, or in privately negotiated transactions using cash on hand, cash generated from operations or proceeds from potential asset sales. This program may be changed based upon our financial condition or changes in market conditions and
is subject to termination prior to completion.
Additionally, during the first six months of 2022 we repurchased $i21 million of shares related to our tax withholding obligation associated with the vesting of employee restricted stock awards and restricted stock units; these repurchases do not impact our share repurchase program authorization.
Subsequent to the quarter, we repurchased
approximately $i282 million of shares of our common stock through August 3, 2022.
17. iIncentive
Based Compensation
Stock options, restricted stock and restricted stock units
i
The following table presents a summary of activity for the first six months of 2022:
During the first six months of 2022, we granted i167,043 stock-based performance units to eligible officers, which are settled in shares. The grant date fair value per unit was $i34.07.
During the first six months of 2022, we also granted i167,043 stock-based performance units to eligible officers, which are settled in cash. At the grant date for these performance units, each unit represents the value of ione
share of our common stock. The fair value of each cash-settled performance unit was $i22.63 as of June 30, 2022.
21
MARATHON
OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
18. iDefined Benefit Postretirement Plans
i
The
following summarizes the components of net periodic benefit costs (credits):
Three Months Ended June 30,
Pension Benefits
Other Benefits
(In millions)
2022
2021
2022
2021
Service
cost
$
i3
$
i4
$
i—
$
i—
Interest
cost
i2
i2
i1
i1
Expected
return on plan assets
(i3)
(i2)
i—
i—
Amortization:
–
prior service credit
(i1)
(i1)
(i4)
(i4)
–
actuarial loss
i1
i1
i—
i—
Net
settlement loss(a)
i—
i5
i—
i—
Net
periodic benefit costs (credits)(b)
$
i2
$
i9
$
(i3)
$
(i3)
Six
Months Ended June 30,
Pension Benefits
Other Benefits
(In millions)
2022
2021
2022
2021
Service cost
$
i7
$
i8
$
i—
$
i—
Interest
cost
i4
i4
i1
i1
Expected
return on plan assets
(i5)
(i4)
i—
i—
Amortization:
–
prior service credit
(i3)
(i3)
(i8)
(i8)
–
actuarial loss
i1
i3
i1
i1
Net
settlement loss(a)
i—
i5
i—
i—
Net
periodic benefit costs (credits)(b)
$
i4
$
i13
$
(i6)
$
(i6)
(a)Settlements
are recognized as they occur, once it is probable that lump sum payments from a plan for a given year will exceed the plan’s total service and interest cost for that year.
(b)Net periodic benefit costs (credits) reflects a calculated market-related value of plan assets which recognizes changes in fair value over three years.
/
During the first six months of 2022, we made contributions of $i9
million to our funded pension plan. We also made a payment of $i5 million related to our other postretirement benefit plans. We expect to contribute an additional $i8
million in contributions to our funded pension plan this year.
22
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
19. iReclassifications Out of Accumulated Other Comprehensive Income
(Loss)
i
The following table presents a summary of amounts reclassified from accumulated other comprehensive income (loss):
Three
Months Ended June 30,
Six Months Ended June 30,
(In millions)
2022
2021
2022
2021
Income Statement Line
Postretirement and postemployment plans
Amortization
of prior service credit
$
i5
$
i5
$
i11
$
i11
Other
net periodic benefit costs
Amortization of actuarial loss
(i1)
(i1)
(i2)
(i4)
Other
net periodic benefit costs
Net settlement loss
i—
(i5)
i—
(i5)
Other
net periodic benefit costs
Interest rate swaps
Reclassification of de-designated forward interest rate swaps
i—
(i30)
i—
(i28)
Net
interest and other
(i1)
i—
(i2)
i—
Provision
(benefit) for income taxes
Total reclassifications of (income) expense, net of tax (a)
$
i3
$
(i31)
$
i7
$
(i26)
Net
income (loss)
/
(a)During 2021 we had a full valuation allowance on net federal deferred tax assets in the U.S. and as such, there is no tax impact to our postretirement and postemployment plans for the three and six months ended June 30, 2021.
20. iSupplemental
Cash Flow Information
i
Six Months Ended June 30,
(In millions)
2022
2021
Included
in operating activities:
Interest paid
$
i99
$
i123
Income
taxes paid to (received from) taxing authorities, net of refunds
$
i93
$
i9
Noncash
investing activities:
Increase in asset retirement costs
$
i3
$
i38
/
Other
noncash investing activities include accrued capital expenditures for the six months ended June 30, 2022 and 2021 of $i116 million and $i85
million, respectively.
23
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
21. iEquity Method Investments
i
During
the periods ended June 30, 2022 and December 31, 2021 our equity method investees were considered related parties. Our investment in our equity method investees are summarized in the following table:
(a)EGHoldings
is engaged in LNG production activity.
(b)Alba Plant LLC processes LPG.
(c)AMPCO is engaged in methanol production activity.
Summarized, 100% combined financial information for equity method investees is as follows:
Three
Months Ended June 30,
Six Months Ended June 30,
(In millions)
2022
2021
2022
2021
Income data:
Revenues and other income
$
i459
$
i246
$
i833
$
i481
Income
(loss) from operations
i306
i111
i535
i207
Net
income (loss)
$
i272
$
i85
$
i476
$
i157
/
Revenues
from related parties were $i7 million and $i15 million for the three and six months ended June 30, 2022, respectively,
$i8 million and $i16 million for the three and six months ended June 30, 2021, respectively, with the majority related
to EGHoldings in all periods.
Cash received from equity investees is classified as dividends or return of capital on the Consolidated Statements of Cash Flows. Dividends from equity method investees are reflected in the Operating activities section in Equity Method Investments, net while return of capital is reflected in the Investing activities section. Dividends and return of capital received by us totaled $i146 million and $i200 million
for the three and six months ended June 30, 2022, respectively, and $i50 million and $i81 million
for the three and six months ended June 30, 2021, respectively.
Current receivables from related parties at June 30, 2022 and December 31, 2021 were $i28 million and $i23 million,
respectively, with the majority related to EGHoldings in both periods. Payables to related parties at June 30, 2022 were $i6 million, with the majority related to EGHoldings and $i20
million at December 31, 2021, with the majority related to Alba Plant LLC.
