false--12-31Q1202000001017781800300000018641000000110000003000000001119250000001925000000937000000937000000191000000106000000002600000026000000000020000000141000000146000000<div style="font-family:Times New Roman;font-size:10pt;"><div style="line-height:120%;padding-bottom:8px;padding-top:20px;text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;font-weight:bold;">Acquisitions</font></div><div style="line-height:120%;padding-bottom:6px;padding-top:6px;text-align:left;text-indent:24px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">In the fourth quarter of 2019, we acquired approximately </font><font style="font-family:inherit;font-size:10pt;">40,000</font><font style="font-family:inherit;font-size:10pt;"> net acres in a Texas Delaware oil play in West Texas for </font><font style="font-family:inherit;font-size:10pt;">$106 million</font><font style="font-family:inherit;font-size:10pt;">. We accounted for these transactions as an asset acquisition, allocating the purchase price to unproved property within property, plant and equipment. </font></div><div style="line-height:120%;padding-bottom:6px;padding-top:6px;text-align:left;text-indent:24px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">During the fourth quarter of 2019, we acquired a 100% working interest in approximately </font><font style="font-family:inherit;font-size:10pt;">18,000</font><font style="font-family:inherit;font-size:10pt;"> net acres in the Eagle Ford from Rocky Creek Resources, LLC and RCR Midstream, LLC for </font><font style="font-family:inherit;font-size:10pt;">$191 million</font><font style="font-family:inherit;font-size:10pt;"> in cash, subject to closing adjustments. </font></div></div> 0000101778 2020-01-01 2020-03-31 0000101778 2019-01-01 2019-03-31 0000101778 2020-04-30 0000101778 2019-12-31 0000101778 2020-03-31 0000101778 2019-03-31 0000101778 2018-12-31 0000101778 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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
FORM 10-Q
(Mark One)
 
 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the Quarterly Period Ended
March 31, 2020
 
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from _____ to _____
 
Commission file number 1-1513
MRO_LOGOB24.JPG
Marathon Oil Corporation
(Exact name of registrant as specified in its charter)
Delaware
 
25-0996816
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
5555 San Felipe Street, Houston, Texas  
77056-2723
(Address of principal executive offices)
(713) 629-6600
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol
 
Name of each exchange on which registered
Common Stock, par value $1.00
 
MRO
 
New York Stock Exchange
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.       Yes þ No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes þ No o
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
þ
Accelerated filer
o  
Non-accelerated filer
o   
 
 
Smaller reporting company
Emerging growth company

 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes No þ
 
There were 790,312,454 shares of Marathon Oil Corporation common stock outstanding as of April 30, 2020.




MARATHON OIL CORPORATION
 
Unless the context otherwise indicates, references to “Marathon Oil,” “we,” “our,” or “us” in this Form 10-Q are references to Marathon Oil Corporation, including its wholly owned and majority-owned subsidiaries, and its ownership interests in equity method investees (corporate entities, partnerships, limited liability companies and other ventures over which Marathon Oil exerts significant influence by virtue of its ownership interest).
For certain industry specific terms used in this Form 10-Q, please see “Definitions” in our 2019 Annual Report on Form 10-K.

 
Table of Contents
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 


1



Part I – FINANCIAL INFORMATION
Item 1. Financial Statements

MARATHON OIL CORPORATION
Consolidated Statements of Income (Unaudited)
 
Three Months Ended
 
 
March 31,
 
(In millions, except per share data)
2020
 
2019
 
Revenues and other income:
 
 
 
 
Revenues from contracts with customers
$
1,024

 
$
1,200

 
Net gain (loss) on commodity derivatives
202

 
(91
)
 
Income (loss) from equity method investments
(12
)
 
11

 
Net gain on disposal of assets
9

 
42

 
Other income
7

 
35

 
Total revenues and other income
1,230

 
1,197

 
Costs and expenses:
 

 
 

 
Production
160

 
187

 
Shipping, handling and other operating
144

 
154

 
Exploration
28

 
59

 
Depreciation, depletion and amortization
644

 
554

 
Impairments
97

 
6

 
Taxes other than income
66

 
72

 
General and administrative
76

 
94

 
Total costs and expenses
1,215

 
1,126

 
Income from operations
15

 
71

 
Net interest and other
(64
)
 
(49
)
 
Other net periodic benefit costs

 
5

 
Income (loss) before income taxes
(49
)
 
27

 
Benefit for income taxes
(3
)
 
(147
)
 
Net income (loss)
$
(46
)
 
$
174

 
Net income (loss) per share:
 

 
 

 
Basic
$
(0.06
)
 
$
0.21

 
Diluted
$
(0.06
)
 
$
0.21

 
Weighted average common shares outstanding:
 

 
 

 
Basic
794

 
819

 
Diluted
794

 
820

 
 The accompanying notes are an integral part of these consolidated financial statements.

2



MARATHON OIL CORPORATION
Consolidated Statements of Comprehensive Income (Unaudited)
 
Three Months Ended
 
 
March 31,
 
(In millions)
2020
 
2019
 
Net income (loss)
$
(46
)
 
$
174

 
Other comprehensive income (loss), net of tax
 
 
 

 
Change in actuarial (loss) for postretirement and postemployment plans

 
(4
)
 
Change in derivative hedges unrecognized loss
(22
)
 

 
Other comprehensive loss
(22
)
 
(4
)
 
Comprehensive income (loss)
$
(68
)

$
170


 The accompanying notes are an integral part of these consolidated financial statements.


