Marathon Oil(MRO) - 2021 Q2 - Quarterly Report

FORM 10-Q Marathon Oil Corporation filed its Q2 2021 Form 10-Q, reporting 788,398,843 shares of common stock outstanding as of July 31, 2021 - Marathon Oil Corporation filed its Quarterly Report on Form 10-Q for the period ended June 30, 2021[2] - The registrant is a large accelerated filer and had 788,398,843 shares of common stock outstanding as of July 31, 2021[3] Table of Contents The report is structured into Part I (Financial Information) and Part II (Other Information), covering financial statements, analysis, and other disclosures - The report is structured into Part I (Financial Information) and Part II (Other Information), detailing financial statements, management's discussion and analysis, market risk, controls, legal proceedings, risk factors, equity sales, and exhibits[4] Part I - FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited consolidated financial statements of Marathon Oil Corporation, including statements of income, comprehensive income, balance sheets, cash flows, and stockholders' equity, along with detailed notes explaining the basis of presentation, accounting policies, and specific financial line items Consolidated Statements of Income (Unaudited) The Consolidated Statements of Income show a significant turnaround from a net loss in Q2 2020 and H1 2020 to net income in Q2 2021 and H1 2021, driven by increased revenues from contracts with customers, despite higher net losses on commodity derivatives | Metric (in millions, except per share data) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | |:--------------------------------------------|:---------------------------------|:---------------------------------|:-------------------------------|:-------------------------------| | Revenues from contracts with customers | $1,254 | $490 | $2,431 | $1,514 | | Net gain (loss) on commodity derivatives | $(166) | $(70) | $(319) | $132 | | Net income (loss) | $16 | $(750) | $113 | $(796) | | Diluted Net income (loss) per share | $0.02 | $(0.95) | $0.14 | $(1.00) | Consolidated Statements of Comprehensive Income (Unaudited) The Consolidated Statements of Comprehensive Income reflect a shift from a comprehensive loss in 2020 to a comprehensive income in H1 2021, primarily due to improved net income, despite fluctuations in other comprehensive income components like derivative hedges and postretirement plans | Metric (in millions) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | |:---------------------|:---------------------------------|:---------------------------------|:-------------------------------|:-------------------------------| | Net income (loss) | $16 | $(750) | $113 | $(796) | | Other comprehensive income (loss) | $(35) | $(46) | $4 | $(68) | | Comprehensive income (loss) | $(19) | $(796) | $117 | $(864) | Consolidated Balance Sheets (Unaudited) The Consolidated Balance Sheets show a slight decrease in total assets and liabilities from December 31, 2020, to June 30, 2021, while stockholders' equity increased, with cash and cash equivalents significantly improving and long-term debt decreasing | Metric (in millions) | June 30, 2021 | December 31, 2020 | |:---------------------|:--------------|:------------------| | Total assets | $17,800 | $17,956 | | Total liabilities | $7,166 | $7,395 | | Total stockholders' equity | $10,634 | $10,561 | | Cash and cash equivalents | $970 | $742 | | Long-term debt | $4,875 | $5,404 | Consolidated Statements of Cash Flows (Unaudited) The Consolidated Statements of Cash Flows indicate a strong increase in net cash provided by operating activities in H1 2021 compared to H1 2020, leading to a net increase in cash and cash equivalents, despite significant debt repayments and capital expenditures | Metric (in millions) | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | |:---------------------|:-------------------------------|:-------------------------------| | Net cash provided by operating activities | $1,277 | $710 | | Net cash used in investing activities | $(463) | $(915) | | Net cash used in financing activities | $(586) | $(131) | | Net increase (decrease) in cash and cash equivalents | $228 | $(336) | Consolidated Statements of Stockholders' Equity (Unaudited) The Consolidated Statements of Stockholders' Equity show an increase in total equity from December 31, 2020, to June 30, 2021, primarily due to net income and other comprehensive income, partially offset by dividends paid and share repurchases for tax withholding | Metric (in millions) | December 31, 2020 Balance | June 30, 2021 Balance | |:---------------------|:--------------------------|:----------------------| | Total Equity | $10,561 | $10,634 | | Net income (loss) | $6,466 (Retained Earnings) | $6,524 (Retained Earnings) | | Dividends paid | $(40) (Six Months Ended June 30, 2020) | $(55) (Six Months Ended June 30, 2021) | Notes to Consolidated Financial Statements (Unaudited) These notes provide detailed disclosures on the company's