馬拉松石油 (MRO) 2007 Q1 法說會逐字稿

Welcome to the Marathon Oil Corporation first quarter earnings conference call. (OPERATOR INSTRUCTIONS) This call is being recorded, for opening remarks and introductions, I would like to open the call over to Mr. Ken Matheny, Vice President of Investor Relations and Public Affairs. Please go ahead, sir. Okay.

Thank you very much, Jason. And I would like to welcome everyone to Marathon Oil Company's first quarter 2007 earnings web cast and teleconference. As a reminder for the telephone participants, you can find the synchronized slides that accompany this call on our website at www.marathon.com. With us on the call today are Clarence Cazalot, President and CEO, Janet Clark, Executive Vice President and CFO, Gary Heminger, Marathon Executive Vice President and President of our Refining, Marketing, and Transportation Organization. Philip Behrman, Senior Vice President of Worldwide Exploration, Steve Hinchman, Senior Vice President of Worldwide Production, Dave Roberts, Senior Vice President of Business Development, and Gary Peiffer, Senior Vice President of Finance and Commercial Services for Refining Marketing and Transportation.

Slide two contains a forward-looking statement and other information related to this presentation. Our remarks and answers to questions today will contain certain forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. In accordance with Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995, Marathon Oil Corporation has included on its annual report on Form 10-K for the year ended December 31, 2006, and subsequent Forms 8-K, cautionary language identifying important factors, but not necessarily all factors that could cause future outcomes to differ materially from those set forth in the forward-looking statements.

Now, we'll turn to slide three, net income adjusted for the first quarter was $717 million, verses $784 million in the first quarter 2006. This slide also provides a reconciliation of net income adjusted -- net income to adjust net income by quarter. The bar graphs on slide 4, show the quarterly net income adjusted for special items for the first quarter was $707 million and provides the quarterly data for 2006 and 2005 for ease of comparison. While adjusted net income from the first quarter 2007 was down slightly from the $739 million recorded in the first quarter 2006, slide number five shows the impact of our share buyback program with a slight increase in the first quarter adjusted net income per diluted share. There were almost 22 million fewer average diluted shares in the first quarter of 2007. And in the same period of 2006.

We move to slide number six. The year-over-year decrease in net income adjusted for special items of $32 million for the first quarter was almost entirely a result of lower upstream natural gas prices partially offset by lower income taxes. Moving to slide seven, adjusted net income for the first quarter 2007, was approximately $130 million lower than the fourth quarter 2006. Lower upstream sales volumes along with a lower refining and wholesale marketing gross margin and lower refined product sales volumes in the downstream business were somewhat offset by lower income taxes.

Turning to slide number eight, upstream segment income for the first quarter was up almost $80 million over the fourth quarter of 2006, reflecting lower income taxes and lower exploration costs, partially offset by lower sales volumes. As shown on slide nine, the lower liquid sales volumes in the first quarter 2007 as compared to the fourth quarter 2006 were mainly attributal to the timing of international liftings in Libya and the UK. The lower gas sales were primarily a result of an additional gas booking in Libya in December 200, higher than normal production from the (inaudible) field in Norway during the fourth quarter, and down time in the first quarter 2007 at the Norwegian Alvheim platform. Moving to slide number ten, domestic upstream income decreased $17 million in the fourth quarter largely a result of lower natural gas sales volumes and higher income taxes, partially offset by lower exploration costs and higher natural gas realizations.

As shown on slide number 11, while the bid week price per natural gas was up only $0.21 per mcf in the fourth quarter, our natural gas realizations were up $0.55, largely a result of stronger basis differentials for gas sold in the mid continent and the Rockies. Additionally, more favorable WTI offsets for both domestic sweet and domestic sour grades caused our domestic liquids realizations to increase despite the decrease in WTI.

Turning to slide number 12, first quarter domestic upstream expense excluding exploration expense was $1.59 per BOE, higher than the fourth quarter, primarily as a result lower volumes and higher DD&A expense. Domestic upstream income for barrel of oil equivalent decrease $0.51 quarter-over-quarter reflecting both the higher expenses just discussed, partially offset by the higher realized prices. Moving to slide 13, international upstream for the first quarter increased $95 million from the fourth quarter to $235 million. This was mainly due to lower income taxes and lower exploration expense, partially offset by lower sales volumes and prices. The lower sales volumes were largely a reflection of the timing of liftings in Libya. The large tax variance quarter-over-quarter is primarily a result of a 77% tax rate in the fourth quarter due to year-end tax accrual adjustments verses the more normal rate of 58% in the current quarter.