3




MARATHON OIL CORPORATION
Consolidated Balance Sheets (Unaudited)
 
March 31,
 
December 31,
(In millions, except par value and share amounts)
2020
 
2019
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
817

 
$
858

Receivables, less reserve of $30 and $11
703

 
1,122

Inventories
78

 
72

Derivative assets
193

 
9

Other current assets
118

 
74

Total current assets
1,909

 
2,135

Equity method investments
628

 
663

Property, plant and equipment, less accumulated depreciation, depletion and amortization of $18,641 and $18,003
16,903

 
17,000

Goodwill

 
95

Other noncurrent assets
275

 
352

Total assets
$
19,715

 
$
20,245

Liabilities
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
1,104

 
$
1,307

Payroll and benefits payable
68

 
112

Accrued taxes
72

 
118

Other current liabilities
198

 
208

Total current liabilities
1,442

 
1,745

Long-term debt
5,502

 
5,501

Deferred tax liabilities
185

 
186

Defined benefit postretirement plan obligations
172

 
183

Asset retirement obligations
236

 
243

Deferred credits and other liabilities
220

 
234

Total liabilities
7,757

 
8,092

Commitments and contingencies


 


Stockholders’ Equity
 

 
 

Preferred stock - no shares issued or outstanding (no par value, 26 million shares authorized)
$

 
$

Common stock:
 

 
 

Issued – 937 million shares (par value $1 per share, 1.925 billion shares authorized at March 31, 2020 and December 31, 2019)
937

 
937

Held in treasury, at cost – 146 million shares and 141 million shares
(4,059
)
 
(4,089
)
Additional paid-in capital
7,102

 
7,207

Retained earnings
7,895

 
7,993

Accumulated other comprehensive income
83

 
105

Total stockholders’ equity
11,958

 
12,153

Total liabilities and stockholders’ equity
$
19,715

 
$
20,245

 The accompanying notes are an integral part of these consolidated financial statements.

4



MARATHON OIL CORPORATION
Consolidated Statements of Cash Flows (Unaudited)
 
Three Months Ended
 
March 31,
(In millions)
2020
 
2019
Increase (decrease) in cash and cash equivalents
 
 
 
Operating activities:
 

 
 

Net income (loss)
$
(46
)
 
$
174

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 

 
 

Depreciation, depletion and amortization
644

 
554

Impairments
97

 
6

Exploratory dry well costs and unproved property impairments
22

 
49

Net gain on disposal of assets
(9
)
 
(42
)
Deferred income taxes
(1
)
 
(31
)
Net (gain) loss on derivative instruments
(202
)
 
91

Net settlements of derivative instruments
31

 
22

Pension and other post retirement benefits, net
(11
)
 
(25
)
Stock-based compensation
15

 
14

Equity method investments, net
28

 
14

Changes in:
 
 
 

Current receivables
407

 
(73
)
Inventories
(6
)
 
4

Current accounts payable and accrued liabilities
(234
)
 
(102
)
Other current assets and liabilities
(16
)
 
14

All other operating, net
(18
)
 
(154
)
Net cash provided by operating activities
701

 
515

Investing activities:
 

 
 

Additions to property, plant and equipment
(620
)
 
(615
)
Additions to other assets
(1
)
 
14

Disposal of assets, net of cash transferred to the buyer
3

 
13

Equity method investments - return of capital
7

 
12

All other investing, net

 
12

Net cash used in investing activities
(611
)
 
(564
)
Financing activities:
 

 
 

Purchases of common stock
(92
)
 
(30
)
Dividends paid
(40
)
 
(41
)
All other financing, net
1

 
(1
)
Net cash used in financing activities
(131
)
 
(72
)
Effect of exchange rate on cash and cash equivalents

 
1

Net decrease in cash and cash equivalents
(41
)
 
(120
)
Cash and cash equivalents at beginning of period
858

 
1,462

Cash and cash equivalents at end of period
$
817

 
$
1,342

Reconciliation of cash and cash equivalents
 
 
 
Cash and cash equivalents
$
817

 
$
1,019

Cash and cash equivalents included in current assets held for sale

 
323

Total cash and cash equivalents
$
817

 
$
1,342

The accompanying notes are an integral part of these consolidated financial statements.

5



MARATHON OIL CORPORATION
Consolidated Statements of Stockholders’ Equity (Unaudited)

 
 
Total Equity of Marathon Oil Stockholders
(In millions)
 
Preferred
Stock
 
Common
Stock
 
Treasury
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Equity
Three Months Ended March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018 Balance
 
$

 
$
937

 
$
(3,816
)
 
$
7,238

 
$
7,706

 
$
63

 
12,128

Cumulative-effect adjustment
 

 

 

 

 
(31
)
 

 
(31
)
Shares issued - stock-based compensation
 

 

 
101

 
(39
)
 

 

 
62

Shares repurchased
 

 

 
(30
)
 

 

 

 
(30
)
Stock-based compensation
 

 

 

 
(50
)
 

 

 
(50
)
Net income
 

 

 

 

 
174

 

 
174

Other comprehensive income (loss)
 

 

 

 

 

 
(4
)
 