financial statements, covering accounting policies, segment information, revenue breakdown, debt, derivatives, equity, and contingencies, offering crucial context for the reported financial performance 1. Basis of Presentation The interim consolidated financial statements are unaudited and prepared in accordance with SEC rules, not full U.S. GAAP, and should be read in conjunction with the 2020 Annual Report on Form 10-K, with results not necessarily indicative of the full year - The consolidated financial statements are unaudited and reflect all necessary adjustments for fair statement, which are of a normal recurring nature[17] - Statements are prepared in accordance with SEC rules, not full U.S. GAAP, and should be read with the 2020 Annual Report on Form 10-K[17] - Results for the second quarter and first six months of 2021 are not necessarily indicative of full-year results[17] 2. Accounting Standards No new accounting standards adopted in the second quarter or first six months of 2021 had a material impact on the consolidated financial statements - No accounting standards adopted in Q2 or H1 2021 had a material impact on consolidated financial statements[18] 3. Income (loss) and Dividends per Common Share Basic and diluted income per share significantly improved in Q2 and H1 2021 compared to losses in the prior year, and dividends per share increased | Metric (in millions, except per share data) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | |:--------------------------------------------|:---------------------------------|:---------------------------------|:-------------------------------|:-------------------------------| | Net income (loss) | $16 | $(750) | $113 | $(796) | | Basic Net income (loss) per share | $0.02 | $(0.95) | $0.14 | $(1.00) | | Diluted Net income (loss) per share | $0.02 | $(0.95) | $0.14 | $(1.00) | | Dividends per share | $0.04 | $0.00 | $0.07 | $0.05 | 4. Revenues Revenues from contracts with customers saw a substantial increase in Q2 and H1 2021, primarily driven by sales of crude oil, condensate, NGLs, and natural gas in the United States and Equatorial Guinea, with receivables from customers also increasing significantly - The majority of revenues are derived from the sale of crude oil and condensate, NGLs, and natural gas in the United States and Equatorial Guinea[21] | Metric (in millions) | June 30, 2021 | December 31, 2020 | |:---------------------|:--------------|:------------------| | Receivables from contracts with customers | $841 | $572 | | Segment (in millions) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | |:----------------------|:---------------------------------|:---------------------------------|:-------------------------------|:-------------------------------| | United States | $1,189 | $462 | $2,321 | $1,432 | | International | $65 | $28 | $110 | $82 | | Total | $1,254 | $490 | $2,431 | $1,514 | 5. Segment Information Marathon Oil operates in two reportable segments, United States and International (Equatorial Guinea), both showing a significant increase in segment income in Q2 and H1 2021 compared to losses in the prior year, driven by improved market conditions, with certain corporate costs and non-comparable items not allocated to segments - The company has two reportable operating segments: United States (explores, produces, and markets crude oil, condensate, NGLs, and natural gas) and International (same activities outside the U.S., plus LNG and methanol production in Equatorial Guinea)[214] | Metric (in millions) | U.S. (Q2 2021) | Int'l (Q2 2021) | Not Allocated (Q2 2021) | Total (Q2 2021) | |:---------------------|:---------------|:----------------|:------------------------|:----------------| | Segment income (loss) | $207 | $68 | $(259) | $16 | | Total assets | $15,747 | $1,047 | $1,006 | $17,800 | | Capital expenditures | $284 | $2 | $3 | $289 | | Metric (in millions) | U.S. (H1 2021) | Int'l (H1 2021) | Not Allocated (H1 2021) | Total (H1 2021) | |:---------------------|:---------------|:----------------|:------------------------|:----------------| | Segment income (loss) | $419 | $118 | $(424) | $113 | | Capital expenditures | $467 | $2 | $4 | $473 | 6. Income Taxes The effective income tax rate increased significantly in Q2 and H1 2021 compared to 2020, primarily due to the income mix of U.S. and E.G. operations, and the company maintains a full valuation allowance on net federal deferred tax assets in the U.S | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | |:------------------------|:---------------------------------|:---------------------------------|:-------------------------------|:-------------------------------| | Effective income tax rate | 38% | 2% | 15% | 2% | - The effective income tax rate differs from the U.S. statutory rate of 21% due to the income mix of U.S. and E.G. operations[224] - A full valuation allowance on net federal deferred tax assets in the U.S. results in no federal deferred tax expense or benefit on current year