As showed on slide 14, our international liquids realizations decreased more than the price of dated brand, largely a reflexion of the timings of liftings. Turning to slide number 15, first quarter international upstream expense excluding exploration expensed increased approximately $1 per barrel of oil equivalent over the fourth quarter of 2006, largely a result of higher asset retirement obligation expenses in the United Kingdom.

Moving to our downstream business on slide number 16, first quarter 2007 segment income totalled $345 million compared to $319 million earned in the same quarter last year. Because of the seasonality of the downstream business, I will compare the first quarter 2007 results against the same quarter of 2006. While the downstream segment income increase was primarily as a result of increases in Speedway SuperAmerica gasoline additional gross margin as well as merchandise gross margin and a decline in the downstream segment effective tax rate, there were a number of other market and companies specific factors, which are worth noting, which basically net to no change. The most significant market related factor quarter to quarter was the increase in the WTI6321 crack spread. On two-thirds Chicago and one-third US Gulf Coast basis, this spread increased $2.82 per barrel from $5.33 per barrel in first quarter 2006 quarter to $8.15 per barrel in the first quarter this year. Another positive impact for the first quarter 2007 compared to the same period last year was that our wholesale sales price realization per gallon did not decline as much as the spot market prices used in the market indicator 6321 calculation.

For example, the wholesale sales price realizations per gallon on our gasoline sales only declined about $0.035 per gallon on average quarter to quarter compared to a decline of almost $0.075 per gallon in a spot market on a two-thirds Chicago and one-third US Gulf Coast basis. We also increased our total refinery inputs 4.2% during the first quarter 2007 as compared to the same quarter last year. A number of items served off -- mostly offset these positive results. First, primarily as a result of the unusually wide differential between WTI and other domestic sweet crudes, our crude oil and other feedstock acquisition costs were relatively higher during the first quarter 2007 compared to the first quarter 2006 and the change in WTI prices would indicate. We also had a change in the mix of crudes we processed this past quarter compared to the same quarter of 2006 as well as a reduction in the differentials of other crude oils and a larger cost increase per charge and other blend stocks and would be indicated by the change in WTI prices quarter to quarter. The cost of feed stocks tend to track changes and light product prices, which increased more than the change in crude oil prices quarter-over-quarter. Additionally, we had much lower margins on the ethanol purchase for resale in the quarter just reported because a number of long-term fixed price ethanol purchase contracts, which we had entered into in 2005 at very attractive prices expired at the beginning of the fourth quarter of 2006. In addition, we recorded a negative derivatives effect of refloating the price of some of our long-term fixed priced ethanol purchase contracts, which we mark-to-market at the end of each quarter.

As shown on slide number 17, Speedway SuperAmerica's gasoline and diselits sales were up 24 million gallons or about 3% quarter-over-quarter. Speedway SuperAmerica same-store gasoline sales volume were up 2.6%, primarily due to the lower prices we experienced in the -- earlier in the first quarter 2007. Speedway SuperAmerica's merchandise sales on the same-store basis increased 6.2% in the first quarter of 2007 compared to the 2006 quarter. Speedway SuperAmerica's gross margin for gasoline and diselits was $0.1217 per gallon compared to $0.1055 per gallon in the same quarter last year.

Our refineries crude oil throughputs improved from 898,000 barrels per day in the first quarter of 2006 to 968,000 barrels per day in the March 2007 quarter. In addition, our first quarter 2007 total throughputs averaged 1.195 million barrels per day compared to 1.147 million barrels a day in the same quarter last year. And for the full year, we expect our total crude oil throughputs to exceed the record level we established in 2006.

Slide 18 provides a summary of segment data along with the reconciliation to net income. I will discuss three items of interest on this slide. First, the integrated gas segment had income of $19 million during the first quarter of 2007 compared to a loss of $7 million in the fourth quarter. The $26 million increase was largely a result of a charge for the forgiveness of debt related to the restructuring of our contracts with (Syntroleum) recorded in the fourth quarter and higher methanol earnings in the first quarter. Second, unallocated administrative expense decreased to $72 million, $25 million lower than the fourth quarter, primarily as a result of accruals for variable pay plans. And third, net interest in financing income was $19 million. A $25 million decrease from the fourth quarter, primarily due to favorable adjustments to interest on outstanding tax issues and foreign exchange gains of $6 million included in the fourth quarter number.