22. iCommitments and Contingencies
In the second quarter of 2019, Marathon E.G. Production Limited (“MEGPL”), a consolidated and wholly owned subsidiary, signed a series of agreements to process third-party Alen
Unit gas through existing infrastructure located in Punta Europa, E.G. Our equity method investee, Alba Plant LLC, is also a party to some of the agreements. These agreements require (subject to certain limitations) MEGPL to indemnify the owners of the Alen Unit against injury to Alba Plant LLC’s personnel and damage to or loss of Alba Plant LLC’s automobiles, as well as third party claims caused by Alba Plant LLC and certain environmental liabilities arising from certain hydrocarbons in the custody of Alba Plant LLC. At this time, we cannot reasonably estimate this obligation as we do not have any history of prior indemnification claims or environmental discharge or contamination. Therefore, we have not recorded a liability with respect to these indemnities since the amount of potential future payments under these indemnification clauses is not determinable.
The agreements to process the third-party Alen Unit gas required
the execution of third-party guarantees by Marathon Oil Corporation in favor of the Alen Unit’s owners. iTwo separate guarantees were executed during the second quarter of 2020; one for a maximum of approximately $i91
million pertaining to the payment obligations of Equatorial Guinea LNG Operations, S.A. and another for a maximum of $i25 million pertaining to the payment obligations of Alba Plant LLC. Payment by us would be required if any of those entities fails to honor its payment obligations pursuant to the relevant agreements with the owners of the Alen Unit. Certain owners of the Alen Unit, or their affiliates, are also direct or indirect shareholders in Equatorial Guinea LNG Operations, S.A. and Alba Plant LLC. Each guarantee expires no later than December
31, 2027. We measured these guarantees
24
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
at fair value using the net present value of premium payments we expect to receive from our investees. Our liability for these guarantees was approximately $i4 million
as of June 30, 2022. Each of Equatorial Guinea LNG Operations, S.A. and Equatorial Guinea LNG Train 1, S.A. provided us with a pledge of its receivables as recourse against any payments we may make under the guaranty of Equatorial Guinea LNG Operations, S.A.’s performance.
Various groups, including the State of North Dakota and ithree Indian tribes (the “iThree
Affiliated Tribes”) represented by the Bureau of Indian Affairs, have been involved in a dispute regarding the ownership of certain lands underlying the Missouri River and Little Missouri River (the “Disputed Land”) from which we currently produce. As a result, as of June 30, 2022, we have a $i145 million current liability in suspended royalty and working interest revenue, including interest, of which $i133 million
was included within accounts payable and $i12 million related to accrued interest and was included within other current liabilities on our consolidated balance sheet. Additionally, we have a long-term receivable of $i25
million for capital and expenses. The United States Department of the Interior (“DOI”) has addressed the United States’ position with respect to this dispute several times over the past five years with conflicting opinions. In January 2017, the DOI issued an opinion that the Disputed Land is held in trust for the iThree Affiliated Tribes, then in June 2018 and May 2020 the DOI issued opinions concluding that the State of North Dakota held title to the Disputed Land. Most recently, on February
4, 2022, the DOI issued an opinion (“M-Opinion”) concluding the DOI’s position that the Disputed Land is held in trust for the iThree Affiliated Tribes. While the M-Opinion is binding on all agencies within the DOI, it is not legally binding on third parties, including Marathon Oil, or a court. Depending on the ultimate outcome of this title dispute, the iThree
Affiliated Tribes could challenge the validity of certain of our leases relating to a portion of the disputed land, and if such challenge were successful it could result in operational delays and additional costs to us. Given the uncertainty in matters such as these, we are unable to predict the ultimate outcome of this matter at this time; however, we believe the resolution of this matter will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.
We are a defendant in a number of legal and administrative proceedings arising in the ordinary course of business including, but not limited to, royalty claims, contract claims, tax disputes and environmental claims. While the ultimate outcome and impact to us cannot be predicted with certainty, we believe the resolution of these proceedings
will not have a material adverse effect on our consolidated financial position, results of operations or cash flows. In addition, we may also be subject to retained liabilities with respect to certain divested assets by operation of law. For example, we are exposed to the risk that owners and/or operators of assets purchased from us become unable to satisfy plugging or abandonment obligations that attach to those assets. In that event, due to operation of law, we may be required to assume plugging or abandonment obligations for those assets. Although we have established reserves for such liabilities, we could be required to accrue additional amounts in the future and these amounts could be material.
Marathon Oil has been named in various lawsuits alleging royalty underpayments in our domestic operations. We intend to vigorously defend ourselves against such claims. For instance, Marathon Oil has been named in a lawsuit alleging
improper royalty deductions in certain of our Oklahoma operations, and plaintiffs have sought class certification, which the court has so far denied. We have accrued for potential liabilities associated with these lawsuits based on currently available information; however, actual losses may exceed our accruals or we could be required to accrue additional amounts in the future.
In January 2020, we received a Notice of Violation from the EPA related to the Clean Air Act. We are actively negotiating a draft consent decree with the EPA containing certain proposed injunctive terms relating to this enforcement action. The enforcement action will likely include monetary sanctions and implementation of both environmental mitigation projects and injunctive terms, which would increase both our development costs and operating costs. Given the uncertainty in matters such as these, we are unable to predict the ultimate outcome of this matter
at this time. However, we believe that any penalties, mitigation costs or corrective actions that may result from this matter will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.
We have incurred and will continue to incur capital, operating and maintenance and remediation expenditures as a result of environmental laws and regulations. If these expenditures, as with all costs, are not ultimately offset by the prices we receive for our products and services, our operating results will be adversely affected. We believe that substantially all of our competitors must comply with similar environmental laws and regulations. However, the specific impact on each competitor may vary depending on a number of factors, including the age and location of its operating facilities, marketing areas and production processes. These laws generally provide for control of pollutants
released into the environment and require responsible parties to undertake remediation of hazardous waste disposal sites. Penalties may be imposed for noncompliance.
At June 30, 2022, accrued liabilities for remediation relating to environmental laws and regulations were not material. It is not presently possible to estimate the ultimate amount of all remediation cost that might be incurred or the penalties that may be imposed.
25
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the preceding consolidated financial statements and notes in Item
1.