U.S. activity[224] 7. Credit Losses Receivables are primarily from commodity purchasers and joint interest owners, with payment terms typically 30 days or less, and the allowance for doubtful accounts decreased slightly from year-end 2020 to June 30, 2021 - Receivables are mainly from purchasers of commodities or joint interest owners, with payment terms of 30 days or less[225] | Metric (in millions) | June 30, 2021 | December 31, 2020 | |:---------------------|:--------------|:------------------| | Ending balance of allowance for doubtful accounts | $19 | $22 | 8. Inventories Inventories, consisting of crude oil, natural gas, supplies, and other items, are valued at weighted average cost and carried at the lower of cost or net realizable value, with total inventories remaining stable from year-end 2020 to June 30, 2021 - Crude oil and natural gas inventories are recorded at weighted average cost and carried at the lower of cost or net realizable value[227] | Metric (in millions) | June 30, 2021 | December 31, 2020 | |:---------------------|:--------------|:------------------| | Inventories | $78 | $76 | 9. Property, Plant and Equipment Net property, plant, and equipment decreased slightly from year-end 2020 to June 30, 2021, while capitalized exploratory well costs for suspended wells increased, reflecting management's belief in their development potential | Metric (in millions) | June 30, 2021 | December 31, 2020 | |:---------------------|:--------------|:------------------| | Net property, plant and equipment | $15,019 | $15,638 | - Capitalized exploratory well costs for suspended wells increased to $158 million as of June 30, 2021, from $98 million at December 31, 2020, as management believes these wells justify potential development[231] 10. Impairments In Q2 2021, the company recorded $24 million in impairment expense for Eagle Ford central facilities and an additional $22 million for increased decommissioning costs of previously divested offshore assets, contrasting with 2020 which saw a $152 million impairment on an equity method investment and a $95 million goodwill impairment - In Q2 2021, recorded $24 million impairment for two central facilities in Eagle Ford due to decommissioning activities[234] - Recognized an incremental $22 million impairment expense in Q2 2021 for increased estimated future decommissioning costs of certain non-producing wells, pipelines, and production facilities for previously divested offshore assets in the Gulf of Mexico[235] - In Q2 2020, recorded a $152 million impairment on an equity method investment due to depressed commodity prices, and in H1 2020, a $95 million goodwill impairment in the International reporting unit[236][237] 11. Asset Retirement Obligations Asset retirement obligations increased in H1 2021, primarily due to a $29 million revision of estimate for anticipated decommissioning costs of previously divested offshore assets in the Gulf of Mexico | Metric (in millions) | June 30, 2021 | June 30, 2020 | |:---------------------|:--------------|:--------------| | Ending balance as of June 30, total | $296 | $252 | | Revisions of estimates | $32 | $(8) | - A $29 million revision of estimate in Q2 2021 related to anticipated decommissioning costs for divested offshore non-producing long-lived assets in the Gulf of Mexico[239] 12. Leases The company primarily acts as a lessee for various operating leases, with right-of-use assets decreasing, and also acts as a lessor for residential housing in Equatorial Guinea while constructing a new Houston office building with a significant residual value guarantee | Metric (in millions) | June 30, 2021 | December 31, 2020 | |:---------------------|:--------------|:------------------| | Right-of-use asset | $92 | $133 | | Current portion of long-term lease liability | $52 | $70 | | Long-term lease liability | $44 | $67 | - Marathon E.G. Production Limited is a lessor for residential housing in E.G., with fixed lease payments of approximately $6 million per year[243] - Project costs incurred for a new Houston office building totaled approximately $214 million as of June 30, 2021, with a residual value guarantee of approximately 89% of total acquisition and construction costs[244] 13. Goodwill Goodwill was fully impaired by $95 million in Q1 2020 for the International reporting unit, following a substantial deterioration in worldwide hydrocarbon demand due to the global pandemic - Goodwill was fully impaired by $95 million in Q1 2020 for the International reporting unit[245] - The impairment was triggered by a substantial deterioration in worldwide hydrocarbon demand due to the global pandemic, which reduced the fair value of the International reporting unit below its carrying value[245] 14. Derivatives The company uses commodity and interest rate derivatives to manage market risks, with commodity derivatives including collars and swaps, and several interest rate swaps previously designated as cash flow hedges for debt refinancing and lease