Slide 19 provides selective preliminary balance sheet and cash flow data. Cash adjusted debt to total capital at the end of the first quarter was 7%, an increase from approximately 6% at the end -- at year-end 2006. As a reminder, the cash adjusted net balance includes approximately $517 million of debt serviced by US steel. Year-to-date preliminary cash flow from operations was approximately $1 billion. And preliminary cash flow from operations before working capital changes was also approximately $1 billion. Slide number 20 provides our guidance for the second quarter and for the full year 2007. I'll now turn the call over to Clarence Cazalot and Steve Hinchman for their comments.

Thank you, Ken. We had a very solid first quarter both operationally and financially. We continued our string of exploration successes offshore Angola.. And made a very promising discovery in the Gulf of Mexico. Operating performance and reliability was strong in both our production and refining businesses. We also saw good growth and SSAs refined product and merchandise sales. We had mixed results; however, on 2 major operated upstream projects. Alvheim Vilje A and E,G,L and G. I've asked Steve Hinchman to provide some detail on both products and to update our production outlook for the year. Steve.

Thank you, Clarence. Let me begin with Alvheim Vilje, during the commissioning additional work was identified to bring the shift into compliance with Norwegian codes and regulations and to fully integrate the existing ship systems with the new top side facilities. This additional work scope along with lower contractor productivity will delay first production to the third quarter and contribute to increased costs. With this revised first production date, the Alvheim Vilje production project will still deliver an industry-leading completion schedule. Moving from initial discovery to first production in only 4 years, 4 wells will be available at first production and the initial drilling program will continue into 2008. A peak net rate of approximately 75,000 barrels of oil equivalent per day from Alvheim Vilje is expected in 2008. And the Volund discovery whose PDO was approved earlier this year will be tied back Alvheim FPSO with first production expected in 2009.

The Equatorial Guinea LNG Train 1 Project is also in the commissioning stage and remains on schedule and on budget for first LNG production and sales in the second quarter. I'll remind you that the original plan is for LNG production to begin in the fourth quarter 2007. Our production outlook for 2007 is still expected to fall within the prior guidance of 390 to 425,000 barrels of oil equivalent per day. This wide range considered the possibility of delays in major project delivery dates. However, given the Alvheim delay, it is more likely we'll be at the lower end of the range provided. We will be in a much better position to narrow the production range at the end of the second quarter and we'll provide more specific guidance at that time. With that, I'll turn the call back over to Ken.

Thanks very much, Steve. Before we take questions, I'd like to remind you that in the interest of fairness to all of those wishing to ask a question, please limit yourself to one question and a related follow-up. You may then reprompt if you have additional questions. Jason, we are now ready to take questions.

Thank you, sir. (OPERATOR INSTRUCTIONS) We'll take our first question Doug Terreson with Morgan Stanley.

Good afternoon, guys.

Afternoon.

Hey, the press release talked about design work on the second phase LNG project and Equatorial Guinea. On this project there's been some commentary regarding agreements between the (Sonogas) and the governments of Nigeria in (Camarun) on supply for that project. And so my question involves an update on that situation. And specifically what you consider to be the most likely eventual ownership structure on that project and how the different parties are likely to be involved in the different points of the value chai. Or if you can just speak for Marathon, as it relates clarification on that situation, that would be helpful.

Yes, Doug, this is Dave Roberts. That's a good question. You're referring, of course, to the fact that there's been HOA signed between the governments in question that will progress the flow of international gas to train to and further complex. The government still are in communication with each other and we think we're going to continue to make progress on those inner governmental treaties as we go forward notwithstanding the fact that there has been an election in Nigeria that is causing some issues in the particular area. At the present time, the critical factor for marathon is to make sure that the ownerships and interests in the full value chain of trained to and beyond are aligned. And so basically marathon currently contemplates having the same interest it has today in Train 2 on a go forward basis. We will have sufficient interest or control in the infrastructure that allows gas to flow to those, to the LNG facility in the future. And we're looking at ways to make sure that we can create alignment on the up stream supply hub. But to include potentially Marathon being able to participate on the up stream side of the business.

Okay.

