MARATHON OIL CORPORATION Executive Overview Outlook Operations Market Conditions Results of Operations Critical Accounting Estimates Accounting Standards Not Yet Adopted Cash Flows Liquidity and Capital Resources Environmental Matters and Other Contingencies 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 based inHouston, Texas . Our strategy is to deliver competitive and improving corporate level returns by focusing our capital investment in the lower cost, higher marginU.S. resource plays (theEagle Ford inTexas , the Bakken inNorth Dakota , STACK and SCOOP inOklahoma andNorthern Delaware inNew Mexico ). Commodity prices declined substantially in the first half of 2020. While commodity prices are likely to remain volatile, we believe we can manage through this lower commodity price macro environment as our portfolio affords us the flexibility to respond to changing market conditions. Our primary focus remains on protecting our balance sheet and maintaining a strong liquidity position. We believe our financial strength, quality portfolio, and ongoing focus on reducing our cost structure better position us to navigate during this unprecedented time. The risks associated with COVID-19 impacted our workforce and the way we meet our business objectives. Due to concerns over health and safety, the vast majority of our corporate workforce works remotely as we plan a process for a phased return of employees to the office. Working remotely has not significantly impacted our ability to maintain operations, has allowed our field offices to operate without any disruption, and has not caused us to incur significant additional expenses; however, we are unable to predict the duration or ultimate impact of these measures. Key highlights include the following: Maintained focus on balance sheet and liquidity •At the end of the second quarter 2020, we had approximately$3.5 billion of liquidity, comprised of an undrawn$3.0 billion revolving credit facility and$0.5 billion in cash, and no significant near-term debt maturities. We remain investment grade at all three primary rating agencies, with recent reviews by all three primary rating agencies. •Continued our capital discipline, with an additional reduction of our Capital Budget to$1.2 billion . •Restructured a portion of our commodity derivative portfolio during the quarter, which minimized the near-term crude downside and protected basis differentials. •Continued to opportunistically execute additional commodity derivatives to minimize the risk of price fluctuations. •InApril 2020 , we took broad-based cost saving measures, including temporary base salary reductions for CEO and other corporate officers through year-end, a reduction in Board of Directors compensation through year-end, andU.S. employee and contractor workforce reductions. •Temporarily suspended the quarterly dividend and share repurchases to maximize liquidity. •In earlyJuly 2020 , collected an$89 million cash refund related to alternative minimum tax credits and associated interest. 28 -------------------------------------------------------------------------------- Financial and operational results •U.S. net sales volumes decreased by 7% to 308 mboed, including a 4% reduction inU.S. crude oil net sales volumes compared to the same quarter last year as a result of overall lower wells to sales activity driven by the lower drilling and completions activity. •Our net loss per share was$0.95 in the second quarter of 2020 as compared to net income per share of$0.20 in the same period last year. Included in our financial results for the current quarter: •Revenues from contracts with customers decreased$891 million compared to the same quarter last year, largely due to lower price realizations and decreased production volumes. Average crude oil price realizations decreased by 64% during the first six months of 2020 as compared to the first six month of 2019. •Net loss on commodity derivatives of$70 million for the second quarter of 2020, an$86 million decrease from the same period in 2019, which was a net gain of$16 million . •A non-cash impairment of an investment in one of our equity method investees of$152 million . •Net cash provided by operating activities in the first six months of 2020 decreased to$710 million or 46% primarily as a result of lower commodity price realizations, compared to the first six months of 2019. •TheJune 30, 2020 cash balance reflects a decrease of approximately$336 million from year-end, due in part to working capital changes reflecting the slowdown of 2020 capital activity. Outlook Capital Budget Earlier this year, we announced an approved 2020 Capital Budget of$2.4 billion , including$200 million to fund resource play leasing and exploration ("REx"). In light of the substantial decline in commodity prices and oversupply in the market, our Board of Directors approved a reduction to our Capital Budget earlier in the year to a level of$1.3 billion . Due to strong execution and capital efficiency improvement, in August we further reduced our full year 2020 capital spending budget to$1.2 billion . This revised Capital Budget represents a 50% reduction of our original budget. The revised budget contemplates a full suspension of ourOklahoma activity in 2020, a decrease inNorthern Delaware drilling activity, and a continued optimization of our development plans in the Bakken andEagle Ford . This also completes our REx drilling program for 2020. Additional adjustments to capital spending plans may be necessary in the future to respond to the shifts in the macro environment.
Commensurate with our revised budget of
The following table presents a summary of our sales volumes for each of our
segments. Refer to the Results of Operations section for a price-volume analysis
for each of the segments.