Executive Overview
We are an independent exploration and production company, focused on U.S. resource plays: Eagle Ford in Texas, Bakken in North Dakota, STACK and SCOOP in Oklahoma and Northern Delaware in New Mexico. Our U.S. assets are complemented by our international operations in E.G. Our overall business strategy is to responsibly deliver competitive corporate return levels, free cash flow and cash returns to shareholders, all of which are sustainable and resilient through long-term commodity price cycles. We expect to achieve our business strategy by adherence to a disciplined reinvestment rate capital allocation framework that limits our capital expenditures relative to our expected cash flow from
operations. Keeping our workforce safe, maintaining a strong balance sheet, responsibly meeting global energy demand with a focus on continuously improving environmental performance, serving as a trusted partner in our local communities and maintaining best in-class corporate governance standards are foundational to the execution of our strategy.
Compared to the prior year’s quarter, we experienced a significant increase in revenues, income from operations and operating cash flow, all of which were driven by higher commodity prices. Total company net sales volumes were roughly flat. Our cash generated from operations more than funded our capital program, dividend payments and share repurchases. These results and activities are consistent with our prioritization of free cash flow generation and adherence to our disciplined capital allocation framework. Below are certain key financial and operational highlights for the quarter:
Improved
financial results
•Our net income was $966 million in the second quarter of 2022 as compared to net income of $16 million in the same period last year. Included in our financial results for the current quarter:
◦Revenues from contracts with customers increased $914 million compared to the same quarter last year as realized commodity prices were significantly higher.
◦Income from equity method investments of $152 million, an increase of $103 million from the same period in 2021, due to higher realized prices.
◦Net losses on commodity derivatives were lower by $139 million compared to the same
quarter last year.
◦As a result of higher income before taxes, our provision for income taxes increased by $269 million compared to the same quarter last year. See Note 6 to the consolidated financial statements for discussion of the increase in income taxes.
26
Maintained investment grade balance sheet, increased return of capital to investors
•All
three primary credit rating agencies continue to rate us as investment grade.
•As of June 30, 2022, we have $1.2 billion of cash on hand and $4.3 billion of total liquidity. Refer to Liquidity and
Capital Resources for information on a subsequent event regarding the amendment of our Credit Facility.
•In the first six months of 2022, we repurchased approximately $1.4 billion of shares through our share repurchase
program.
•Paid $108 million of dividends, or $0.15 per share, during the first six months of 2022. This is more than double the dividends paid of $0.07 per share during the first six months of 2021.
Outlook
Capital Budget
Our Board of Directors has approved a 2022 capital budget of $1.3 billion. We continue to monitor inflationary pressures given the labor market, commodity prices, supply chain challenges and geopolitical instability.
Operations
The
following table presents a summary of our sales volumes for each of our segments. Refer to Results of Operations for a price-volume analysis for each of the segments.
Three
Months Ended June 30,
Six Months Ended June 30,
Net Sales Volumes
2022
2021
Increase (Decrease)
2022
2021
Increase (Decrease)
United States (mboed)
283
283
—
%
282
279
1
%
International
(mboed)
60
65
(8)
%
60
66
(9)
%
Total (mboed)
343
348
(1)
%
342
345
(1)
%
United
States
Net sales volumes in the segment were consistent in the second quarter of 2022 as compared to the second quarter of 2021.
The following tables provide additional details regarding net sales volumes, sales mix and operational drilling activity for our significant operations within this segment:
Net sales volumes were lower in the second quarter of 2022 as compared to the second quarter of 2021 primarily due to natural decline. The following table provides details regarding net sales volumes for our operations within this segment:
Three
Months Ended June 30,
Six Months Ended June 30,
Net Sales Volumes
2022
2021
Increase (Decrease)
2022
2021
Increase (Decrease)
Equivalent Barrels (mboed)
Equatorial
Guinea
60
65
(8)
%
60
66
(9)
%
Equity
Method Investees
LNG (mtd)
2,601
3,094
(16)
%
3,043
3,220
(5)
%
Methanol
(mtd)
964
744
30
%
973
917
6
%
Condensate and LPG (boed)
10,363
7,892
31
%
8,648
9,303
(7)
%
Market
Conditions
Commodity prices are the most significant factor impacting our revenues, profitability, operating cash flows, the amount of capital we invest in our business, redemption of our debt, payment of dividends and funding of share repurchases. Beginning in December 2020 and continuing through the first six months of 2022, commodity prices continued to increase due to rising oil demand as global economic activity increased. Higher commodity prices were also supported by ongoing OPEC petroleum supply limitations, conflicts and economic sanctions involving producer countries. We continue to expect commodity price volatility given the global dynamics of supply and demand that exist in the market, including geopolitical events. Refer to Item 1A. Risk Factors in our 2021 Annual Report on Form 10-K for further discussion on how volatility in commodity prices could impact us.
28
United
States
The following table presents our average price realizations and the related benchmarks for crude oil and condensate, NGLs and natural gas for the second quarter and first six months of 2022 and 2021.
Magellan East Houston (“MEH”)
crude oil average of daily prices (per bbl)
112.35
67.13
67
%
104.51
63.22
65
%
Mont Belvieu NGLs (per bbl)(e)
41.73
24.81
68
%
39.99
24.40
64
%
Henry
Hub natural gas settlement date average (per mmbtu)
7.17
2.83
153
%
6.06
2.76
120
%
(a)Excludes gains or losses on commodity derivative instruments.
(b)Inclusion of
realized gains (losses) on crude oil derivative instruments would have decreased average price realizations by $4.43 per bbl and $5.54 per bbl for the second quarter 2022 and 2021, respectively. Inclusion of realized gains (losses) on crude oil derivative instruments would have decreased average price realizations by $3.22 per bbl and $5.08 per bbl for the first six months of 2022 and 2021, respectively.
(c)Inclusion of realized gains (losses) on NGL derivative instruments would have no impact for the second quarter 2022 and the second quarter 2021 would have decreased average price realizations by $1.15 per bbl. Inclusion of realized gains (losses) on NGL derivative instruments would have no impact per bbl for the first six months of 2022 and decreased average price realization by $1.24 for the six months ended 2021.
(d)Inclusion
of realized gains (losses) on natural gas derivative instruments would have minimal impact on average price realizations for the second quarter and the first six months of 2022 and 2021.
(e)Bloomberg Finance LLP: Y-grade Mix NGL of 55% ethane, 25% propane, 5% butane, 8% isobutane and 7% natural gasoline.
Crude oil and condensate –Price realizations may differ from benchmarks due to the quality and location of the product.