payments were de-designated in 2021 | Metric (in millions) | June 30, 2021 Net Asset (Liability) | December 31, 2020 Net Asset (Liability) | |:---------------------|:------------------------------------|:----------------------------------------| | Total Not Designated as Hedges | $(119) | $(13) | | Total Designated Hedges | $(8) | $3 | | Total Derivatives | $(127) | $(10) | - Commodity derivatives include three-way collars, two-way collars, fixed price swaps, basis swaps, and NYMEX roll basis swaps for crude oil, natural gas, and NGLs[250] - In H1 2021, net cash paid for settled derivative positions was $95 million, compared to net cash received of $91 million in H1 2020[253] - De-designated forward starting interest rate swaps in Q1 and Q2 2021 related to forecasted debt issuances (2022 and 2025 notes) and Houston office lease payments, reclassifying cumulative gains/losses to net interest[255][257] 15. Fair Value Measurements Fair value measurements for recurring derivative instruments are primarily Level 2 and Level 1, using models with observable inputs, while nonrecurring fair values relate to impairments, and financial instruments like long-term debt are measured using market approaches (Level 2 inputs) | Metric (in millions) | June 30, 2021 Total | December 31, 2020 Total | |:---------------------|:--------------------|:------------------------| | Derivative instruments, assets | $62 | $29 | | Derivative instruments, liabilities | $(189) | $(39) | - Commodity derivatives are measured at fair value using Black-Scholes or modified Black-Scholes models, with inputs categorized as Level 1 (swaps) or Level 2 (collars)[261] - Long-term debt fair values are measured using a market approach based on quotes from major financial institutions (Level 2 inputs)[266] 16. Debt The company amended its revolving credit facility, increasing its size to $3.1 billion and extending maturity, fully redeemed $500 million of 2022 Senior Notes in April 2021, and plans to redeem $900 million of 2025 Senior Notes in September 2021, incurring make-whole premiums but reducing future interest expense - The unsecured revolving credit facility was increased from $3.0 billion to $3.1 billion, with maturity extended to June 21, 2024[267] - Total long-term debt outstanding was $4.9 billion at June 30, 2021[269] - Redeemed $500 million 2.8% Senior Notes due 2022 in April 2021, incurring $19 million in costs[268][269] - Plans to redeem $900 million 3.85% Senior Notes due 2025 in September 2021, with an estimated make-whole premium of $85 million to $105 million[269] - Debt to total capitalization ratio was 24% at June 30, 2021, well below the 65% covenant limit[267][349] 17. Stockholders' Equity No significant share repurchases were made under the program in H1 2021, except for $9 million related to tax withholding obligations for employee restricted stock awards, and the company retains $1.3 billion in remaining share repurchase authorization - No share repurchases under the program during H1 2021, except for $9 million related to tax withholding for employee restricted stock awards[270] - Total remaining share repurchase authorization was $1.3 billion at June 30, 2021[270] 18. Incentive Based Compensation The company granted stock-based performance units settled in shares and introduced new cash-settled performance units tied to cumulative free cash flow, with a banking feature, and activity for stock options and restricted stock awards/units is also detailed - Granted 307,473 stock-based performance units (share-settled) with a grant date fair value of $18.07 per unit, tied to total shareholder return (TSR)[273] - Introduced new cash-settled stock-based performance units (307,473 units) tied to cumulative free cash flow, with a banking feature that fixes vesting percentages at certain milestones[273][274] | Metric (Number of Shares) | Outstanding at Dec 31, 2020 | Outstanding at June 30, 2021 | |:--------------------------|:----------------------------|:-----------------------------| | Stock Options | 6,014,255 | 4,522,776 | | Restricted Stock Awards & Units | 7,851,754 | 6,359,127 | 19. Defined Benefit Postretirement Plans The company reported net periodic benefit costs for pension and other postretirement plans, with contributions made to funded and unfunded pension plans in H1 2021 | Metric (in millions) | Six Months Ended June 30, 2021 (Pension) | Six Months Ended June 30, 2020 (Pension) | Six Months Ended June 30, 2021 (Other Benefits) | Six Months Ended June 30, 2020 (Other Benefits) | |:---------------------|:-----------------------------------------|:-----------------------------------------|:------------------------------------------------|:------------------------------------------------| | Net periodic benefit costs (credits) | $13 | $24 | $(6) | $(21) | - Contributions of $14 million were made to the funded pension plan in H1 2021, with an additional $9 million expected this year[276] 20. Reclassifications Out of Accumulated Other