So that's still our plan. We're very confident that the discussions are going as we expected. And we think that we'll be in position to make our investment decisions within the ranges of the times that we've mentioned in the past.

Okay. Great. Thanks a lot.

Take a question from Robert Kessler. Please go ahead, sir.

Good afternoon, gentlemen. Looking at your particularly wide guidance for 2Q production and understanding, of course, the eminent start up for AGL and Train 1. Wondering if you could be more specific on the date for first loading there?

Robert, this is Steve Hinchman, we're in the middle of our commissioning. We're fairly well progressed, but there's always something that could come up. So I'd prefer not to give anymore specific guidance other than pretty high confidence level we'll come up in the second quarter. And as you mentioned, indeed the wide guidance that we had given for the second quarter is dominated by the exact start-up time the first LNG Train and EG.

Thanks very much.

Moving on, we take a question from Arjun Murti with Goldman Sachs.

Thank you. You all continue to increase the dividend and buy back additional shares. Can you just talk about how you're thinking about your balance sheet leverage and maybe magnitude of stock buy back and dividend increases going forward? Do you see your debt levels as too low and is that a means to get them up a little bit? Or is it more a function of if there is available free cash flow you'll buy back stock? Thank you.

This is Janet. We look at a lot of different measure when we think about the dividend. As you know, we increased it 20% here in the last quarter. And we like to look at the dividend as an important part of shareholder value. And we look at the dividend as well as the share buyback program. Basically on a quarterly basis. And we look at the dividend payout ratio as well as making sure we have a competitive and growing yield. And so, if you put all of that together, we will continue to, if we have the cash flow and the balance sheet to do it to continue to increase that dividend. We did have about $350 million left of the share buyback authorization from the board. And again, that's something that we'll continue to take to the board, perhaps on a quarterly basis. I think that if you look at our balance sheet with the net debt to book cap in the 7% range, I think it's -- it is under levered. As you know, as we've said many times before, our first priority is investing in value accretive projects in the Company. And that in this environment, it's important to keep a strong balance sheet. So again, we're very focussed on that as a means of returning value to the shareholders.

Yes. You certainly have a number of capital projects coming up and who knows what commodity prices do, but mid single digit debt to cap does seem especially low.

Yes, but recognize that we have bought back $2.2 billion of stock over the last -- just over 12 months. So it's something we've focussed on.

That's terrific. Thank you very much.

Next from Citigroup, we'll take a question from Doug Leggate.

Thank you, good afternoon, everybody. Can I ask a question about Angola. Clearly there's been additional (inaudible) over the last couple of months. And I think the press release alluded to the fact that there may be more to come from the 5 wells that have TD. Can you give an update on the future drilling plans for this year, and maybe look ahead into '08 and how you're feeling now about time frame?

Yes, Doug, this is Phil Behrman. Just to give you an update, I think our original plans were about 10 to 12 wells in Angola on blocks 31 and 32. We feel very comfortable with those plans. It's a little early to comment on any new plans for block 31 and 32 for 2008, but we had previously told you 5 to 6 wells. We're now looking at those plans and seeing if that's the right number of wells to drill. We'll have more information as we go forward down this year. I think our plans further for sanctioning really haven't changed. Angola block 31 northeast is number one in the queue for sanctioning, and we're looking to do that by year-end 2007.

We could see some bookings there this year?

That probably would be early next year or the timing of sanctions.

All right. Thanks.

We'll go next to Nikki Decker with Bear Stearns.

Good afternoon. My question's on (inaudible). Maybe you could just give us some color on what your intentions are there the appraisal schedule?

Sure, this is again Phil. The original well we found 250 feet of pay or oil that we've encountered. We have drilled it down (inaudible) and now encountered over 600 feet of net pay, also oil. We're just completing that down dip side track. So now we've just started today to plug back and do a lateral side track. Once we finish that lateral side track we'll provide a lot more color on our going forward plans. But it's very close to (inaudible) infrastructure, so our plans under any scenario we envisioned today is to bring that future production through the (inaudible) facility.

So do you have a resource estimate, Phil on that?

Once we drill our lateral side track, we want to get that information down and then we'll give you a resource estimate, which is roughly in about a month or so.

Okay. Great. Thank you.

Next we'll move to Ryan Todd with Deutsche Bank.