Three Months Ended June 30, Six Months Ended June 30,
Increase Increase
Net Sales Volumes 2020 2019 (Decrease) 2020 2019 (Decrease)
United States (mboed) 308 330 (7) % 323 314 3 %
International (mboed)(a) 84 107 (21) % 83 98 (15) %
Total (mboed) 392 437 (10) % 406 412 (1) %
(a)In the first quarter of 2019, we announced the sale of our U.K. business,
which closed in the third quarter of 2019. The six months ended June 30, 2019
includes net sales volumes related to the U.K. of 11 mboed. See Note 4 to
the consolidated financial statements for further information.
United States
Net sales volumes in the segment were lower in the second quarter of 2020
but higher in the first six months of 2020 as compared to their respective 2019
periods. In the second quarter of 2020, we began the process of transitioning to
a significantly lower level of drilling and completion activity across our
domestic portfolio. This lower pace of activity had the biggest effect in
Oklahoma , where we did not bring any wells to sales during the quarter and
experienced a significant decline in production. Overall sales volumes increased
in the first six months of 2020 due to an increase in the absolute number of
producing wells since June 30, 2019 , primarily in the Bakken and Eagle Ford .
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We expect that our planned pace of drilling and completions activity during the
second half of the year will enable us to meet our 2020 production guidance as
noted in the preceding Outlook section. The following tables provide additional
details regarding net sales volumes, sales mix and operational drilling activity
for our significant operations within this segment:
Three Months Ended June 30, Six Months Ended June 30,
Increase Increase
Net Sales Volumes 2020 2019 (Decrease) 2020 2019 (Decrease)
Equivalent Barrels (mboed)
Eagle Ford 108 109 (1) % 111 107 4 %
Bakken 103 103 - % 106 98 8 %
Oklahoma 60 82 (27) % 67 72 (7) %
Northern Delaware 30 27 11 % 30 27 11 %
Other United States 7 9 (22) % 9 10 (10) %
Total United States 308 330 (7) % 323 314 3 %
Three Months Ended June 30, 2020
Northern
Sales Mix - U.S. Resource Plays Eagle Ford Bakken Oklahoma Delaware Total
Crude oil and condensate 61 % 78 % 26 % 54 % 60 %
Natural gas liquids 18 % 12 % 28 % 21 % 18 %
Natural gas 21 % 10 % 46 % 25 % 22 %
Six Months Ended June
Three Months Ended June 30, 30,
Drilling Activity - U.S. Resource Plays 2020 2019 2020 2019
Gross Operated
Eagle Ford:
Wells drilled to total depth 9 36 41 66
Wells brought to sales 20 41 58 82
Bakken:
Wells drilled to total depth 8 20 35 32 Wells brought to sales 8 30 33 59
Wells drilled to total depth - 18 9 38 Wells brought to sales - 18 13 36Northern Delaware : Wells drilled to total depth 3 14 15 27 Wells brought to sales 6 16 12 31 •Eagle Ford - Our net sales volumes were 108 mboed in the second quarter of 2020, including oil sales of 66 mbbld and we brought 20 gross company-operated wells to sales. Given the market conditions in the second quarter, we suspended frac activities. In the third quarter of 2020, we restarted our drilling program and plan to average 2 rigs and 1 frac crew over the second half of 2020. •Bakken - Our net sales volumes were 103 mboed, including 81 mbbld of oil sales and we brought 8 gross company-operated wells to sales. We suspended frac activity in the second quarter. In the third quarter of 2020, we resumed completions activities. We plan to average 2 rigs and 1 frac crew over the second half of 2020. •Oklahoma - Our net sales volumes were 60 mboed, including 16 mbbld of oil sales. During the quarter, we suspended all drilling and completions operations inOklahoma ; we do not plan to drill any additional wells inOklahoma during 2020. 30 -------------------------------------------------------------------------------- •Northern Delaware - Our net sales volumes were 30 mboed, including 16 mbbld of oil sales and we brought 6 gross company-operated wells to sales. We suspended all drilling and completions operations during the quarter and expect to bring only a limited number of wells to sales during the remainder of the year. International Net sales volumes were lower in the second quarter of 2020 compared to the second quarter of 2019 primarily due to timing of E.G liftings and disposition of ourU.K. business. 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, Increase Increase Net Sales Volumes 2020 2019 (Decrease) 2020 2019 (Decrease) Equivalent Barrels (mboed) Equatorial Guinea 84 95 (12) % 83 85 (2) % United Kingdom(a) - 10 (100) % - 11 (100) % Other International - 2 (100) % - 2 (100) %Total International 84 107 (21) % 83 98 (15) % Equity Method Investees LNG (mtd) 4,635 5,321 (13) % 4,850 4,981 (3) % Methanol (mtd) 738 1,134 (35) % 962 1,069 (10) % Condensate and LPG (boed) 10,896 11,080 (2) % 10,767 10,488 3 %
(a)Includes natural gas acquired for injection and subsequent resale.