Comprehensive Income (Loss) Total reclassifications from accumulated other comprehensive income (loss) resulted in a net income impact in H1 2021, primarily due to the reclassification of de-designated forward interest rate swaps | Metric (in millions) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | |:---------------------|:---------------------------------|:---------------------------------|:-------------------------------|:-------------------------------| | Total reclassifications of (income) expense, net of tax | $(31) | $7 | $(26) | $8 | | Reclassification of de-designated forward interest rate swaps | $(30) | — | $(28) | — | 21. Supplemental Cash Flow Information Supplemental cash flow information highlights interest and income taxes paid, and a significant increase in asset retirement costs in H1 2021 | Metric (in millions) | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | |:---------------------|:-------------------------------|:-------------------------------| | Interest paid, net of amounts capitalized | $123 | $126 | | Income taxes paid | $9 | $4 | | Increase (decrease) in asset retirement costs | $38 | $(6) | - Accrued capital expenditures for H1 2021 were $85 million, compared to $48 million in H1 2020[280] 22. Equity Method Investments The company's equity method investments, primarily in EGHoldings, Alba Plant LLC, and AMPCO, are considered related parties, with net income from these investees significantly improving in H1 2021, reversing a loss from the prior year | Investee | Ownership as of June 30, 2021 | June 30, 2021 (in millions) | December 31, 2020 (in millions) | |:---------------------|:------------------------------|:----------------------------|:--------------------------------| | EGHoldings | 60% | $138 | $113 | | Alba Plant LLC | 52% | $168 | $168 | | AMPCO | 45% | $152 | $166 | | Total | | $458 | $447 | | Metric (in millions) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | |:---------------------|:---------------------------------|:---------------------------------|:-------------------------------|:-------------------------------| | Net income (loss) | $85 | $(13) | $157 | $(39) | - Revenues from related parties were $16 million for H1 2021, with the majority related to EGHoldings[285] 23. Commitments and Contingencies The company has various commitments and contingencies, including indemnification agreements, third-party guarantees for payment obligations of equity method investees, a $121 million current liability for suspended royalty and working interest revenue, an EPA Notice of Violation, and increased reserves for decommissioning divested offshore assets - Executed third-party guarantees for up to $91 million for Equatorial Guinea LNG Operations, S.A. and $25 million for Alba Plant LLC, expiring no later than December 31, 2027[287] - As of June 30, 2021, a $121 million current liability exists for suspended royalty and working interest revenue, including $111 million in accounts payable and $10 million in accrued interest[287] - Increased existing reserve to $29 million in Q2 2021 for anticipated decommissioning costs of certain wells, pipelines, and production facilities for previously divested offshore assets[288] - Received an EPA Notice of Violation in January 2020 related to the Clean Air Act, but believes it will not have a material adverse effect[287] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides an in-depth analysis of Marathon Oil's financial condition and operational performance, highlighting its strategy, market conditions, and detailed results for the three and six months ended June 30, 2021, compared to the prior year Executive Overview Marathon Oil, an independent E&P company, focuses on lower-cost, higher-margin U.S. resource plays, prioritizing free cash flow, shareholder returns, and balance sheet enhancement, reporting strong liquidity, significant cash flow from operations, and a return to net income in Q2 2021, despite decreased U.S. net sales volumes - Strategy focuses on competitive returns by investing in lower-cost, higher-margin U.S. resource plays (Eagle Ford, Bakken, STACK, SCOOP, Northern Delaware)[291] - Liquidity at Q2 2021 was approximately $4.1 billion, comprising an undrawn $3.1 billion revolving credit facility and $970 million in cash[292] - Generated $1.3 billion of cash provided by operating activities in H1 2021, sufficient to fund debt redemption, capital expenditures, and dividends[292] - Net income per share was $0.02 in Q2 2021, a significant improvement from a net loss per share of $0.95 in Q2 2020[294] - U.S. net sales volumes decreased by 8% to 283 mboed in Q2 2021 due to lower drilling and completion activities and natural decline[293][294] Outlook The company's 2021 Capital Budget is set at $1.0 billion, a maintenance level aimed at keeping total company oil production consistent with Q4 2020 exit rates, with approximately 90% of this budget allocated to the Eagle Ford and Bakken U.S. resource plays, prioritizing