Good afternoon, gentlemen. I just had a question for you on the downstream margins. In the first quarter we certainly saw a less than historical (inaudible) for quite a few reasons which you've mentioned and which we're aware of. In the second quarter, we've seen any recovery back for the more traditional capture? How are the pieces falling together so far in this quarter?

Ryan, in the first quarter, what we realized in comparison to Marathon's historical -- first of all you have to recognize we had Garyville for a plant turnaround and we had Canton down. Both of those run a heavy slate. So historically, we'll run probably 57 to 60% heavy. We only ran about 52% heavy in the first quarter. So that's why we were down on a historical margin basis verses what you would have expected. The crack spreads that are out there today are widely known. And they've been very, very strong. And knock on wood, the plants have been running very, very well. We would expect the second quarter being able to also capture the asphalt in the first quarter we aren't able to capture the asphalt market as much as we go generally into storage. And then the last point on the first quarter, due to the big increase in crack spreads, our charge of blend stocks were much more expensive. So I think you will see -- we'd expect here in the second quarter charge to blend stocks to continue to be expensive. But we have all of the plants up and running and as I say I don't want to jinx them. Things are going well here in the second quarter.

Great, thank you very much.

Next we'll go to Paul Cheng with Lehman Brothers.

Hey, guys. I think, Gary. Is talking about in the first quarter (inaudible) from the sales contract. You have a mark-to-market and also the (inaudible) long-term contract was expired by the early part of fourth quarter. Can you give a number of what is the relative negative impact to (inaudible) the in terms of earning, and what that may look like in the second quarter if we assume the revenue spot price going to stay where they are?

Right, Paul, if you as Ken said around $40 million or so in the first quarter. What the effect was was last year we had very favorable long-term contracts as we came into the first quarter this year, we did not have those favorable contracts. And as we do the mark-to-market, in a rising market in ethanol where you're protecting yourself against gasoline and a rising market on the paper side, it's going to be difficult to be able to neutralize that cost on a mark-to-market basis. As we roll into the second quarter, I really can't forecast what that mark-to-market impact's going to be because it's going to depend on the change in ethanol price and the change more so the change in gasoline price. Paul, it'd be difficult for us to forecast that today going forward, but as I say, it is tied to the gasoline price.

and this --

Can you elaborate a little bit how exactly or that you mark-to-market on this one?

Yes, let me have Gary Peiffer speak to that.

Yes, in the first quarter compared to the first quarter last year, we made about $80 million less on our ethanol purchase for resell program. About half of that was due to the fact that these long-term contracts we entered into in 2005 expired. As Ken said, basically at the beginning of the fourth quarter, so we lost about half of that 80 million was due to those, the other half was marking the market. Some contracts which we entered into late last year anywhere from 18 months to 2 years to buy ethanol forward at a fixed price. We don't mark-to-market those fixed price physical contracts. We do mark-to-market the derivatives we put in place to refloat those fixed prices. As Gary said, whether -- and most of that 40 million on the derivatives was mark-to-market of the future unrealized losses there. To the extent that gasoline prices stay where they are, we won't recover that, but we'll make it on the physical gallons going forward. So a lot of it's driven where that absolute price of ethanol or gasoline is going to be in the next 12 to 18 months.

Thank you.

And moving on, we'll take the next question from John Herrlin with Merrill Lynch.

Yes, hi. I believe last quarter, Clarence, you mentioned that you were going to be investigating possibly doing joint ventures with oil sands or at least looking at potential oil sand ventures. Can you elaborate on anything that's transpired?

Yes, John, we talked about an RFP process we had underway. I'm going to have Dave Roberts update you on that process.

John, yes, we're -- as we talked about towards the end of last year, we expected the process to be down to a select number of companies that we're visiting with. And we are actively engaged with what we're calling a handful of companies here from a fairly broadlist that we started late in 2006. The discussions continue to be frank. They're obviously based around the value that Canadian producers hold their barrels in the ground verses the justifiably high value that we placed on our refining assets in the Midwest as the most logical and most valuable source of value creation for those oil sands producers. We should be in a position as we've said in our time line in the reasonable future to let people know with results those discussions are going to be.

That mean second half?

I think we have said before that we look towards the first half to having more definitive judgment but I don't think think I'd put a necessary time frame on it.

Thank you.

Next we take a question from Mark Gilman with the Benchmark.