•Equatorial Guinea - Net sales volumes in the second quarter of 2020 were lower compared to the same period in 2019 due to timing of liftings. We expect our production in the third quarter of 2020 to decline sequentially due to the impact of expected higher realized prices, which would reduce our net interest under the production sharing contract, higher third quarter facility downtime, and natural field decline. •United Kingdom - InJuly 2019 , we closed on the sale of ourU.K. business. See
Note 4 to the consolidated financial statements for further information.
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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, payment of dividends and funding of share repurchases. Commodity
prices declined substantially in the first half of 2020 resulting from demand
contraction related to the global pandemic and increased supply following the
OPEC decision to increase production. A revised OPEC deal to reduce production
was agreed early in the second quarter of 2020 and oil prices partially
recovered in the latter part of the second quarter. However, given the scale of
worldwide demand contraction, we expect commodity prices to remain volatile.
Refer to Item 1A. Risk Factors in our 2019 Annual Report on Form 10-K for
further discussion on how further declines in commodity prices could impact us.
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 2020 and 2019.
Three Months Ended June 30, Six Months Ended June 30,
Increase Increase
2020 2019 (Decrease) 2020 2019 (Decrease)
Average Price Realizations(a)
Crude oil and condensate (per bbl)(b) $ 21.65 $ 59.18 (63) % $ 33.60 $ 56.72 (41) %
Natural gas liquids (per bbl) 7.09 14.60 (51) % 8.54 15.09 (43) %
Natural gas (per mcf)(c) 1.44 1.89 (24) % 1.52 2.36 (36) %
Benchmarks
WTI crude oil average of daily prices
(per bbl) $ 28.00 $ 59.91 (53) % $ 36.82 $ 57.45 (36) %
Magellan East Houston ("MEH") crude
oil average of daily prices (per bbl) 25.66 66.32 (61) % 37.60 63.37 (41) %
Mont Belvieu NGLs (per bbl)(d) 12.25 19.20 (36) % 12.70 21.19 (40) %
Henry Hub natural gas settlement date
average (per mmbtu) 1.72 2.64 (35) % 1.83 2.89 (37) %
(a)Excludes gains or losses on commodity derivative instruments.
(b)Inclusion of realized gains (losses) on crude oil derivative instruments
would have increased average price realizations by $1.59 per bbl and $0.32 per
bbl for the second quarter 2020 and 2019 and $1.53 per bbl and $0.70 per bbl for
the first six months of 2020 and 2019.
(c)Inclusion of realized gains (losses) on natural gas derivative instruments
would have a minimal impact on average price realizations for the periods
presented.
(d)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
The following table presents our average price realizations and the related
benchmark for crude oil for the second quarter and first six months of 2020 and
2019.
Three Months Ended June 30, Six Months Ended June 30,
Increase Increase
2020 2019 (Decrease) 2020 2019 (Decrease)
Average Price Realizations
Crude oil and condensate (per
bbl) $ 13.79 $ 58.21 (76) % $ 24.40 $ 56.36 (57) %
Natural gas liquids (per bbl) 1.00 1.67 (40) % 1.00 1.81 (45) %
Natural gas (per mcf) 0.24 0.35 (31) % 0.24 0.41 (41) %
Benchmark
Brent (Europe ) crude oil (per
bbl)(a) $ 29.34 $ 68.92 (57) % $ 39.89 $ 66.05 (40) %
(a)Average of monthly prices obtained from the
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United Kingdom
Crude oil and condensate - Generally sold in relation to the Brent crude
benchmark. We closed on the sale of our
Equatorial Guinea Crude oil and condensate - Alba field liquids production is primarily condensate and generally sold 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 byAlba 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 field for distribution and sale to AMPCO and EG LNG. Natural gas liquids - Wet gas is sold toAlba Plant LLC at a fixed-price 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 fromAlba Plant LLC being reflected in the income from equity method investments on the consolidated statements of income. Natural gas - Dry natural gas, processed byAlba Plant LLC on behalf of the Alba field 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. Results of Operations Three Months EndedJune 30, 2020 vs. Three Months EndedJune 30, 2019 Revenues from contracts with customers are presented by segment in the table below: Three Months Ended June 30, (In millions) 2020 2019 Revenues from contracts with customers United States$ 462 $ 1,200 International 28
181
Segment revenues from contracts with customers$ 490
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.