(4
)
Dividends paid (per share amount of $0.05)
 

 

 

 

 
(41
)
 

 
(41
)
March 31, 2019 Balance
 
$

 
$
937

 
$
(3,745
)
 
$
7,149

 
$
7,808

 
$
59

 
$
12,208

Three Months Ended March 31, 2020
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2019 Balance
 
$

 
$
937

 
$
(4,089
)
 
$
7,207

 
$
7,993

 
$
105

 
12,153

Cumulative-effect adjustment (Note 2)
 

 

 

 

 
(12
)
 

 
(12
)
Shares issued - stock based compensation
 

 

 
121

 
(83
)
 

 

 
38

Shares repurchased
 

 

 
(91
)
 

 

 

 
(91
)
Stock-based compensation
 

 

 

 
(22
)
 

 

 
(22
)
Net income (loss)
 

 

 

 

 
(46
)
 

 
(46
)
Other comprehensive income (loss)
 

 

 

 

 

 
(22
)
 
(22
)
Dividends paid (per share amount of $0.05)
 

 

 

 

 
(40
)
 

 
(40
)
March 31, 2020 Balance
 
$

 
$
937

 
$
(4,059
)
 
$
7,102

 
$
7,895

 
$
83

 
$
11,958

The accompanying notes are an integral part of these consolidated financial statements.





6

MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)


1.
Basis of Presentation
These consolidated financial statements are unaudited; however, in the opinion of management, these statements reflect all adjustments necessary for a fair statement of the results for the periods reported. All such adjustments are of a normal recurring nature unless disclosed otherwise. These consolidated financial statements, including notes, have been prepared in accordance with the applicable rules of the SEC and do not include all of the information and disclosures required by U.S. GAAP for complete financial statements.
These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our 2019 Annual Report on Form 10-K. The results of operations for the first quarter of 2020 are not necessarily indicative of the results to be expected for the full year.
2.    Accounting Standards
Recently Adopted
Financial instruments – credit losses    
In June 2016, the FASB issued a new accounting standards update that changes the impairment model for trade receivables, net investments in leases, debt securities, loans and certain other instruments. On January 1, 2020 we adopted this standard using the modified retrospective transition method through a cumulative-effect adjustment of $12 million to retained earnings as of the beginning of the adoption period. The standard requires the use of a forward-looking “expected loss” model as opposed to the “incurred loss” model used previously. See Note 8 for more information on credit losses.
3.    Income (loss) and Dividends per Common Share
Basic income (loss) per share is based on the weighted average number of common shares outstanding. Diluted income (loss) per share assumes exercise of stock options in all periods, provided the effect is not antidilutive. The per share calculations below exclude 6 million and 5 million of stock options for the three months ended March 31, 2020 and 2019 that were antidilutive.
 
Three Months Ended March 31,
 
(In millions, except per share data)
2020
 
2019
 
Net income (loss)
$
(46
)
 
$
174

 
 
 
 
 
 
Weighted average common shares outstanding
794

 
819

 
Effect of dilutive securities

 
1

 
Weighted average common shares, diluted
794

 
820

 
Net income (loss) per share:
 
 
 
 
Basic
$
(0.06
)
 
$
0.21

 
Diluted
$
(0.06
)
 
$
0.21

 
 
 
 
 
 
Dividends per share
$
0.05

 
$
0.05

 

4.    Dispositions
International Segment
In the first quarter of 2019, we entered into an agreement to sell our U.K. business (Marathon Oil U.K. LLC and Marathon Oil West of Shetlands Limited). This transaction closed on July 1, 2019 for proceeds of $95 million which reflects the assumption by RockRose Energy PLC (“RockRose”) of the U.K. business’ cash equivalent balance and working capital balance as of year-end 2018. Our income before taxes relating to our U.K. business for the three months ended March 31, 2019, was $10 million.


7

MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)

5.    Revenues
The majority of our revenues are derived from the sale of crude oil and condensate, NGLs and natural gas under spot and term agreements with our customers in the United States and various international locations.
As of March 31, 2020 and December 31, 2019, receivables from contracts with customers, included in receivables, less reserves were $477 million and $837 million, respectively.
The following tables present our revenues from contracts with customers disaggregated by product type and geographic areas for the three months ended March 31 as follows:
United States
 
March 31, 2020
(In millions)
Eagle Ford
 
Bakken
 
Oklahoma
 
Northern Delaware
 
Other U.S.
 
Total
Crude oil and condensate
$
307

 
$
330

 
$
84

 
$
74

 
$
33

 
$
828

Natural gas liquids
16

 
10

 
21

 
3

 
2

 
52

Natural gas
23

 
8

 
29

 
3

 
3

 
66

Other
2

 

 

 

 
22

 
24

Revenues from contracts with customers
$
348

 
$
348

 
$
134

 
$
80

 
$
60

 
$
970

 
March 31, 2019
(In millions)
Eagle Ford
 
Bakken
 
Oklahoma
 
Northern Delaware
 
Other U.S.
 
Total
Crude oil and condensate
$
318

 
$
372

 
$
77

 
$
64

 
$
28

 
$
859

Natural gas liquids
35

 
10

 
22

 
8

 
2

 
77

Natural gas
34

 
12

 
45

 
6

 
6

 
103

Other
2

 

 

 

 
21

 
23

Revenues from contracts with customers
$
389

 
$
394

 
$
144

 
$
78

 
$
57

 
$
1,062

International
 
March 31, 2020
(In millions)
E.G.
 