Guys, good afternoon. Downstream question for Gary Heminger if I could, please. In addition to the factors Ken cited in discussing the first quarter. Look to me in terms of looking at the numbers that there was a fairly noticeable change in yield pattern, which may or may not have been related to down times turnarounds and what have you. Gasoline down on a yield side by appreciable amount with the offset being quote unquote, feedstocks and special products. Gary, could you clarify what that is? What the cause is? Whether it was turn around related?

Yes, it would be turn around related. As I said earlier, with Garyville being down for turn around, and the CAP being down, that's our big gasoline machine. That really dominates, especially in the first quarter that dominates our performance. And the yields, when I look at gasoline, we were around 51% in comparison to total year of about 54%. So the whole thing was dominated by Garyville. And also Canton, which runs a high conversion for a small refinery was a pretty good -- we had a little bit of that hit and then we had a small turn around to fix the cat cracker at Robinson that cost us about 10 days in production. Again, a big gasoline-making component of our downstream. Those would be the three factors, Mark.

Thanks, Gary.

(OPERATOR INSTRUCTIONS) We'll move next to Neil McMahon with Sanford Bernstein.

Hi, just a question. Really on your US gas position. It looks like that's been declining reasonably steadily if you take out seasonal swings from the Alaska to Japan LNG shipments. And just wondering given the cash on your balance sheet, what's your appetite for domestic onshore gas acquisitions within the US and what your strategy is really looking for your domestic program going forward throughout the year?

Well, I think we continue to remain interested in building our US gas. And year-over-year we have seen a decline in our gas -- in our gas production typically in the range that I've provided before. But we've exposed ourselves now to a number of additional gas opportunities in the US, including the Piceance and the Barnett. And although they're not making a contribution this early, we do expect that they'll contribute fairly significantly within the next several years.

So --

I guess, Neil, I would add to that, this is Dave Roberts. As Steve has mentioned, we put ourselves in position with stuff we've already brought into our portfolio to perhaps address that issue. And we're always looking for value accredited opportunities around our core businesses. And we recognize the value of US natural gas.

But just as a follow-up, when should we be expecting that sort of stop and decline of the US gas production? When do you think you're going to be able to turn that around given the new drilling going on in Piceance and other areas?

Yes, we'd expect to begin to see a leveling off in US decline beginning in around 2010.

Okay. Thanks.

And next we take a follow-up from Paul Cheng with Lehman Brothers.

Hi, just a quick follow-up, Gary. For expansion, is that? (inaudible) Last time you talked, you guys were looking at whether you definitely want to do it or not.

Paul, it's definitely a go. And we are in the process of doing the work. We have cleared the site, we're starting to fill process and testing piles. And plan on late summer to start some foundation work.

Gary, can I sneak in a follow-up a somewhat different question? Can you give us some market encouragement in terms of what you see for the pilot (inaudible) for the demand?

Well, I would say the instead of quoting exactly where a pilot is. If you look at the American trucking association or North American truck stop owners group, we're seeing a softening in tonnage on the highways and demand. And if you look at some of the biggest carriers is where we're recognizing a softening in the miles driven. So while the first quarter we had -- had very strong demand, we do expect to see a bit of softening and a slow down in disilet demand here in the second quarter.

Do you expect you're going to be positive year-over-year or going to be flat or negative?

Well, we were positive in the first quarter and I would expect the second quarter to be just a maybe a half a percent or so positive.

Very good, thank you.

Next, take a follow-up from Mr Gilman with the Benchmark.

Thanks. For Phil Behrman, on (Draski) can you confirm that the horizon on the side track was the same one, same lower or middle Miocene as penetrated in discovery? Also, give me an idea the distance from the discovery in terms of a bottom hole location?

Yes, Mark. It is to say Miocene section We did drill deeper in the section. So we did encounter more section than what we originally reported before. And it's about 1,000 feet away.

Okay. Thanks. Let me sneak in one other quick one. Powder River Gas sales first quarter ticked down, is that an anomaly of some kind? Or is there something you might want to clarify in that?

How about 3 foot of snow?

That'll do it. That really it, Steve?

Yes, we had quite a bit disruption with a pretty tough winter here, especially in the first quarter. Not only in terms of accessing our wells, but the compressors -- the compression stations struggled through that, as well.

Thanks a lot.

And next we'll move to a follow-up from Mr. McMahon with Sanford Bernstein.