corporate returns and free cash flow over production growth - 2021 Capital Budget is $1.0 billion, a maintenance level to keep total company oil production consistent with Q4 2020 exit rates[296] - The capital allocation framework prioritizes corporate returns and free cash flow generation over production growth[296] - Approximately 90% of the 2021 Capital Budget is weighted towards the Eagle Ford and Bakken U.S. resource plays[296] Operations Net sales volumes for both U.S. and International segments decreased in Q2 and H1 2021 compared to the prior year, primarily due to lower capital investment and natural decline, with drilling activity in key U.S. resource plays varying while International operations saw fewer liftings | Segment (mboed) | Q2 2021 | Q2 2020 | Change (%) | H1 2021 | H1 2020 | Change (%) | |:----------------|:--------|:--------|:-----------|:--------|:--------|:-----------| | United States | 283 | 308 | (8)% | 279 | 323 | (14)% | | International | 65 | 84 | (23)% | 66 | 83 | (20)% | | Total | 348 | 392 | (11)% | 345 | 406 | (15)% | - Lower capital investment and natural decline contributed to decreased net sales volumes in both U.S. and International segments[299][305] | U.S. Resource Play | Q2 2021 Wells Drilled to Total Depth | Q2 2020 Wells Drilled to Total Depth | H1 2021 Wells Drilled to Total Depth | H1 2020 Wells Drilled to Total Depth | |:-------------------|:-------------------------------------|:-------------------------------------|:-------------------------------------|:-------------------------------------| | Eagle Ford | 23 | 9 | 53 | 41 | | Bakken | 17 | 8 | 39 | 35 | | International Equity Method Investees (mtd/boed) | Q2 2021 | Q2 2020 | Change (%) | H1 2021 | H1 2020 | Change (%) | |:-------------------------------------------------|:--------|:--------|:-----------|:--------|:--------|:-----------| | LNG (mtd) | 3,094 | 4,635 | (33)% | 3,220 | 4,850 | (34)% | | Condensate and LPG (boed) | 7,892 | 10,896 | (28)% | 9,303 | 10,767 | (14)% | Market Conditions Commodity prices significantly influence the company's financial performance, increasing in H1 2021 due to rising oil demand, increased vaccination rates, global economic recovery, and OPEC supply limitations, following a period of decline in H1 2020, with continued price volatility anticipated - Commodity prices increased in H1 2021 due to rising oil demand, increased COVID-19 vaccination rates, global economic activity, and ongoing OPEC supply limitations[307] | Metric (per bbl/mcf) | H1 2021 U.S. Average Price Realization | H1 2020 U.S. Average Price Realization | Change (%) | |:---------------------|:---------------------------------------|:---------------------------------------|:-----------| | Crude oil and condensate | $60.08 | $33.60 | 79% | | Natural gas liquids | $24.06 | $8.54 | 182% | | Natural gas | $4.43 | $1.52 | 191% | | Metric (per bbl) | H1 2021 International Average Price Realization | H1 2020 International Average Price Realization | Change (%) | |:---------------------|:------------------------------------------------|:------------------------------------------------|:-----------| | Crude oil and condensate | $49.06 | $24.40 | 101% | - Continued commodity price volatility is expected due to the ongoing impact of COVID-19, uneven global economic recovery, and OPEC supply policy[307] Results of Operations The results of operations show a significant improvement in profitability for both the three and six months ended June 30, 2021, compared to the prior year, primarily driven by higher commodity price realizations, partially offset by increased derivative losses and shipping/handling costs Three Months Ended June 30, 2021 vs. Three Months Ended June 30, 2020 Revenues from contracts with customers increased substantially in Q2 2021, leading to a significant turnaround in segment income for both U.S. and International operations, primarily due to higher price realizations, though partially offset by increased net losses on commodity derivatives and shipping/handling costs | Metric (in millions) | Q2 2021 | Q2 2020 | Change | |:---------------------|:--------|:--------|:-------| | Revenues from contracts with customers | $1,254 | $490 | +$764 | | Net gain (loss) on commodity derivatives | $(166) | $(70) | $(96) | | Income from equity method investments | $49 | $(152) | +$201 | | Production expenses | $126 | $129 | $(3) | | Shipping, handling and other operating | $167 | $105 | +$62 | | Depreciation, depletion and amortization | $532 | $597 | $(65) | | Impairments | $46 | — | +$46 | | Taxes other than income | $74 | $30 | +$44 | | General and administrative | $68 | $88 | $(20) | | Loss on early extinguishment of debt | $19 | — | +$19 | | Effective income tax rate | 38% | 2% | +36% | | Segment (in millions) | Q2 2021 Segment Income (Loss) | Q2 2020 Segment Income (Loss) | |:----------------------|:------------------------------|:------------------------------| | United States | $207 | $(365) | | International | $68 | $(6) | Six