Crude oil and condensate
$
45

 
Natural gas liquids
1

 
Natural gas
8

 
Revenues from contracts with customers
$
54

 

 
March 31, 2019
(In millions)
E.G.
 
U.K.
 
Other Int’l
 
Total
Crude oil and condensate
$
47

 
$
56

 
$
10

 
$
113

Natural gas liquids
1

 
1

 

 
2

Natural gas
7

 
8

 

 
15

Other

 
8

 

 
8

Revenues from contracts with customers
$
55

 
$
73

 
$
10

 
$
138



8

MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)

6.    Segment Information
We have two reportable operating segments. Both of these segments are organized and managed based upon geographic location and the nature of the products and services offered.
United States (“U.S.”) – explores for, produces and markets crude oil and condensate, NGLs and natural gas in the United States
International (“Int’l”) – explores for, produces and markets crude oil and condensate, NGLs and natural gas outside of the United States as well as produces and markets products manufactured from natural gas, such as LNG and methanol, in Equatorial Guinea (“E.G.”)
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, certain property and goodwill impairments, unrealized gains or losses on commodity derivative instruments, pension settlement losses or other items (as determined by the chief operating decision maker (“CODM”)) are not allocated to operating segments.
 
Three Months Ended March 31, 2020
(In millions)
U.S.
 
Int’l
 
Not Allocated to Segments
 
Total
Revenues from contracts with customers
$
970

 
$
54

 
$

 
$
1,024

Net gain (loss) on commodity derivatives
31

 

 
171

(b) 
202

Income (loss) from equity method investments

 
(12
)
 

 
(12
)
Net gain on disposal of assets

 

 
9

 
9

Other income
4

 
2

 
1

 
7

Less costs and expenses:
 
 
 
 
 
 
 
Production
143

 
17

 

 
160

Shipping, handling and other operating
140

 
3

 
1

 
144

Exploration
28

 

 

 
28

Depreciation, depletion and amortization
617

 
21

 
6

 
644

Impairments

 

 
97

(c) 
97

Taxes other than income
66

 

 

 
66

General and administrative
32

 
4

 
40

 
76

Net interest and other

 

 
64

 
64

Other net periodic benefit costs

 

 

 

Income tax benefit
(1
)
 

 
(2
)
 
(3
)
Segment loss
$
(20
)
 
$
(1
)
 
$
(25
)
 
$
(46
)
Total assets
$
17,453

 
$
1,405

 
$
857

 
$
19,715

Capital expenditures(a)
$
561

 
$

 
$
7

 
$
568

(a) 
Includes accruals.
(b) 
Unrealized gain on commodity derivative instruments (See Note 15).
(c) 
Includes the full impairment of the International reporting unit goodwill of $95 million (See Note 14).


9

MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)

 
Three Months Ended March 31, 2019
(In millions)
U.S.
 
Int’l
 
Not Allocated to Segments
 
Total
Revenues from contracts with customers
$
1,062

 
$
138

 
$

 
$
1,200

Net gain (loss) on commodity derivatives
22

 

 
(113
)
(b) 
(91
)
Income from equity method investments

 
11

 

 
11

Net gain on disposal of assets

 

 
42

(c) 
42

Other income
1

 
3

 
31

(d) 
35

Less costs and expenses:
 
 
 
 
 
 
 
Production
139

 
50

 
(2
)
 
187

Shipping, handling and other operating
140

 
13

 
1

 
154

Exploration
59

 

 

 
59

Depreciation, depletion and amortization
514

 
34

 
6

 
554

Impairments

 

 
6

(e) 
6

Taxes other than income
74

 

 
(2
)
 
72

General and administrative
29

 
7

 
58

 
94

Net interest and other

 

 
49

 
49

Other net periodic benefit costs

 
(2
)
 
(3
)
 
(5
)
Income tax benefit
(2
)
 
(11
)
 
(134
)
(f) 
(147
)
Segment income (loss)
$
132

 
$
61

 
$
(19
)
 
$
174

Total assets
$
17,503

 
$
2,668

 
$
1,239

 
$
21,410

Capital expenditures(a)
$
606

 
$
5

 
$
3

 
$
614


(a) 
Includes accruals.
(b) 
Unrealized loss on commodity derivative instruments (See Note 15).
(c) 
Primarily related to the sale of our working interest in the Droshky field (Gulf of Mexico), which closed during the first quarter of 2019.
(d) 
Primarily related to the indemnification of certain tax liabilities in connection with the 2010-2011 Federal Tax Audit with the IRS (See Note 7).
(e) 
Due to the anticipated sale of non-operated interest in the Atrush block in Kurdistan (See Note 11).
(f) 
Primarily relates to the settlement of the 2010-2011 Federal Tax Audit (See Note 7).











