Marathon 2Q profit falls by half, may split into 2

Marathon Oil Corp. said Thursday it may split itself into two separate companies, one focused primarily on exploration and production and the other on refining and marketing.

The announcement came as Houston-based Marathon said its second-quarter profit fell roughly 50 percent from a year ago, as significantly lower refining and marketing margins took a huge toll on profits.

Marathon said net income for the April-June period fell to $774 million, or $1.08 a share, from $1.55 billion, or $2.25 per share, a year ago.

Excluding special items in the latest quarter, the company said its profit amounted to $858 million, or $1.20 a share. Revenue rose nearly 32 percent to $22.22 billion from $16.88 billion.

Adjusted further for a derivatives-related loss linked to its Canadian oil sands operations, Marathon's per-share earnings were in line with Wall Street estimates, though revenue came in a bit below the forecast of analysts surveyed by Thomson Financial.

Marathon's shares rose $2.37, or about 5.25 percent, to $47.50 in afternoon trading — a jump that some analysts attributed to news of the company's possible separation.

Marathon said it has been mulling a split for several months, and a decision could be made in the fourth quarter of this year. If a decision is made to separate, the split would likely occur during the first quarter of 2009.

Marathon is the fourth-largest U.S. integrated oil company, meaning it's involved in exploration and production as well as refining and marketing. The nation's top three are Exxon Mobil Corp., Chevron Corp. and ConocoPhillips. The company says it's also the nation's fifth largest refiner.

Like its larger competitors, Marathon posted sharply lower results from its refining and marketing, or downstream, operations. The company said income from that segment amounted to $158 million, down from $1.25 billion a year earlier. The culprit: lower refining and wholesale marketing margins.

Those margins reflect the difference between what companies pay for crude and the price they receive for gasoline and other products made from it.

Marathon said the refining and wholesale marketing gross margin per gallon in the quarter amounted to 8.35 cents, down from 39.25 cents in the second quarter of 2007.

Results were better on the upstream, or exploration and production, side of the business.

Marathon said exploration and production income totaled $828 million in the most-recent quarter, more than double the result of a year ago, helped largely by record commodity prices.

The company said sales volumes during the quarter averaged 350,000 barrels of oil equivalent a day, up from 338,000 barrels a year ago.

Marathon's oil sands business reported a loss of $157 million in the second quarter, a result that included a $250 million after-tax loss on derivative instruments. The mark-to-market portion of that loss was $220 million, the company said.

Under what's known as fair-value accounting, companies have to periodically update their estimate of what investments are worth based on current market values — a procedure more commonly known as "marking to market."

Marathon said the derivative instruments were put in place by Western Oil Sands before its acquisition by Marathon in October and are intended to mitigate risk related to future sales of synthetic crude oil. The last of the derivative instruments are set to expire in the fourth quarter next year.

Like others in the industry, Marathon continued its share repurchase program in the second quarter, buying back about 3 million shares at a cost of about $152 million.

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