Months Ended June 30, 2021 vs. Six Months Ended June 30, 2020 For H1 2021, revenues from contracts with customers increased significantly, contributing to a substantial improvement in segment income for both U.S. and International operations, primarily driven by higher price realizations, despite increased net losses on commodity derivatives and shipping/handling costs, and lower production volumes | Metric (in millions) | H1 2021 | H1 2020 | Change | |:---------------------|:--------|:--------|:-------| | Revenues from contracts with customers | $2,431 | $1,514 | +$917 | | Net gain (loss) on commodity derivatives | $(319) | $132 | $(451) | | Income (loss) from equity method investments | $93 | $(164) | +$257 | | Production expenses | $247 | $289 | $(42) | | Shipping, handling and other operating | $319 | $249 | +$70 | | Exploration expenses | $46 | $54 | $(8) | | Depreciation, depletion and amortization | $1,028 | $1,241 | $(213) | | Impairments | $47 | $97 | $(50) | | Taxes other than income | $148 | $96 | +$52 | | Net interest and other | $(72) | $(133) | +$61 | | Loss on early extinguishment of debt | $19 | — | +$19 | | Effective income tax rate | 15% | 2% | +13% | | Segment (in millions) | H1 2021 Segment Income (Loss) | H1 2020 Segment Income (Loss) | |:----------------------|:------------------------------|:------------------------------| | United States | $419 | $(385) | | International | $118 | $(7) | Critical Accounting Estimates There have been no material changes or developments in the evaluation of the accounting estimates and underlying assumptions or methodologies pertaining to the critical accounting estimates disclosed in the 2020 Form 10-K - No material changes or developments in critical accounting estimates from the 2020 Annual Report on Form 10-K[337] Accounting Standards Not Yet Adopted Information regarding accounting standards not yet adopted is referenced to Note 2 of the consolidated financial statements - Refer to Note 2 to the consolidated financial statements for details on accounting standards not yet adopted[338] Cash Flows The company generated significantly higher cash flow from operating activities in H1 2021 due to increased commodity prices, despite being partially offset by net realized losses on commodity derivatives and increased working capital usage, with capital expenditures decreasing in the U.S. segment - Cash flows generated from operating activities in H1 2021 were $1,277 million, an 80% increase compared to H1 2020, primarily due to higher realized commodity prices[341] | Metric (in millions) | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | |:---------------------|:-------------------------------|:-------------------------------| | Additions to property, plant and equipment | $(483) | $(946) | | Debt repayment | $(500) | — | | Purchases of common stock | $(9) | $(92) | | Dividends paid | $(55) | $(40) | - Capital expenditures for the U.S. segment declined in H1 2021 due to lower drilling and completions activities[342] Liquidity and Capital Resources Marathon Oil maintains a strong liquidity position of $4.1 billion, comprising cash and an undrawn revolving credit facility, actively managing its debt by redeeming $500 million of 2022 Notes and planning to redeem $900 million of 2025 Notes, while maintaining investment-grade credit ratings and approving a Q3 2021 dividend - Total liquidity at June 30, 2021, was approximately $4.1 billion, consisting of $970 million in cash and cash equivalents and $3.1 billion available under its revolving Credit Facility[343] - Maintained investment grade ratings at all three primary credit rating agencies, with Moody's and Fitch recently upgrading their rating outlooks to stable and positive, respectively[345] - Fully redeemed $500 million 2.8% Senior Notes due 2022 in April 2021 and plans to fully redeem $900 million 3.85% Senior Notes due 2025 in September 2021, reducing annual cash interest expense[346] - The Board of Directors approved a dividend of $0.05 per share payable September 10, 2021[345] - The debt to total capitalization ratio was 24% at June 30, 2021, well within the 65% covenant limit[349] Environmental Matters and Other Contingencies The company continues to incur capital, operating, and maintenance expenditures for environmental compliance, with no significant changes to environmental, health, and safety matters reported beyond those detailed in Note 23 and Part II, Item 1 - The company incurs ongoing capital, operating, and maintenance, and remediation expenditures due to environmental laws and regulations[352] - No significant changes to environmental, health, and safety matters were reported, other than those detailed in Part II - Item 1. Legal Proceedings and Note 23 to the consolidated financial statements[352] Forward-Looking Statements This report contains forward-looking statements regarding future performance, business strategy, and financial position, with results potentially differing materially due