10

MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)

7.    Income Taxes
Effective Tax Rate
The effective income tax rate is influenced by a variety of factors including the geographic and functional sources of income and the relative magnitude of these sources of income. The difference between the total provision and the sum of the amounts allocated to segments is reported in the “Not Allocated to Segments” column of the tables in Note 6.
For the three months ended March 31, 2020 and 2019, our effective income tax rates were as follows:
 
Three Months Ended March 31,
 
 
2020
 
2019
 
Effective income tax rate(a)
6
%
 
(544
)%
 

(a) 
In all periods presented, we maintained our valuation allowance on our net federal deferred tax assets in the U.S.
The following items caused the effective income tax rates to be different from our U.S. statutory tax rate of 21% for 2020 and 2019:
Income taxes for the first quarter of 2020 were impacted by the income mix within E.G. between equity method investees and subsidiaries, which reduces the annual effective tax rate below the statutory tax rate.
Income taxes for the three months ended March 31, 2019 were impacted by the settlement of the 2010-2011 U.S. Federal Tax Audit (“IRS Audit”) in the first quarter of 2019, resulting in a tax benefit of $126 million. Additionally, in the first quarter of 2019, we recorded a non-cash deferred tax benefit of $18 million in the U.K. related to an internal restructuring. These two items are discrete to the first quarter of 2019. Excluding these discrete adjustments, the effective income tax rate for the first quarter of 2019 was an expense of 8%.
On March 27, 2020, the U.S. enacted the Coronavirus Aid, Relief, and Economic Security Act, commonly referred to as the CARES Act.  This legislation included certain provisions which accelerate income tax refunds, and as a result, in the first quarter of 2020, long term receivable balances related to alternative minimum tax credits have been reclassified as short term. We expect to receive cash tax refunds of $86 million related to alternative minimum tax credits in 2020.
8.    Credit Losses
The majority of our receivables are from purchasers of commodities or joint interest owners in properties we operate, both of which are recorded at estimated or invoiced amounts and do not bear interest. The majority of these receivables have payment terms of 30 days or less. At the end of each reporting period, we assess the collectability of our receivables and estimate the expected credit losses using historical data, current market conditions and reasonable and supportable forecasts of future economic conditions.
We are exposed to credit losses through the receivables generated from sales of crude oil, NGLs and natural gas to our customers. When dealing with the commodity purchasers, we conduct a credit review to assess each counterparty’s ability to pay. The credit review considers our expected billing exposure, timing for payment and the counterparty’s established credit rating with the rating agencies or our internal assessment of the counterparty’s creditworthiness based on our analysis of their financial statements. Our evaluation also considers contract terms and other factors, such as country and/or political risk. A credit limit is established for each counterparty based on the outcome of this review. We may require a bank letter of credit or a prepayment to mitigate credit risk. We monitor our ongoing credit exposure through active review of counterparty balances against contract terms and due dates. The expected credit losses related to receivables with the commodity purchasers were determined using the weighted average probability of default method. We also collect revenues from our non-operated joint properties where other oil and gas exploration and production companies operate the properties and market our share of production and remit payments to us. The current expected credit losses related to these receivables were determined using the loss rate method applied to aging pools.
We are exposed to credit losses from joint interest billings to other joint interest owners for properties we operate. For this group of receivables, the expected credit losses are determined using the loss rate method applied to aging pools. Our counterparties in this group include numerous large, mid-size and small oil and gas exploration and production companies. Although we may have the ability to withhold future revenue disbursements to recover any non-payment of joint interest billings or require a prepayment of future costs through cash calls, our credit loss exposure with this group is more significant due to inherent ownership or billing adjustments. Also, some of our counterparties may experience liquidity problems and may

11

MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)

not be able to meet their financial obligations to us. We expect that liquidity problems will increase in the future as a result of the recent demand and pricing decline for hydrocarbons. Our current-period provision reflects the anticipated effects caused by the recent market deterioration.
Changes in the allowance for doubtful accounts balance for the three months ended were as follows:    
 
March 31,
(In millions)
2020
Beginning balance
$
11

Cumulative-effect adjustment
12

Current period provision (a)
8

Recoveries of amounts previously written off
(1
)
Ending balance
$
30

(a) 
Consists of $6 million of joint interest receivables and $2 million of trade receivables.
9.    Inventories
Crude oil and natural gas are recorded at weighted average cost and carried at the lower of cost or net realizable value. Supplies and other items consist principally of tubular goods and equipment which are valued at weighted average cost and reviewed periodically for obsolescence or impairment when market conditions indicate. The continued decline in crude oil and natural gas prices could affect the value of our inventories and result in future impairments.
(In millions)
March 31, 2020
 
December 31, 2019
Crude oil and natural gas
$
12

 
$
10

Supplies and other items
66

 
62

Inventories
$
78

 
$
72


10.    Property, Plant and Equipment
(In millions)
March 31, 2020
 
December 31, 2019
United States
$
16,352

 
$
16,427

International
471

 
493

Corporate
80

 
80

Net property, plant and equipment
$
16,903


$
17,000


We had no exploratory well costs capitalized greater than one year as of March 31, 2020 and December 31, 2019.
11.    Impairments
During the first quarter of 2020, a global pandemic caused a substantial deterioration in the worldwide demand of hydrocarbons. We reviewed our long-lived assets for indicators of impairment by conducting a sensitivity analysis of the most impactful inputs to their undiscounted cash flows, including commodity prices, capital spend and reductions in production volumes to correspond with lower capital spending. Our review concluded that the carrying amounts of our long-lived assets are recoverable, with our most at risk asset having undiscounted cash flows that exceeded its $461 million carrying value by approximately 90%. However, further deterioration or a more sustained decline of commodity prices may result in impairment charges in future periods. 