Increase (Decrease) Related to
Three Months Ended June Three Months Ended June 30,
(In millions) 30, 2019 Price Realizations Net Sales Volumes 2020
United States Price/Volume Analysis
Crude oil and condensate $ 1,021 $ (625) $ (35) $ 361
Natural gas liquids 84 (38) (9) 37
Natural gas 79 (17) (8) 54
Other sales 16 10
Total $ 1,200 $ 462
International Price/Volume Analysis
Crude oil and condensate $ 161 $ (63) $ (78) $ 20
Natural gas liquids 1 - - 1
Natural gas 13 (4) (2) 7
Other sales 6 -
Total $ 181 $ 28
33-------------------------------------------------------------------------------- Net gain (loss) on commodity derivatives In the second quarter of 2020, the net loss on commodity derivatives was$70 million , compared to the same period in 2019, which was a net gain of$16 million . We have multiple crude oil and natural gas 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 15 to the consolidated financial statements for further information. Income from equity method investments decreased$183 million for the second quarter of 2020 from the comparable 2019 period primarily due to an impairment of$152 million to an investment in an equity method investee, and lower volumes and price realizations associated with our investees. See Note 11 to the consolidated financial statements for further information on the equity method investee impairment. Production expenses decreased$64 million in the second quarter of 2020 versus the same period in 2019, primarily as a result of lower well workover and maintenance activities, lowerU.S. contract labor, and the sale of ourU.K. business which closed during the third quarter of 2019. The second quarter of 2020 production expense rate (expense per boe) was lower for International as a result of the sale of ourU.K. business which closed during the third quarter of 2019. OurU.S. production expense rate was lower as a result of the same reasons identified in the preceding paragraph in the second quarter of 2020. While the production expense rates for each of ourU.S. and International segments were significantly lower than the prior period, we still expect our full year production expense rates to be consistent with previously provided guidance of$4.25 -$5.25 per boe and$2.15 -$2.65 per boe, respectively. The following table provides production expense and production expense rates for each segment: Three Months Ended June 30, ($ per boe) 2020 2019 Increase
(Decrease) 2020 2019 Increase (Decrease) Production Expense and Rate
Expense Rate
United States $ 114 $ 147 (22) % $ 4.09 $ 4.89 (16) %
International $ 15 $ 46 (67) % $ 1.88 $ 4.72 (60) %
Shipping, handling and other operating decreased $65 million in the second
quarter of 2020 primarily due to lower NGL shipping and handling rates realized
in Bakken along with lower net sales volumes in Oklahoma . To the extent that our
future Bakken realized NGL prices exceed those as compared to the second
quarter, we expect our shipping and handling costs to increase as well.
Exploration expenses include unproved property impairments, dry well costs,
geological and geophysical, and other costs, which remained flat in comparison
to the second quarter of 2019.
The following table summarizes the components of exploration expenses:
Three Months Ended June 30,
(In millions) 2020 2019 Increase (Decrease)
Exploration Expenses
Unproved property impairments $ 17 $ 20 (15) %
Dry well costs 1 - - %
Geological and geophysical 3 3 - %
Other 5 3 67 %
Total exploration expenses $ 26 $ 26 - %
Depreciation, depletion and amortization decreased $8 million in the second
quarter of 2020 primarily due to the sale of our U.K. business which closed
during the third quarter of 2019. Our segments apply the units-of-production
method to the majority of their assets, including capitalized asset retirement
costs; therefore volumes have an impact on DD&A expense.
The DD&A rate (expense per boe), which is impacted by field-level changes in
reserves, capitalized costs and sales volumes, can also impact our DD&A expense.
Our International DD&A rate decreased primarily due to the sale of our U.K.
business which closed during the third quarter of 2019.
34
--------------------------------------------------------------------------------The following table provides DD&A expense and DD&A expense rates for each segment:
Three Months Ended
Increase Increase
($ per boe) 2020 2019 (Decrease) 2020 2019 (Decrease)
DD&A Expense and Rate Expense Rate
United States $ 569 $ 561 1 % $ 20.28 $ 18.72 8 %
International $ 22 $ 38 (42) % $ 2.86 $ 3.92 (27) %
Impairments decreased $18 million primarily as a result of impairments to
certain non-core proved properties in our United States segment in the second
quarter of 2019. See Note 11 to the consolidated financial statements for
more 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 decreased $49 million primarily due
to lower price realizations and lower sales volumes in the U.S. segment in the
second quarter of 2020.
Provision (benefit) for income taxes reflects an effective income tax rate of 2%
in the second quarter of 2020, as compared to an effective income tax rate of
17% in the second quarter of 2019. See Note 7 to the consolidated financial
statements for a more detailed discussion concerning the rate changes.