Natural gas liquids – The majority of our sales volumes are sold at reference to Mont Belvieu prices.
Natural gas – A significant portion of our volumes are sold at bid-week prices, or
first-of-month indices relative to our producing areas.
International (E.G.)
The following table presents our average price realizations and the related benchmark for crude oil for the second quarter and first six months of 2022 and 2021.
(a)Average
of monthly prices obtained from the United States Energy Information Agency website.
Crude oil and condensate – Alba field liquids production is primarily condensate. MEGPL and Marathon E.G. International Limited generally sell their share of condensate in relation to the Brent crude benchmark. Alba Plant LLC processes the rich hydrocarbon gas which is supplied by the Alba field under a fixed-price long-term contract. Alba Plant LLC extracts NGLs and secondary condensate which is then sold by Alba Plant LLC at market prices, with our share of the revenue reflected in income from equity method investments on the consolidated statements of income. Alba Plant LLC delivers the
processed dry natural gas to the Alba Unit Parties for distribution and sale to AMPCO and EG LNG.
29
Natural gas liquids –Wet gas is sold to Alba Plant LLC at a fixed-price long-term contract resulting in realized prices not tracking market price. Alba Plant LLC extracts and keeps NGLs, which are sold at market price, with our share of income from Alba Plant LLC being reflected in the income from equity method investments on the consolidated statements of income.
Natural gas –Dry natural
gas, processed by Alba Plant LLC on behalf of the Alba Unit Parties is sold by the Alba field to EG LNG and AMPCO at fixed-price long-term contracts resulting in realized prices not tracking market price. We derive additional value from the equity investment in our downstream gas processing units EG LNG and AMPCO. EG LNG sells LNG on a market-based long-term contract and AMPCO markets methanol at market prices. Alba Plant LLC and EG LNG process third party gas under a combination of tolling and a market linked profit-sharing arrangement, the benefits of which are included in our respective share of income from equity method investees.
Below is a price/volume analysis for each segment. Refer to the preceding Operations
and Market Conditions sections for additional detail related to our net sales volumes and average price realizations.
Net
gain (loss) on commodity derivatives in the second quarter of 2022, was a loss of $27 million, compared to a net loss of $166 million for the same period in 2021. We have multiple crude oil, natural gas and NGL derivative contracts that settle against various indices. We record commodity derivative gains/losses as the index pricing and forward curves change each period. See Note 13 to the consolidated financial statements for further information.
Income from equity method investmentsincreased $103 million in second quarter of 2022. Our investees benefited from higher price realizations in 2022.
Production
expenses increased $38 million in the second quarter of 2022 versus the same period in 2021, primarily as a result of the U.S. segment’s higher project and workover activity and inflationary pressures on labor, fuel, chemicals and services.
30
The following table provides production expense and production expense rates (expense per boe) for each segment:
Three
Months Ended June 30,
($ in millions; rate in $ per boe)
2022
2021
Increase (Decrease)
2022
2021
Increase (Decrease)
Production Expense and Rate
Expense
Rate
United States
$
150
$
113
33
%
$
5.80
$
4.41
32
%
International
$
14
$
13
8
%
$
2.83
$
2.17
30
%
Shipping, handling and other operating increased $24 million in the second quarter of 2022 versus the
same period in 2021. As disclosed in our Form 10-K, certain of our processing arrangements with midstream entities are percentage-of-proceeds contracts. We classify the proceeds retained by the midstream companies as shipping and handling costs. The increase in shipping and handling costs of these percentage-of-proceeds contracts coincides with the increase in realized natural gas liquids and natural gas prices. In addition, higher marketing costs contributed to the increase as we purchased additional volumes for resale to satisfy transportation commitments.
Exploration expensesinclude unproved property impairments, dry well costs, geological and geophysical and other costs. The decrease in unproved
property impairments is due to a combination of factors including timing of lease expiration dates and decisions not to develop acreage deemed non-core in 2021. We incurred less amortization expense related to insignificant unproved property lease balances in 2022.
The following table summarizes the components of exploration expenses:
Three Months Ended June 30,
(In millions)
2022
2021
Increase
(Decrease)
Exploration Expenses
Unproved property impairments
$
6
$
22
(73)
%
Dry well costs
—
—
—
%
Geological
and geophysical
1
1
—
%
Other
1
2
(50)
%
Total exploration expenses
$
8
$
25
(68)
%
Depreciation,
depletion and amortizationdecreased $96 million in the second quarter of 2022 primarily as a result of lower DD&A (expense per boe) rate impacted by field-level changes in reserves. In addition, the DD&A rate is impacted by capitalized costs and the sales volume mix between fields.
Our segments apply the units-of-production method to the majority of assets, including capitalized asset retirement costs; therefore, volumes have an impact on DD&A expense. The following table provides DD&A expense and DD&A expense rates for each segment:
Three
Months Ended June 30,
($ in millions; rate in $ per boe)
2022
2021
Increase (Decrease)
2022
2021
Increase (Decrease)
DD&A Expense and Rate
Expense
Rate
United States
$
415
$
506
(18)
%
$
16.11
$
19.65
(18)
%
International
$
16
$
18
(11)
%
$
2.80
$
3.08
(9)
%
Impairments decreased $44 million in the second quarter of 2022. Impairments in 2021 consisted of
a $24 million impairment as we decommissioned certain Eagle Ford central facilities and a $22 million impairment related to an increase in the estimated future decommissioning costs of certain non-producing wells, pipelines and production facilities for previously divested offshore assets located in the Gulf of Mexico. See Note 10 to the consolidated financial statements for discussion of the impairments in further detail.
Taxes other than income include production, severance and ad valorem taxes, primarily in the U.S., which tend to increase or decrease in relation to revenue and sales volumes. Taxes other than income increased $66 million primarily due to higher price realizations in the U.S. segment in the second quarter of 2022.
31
Loss
on early extinguishment of debt decreased $19 million due to make-whole call provisions paid upon redemption of $500 million in senior unsecured notes in the second quarter of 2021.
Provision (benefit) for income taxes reflects an effective income tax rate of 22% in the second quarter of 2022, as compared to an effective income tax rate of 38% in the second quarter of 2021. See Note 6 to the consolidated financial statements for a more detailed discussion concerning the changes in the effective tax rate.