12

MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)

The following table summarizes impairment charges of proved properties and goodwill and their corresponding fair values.
 
Three Months Ended March 31,
 
2020
 
2019
(In millions)
Fair Value
 
Impairment
 
Fair Value
 
Impairment
Long-lived assets held for use
$

 
$
2

 
$
37

 
$
6

Goodwill
$

 
$
95

 
N/A

 
$

 
 
 
 
 
 
 
 

2020 – Impairments included $95 million of goodwill impairment in the International reporting unit. See Note 14 for further information.
2019 – During the three months ended March 31, 2019, we recorded a proved property impairment charge of $6 million, as a result of the anticipated sale of our non-operated interest in the Atrush block (Kurdistan) in our International segment. The related fair value was measured using the market approach, based upon anticipated sales proceeds less costs to sell which resulted in a Level 2 classification.
    
12.    Asset Retirement Obligations
Asset retirement obligations primarily consist of estimated costs to remove, dismantle and restore land or seabed at the end of oil and gas production operations. Changes in asset retirement obligations for the three months ended were as follows:
 
March 31,
(In millions)
2020
 
2019
Beginning balance
$
254

 
$
1,145

Incurred liabilities, including acquisitions
1

 
12

Settled liabilities, including dispositions
(2
)
 
(109
)
Accretion expense (included in depreciation, depletion and amortization)
3

 
13

Revisions of estimates
(9
)
 
11

Held for sale

 
(862
)
Ending balance
$
247

 
$
210


March 31, 2020
Ending balance includes $11 million classified as short-term at March 31, 2020.
March 31, 2019
Settled liabilities primarily relate to the sale of our working interest in the Droshky field (Gulf of Mexico), which closed during the first quarter of 2019.
Held for sale includes the asset retirement obligations associated with the sale of our U.K. business, which was partially offset by settled liabilities for dispositions primarily related to the Droshky field in the first quarter of 2019. See Note 4 for discussion of the divestitures in further detail.
Ending balance includes $18 million classified as short-term at March 31, 2019.

13

MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)

13. Leases
We enter into various lease agreements to support our operations including drilling rigs, well fracturing equipment, compressors, buildings, aircraft, vessels, vehicles and miscellaneous field equipment. We primarily act as a lessee in these transactions and all of our existing leases are classified as either short-term or long-term operating leases.
Supplemental balance sheet information related to leases was as follows:
(In millions)
 
March 31, 2020
Operating Leases:
Balance Sheet Location:
 
ROU asset
Other noncurrent assets
$
162

Current portion of long-term lease liability
Other current liabilities
$
83

Long-term lease liability
Deferred credits and other liabilities
$
86



Our wholly-owned subsidiary, Marathon E.G. Production Limited, is a lessor for residential housing in Equatorial Guinea, which is occupied by EGHoldings, a related party equity method investee see Note 24. The lease was classified as an operating lease and expires in 2024, with a lessee option to extend through 2034. Lease payments are fixed for the entire duration of the agreement at approximately $6 million per year. Our lease income is reported in other income in our consolidated statements of income for all periods presented. The undiscounted cash flows to be received under this lease agreement are summarized below.
(In millions)
Operating Lease Future Cash Receipts
2020
$
5

2021
6

2022
6

2023
6

2024
6

Thereafter
60

Total undiscounted cash flows
$
89


In 2018, we signed an agreement with an owner/lessor to construct and lease a new build-to-suit office building in Houston, Texas. The new Houston 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 of March 31, 2020, project costs incurred totaled approximately $70 million, primarily for land acquisition and initial design costs. The initial lease term is five years and will commence once construction is substantially complete and the new Houston office is ready for occupancy. At the end of the initial lease term, we can negotiate to extend the lease term for an additional five years, subject to the approval of the participants; purchase the property subject to certain terms and conditions; or remarket the property to an unrelated third party. The lease contains a residual value guarantee of approximately 89% of the total acquisition and construction costs.
14.  Goodwill
As of December 31, 2019, our consolidated balance sheet included goodwill of $95 million in the International reporting unit. Goodwill is tested for impairment on an annual basis, or between annual tests when events or changes in circumstances indicate the fair value of a reporting unit with goodwill may have been reduced below its carrying value. During the first quarter of 2020, a global pandemic caused a substantial deterioration in the worldwide demand of hydrocarbons. This demand loss resulted in a significant decline in hydrocarbon prices. The commensurate decline in our market capitalization during the first quarter indicated that it was more likely than not that the fair value of the International reporting unit was less than its carrying value.
We estimated the fair value of our International reporting unit using a combination of market and income approaches. The market approach referenced observable inputs specific to us and our industry, such as the price of our common equity, our enterprise value, and valuation multiples of us and peers from the investor analyst community. The income approach utilized discounted cash flows, which were based on forecasted assumptions. Key assumptions to the income approach include future liquid hydrocarbon and natural gas pricing, estimated quantities of liquid hydrocarbons and natural gas proved and probable reserves, estimated timing of production, discount rates, future capital requirements, operating expenses and tax rates. The

14

MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)

assumptions used in the income approach are consistent with those that management uses to make business decisions. These valuation methodologies represent Level 3 fair value measurements. Based on the results, we concluded our goodwill was fully impaired, and recorded an impairment of $95 million in the consolidated statements of income for the quarter ended March 31, 2020.
 