to various factors, and the company undertakes no obligation to revise or update these statements unless required by law - This report contains forward-looking statements regarding future performance, business strategy, and financial position[354] - Results could differ materially due to factors such as commodity prices, political and economic conditions, hedging activities, operational risks, and regulatory changes[354] - The company undertakes no obligation to revise or update any forward-looking statements unless required by law[354] Part II - OTHER INFORMATION Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to commodity price risk and interest rate risk, which it manages using financial derivatives, and a hypothetical 10% change in commodity prices or interest rates would significantly impact the fair values of its derivative positions - The company is exposed to commodity price risk and interest rate risk, managed through financial derivatives[355] | Metric (in millions) | Fair Value (June 30, 2021) | Hypothetical Price Increase of 10% | Hypothetical Price Decrease of 10% | |:---------------------|:---------------------------|:-----------------------------------|:-----------------------------------| | Derivative asset (liability) - Crude Oil | $(133) | $(157) | $(37) | | Derivative asset (liability) - Natural Gas | $(26) | $(39) | $(14) | | Derivative asset (liability) - NGL | $(22) | $(28) | $(17) | | Total Commodity Derivatives | $(181) | $(224) | $(68) | | Metric (in millions) | Fair Value (June 30, 2021) | Hypothetical Interest Rate Increase of 10% | Hypothetical Interest Rate Decrease of 10% | |:---------------------|:---------------------------|:-------------------------------------------|:-------------------------------------------| | Interest rate asset (liability) - designated as cash flow hedges | $(8) | $(7) | $(9) | | Interest rate asset (liability) - not designated as cash flow hedges | $62 | $79 | $50 | | Total Interest Rate Derivatives | $54 | $72 | $41 | Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of June 30, 2021, with no material changes to internal control over financial reporting occurring during H1 2021 - Disclosure controls and procedures were effective as of June 30, 2021, based on evaluation by management, CEO, and CFO[360] - No material changes in internal control over financial reporting occurred during the first six months of 2021[360] Item 1. Legal Proceedings The company is involved in an EPA enforcement action related to the Clean Air Act and various lawsuits alleging royalty underpayments, and while the ultimate outcome is uncertain, the company believes these proceedings will not have a material adverse effect on its financial position, results of operations, or cash flows - Received a Notice of Violation from the EPA in January 2020 related to the Clean Air Act, which may result in monetary sanctions and corrective actions[362] - Named in various lawsuits alleging royalty underpayments in domestic operations, with some plaintiffs seeking class certification[362] - The company believes the resolution of these proceedings will not have a material adverse effect on its consolidated financial position, results of operations, or cash flows[362] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the company's 2020 Annual Report on Form 10-K - No material changes to the risk factors from those listed in Item 1A. Risk Factors in the 2020 Annual Report on Form 10-K[363] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased a small number of shares in Q2 2021, primarily to satisfy tax withholding obligations for employee restricted stock awards, and the share repurchase program has a remaining authorization of $1.3 billion | Period | Total Number of Shares Purchased | Average Price Paid per Share | |:----------------------|:---------------------------------|:-----------------------------| | 04/01/2021 - 04/30/2021 | 5,032 | $11.47 | | 06/01/2021 - 06/30/2021 | 1,259 | $13.34 | | Total | 6,291 | $11.85 | - 6,291 shares of restricted stock were delivered by employees to satisfy tax withholding requirements upon vesting[365] - The total remaining share repurchase authorization was $1.3 billion as of June 30, 2021[365] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including corporate organizational documents, debt indentures, the amended credit agreement, and various certifications - Exhibits include the Restated Certificate of Incorporation, By-laws, Indenture, and the Sixth Amendment to the Amended and Restated Credit Agreement[370] - Certifications from the President and Chief Executive Officer and Executive Vice President and Chief Financial Officer are also filed[370] Signatures The report was signed on behalf of Marathon Oil Corporation by Gary E. Wilson, Vice President, Controller and Chief Accounting Officer, on August 5, 2021 - The report was signed by Gary E. Wilson, Vice President, Controller and Chief Accounting Officer[368] - The signing date was August 5, 2021[368]