Segment Income
Segment income represents income that 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, impairments of proved and certain unproved properties, goodwill and equity method investments, changes in our valuation allowance, unrealized gains or losses on commodity and interest rate derivative instruments, effects of pension settlements and curtailments or other items (as determined by the chief operating decision maker (“CODM”)) are not allocated to operating segments.
The following table reconciles segment income (loss) to net income (loss):
Three
Months Ended June 30,
(In millions)
2022
2021
United States
$
846
$
207
International
160
68
Segment
income (loss)
1,006
275
Items not allocated to segments, net of income taxes
(40)
(259)
Net income (loss)
$
966
$
16
United
States segment income (loss) in the second quarter of 2022 was$846 million of income versus a $207 million income for the same period in 2021. The increase in income was primarily due to higher price realizations and lower DD&A expenses. These favorable changes were partially offset by higher income taxes and production taxes in the second quarter of 2022.
International segment income (loss) in the second quarter of 2022 was$160 million of income versus $68 million of income for the same period in 2021, primarily due to higher prices realized by our equity method investees.
Below
is a price/volume analysis for each segment. Refer to Operations and Market Conditions for additional detail related to our net sales volumes and average price realizations.
Net
gain (loss) on commodity derivatives in the first six months of 2022 was a loss of $170 million, compared to a loss of $319 million for the same period in 2021. We have multiple crude oil, natural gas and NGL derivative contracts that settle against various indices. We record commodity derivative gains/losses as the index pricing and forward curves change each period. SeeNote 13 to the consolidated financial statements for further information.
Income (loss) from equity method investmentsincreased $186 million for the first six months of 2022. Our investees benefited from higher price realizations in the
first six months of 2022.
Production expenses for the first six months of 2022 increased by $69 million compared to the same period in 2021, primarily as a result of the U.S. segment’s higher project and workover activity and inflationary pressures on labor, fuel, chemicals and services.
The following table provides production expense and production expense rates for each segment:
Six
Months Ended June 30,
($ in millions; rate in $ per boe)
2022
2021
Increase (Decrease)
2022
2021
Increase (Decrease)
Production Expense and Rate
Expense
Rate
United States
$
291
$
224
30
%
$
5.70
$
4.43
29
%
International
$
25
$
23
9
%
$
2.37
$
1.93
23
%
Shipping, handling and other operating expensesincreased$57 million in the first six months of 2022 from the comparable 2021 period. As disclosed in
our Form 10-K, certain of our processing arrangements with midstream entities are percentage-of-proceeds contracts. We classify the proceeds retained by the midstream companies as shipping and handling cost. The increase in shipping and handling costs of these percentage-of-proceeds contracts coincides with the increase in realized natural gas liquids and natural gas prices. In addition, higher marketing costs contributed to the increase as we purchased additional volumes for resale to satisfy transportation commitments.
Exploration expensesinclude unproved property impairments, dry well costs, geological and geophysical and other costs. The decrease in unproved property impairments is due to a combination
of factors including timing of lease expiration dates and decisions not to develop acreage deemed non-core in 2021. We incurred less amortization expense related to insignificant unproved property lease balances in 2022.
33
The following table summarizes the components of exploration expenses:
Six
Months Ended June 30,
(In millions)
2022
2021
Increase (Decrease)
Exploration Expenses
Unproved property impairments
$
14
$
37
(62)
%
Dry
well costs
—
2
(100)
%
Geological and geophysical
1
3
(67)
%
Other
4
4
—
%
Total
exploration expenses
$
19
$
46
(59)
%
Depreciation, depletion and amortization decreased $169 million in the first six months of 2022 primarily as a result of lower DD&A (expense per boe) rate impacted by field-level changes in reserves. In addition, the DD&A rate is impacted by capitalized costs and the sales volume mix between fields.
Our segments apply the units-of-production method to the majority of their assets, including capitalized asset retirement
costs; therefore volumes have an impact on DD&A expense. The following table provides DD&A expense and DD&A expense rates for each segment:
Six Months Ended June 30,
($ in millions; rate in $ per boe)
2022
2021
Increase
(Decrease)
2022
2021
Increase (Decrease)
DD&A Expense and Rate
Expense
Rate
United States
$
819
$
978
(16)
%
$
16.06
$
19.36
(17)
%
International
$
31
$
37
(16)
%
$
2.80
$
3.09
(9)
%
Impairments decreased $45 million in the first six months of 2022.Impairments in 2021 consisted of a $24 million impairment as we decommissioned certain Eagle Ford central
facilities and a $22 million impairment related to an increase in the estimated future decommissioning costs of certain non-producing wells, pipelines and production facilities for previously divested offshore assets located in the Gulf of Mexico. See Note 10 to the consolidated financial statements for discussion of the impairments in further detail.
Taxes other than income include production, severance and ad valorem taxes, primarily in the U.S., which tend to increase or decrease in relation to revenue and sales volumes. Taxes other than income increased $96 million primarily due to higher price realizations in the U.S. segment in the first six months of 2022.
General and administrative expenses
decreased $16 million in the first six months of 2022 primarily due to expenses incurred in 2021 related to termination of an aircraft lease agreement.
Loss on early extinguishment of debt decreased $19 million due to make-whole call provisions paid upon redemption of $500 million in senior unsecured notes in 2021.
Provision (benefit) for income taxes for current year includes a tax benefit of $685 million arising from the partial release of a valuation allowance on certain U.S. and state deferred tax assets in first quarter of 2022. This was partially offset by the provision related to current year income earned by our operations. See Note 6 to the consolidated financial statements for a more
detailed discussion concerning the rate changes.
34
Segment Income
Segment income represents income that 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, impairments of proved and certain unproved properties, goodwill and equity method investments, changes in our valuation
allowance, unrealized gains or losses on commodity and interest rate derivative instruments, effects of pension settlements and curtailments or other items (as determined by the chief operating decision maker (“CODM”)) are not allocated to operating segments.
The following table reconciles segment income (loss) to net income (loss):
Six Months Ended June 30,
(In millions)
2022
2021
United
States
$
1,507
$
419
International
275
118
Segment income (loss)
1,782
537
Items
not allocated to segments, net of income taxes
488
(424)
Net income (loss)
$
2,270
$
113
United States segment income (loss) for the first six months of 2022 was $1,507 million of income versus a $419 million of income for the same period in 2021. This increase was primarily due to higher price realizations
and lower DD&A expenses. These favorable changes were partially offset by higher income taxes and production taxes in the first six months of 2022.