Hi, really just delving into the financials a bit. Just wondering on the tax guidance for the year, you mentioned that your international rate was going to be more in the high 50s for the year. Are you doing a presuming that you're going to do quarter on quarter with a true up at the end of the year like you did last year? And also for DD&A, are you forecasting a yearly depreciation charge and dividing it into four? And are you again as we see EG coming on and Norway later on in the year, are you doing to see DD&A also increase going forward?

In terms of the effective tax rate, I think the guidance is given for the year is 46 to 48% overall. And yes, it does tend to get trued up in the fourth quarter as a mix of business evolves throughout the year.

And DD&A is pretty much as we see it. Quarter by quarter as to how it's made up of the mix.

Okay, just on the DD&A, would you expect it to rise as you bring on Norway maybe of the additional charges? I don't know if there are any or not of the projects got slightly delayed?

Yes. If you look at our international, our DD&A for the first quarter was around 697. We provided a guidance of 7 to 8 for DD&A. So on the lower end internationally and that's because comes on, it will increase the DD&A for the year.

On a similar number on the domestic guidance we gave was 9 to 10 for the year.

And we came in at 911. Pretty much in line with the guidance we have provided.

Great. Sorry to get into the majuere of the financials.

Next we do have a follow-up from Doug Leggate with Citigroup.

Thank you I'm just following the trend here. Libya, there's not been a lot of mention of it this quarter, I guess. My question goes back to Conaco strategy presentation. They gave some a little bit more detail on potentially four developments that I believe they were suggesting have already been approved by the partners to move forward. I think (Calop) was one of them and there's a few others. Could you comment on where you see things there? And if I could also squeeze in a follow-up, the guidance on the exploration charge for Q2 looks like it's up quite a bit domestically, if you could comment on what's driving that, as well, that'd be great. Thanks.

Well, Doug this is Steve. Let comment on Libya's going pretty much according to our expectations. They had a little bit of OPEC curtailment in the fourth quarter, a little more in the third but still operationally it is going pretty much as expected. Conaco, Phillips and Hess and Marathon as we reentered had basically had a growth program that outlined. And we've talked about that growth program in some of our analyst presentations. And those are pretty much in line. They'll come in over really over the next 5 to 10 years. It's a long-term view, but we do see significant growth potential. Not only made up of some major development projects, but due to in production optimization and infill programs as well as 3 or 4 major development projects. Pretty much in line with what Conaco had provided at their strategy session.

And Doug, this is Phil. On the exploration expenses for the second quarter, it's actually probably not too different than what we estimated originally for the first quarter. And, again it reflects a large amount of drilling, of course not just the drilling, it reflects our physical spend, which we see and our drilling is not only in the Gulf of Mexico, but in the onshore lower 48, pretty active programs in both areas.

Just back to Steve very quickly. The Libya production assumptions that you have in your production targets, your longer term production targets, just to be clear there's nothing in there for any up side beyond the current assets? Is that fair.

That's correct. It's just within the Wahaw concession. And there's plenty in the Wahaw concession to get our arms around.

To be clear, your assumption is flat? Or are you assuming growth in there?

No, we're assuming growth. Out to 2010 we'll begin to see fairly significant impact of growth in Libya. And really over the life, there's a potential that Libya's production could nearly double.

Great. Thanks a lot.

And next we have a follow-up question from Mark Gilman with the Benchmark.

This one for Steve Hinchman. Steve, wondered if you could give us a little bit of an update on how you see the reserve picture at all? If you do a little back of the envelope math off 75,000 a day plateau net, it would seem at least to me to suggest recoverable reserve numbers gross basis that would be well north of 300, which is well above, I think much of what's been said. Any comment?

I think we've said 200 to 250 million barrels of growth. And our subsurface or results to date with our drilling program have pretty much been meeting expectation. So I still think that's a good number.

Well if it's 2 to 250, things are going to fall off real quick from that 75?

There is a plateau period for it, but it's not long. And obviously we've got the tie-in that we expect to come in in 2009 and help to more fully utilize the facilities at that time.

Okay. Thanks, Steve.

There are no other questions in the queue at this time. I'll turn the conference back over to our speakers.

Okay. Thank you very much, Jason. I'd like to thank everybody for their participation today. And we'll talk to you again next quarter.

Everyone, we thank you for joining us today. This will conclude this Marathon Oil conference call. We thank you for joining us today.