 
March 31,
(In millions)
 
2020
 
2019
Beginning balance, gross
 
$
95

 
$
95

Less: accumulated impairments
 

 

Beginning balance, net
 
95


95

Impairment
 
(95
)
 

Ending balance, net
 
$


$
95


15.  Derivatives
For further information regarding the fair value measurement of derivative instruments, see Note 16. All of our commodity derivatives are subject to enforceable master netting arrangements or similar agreements under which we report net amounts. The following tables present the gross fair values of derivative instruments and the reported net amounts along with where they appear on the consolidated balance sheets.
 
March 31, 2020
 
 
(In millions)
Asset
 
Liability
 
Net Asset (Liability)
 
Balance Sheet Location
Not Designated as Hedges
 
 
 
 
 
 
 
Commodity
$
176

 
$
1

 
$
175

 
Derivative assets
Total Not Designated as Hedges
$
176

 
$
1

 
$
175

 
 
 
 
 
 
 
 
 
 
Cash Flow Hedges
 
 
 
 
 
 
Interest Rate
$

 
$
20

 
$
(20
)
 
Other noncurrent liabilities
Total Designated Hedges
$

 
$
20

 
$
(20
)
 
 
Total
$
176

 
$
21

 
$
155

 
 
 
December 31, 2019
 
 
(In millions)
Asset
 
Liability
 
Net Asset (Liability)
 
Balance Sheet Location
Not Designated as Hedges
 
 
 
 
 
 
 
Commodity
$
9

 
$
1

 
$
8

 
Derivative assets
Commodity
1

 

 
1

 
Other noncurrent assets
Commodity

 
5

 
(5
)
 
Other current liabilities
Total Not Designated as Hedges
$
10

 
$
6

 
$
4

 
 
 
 
 
 
 
 
 
 
Cash Flow Hedges
 
 
 
 
 
 
 
Interest Rate
$
2

 
$

 
$
2

 
Other noncurrent assets
Total Designated Hedges
$
2

 
$

 
$
2

 
 
Total
$
12

 
$
6

 
$
6

 
 


15

MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)

Derivatives Not Designated as Hedges
We have entered into multiple crude oil derivatives indexed to the respective indices as noted in the table below, related to a portion of our forecasted United States sales through 2021. These derivatives consist of three-way collars, fixed price swaps, basis swaps and NYMEX roll basis swaps. Three-way collars consist of a sold call (ceiling), a purchased put (floor) and a sold put. The ceiling price is the maximum we will receive for the contract volumes; the floor is the minimum price we will receive, unless the market price falls below the sold put strike price. In this case, we receive the NYMEX WTI price plus the difference between the floor and the sold put price. These crude oil derivatives were not designated as hedges.
The following table sets forth outstanding derivative contracts as of March 31, 2020, and the weighted average prices for those contracts:
 
 
2020
 
 
2021
 
 
Second Quarter
 
Third Quarter
 
Fourth Quarter
 
 
Full Year
Crude Oil
 
 
 
 
 
 
 
 
 
NYMEX WTI Three-Way Collars
 
 
 
 
 
 
 
 
 
Volume (Bbls/day)
 
80,000

 
80,000

 
80,000

 
 

Weighted average price per Bbl:
 
 
 
 
 
 
 
 
 
Ceiling
 
$
66.12

 
$
64.40

 
$
64.40

 
 
$

Floor
 
$
55.00

 
$
55.00

 
$
55.00

 
 
$

Sold put
 
$
47.75

 
$
48.00

 
$
48.00

 
 
$

Basis Swaps - Argus WTI Midland (a)
 
 
 
 
 
 
 
 
 
Volume (Bbls/day)
 
15,000

 
15,000

 
15,000

 
 

Weighted average price per Bbl
 
$
(0.94
)
 
$
(0.94
)
 
$
(0.94
)
 
 
$

Basis Swaps - NYMEX WTI / ICE Brent (b)
 
 
 
 
 
 
 
 
 
Volume (Bbls/day)
 
5,000

 
5,000

 
5,000

 
 
808

Weighted average price per Bbl
 
$
(7.24
)
 
$
(7.24
)
 
$
(7.24
)
 
 
$
(7.24
)
Basis Swaps - Argus WTI Houston (c)
 
 
 
 
 
 
 
 
 
Volume (Bbls/day)
 
26,813

 

 

 
 

Weighted average price per Bbl
 
$
(0.75
)
 
$

 
$

 
 
$

NYMEX Roll Basis Swaps
 
 
 
 
 
 
 
 
 
Volume (Bbls/day)
 
43,571

 

 

 
 

Weighted average price per Bbl
 
$
(1.62
)
 
$

 
$

 
 
$

Fixed Price Swaps
 
 
 
 
 
 
 
 
 
Volume (Bbls/day)
 
20,000

 

 

 
 

Weighted average price per Bbl
 
$
24.61

 
$

 
$

 
 
$


(a) 
The basis differential price is indexed against Argus WTI Midland.
(b) 
The basis differential price is indexed against Intercontinental Exchange (“ICE”) Brent and NYMEX WTI.
(c) 
The basis differential price is indexed against Argus WTI Houston.
Subsequent to March 31, 2020, we terminated our 80,000 bbls/day NYMEX WTI three-way collars and replaced them with 40,000 bbls/day of two-way collars with an average ceiling price of $40.31 and an average floor price of $32.89 and 40,000 bbls/day of fixed price swaps with an average price of $33.79. This termination and subsequent replacement applies only to derivative positions for the second quarter of 2020. Thus, the NYMEX WTI three-way collars for the third and fourth quarters of 2020 remain as presented in the schedule above.