Segment Income
Segment income represents income which 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 property, goodwill and equity method investments,
unrealized gains or losses on commodity derivative instruments, effects of
pension settlements and curtailments, or other items (as determined by the 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) 2020 2019 Increase (Decrease)
United States $ (365) $ 215 (270) %
International (6) 96 (106) %
Segment income (loss) (371) 311 (219) %
Items not allocated to segments, net of income taxes (379) (150) (153) %
Net income (loss) $ (750) $ 161 (566) %
United States segment loss In the second quarter of 2020, U.S. segment loss was
$365 million after-tax versus $215 million income after-tax for the same period
in 2019, primarily due to lower price realizations and sales volumes in the
current quarter, which was partially offset by lower production taxes, shipping
and handling expense, and production expense.
International segment loss In the second quarter of 2020, International segment
loss was $6 million after-tax versus $96 million income after-tax for the same
period in 2019, primarily due to lower price realizations in E.G. resulting in
lower income from equity method investments and the sale of our U.K. business in
the third quarter of 2019.
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Six Months Ended June 30, 2020 vs. Six Months Ended June 30, 2019
Revenues from contracts with customers are presented by segment in the table
below:
Six Months Ended June 30,
(In millions) 2020 2019
Revenues from contracts with customers
United States $ 1,432 $ 2,262
International 82 319
Segment revenues from contracts with customers $ 1,514 $ 2,581 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.
Increase (Decrease) Related to
Six Months Ended June Six Months Ended June
(In millions) 30, 2019 Price Realizations Net Sales Volumes 30, 2020
United States Price/Volume Analysis
Crude oil and condensate $ 1,880 $ (818) $ 127 $ 1,189
Natural gas liquids 161 (68) (5) 88
Natural gas 182 (66) 5 121
Other sales 39 34
Total $ 2,262 $ 1,432
International Price/Volume Analysis
Crude oil and condensate $ 274 $ (84) $ (125) $ 65
Natural gas liquids 3 (1) - 2
Natural gas 28 (11) (2) 15
Other sales 14 -
Total $ 319 $ 82
Net gain (loss) on commodity derivatives In the first six months of 2020,
the net gain on commodity derivatives was $132 million , compared to the same
period in 2019 which was a net loss of $75 million . We have multiple crude oil
and natural gas 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 15 to the consolidated financial statements for
further information.
Income from equity method investments decreased $206 million for the first six
months of 2020 primarily due to an impairment of $152 million to an investment
in an equity method investee in the second quarter of 2020 as well as lower
price realizations and lower net sales volumes from equity method investments in
E.G. due to the planned triennial turnaround in the first quarter of 2020.
Net gain on disposal of assets decreased $27 million for the first six months of
2020 primarily as a result of the sale of our working interest in the Droshky
field (Gulf of Mexico ), which closed during the first quarter of 2019.
Other income decreased $35 million in the first six months of 2020 primarily due
to income recognized in 2019 arising from indemnification payments received from
Marathon Petroleum Corporation ("MPC"). Pursuant to the Tax Sharing Agreement we
entered into with MPC, in connection with the 2011 spin-off transaction, MPC
agreed to indemnify us for certain liabilities. The indemnity relates to tax and
interest allocable to MPC as a result of the closure of the IRS Audit in the
first quarter of 2019.
Production expenses for the first six months of 2020 decreased by $91 million
compared to the same period in 2019. Production expense in our International
segment decreased $64 million primarily as a result of the sale of our U.K.
business, which closed during the third quarter of 2019. Production expense in
our United States segment decreased $29 million primarily due to lower well
workover and maintenance activities, and lower contract labor.
The first six months of 2020 production expense rate (expense per boe) was lower
for our United States segment due to the aforementioned reasons. Expense per boe
for our International segment decreased due to sale of the U.K. business, which
closed during the third quarter of 2019.
36
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The following table provides production expense and production expense rates for
each segment:
Six Months Ended June 30,
Increase Increase
($ per boe) 2020 2019 (Decrease) 2020 2019 (Decrease)
Production Expense and Rate Expense Rate
United States $ 257 $ 286 (10) % $ 4.37 $ 5.04 (13) %
International $ 32 $ 96 (67) % $ 2.11 $ 5.40 (61) %
Shipping, handling and other operating expenses decreased $75 million in the
first six months of 2020 from the comparable 2019 period, primarily as a result
of lower NGL shipping and handling rates realized in Bakken as well as lower net
sales volumes in Oklahoma .
Exploration expenses include unproved property impairments, dry well costs,
geological and geophysical, and other, which decreased $31 million in the first
six months of 2020. Decreases in unproved property impairments were primarily
driven by our decision not to drill certain leases related to resource
exploration in the first quarter of 2019.