International segment income (loss) for the first six months of 2022 was $275 million of income versus $118 million of income for the same period in 2021,primarily due to higher prices realized by our equity method investees.
Items not allocated to segments, net of income taxes for the first six months of 2022 was $488 million of income versus a $424 million loss for the same period in 2021. The increase was primarily due to the first quarter 2022 release of the valuation allowance on certain U.S. and state deferred tax assets resulting in a non-cash deferred tax benefit of $685 million.
Critical
Accounting Estimates
Other than the item set forth below, there have been no material changes or developments in the evaluation of the accounting estimates and the underlying assumptions or methodologies pertaining to our Critical Accounting Estimates disclosed in our Form 10-K for the year ended December 31, 2021.
Income Taxes
We have recorded deferred tax assets and liabilities, measured at enacted tax rates, for temporary differences between book basis and tax basis, tax credit carryforwards and operating loss carryforwards. In accordance with U.S. GAAP, we routinely assess the realizability of our deferred tax assets and reduce such assets to the expected realizable amount by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will
not be realized. In assessing the need for additional or adjustments to existing valuation allowances, we consider all available positive and negative evidence. Positive evidence includes reversals of temporary differences, forecasts of future taxable income, assessment of future business assumptions and applicable tax planning strategies that are prudent and feasible. Negative evidence includes losses in recent years as well as the forecasts of future losses in the realizable period. In making our assessment regarding valuation allowances, we weight the evidence based on objectivity.
We base our future taxable income estimates on projected financial information which we believe to be reasonably likely to occur. Numerous judgments and assumptions are inherent in the estimation of future taxable income, including factors such as future operating conditions and the assessment of the effects of foreign taxes on our U.S. federal
income taxes. Future operating conditions can be affected by numerous factors, including (i) future crude oil and condensate, NGLs and natural gas prices, (ii) estimated quantities of crude oil and condensate, NGLs and natural gas, (iii) expected timing of production, and (iv) future capital requirements. An estimate of the sensitivity to changes in assumptions resulting in future taxable income calculations is not practicable, given the numerous assumptions that can materially affect our estimates. Unfavorable adjustments to some of the above listed assumptions would likely be offset by favorable adjustments in other assumptions. For example, the impact of sustained reduced commodity prices on future taxable income would likely be partially offset by lower capital expenditures.
35
Based
on the assumptions and judgments described above, during the first quarter of 2022, we re-evaluated the realizability of U.S. and state deferred tax assets and determined that a valuation allowance against certain deferred tax assets was no longer necessary. As such, we recorded a non-cash deferred tax benefit in the first quarter of 2022 for $685 million. See Note 6 to the consolidated financial statements for further detail.
Accounting Standards Not Yet Adopted
See Note 2 to the
consolidated financial statements.
Cash Flows
Commodity prices are the most significant factor impacting our revenues, profitability, operating cash flows, the amount of capital we invest in our business, principal debt repayments, payment of dividends and funding of share repurchases. We generated significant positive cash flow from operations during the first six months of 2022 given the continued improvement in commodity prices. We continue to expect volatility in commodity prices and that could impact how much cash flow from operations we generate. The following table presents sources and uses of cash and cash equivalents:
Six
Months Ended June 30,
(In millions)
2022
2021
Sources of cash and cash equivalents
Operating activities
$
2,745
$
1,277
Disposal
of assets, net of cash transferred to the buyer
4
15
Other
33
6
Total sources of cash and cash equivalents
$
2,782
$
1,298
Uses of cash and cash equivalents
Additions
to property, plant and equipment
$
(687)
$
(483)
Debt repayment
(32)
(500)
Debt extinguishment costs
—
(19)
Shares
repurchased under buyback programs
(1,352)
—
Dividends paid
(108)
(55)
Purchases of shares for tax withholding obligations
(21)
(9)
Other
—
(4)
Total
uses of cash and cash equivalents
$
(2,200)
$
(1,070)
Cash flows generated from operating activities in the first six months of 2022 were significantly higher compared to the same period in 2021, primarily as a result of higher realized commodity prices.
The following table shows capital expenditures by segment and reconciles to additions to property, plant and equipment as presented in the consolidated statements of cash flows:
Six
Months Ended June 30,
(In millions)
2022
2021
United States
$
718
$
467
International
—
2
Corporate
5
4
Total
capital expenditures (accrued)
723
473
Change in capital expenditure accrual
(36)
10
Total use of cash and cash equivalents for property, plant and equipment
$
687
$
483
The increase in our capital expenditures
for the U.S. segment in the first six months of 2022 compared to the same period in 2021 largely reflects inflationary pressures driven by the significant increase in crude oil and natural gas prices, as well as a drilling and completion program more heavily weighted to the first half of the year.
36
Liquidity and Capital Resources
Capital Resources and Available Liquidity
Our main sources of liquidity are cash and cash equivalents, internally generated cash flow from operations, sales of non-core assets, capital market transactions and our revolving Credit
Facility. At June 30, 2022, we had approximately $4.3 billion of liquidity consisting of $1.2 billion in cash and cash equivalents and $3.1 billion available under our revolving Credit Facility. On July 28, 2022, we executed the seventh amendment to our Credit Facility. The primary changes to the Credit Facility effected by this amendment were to (i) extend the maturity date of the Credit Facility by three years to July 28, 2027, (ii) decrease the size of the Credit Facility from $3.1 billion to $2.5 billion, (iii) replace the LIBOR interest rate benchmark with the secured overnight financing rate (“SOFR”) and (iv) implement certain revisions to the Pricing Schedule.
Our working capital requirements are supported by our cash and cash equivalents and our Credit Facility.
We may draw on our revolving Credit Facility to meet short-term cash requirements or issue debt or equity securities through the shelf registration statement discussed below as part of our longer-term liquidity and capital management program. Because of the alternatives available to us as discussed above, we believe that our short-term and long-term liquidity are adequate to fund not only our current operations, but also our near-term and long-term funding requirements including our capital spending programs, defined benefit plan contributions, repayment of debt maturities, dividends and other amounts that may ultimately be paid in connection with contingencies. General economic conditions, commodity prices, and financial, business and other factors, including the global pandemic, could affect our operations and our ability to access the capital markets.
We continue to be rated investment grade at all three primary credit rating
agencies. A downgrade in our credit ratings could increase our future cost of financing or limit our ability to access capital and could result in additional credit support requirements. We do not have any triggers on any of our corporate debt that would cause an event of default in the case of a downgrade of our credit ratings. See Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2021 for a discussion of how a downgrade in our credit ratings could affect us.