16

MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)

The following table sets forth outstanding derivative contracts as of May 4, 2020, and the weighted average prices for those contracts:
 
 
2020
 
 
2021
 
 
 
Second Quarter
 
Third Quarter
 
Fourth Quarter
 
 
Full Year
 
Crude Oil
 
 
 
 
 
 
 
 
 
 
NYMEX WTI Three-Way Collars
 
 
 
 
 
 
 
 
 
 
Volume (Bbls/day)
 

 
80,000

 
80,000

 
 

 
Weighted average price per Bbl:
 
 
 
 
 
 
 
 
 
 
Ceiling
 
$

 
$
64.40

 
$
64.40

 
 
$

 
Floor
 
$

 
$
55.00

 
$
55.00

 
 
$

 
Sold put
 
$

 
$
48.00

 
$
48.00

 
 
$

 
NYMEX WTI Two-Way Collars
 
 
 
 
 
 
 
 
 
 
Volume (Bbls/day)
 
40,000

 

 

 
 

 
Weighted average price per Bbl:
 
 
 
 
 
 
 
 
 
 
Ceiling
 
$
40.31

 
$

 
$

 
 
$

 
Floor
 
$
32.89

 
$

 
$

 
 
$

 
Fixed Price WTI Swaps
 
 
 
 
 
 
 
 
 
 
Volume (Bbls/day)
 
76,703

 
10,000

 

 
 

 
Weighted average price per Bbl:
 
$
28.99

 
$
32.77

 
$

 
 
$

 
Basis Swaps - Argus WTI Midland (a)
 
 
 
 
 
 
 
 
 
 
Volume (Bbls/day)
 
15,000

 
15,000

 
15,000

 
 

 
Weighted average price per Bbl
 
$
(0.94
)
 
$
(0.94
)
 
$
(0.94
)
 
 
$

 
Basis Swaps - NYMEX WTI / ICE Brent (b)
 
 
 
 
 
 
 
 
 
 
Volume (Bbls/day)
 
5,000

 
5,000

 
5,000

 
 
808

 
Weighted average price per Bbl
 
$
(7.24
)
 
$
(7.24
)
 
$
(7.24
)
 
 
$
(7.24
)
 
Basis Swaps - NYMEX WTI / MEH (c)
 
 
 
 
 
 
 
 
 
 
Volume (Bbls/day)
 
26,813

 

 

 
 

 
Weighted average price per Bbl
 
$
(0.75
)
 
$

 
$

 
 
$

 
NYMEX Roll Basis Swaps
 
 
 
 
 
 
 
 
 
 
Volume (Bbls/day)
 
43,571

 
60,000

 
10,000

 
 

 
Weighted average price per Bbl
 
$
(1.62
)
 
$
(1.58
)
 
$
(1.94
)
 
 
$

 
(a) 
The basis differential price is indexed against Argus WTI Midland.
(b) 
The basis differential price is indexed against Intercontinental Exchange (“ICE”) Brent and NYMEX WTI.
(c) 
The basis differential price is indexed against Argus WTI Houston.
The mark-to-market impact and settlement of our commodity derivative instruments appears in the table below and is reflected in net gain (loss) on commodity derivatives in the consolidated statements of income.
 
Three Months Ended March 31,
 
(In millions)
2020
 
2019
 
Mark-to-market gain (loss)
$
171

 
$
(113
)
 
Net settlements of commodity derivative instruments
$
31

 
$
22

 
Derivatives Designated as Cash Flow Hedges
In March 2020, we entered into forward starting interest rate swaps with a notional amount of $350 million to hedge variations in cash flows arising from fluctuations in the London Interbank Offered Rate (“LIBOR”) benchmark interest rate related to forecasted interest payments of a future debt issuance in 2022; and an additional $100 million of notional for our future debt issuance in 2025. We expect to refinance both of the debt maturities in 2022 and 2025. The swaps will terminate on

17

MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)

or prior to the refinancing of the debt and the final value will be reclassified from accumulated other comprehensive income into earnings with each future interest payment. Subsequent to March 31, 2020, we entered into additional forward starting interest rate swaps with a notional amount of $150 million to hedge variations in cash flows related to the same LIBOR interest rate for our debt due in 2022 and $150 million notional for our debt due in 2025.
During 2019, we entered into forward starting interest rate swaps with a total notional amount of $320 million to hedge variations in cash flows related to the 1-month LIBOR component of future lease payments of our future Houston office. These swaps will settle monthly on the same day the lease payment is made with the first swap settlement occurring in January 2022. We expect the first lease payment to commence sometime in the period from December 2021 to May 2022. The last swap will mature on September 9, 2026. See Note 13 for further details regarding the lease of the new Houston office.
The following table presents, by maturity date, information about our interest rate swap agreements, including the weighted average LIBOR-based, fixed rate.
 
March 31, 2020
 
December 31, 2019
Maturity Date
Aggregate Notional Amount
(in millions)
 
Weighted Average, LIBOR
 
Aggregate Notional Amount
(in millions)