The following table summarizes the components of exploration expenses:
Six Months Ended June 30,
(In millions) 2020 2019 Increase (Decrease)
Exploration Expenses
Unproved property impairments $ 39 $ 64 (39) %
Dry well costs 1 5 (80) %
Geological and geophysical 4 9 (56) %
Other 10 7 43 %
Total exploration expenses $ 54 $ 85 (36) %
Depreciation, depletion and amortization increased $82 million in the first six
months of 2020 from the comparable 2019 period, primarily due to the higher net
sales volumes in our U.S. segment driven by first quarter 2020 activity,
partially offset by the sale of our U.K. business, which closed during the third
quarter of 2019. Our segments apply the units-of-production method to the
majority of their assets, including capitalized asset retirement costs;
therefore volumes have an impact on DD&A expense.
The DD&A rate (expense per boe), which is impacted by field-level changes in
reserves, capitalized costs and sales volumes, can also impact our DD&A expense.
The DD&A rate for International decreased primarily as a result of dispositions.
The following table provides DD&A expense and DD&A expense rates for each
segment:
Six Months Ended June 30,
Increase Increase
($ per boe) 2020 2019 (Decrease) 2020 2019 (Decrease)
DD&A Expense and Rate Expense Rate
United States $ 1,186 $ 1,075 10 % $ 20.15 $ 18.98 6 %
International $ 43 $ 72 (40) % $ 2.86 $ 4.06 (30) %
Impairments increased $73 million in the first six months of 2020, primarily as
a result of impairment to goodwill for $95 million related to our International
reporting unit in the first quarter of 2020. See No te 1 1 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 decreased $55 million primarily due
to lower price realizations in the U.S. segment in the first six months of 2020.
General and administrative decreased $17 million in the first six months of 2020
primarily as a result of the change in value of stock-based performance units
tied to our total shareholder return ("TSR") as compared to our peer group and a
decrease in other compensation costs.
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Provision (benefit) for income taxes reflects an effective income tax rate of 2%
in the first six months of 2020, as compared to an effective income tax rate of
(52)% for the comparable 2019 period. See Note 7 to the consolidated
financial statements for a more detailed discussion concerning the components
impacting the rate change.
Segment Income
Segment income represents income which 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 property, goodwill and equity method investments,
unrealized gains or losses on commodity derivative instruments, effects of
pension settlements and curtailments, or other items (as determined by the 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) 2020 2019 Increase (Decrease)
United States $ (385) $ 347 (211) %
International (7) 157 (104) %
Segment income (loss) (392) 504 (178) %
Items not allocated to segments, net of income taxes (404) (169) (139) %
Net income (loss) $ (796) $ 335 (338) %
United States segment loss For the first six months of 2020, U.S. segment loss
was $385 million after-tax versus $347 million income after-tax for the same
period in 2019, primarily as a result of lower crude price realizations and
higher DD&A due to higher net sales volumes, which was partially offset by lower
production taxes, shipping and handling expense, and production expense.
International segment loss For the first six months of 2020, International
segment loss was $7 million after-tax versus $157 million income after-tax for
the same period in 2019, primarily due to lower price realizations and sales
volumes partially offset by lower costs due to sale of our U.K. business in
third quarter of 2019.
Critical Accounting Estimates
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, 2019 , except as discussed below.
Impairment of Equity Method Investments
In the second quarter of 2020, we recorded an impairment of $152 million to an
investment in an equity method investee, which was reflected in income (loss)
from equity method investments in our consolidated statements of income. Equity
method investments are assessed for impairment whenever changes in the facts and
circumstances indicate a loss in value may have occurred. When a loss is deemed
to have occurred that is other than temporary, the carrying value of the equity
method investment is written down to fair value.
Fair value calculated for the purpose of testing our equity method investees for
impairment is estimated using the present value of expected future cash flows
method. Significant judgment is involved in performing these fair value
estimates since the results are based on forecasted assumptions and the
performance of entities that we do not control. Significant assumptions include:
•Future condensate, NGL, LNG, natural gas & methanol prices. Our estimates of
future prices are based on our analysis of market supply and demand and
consideration of market price indicators. Although these commodity prices may
experience extreme volatility in any given year, we believe long-term industry
prices are driven by global market supply and demand. To estimate supply, we
consider numerous factors, including the worldwide resource base, depletion
rates and OPEC production policies. We believe demand is largely driven by
global economic factors, such as population and income growth, and governmental
policies. The prices we use in our fair value estimates are consistent with
those used in our planning and capital investment reviews. There has been
significant volatility in
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commodity prices and estimates of such future prices are inherently imprecise.
See Item 1A. Risk Factors in our Form 10-K for the year ended December 31, 2019
for further discussion on commodity prices.
•Estimated quantities of feedstock condensate, NGLs and natural gas processed by
our investees. There are two primary sets of inputs used to estimate feedstock
volumes processed by our investees. The first input involves hydrocarbons
produced from our Alba Field . Our equity method investees currently process
hydrocarbons from our Alba Field , which consists of condensate, NGLs and natural
gas reserves. Estimated quantities of hydrocarbons processed from our Alba Field
are based on a combination of proved reserves and risk-weighted probable
reserves and resources such that the combined volumes represent the most likely
expectation of recovery. See Item 1A. Risk Factors in our Form 10-K for the year
ended December 31, 2019 for further discussion on reserves.