Credit Arrangements and Borrowings
Our Credit Facility includes a covenant requiring that our total debt to total capitalization ratio not exceed 65% as of the last day of the fiscal quarter. Our ratio was 19% at June 30, 2022 and 20% at December 31,
2021. See Note 15 to the consolidated financial statements for further information.
At June 30, 2022, we had no borrowings on our $3.1 billion Credit Facility and $4.0 billion of total long-term debt outstanding. In May 2022, we redeemed the $32 million 9.375% Senior Notes on the maturity date. Our next significant long-term debt maturity is in the amount of $1.0 billion due 2027. Refer to our 2021 Annual Report on Form 10-K for a listing of our long-term debt maturities.
Shelf Registration
We have a universal shelf registration statement filed with the SEC under which we, as a “well-known seasoned issuer” for purposes of SEC rules, have
the ability to issue and sell an indeterminate amount of various types of debt and equity securities.
Capital Requirements
Share Repurchase Program
During the first six months of 2022, we repurchased approximately $1.4 billion of shares of our common stock. On May 4, 2022, our Board of Directors increased our remaining share repurchase program authorization to $2.5 billion. The total remaining share repurchase authorization was approximately $2.0 billion at June 30, 2022. Additionally, we repurchased $21 million of shares during the first six months of 2022 related to our tax withholding obligations associated with the vesting of employee restricted stock awards and restricted stock units; these repurchases do not impact our share repurchase
program authorization.
Subsequent to the quarter, we repurchased approximately $282 million of shares of our common stock through August 3, 2022.
As
of June 30, 2022, there are no material changes to our consolidated cash obligations to make future payments under existing contracts, as disclosed in our 2021 Annual Report on Form 10-K.
Environmental Matters and Other Contingencies
We have incurred and will continue to incur capital, operating and maintenance and remediation expenditures as a result of environmental laws and regulations. If these expenditures, as with all costs, are not ultimately offset by the prices we receive for our products and services, our operating results will be adversely affected. We believe that substantially all of our competitors must comply
with similar environmental laws and regulations. However, the specific impact on each competitor may vary depending on a number of factors, including the age and location of its operating facilities, marketing areas and production processes. These laws generally provide for control of pollutants released into the environment and require responsible parties to undertake remediation of hazardous waste disposal sites. Penalties may be imposed for noncompliance.
Other than the items set forth in Part II - Item 1. Legal Proceedings, there have been no significant changes to the environmental, health and safety matters under Item 1. Business or Item 3. Legal Proceedings in our 2021 Annual Report on Form 10-K. See Note
22 to the consolidated financial statements for a description of other contingencies.
38
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). All statements, other than statements of historical fact, including without limitation statements regarding our future performance, business strategy, 2022 capital budget, reserve
estimates, asset quality, production guidance, drilling plans, capital plans, future debt retirement, cost and expense estimates, asset acquisitions and dispositions, tax allowances, future financial position, statements regarding future commodity prices and statements regarding management’s other plans and objectives for future operations, are forward-looking statements. Words such as “anticipate,”“believe,”“continue,”“could,”“estimate,”“expect,”“forecast,”“future,”“guidance,”“intend,”“may,”“outlook,”“plan,”“positioned,”“project,”“seek,”“should,”“target,”“will,”“would” or similar words may be used to identify forward-looking statements; however, the absence of these words does not mean that the statements are not forward-looking. While we believe our assumptions concerning future events
are reasonable, a number of factors could cause results to differ materially from those projected, including, but not limited to:
•conditions in the oil and gas industry, including supply and demand levels for crude oil and condensate, NGLs and natural gas and the resulting impact on price;
•changes in expected reserve or production levels;
•changes in political and economic conditions in the U.S. and E.G., including changes in foreign currency exchange rates, interest rates, inflation rates and global and domestic market conditions;
•actions taken by the members of OPEC and Russia affecting the production and pricing of crude oil; and other global and domestic political, economic or diplomatic developments;
•risks
related to our hedging activities;
•voluntary and involuntary curtailments, delays or cancellations of certain drilling activities;
•well production timing;
•liabilities or corrective actions resulting from litigation, other proceedings and investigations or alleged violations of law or permits;
•capital available for exploration and development;
•the inability of any party to satisfy closing conditions or delays in execution with respect to our asset acquisitions and dispositions;
•drilling and operating risks;
•lack
of, or disruption in, access to storage capacity, pipelines or other transportation methods;
•well production timing;
•availability of drilling rigs, materials and labor, including the costs associated therewith;
•difficulty in obtaining necessary approvals and permits;
•the availability, cost, terms and timing of issuance or execution of, competition for, and challenges to, mineral licenses and leases and governmental and other permits and rights-of-way, and our ability to retain mineral licenses and leases;
•non-performance by third parties of their contractual or legal obligations, including due to bankruptcy;
•unexpected
events that may impact distributions from our equity method investees;
•changes in our credit ratings;
•hazards such as weather conditions, a health pandemic (including COVID-19), acts of war or terrorist acts and the governmental or military response thereto;
•shortages of key personnel, including employees, contractors and subcontractors;
•security threats, including cybersecurity threats and disruptions to our business and operations from breaches of our information technology systems, or breaches of the information technology systems, facilities and infrastructure of third parties with which we transact business;
•changes
in safety, health, environmental, tax and other regulations or requirements or initiatives including those addressing the impact of global climate change, air emissions or water management;
•other geological, operating and economic considerations; and
•the risk factors, forward-looking statements and challenges and uncertainties described in our 2021 Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and other filings with the SEC.
All forward-looking statements included in this report are based on information available to us on the date of this report. Except as required by law, we undertake no obligation to revise or update any forward-looking statements as a result of new information, future events or otherwise.
39
Item
3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks in the normal course of business including commodity price risk and interest rate risk. We employ various strategies, including the use of financial derivatives to manage the risks related to commodity price fluctuations. See Note 13 and Note 14 to the consolidated financial statements for detail relating to our open commodity derivative positions, including underlying notional quantities, how they are reported in our consolidated financial statements and how their fair values are measured.
