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Marathon’s U.S. Output Cost Rises; Sees Flat Growth

Marathon Oil Corp., the U.S. oil and natural-gas producer that plans to spin off its refining operations this year, fell after reporting fourth quarter U.S. production profit was down and growth would be flat.

Profit from U.S. production of oil and gas fell to $17 million in the quarter from $116 million for the same period last year, the company said in a statement today. Marathon’s costs in the U.S. exploration and production segment were higher than expected in the quarter, Paul Sankey, an analyst with Deutsche Bank in New York, said in a note to clients.

Marathon said production in 2011 will be “essentially flat” with last year, with output estimated at 380,000 to 400,000 barrels a day compared with 391,000 in 2010. The forecast excludes the effects of future acquisitions or sales.

“The biggest challenge that a company like Marathon is going to face is how do you grow production when you do have some mature fields in your portfolio,” said Gianna Bern, president of Brookshire Advisory & Research Inc. in Chicago.

The shares fell 71 cents, or 1.5 percent, to $45.89 at 4:03 p.m. in New York Stock Exchange composite trading.

The company reported fourth-quarter net income climbed to $706 million, or 99 cents a share, from $355 million, or 50 cents, a year earlier. Excluding a pension settlement and asset sale costs, Marathon earned $1.09 a share, 12 cents more than the average of 19 analysts’ estimates compiled by Bloomberg.

Expenses at Droshky

Marathon follows Exxon Mobil Corp. and ConocoPhillips in reporting higher fourth-quarter profit amid rising crude prices and wider margins from refining oil into fuels. Oil futures traded in New York averaged 12 percent more in the quarter than a year earlier. Oil demand is expected to increase 1.6 percent in 2011, according to an International Energy Agency report.

Marathon said revenue in the fourth quarter rose 26 percent from a year earlier to $20.2 billion.

The company faced expenses that rose $236 million in the U.S., mostly from the Droshky project in the Gulf of Mexico, which the company had previously called disappointing. Marathon expects depreciation, depletion and amortization costs for Droshky to rise further, David Roberts, an executive vice president, said today during a conference call with analysts.

The refining, marketing and transportation segment had a fourth-quarter profit of $213 million, compared with a loss of $18 million a year earlier, as the company’s gross margin per gallon surged to 8.99 cents from less than a penny.

Capital Spending

Global oil and gas production earned Marathon $496 million, a 13 percent increase from a year earlier. Production available for sale averaged the equivalent of 420,000 barrels of oil a day in the quarter, compared with 403,000 a year earlier.

Also today, Marathon said capital spending in 2011 will be about $5.27 billion, an increase of almost 9 percent from 2010. The company said exploration and production, oil-sands mining, and integrated-gas operations will account for $3.7 billion of this year’s plan.

Marathon said it has increased its holdings in the Niobrara play in Wyoming and Colorado and the Anadarko Woodford Shale in Oklahoma. The company also said it agreed to enter the Eagle Ford Shale in Texas.

The company replaced 75 percent of its output last year, adding 112 million barrels of oil equivalent to proved reserves.

Marathon announced Jan. 13 that it plans to spin off its refining and marketing business to create what Chief Executive Officer Clarence Cazalot called two “pure-play companies” that are easier to understand and value. The company said today it still sees the split being effective June 30.

Exxon Mobil, the largest U.S. oil company, said on Jan. 31 that fourth-quarter profit rose 53 percent. Chevron Corp., the second-largest U.S. oil company, said on Jan. 28 that net income climbed 72 percent. ConocoPhillips, the third-biggest, said on Jan. 26 that profit increased 59 percent.

(Marathon is scheduled to hold an earnings conference call for investors and analysts, starting at 2 p.m. New York time. To listen, access a broadcast at http://www.marathon.com.)

To contact the reporter on this story: Edward Klump in Houston at eklump@bloomberg.net.

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net.

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