The second input involves our estimate of future third-party gas to be processed
by our investees. Our investees have capacity to process hydrocarbons from
sources other than our Alba field. During 2019, we executed agreements for
processing natural gas produced from the third party-owned Alen field through
the existing Alba Plant LLC LPG processing plant and the EGHoldings LNG
production facility beginning in 2021. Estimated natural gas volumes processed
from the Alen field were based on forecasts received from the operator of the
Alen field.
•Expected timing of production. Production forecasts are the outcome of
engineering studies which estimate reserves, as well as expected capital
programs. The actual timing of the production could be different than the
projection. Cash flows realized later in the projection period are less valuable
than those realized earlier due to the time value of money. The expected timing
of production from the Alba Field that we use in our fair value estimates is
consistent with that used in our planning and capital investment reviews. The
expected timing of production from the Alen Field is consistent with forecasts
received from the operator of that field.
•Discount rate commensurate with the risks involved. We apply a discount rate to
our expected cash flows based on a variety of factors, including market and
economic conditions, operational risk, regulatory risk and political risk. A
higher discount rate decreases the net present value of cash flows
We base our fair value estimates on projected financial information which we
believe to be reasonably likely to occur. This includes the estimated dividends
and/or return of capital we expect to be paid by our equity method investees,
which are directly affected by the significant assumptions described in the
preceding paragraphs. An estimate of the sensitivity to changes in assumptions
in our cash flow calculations is not practicable, given the numerous other
assumptions (e.g. reserves, commodity prices, operating costs, inflation and
discount rates) 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.
See Note 1 1 to the consolidated financial statements for further
information regarding the impairment recognized during the second quarter of
2020.
Fair Value Estimates - Goodwill
In the first quarter of 2020, a triggering event (significant decline in
market capitalization caused by worldwide declines in hydrocarbon demand and
corresponding prices) required us to assess our goodwill in the International
reporting unit for impairment as of March 31, 2020 . We estimated the fair value
of our International reporting unit using a combination of market and income
approaches and concluded that a full impairment of $95 million was required. See
Note 14 to the consolidated financial statements for further information.
Estimated Quantity of Net Reserves
Continued lower commodity prices could have a material effect on the quantity
and present value of our proved reserves. To the extent that commodity prices
decline further throughout 2020, a portion of our proved reserves could be
deemed uneconomic and no longer classified as proved. This could impact both
proved developed producing reserves as well as proved undeveloped reserves.
Future reserve revisions could also result from changes to our Capital Budget
and drilling plans among other things. However, any impact of lower SEC pricing
will likely be partially offset by continued cost reduction efforts. Also, any
volumes reclassified to unproved reserves could return to proved reserves as
commodity prices improve. Any reduction in proved reserves, especially as a
result of continued lower commodity prices, could result in an acceleration of
future DD&A expense and impairments to long-lived assets.
Accounting Standards Not Yet Adopted
See Note 2 to the consolidated financial statements.
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--------------------------------------------------------------------------------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, payment of dividends, and funding of share repurchases. While we
generated cash flows from operations during the first six months of 2020, the
lower price environment reduced our cash flow generation compared to the prior
year. Should lower prices continue, our ability to generate cash from operations
could be negatively affected. The following table presents sources and uses of
cash and cash equivalents:
Six Months Ended June 30,
(In millions) 2020 2019
Sources of cash and cash equivalents
Operating activities $ 710 $ 1,312
Disposal of assets, net of cash transferred to the buyer 9 69
Other 11 50
Total sources of cash and cash equivalents $ 730 $ 1,431
Uses of cash and cash equivalents
Additions to property, plant and equipment $ (946) $ (1,262)
Additions to other assets 12 42
Purchases of common stock (92) (266)
Dividends paid (40) (82)
Other - (29)
Total uses of cash and cash equivalents $ (1,066)
Cash flows generated from operating activities in the first six months of 2020
were 46% lower primarily as a result of lower commodity price realizations.
