Marathon Oil Corporation (MRO) — the fifth largest refiner and marketer of petroleum products in the U.S. — announced significantly better-than-expected first-quarter 2010 results.

As has been the case with the larger rivals that have already reported, such as Exxon (XOM), ConocoPhillips (COP), BP Plc (BP), Royal Dutch Shell PLC (RDS.A) and Chevron Corp. (CVX), results were boosted by higher crude realizations. However, Marathon’s downstream operations remained under pressure on the back of depressed refining margins.

Earnings per share, excluding special items, came in at 44 cents, way above the Zacks Consensus Estimate of 19 cents and also exceeded the year-ago period adjusted profit of 34 cents. Quarterly revenue of $16.8 billion was up 63.6% from the year-earlier level, driven by robust upstream results.

Upstream Earnings Soar

Income from the upstream segment totaled $502 million during the quarter, up significantly from $83 million in the year-ago level. Marathon’s worldwide realized crude oil price (from continuing operations) of $74.35 per barrel was 85.0% above the year-earlier level, while natural gas realizations (also from continuing operations) increased 17.4% to $3.31 per thousand cubic feet (Mcf).

The company reported production (available for sale) of 364,000 oil-equivalent barrels per day (BOE/d), slightly above its interim guidance last month but down more than 13% from the previous year period. The negative year-over-year performance reflects planned turnaround in Equatorial Guinea, the sale of a portion of Marathon’s Permian Basin assets in the second quarter of 2009, and normal production declines.

Downstream Margins Plunge

Margins in the refining business decreased significantly from the year-earlier levels. The situation was further aggravated by higher crude oil costs and narrower sweet/sour differentials. Marathon ’s refining and marketing unit lost $237 million during the quarter, compared to income of $159 million last year — reflecting weak margins and crack spreads.

The company’s realized gross refining and wholesale marketing margin of negative 5.69 cents per gallon was down markedly from last year’s income of 7.92 cents per gallon. Total refined product sales volumes were up 5.4% from the year-earlier level to 1,355 thousand barrels per day, while throughput was up 2.7% to 1,100 thousand barrels per day.

Capital Expenditure

During the quarter, Marathon spent roughly $1.2 billion on capital programs (51% on E&P and 26% on Refining, Marketing and Transportation).

Dividend Hiked

Recently, Marathon announced a 4.2% increase in its quarterly dividend to 25 cents per share, or $1.00 per share annualized. The dividend is payable on June 10 to shareholders of record on May 19, 2010.

Capex & Volume Guidance

Marathon earlier announced that it will prune its capital expenditures by about 17% in 2010, as the company allocates a larger percentage of funds towards the Exploration & Production (E&P) segment as against the under-pressure refining business.

The Houston-based firm has pegged its 2010 capital budget at $5.1 billion. As per the plan, expenditure on the downstream business (refining, marketing and transportation) will be 53% lower in 2010 compared to 2009, while the E&P segment will witness a 24% rise in spending. Management’s decision to significantly reduce expenditure on downstream operations was also influenced by the recent on-time completion of its refinery project in Garyville, Louisiana.

Marathon estimates second quarter 2010 E&P production available for sale to be in the range of 365,000 – 380,000 BOE/d, excluding the effect of any future acquisitions or dispositions. Full year guidance remain unchanged at 390,000 – 410,000 BOE/d.
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