Commodity
Price Risk
As of June 30, 2022, we had various open commodity derivatives. Based on the June 30, 2022 published NYMEX WTI and natural gas futures prices, a hypothetical 10% change (per bbl for crude oil and per MMBtu for gas) would change the fair values of our commodity derivative positions to the following:
At June 30, 2022, our portfolio of current and long-term debt is comprised of fixed-rate instruments with an outstanding balance of $4.0 billion. Our sensitivity to interest rate movements and corresponding changes in the fair value of our fixed-rate debt portfolio affects our results of operations and cash flows only when we elect to repurchase or otherwise retire fixed-rate
debt at prices different than carrying value.
At June 30, 2022, we had forward starting interest rate swap agreements with a total notional amount of $295 million designated as cash flow hedges. We utilize cash flow hedges to manage our exposure to interest rate movements by utilizing interest rate swap agreements to hedge variations in cash flows related to the 1-month LIBOR component of future lease payments on our Houston office. A hypothetical 10% change in interest rates would change the fair values of our cash flow hedge to the following as of June 30, 2022:
Interest rate asset (liability) - designated as cash flow hedges
$
16
$
19
$
13
Item
4. Controls and Procedures
An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. As of the end of the period covered by this Report based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective as of June 30, 2022.
During the first six months of 2022, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
40
Part
II – OTHER INFORMATION
Item 1. Legal Proceedings
In January 2020, we received a Notice of Violation from the EPA related to the Clean Air Act. We continue to actively negotiate a draft consent decree with the EPA containing certain proposed injunctive terms relating to this enforcement action. The enforcement action will likely include monetary sanctions and implementation of both environmental mitigation projects and injunctive terms, which would increase both our development costs and operating costs. Given the uncertainty in matters such as these, we are unable to predict the ultimate outcome of this matter at this time. However, we do not believe these enforcement actions would have a material adverse effect on our consolidated financial position, results of
operations or cash flows.
Marathon Oil has been named in various lawsuits alleging royalty underpayments in our domestic operations. We intend to vigorously defend ourselves against such claims. For instance, Marathon Oil has been named in a lawsuit alleging improper royalty deductions in certain of our Oklahoma operations, and plaintiffs have sought class certification, which the court has so far denied. We have accrued for potential liabilities associated with these lawsuits based on currently available information; however, actual losses may exceed our accruals or we could be required to accrue additional amounts in the future.
Other than the items set forth above, there have been no significant changes to Item 3. Legal Proceedings in our 2021 Annual Report on Form 10-K. See Note
22 to the consolidated financial statements included in Part I, Item I for a description of such legal and administrative proceedings and Item 3. Legal Proceedings in our 2021 Annual Report on Form 10-K.
Item 1A. Risk Factors
We are subject to various risks and uncertainties in the course of our business. In addition to the other information set forth in this Quarterly Report on Form 10-Q, the reader should carefully consider the factors discussed in Item 1A. Risk Factors in our 2021 Annual Report on Form 10-K. Other than the risk factor set forth below, there have been no material changes to the risk factors from those listed in Item 1A. Risk Factors in our 2021 Annual Report on Form 10-K.
Our
sector and the broader US economy have experienced higher than expected inflationary pressures in the first six months of 2022, related to continued supply chain disruptions, labor shortages and geopolitical instability. Should these conditions persist, it may impact our ability to procure materials and equipment on a cost-effective basis, or at all, and, as a result, our business, results of operations and cash flows could be materially and adversely affected.
Throughout the first six months of 2022, we have experienced significant increases in the costs of certain materials, including steel, sand and fuel, as a result of availability constraints, supply chain disruption, increased demand, labor shortages associated with a fully employed US labor force, inflation and other factors. Though we incorporated inflationary factors into our 2022 business plan, inflation has outpaced those original assumptions. These challenges are
due in large measure to increased demand for oil and gas production driven by the continued economic recovery from the COVID-19 pandemic and more broadly, systemic underinvestment in global oil and gas development. These supply and demand fundamentals have been further aggravated by disruptions in global energy supply caused by multiple geopolitical events, including the ongoing conflict between Russia and Ukraine. We continue to undertake actions and implement plans to strengthen our supply chain to address these pressures and protect the requisite access to commodities and services. Nevertheless, we expect for the foreseeable future to experience supply chain constraints and inflationary pressure on our cost structure. These supply chain constraints and inflationary pressures will likely continue to adversely impact our operating costs and if we are unable to manage our global supply chain, it may impact our ability to procure materials and equipment in a timely and
cost-effective manner, if at all, which could result in reduced margins and production delays and, as a result, our business, financial condition, results of operations and cash flows could be materially and adversely affected.
41
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information about purchases by Marathon Oil, during the quarter ended June 30, 2022 of equity securities that are registered by Marathon Oil pursuant to Section 12 of the Securities Exchange Act of 1934:
Period
Total Number of
Shares Purchased(a)
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(b)
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs(b)
04/01/2022 - 04/30/2022
9,548,422
$
25.66
9,548,422
$
1,140,310,932
05/01/2022
- 05/31/2022
9,636,905
$
26.69
9,636,905
$
2,304,000,254
06/01/2022 - 06/30/2022
9,300,166
$
27.66
9,299,310
$
2,046,750,659
Total
28,485,493
$
26.66
28,484,637
(a)856
shares of restricted stock were delivered by employees to Marathon Oil, upon vesting, to satisfy tax withholding requirements.
(b)Refer to our 2021 Annual Report on Form 10-K for historical share repurchase program authorizations and repurchase activity through December 31, 2021. In May 2022, our Board of Directors increased the authorization of repurchases under the program to $2.5 billion. As of June 30, 2022, we have $2.0 billion of authorization remaining under the share repurchase program. Purchases under the program are made at our discretion and may be in either open market transactions, including block purchases, or in privately negotiated transactions using cash on hand, cash generated from operations, or proceeds from potential asset sales. This
program may be changed based upon our financial condition or changes in market conditions and is subject to termination prior to completion. Shares repurchased as of June 30, 2022 were held as treasury stock.
Item 6. Exhibits
The information required by this Item 6 is set forth in the Exhibit Index accompanying this Form 10-Q.
42
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
XBRL Instance Document - the XBRL Instance
Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH*
XBRL Taxonomy Extension Schema
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase
101.DEF*
XBRL
Taxonomy Extension Definition Linkbase
101.LAB*
XBRL Taxonomy Extension Label Linkbase
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase
104*
Cover
Page Interactive Data File, formatted in iXBRL and contained in Exhibit 101