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) 2020 2019
United States $ 698 $ 1,292
International - 15
Corporate 9 8
Total capital expenditures 707 1,315
Change in capital expenditure accrual 239 (53)
Total use of cash and cash equivalents for property, plant and equipment
$ 946 The decline in our capital expenditures for theU.S. segment was caused by lower drilling and completions activities across all four of our shale basins. In the first quarter of 2020, we acquired approximately 9 million common shares at a cost of$85 million , which were held as treasury stock. See Note 18
to
the consolidated financial statements for further information. Liquidity and Capital Resources 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. AtJune 30, 2020 , we had approximately$3.5 billion of liquidity consisting of$0.5 billion in cash and cash equivalents and$3.0 billion available under our revolving Credit Facility. Additionally, in early July, we collected an$89 million cash refund related to alternative minimum tax credits and associated interest. We expect cash flow from operations to improve during each of the third and fourth quarters of 2020, relative to the second quarter 2020, commensurate with an expected increase in commodity prices relative to the second quarter. See Item 1A. Risk Factors for a more detailed discussion of recent developments affecting the energy industry. 40 -------------------------------------------------------------------------------- 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, 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. During the first half of 2020, commodity prices significantly declined due to the combined impacts of global crude oil oversupply and lower demand for hydrocarbons due to the global pandemic. As a result, credit rating agencies reviewed many companies in the industry, including us. 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. See Item 1A. Risk Factors in our Annual Report on Form 10-K for the year endedDecember 31, 2019 for a discussion of how a downgrade in our credit ratings could affect us. OnMay 6, 2020 , our Board of Directors temporarily suspended our quarterly dividend payment as we prioritize our liquidity and balance sheet. Capital Resources Credit Arrangements and Borrowings AtJune 30, 2020 , we had no borrowings against our Credit Facility. AtJune 30, 2020 , we had$5.5 billion of total debt outstanding, with our next significant debt maturity of$1.0 billion dueNovember 2022 . 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. We continue to own$400 million ofSt. John the Baptist,State of Louisiana revenue refunding bonds that were originally issued inDecember 2017 . In July, we announced that we had delivered to the trustee and remarketing agent a conditional notice of conversion of up to$400 million of the bonds to remarket them in August. Information about these bonds are available on the website of theMunicipal Securities Rulemaking Board via its Electronic Municipal Market Access system at www.msrb.org. Information on that website is not incorporated by reference into this filing. In 2018, we signed an agreement with an owner/lessor to construct and lease a new build-to-suit office building inHouston, Texas . The newHouston office location is expected to be completed in 2021. The lessor and other participants are providing financing for up to$380 million , to fund the estimated project costs. As ofJune 30, 2020 , project costs incurred totaled approximately$87 million , including land acquisition and construction costs. InJune 2020 , we submitted a notice to the lessor, as the construction agent, to reduce the financing capacity to$340 million to align with our revised estimate of the project costs. We expect the reduction to become effective inAugust 2020 . Shelf Registration We have a universal shelf registration statement filed with theSEC under which we, as a "well-known seasoned issuer" for purposes ofSEC rules, have the ability to issue and sell an indeterminate amount of various types of debt and equity securities. Debt-To-Capital Ratio The 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 33% and 31% atJune 30, 2020 and atDecember 31, 2019 , respectively. Capital Requirements Share Repurchase Program In the first quarter of 2020, we acquired approximately 9 million common shares at a cost of$85 million under our share repurchase program. While the share repurchase program has$1.3 billion of remaining authorization, we elected to suspend additional share repurchases to preserve liquidity.
Contractual Cash Obligations
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As of June 30, 2020 , our contractual cash obligations as it relates to our
transportation and processing commitments decreased approximately $79 million
($8 million in 2021, $11 million in 2022, $11 million in 2023, $11 million in
2024 and $38 million thereafter) related to the cancellation of a transportation
service agreement in the Bakken resource play.
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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.
There have been no significant changes to the environmental, health and safety
matters under Item 1. Business or Item 3. Legal Proceedings in our 2019 Annual
Report on Form 10-K. See Note 24 to the consolidated financial statements
for a description of other contingencies.
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 operational and financial strategies, including drilling plans and projects,
planned wells, rig count, inventory, seismic, exploration plans, maintenance
activities, drilling and completion improvements, cost reductions, and financial
flexibility; our ability to successfully effect those strategies and the
expected timing and results thereof; our 2020 Capital Budget and the planned
allocation thereof; planned capital expenditures and the impact thereof;
expectations regarding future economic and market conditions and their effects
on us; our financial and operational outlook, and ability to fulfill that
outlook; our financial position, balance sheet, liquidity and capital resources,
and the benefits thereof; resource and asset potential; reserve estimates;
growth expectations; and future production and sales expectations, and the
drivers thereof, are forward-looking statements. Words such as "anticipate,"
"believe," "could," "estimate," "expect," "forecast," "guidance," "intend,"
"may," "outlook," "plan," "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, and inflation rates;
•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 volume curtailments;
•delays or cancellations of certain drilling activities;
•liability resulting from litigation;
•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;
•non-performance by third parties of their contractual obligations, including
due to bankruptcy;
•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;
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•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 2019 Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and other filings with theSEC . 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. 44
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