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Marathon Oil (NYSE:MRO)

Q2 2010 Earnings Call

August 03, 2010 2:00 pm ET

Executives

Clarence Cazalot - Chief Executive Officer, President, Director and Member of Proxy Committee

Gary Heminger - Executive Vice President of Downstream

Howard Thill - Vice President of Investor Relations & Public Affairs

David Roberts - Executive Vice President of Upstream

Janet Clark - Chief Financial Officer, Executive Vice President and Member of Proxy Committee

Analysts

Edward Westlake - Crédit Suisse AG

Douglas Terreson - ISI Group Inc.

Paul Cheng - Barclays Capital

Evan Calio - Morgan Stanley

Pavel Molchanov - Raymond James & Associates

Mark Gilman - The Benchmark Company, LLC

John Herrlin - Merrill Lynch

Arjun Murti - Goldman Sachs Group Inc.

Faisel Khan - Citigroup Inc

Douglas Leggate - BofA Merrill Lynch

Blake Fernandez - Howard Weil Incorporated

Operator

Good day, and welcome to Marathon Oil's 2010 Second Quarter Earnings Call. [Operator Instructions] For opening remarks and introductions, I would like to turn the call over to Mr. Howard Thill, Vice President of Investor Relations and Public Affairs. Please go ahead, sir.

Howard Thill

Thank you, Nancy, and welcome to Marathon Oil Corporation's Second Quarter 2010 Earnings Webcast and Conference Call. The synchronized slides that accompany this call can be found on our website, marathon.com.

On the call today are Clarence Cazalot, President and CEO; Janet Clark, Executive Vice President and CFO; Gary Heminger, Executive Vice President, Downstream; Dave Roberts, Executive Vice President, Upstream; and Gary Peiffer, Senior Vice President of Finance and Commercial Services, Downstream.

Slide 2 contains a discussion of forward-looking statements and other information included in this presentation. Our remarks and answers to questions today will contain forward-looking statements subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. In accordance with Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995, Marathon Oil Corporation has included in its annual report on Form 10-K for the year ended December 31, 2009, and subsequent Forms 10-Q and 8-K, cautionary language identifying important factors, but not necessarily all factors, that could cause future outcomes to differ materially from those set forth in the forward-looking statements.

Please note that in the appendix of this presentation is a reconciliation of quarterly net income to adjusted net income for 2009 and the first two quarters of 2010, preliminary balance sheet information, third quarter and full year 2010 operating estimates and other data that you may find useful.

Slide 3 provides net income and adjusted net income data, both on an absolute and per-share basis. Our second quarter 2010 adjusted net income of $792 million reflects a 151% increase from the first quarter results of $315 million and a 216% increase from the $251 million earned in the second quarter of 2009.

The waterfall chart on Slide 4 shows the first to second quarter change in pretax income by segment, as well as the subsequent change in income taxes. The increase in RM&T's pretax income, partially offset by income taxes, was the primary reason for the increase in the second quarter adjusted net income as compared to the first quarter. We expect the overall corporate effective income tax rate, excluding special items and the effect of foreign currency remeasurement of our tax balances, to be between 49% and 54% for the full year 2010. For the second quarter, the effective income tax rate, including special items and the effect of foreign currency remeasurement of our tax balances, was 51%.

The E&P variance analysis is shown on Slide 5. Compared to the first quarter, the second quarter saw higher liftings, largely offset by lower realization and higher costs. Higher income taxes booked during the second quarter contributed to pushing E&P segment income down 14% from $502 million in the first quarter to $432 million in the quarter just completed. The higher income tax rate in the second quarter is a reflection of the production mix. Second quarter E&P segment income reflects a $29 million pretax gain on derivative activity compared to a $49 million pretax gain in the first quarter. As a reminder, the E&P crude oil contracts expired at the end of June, while the gas contracts continue through the end of this year.

Slide 6 shows our historical realizations and highlights the $1.29 per BOE decrease in our average realizations, which moved from $53.90 per BOE in the first quarter to $52.61 per BOE in the second quarter. This is largely in line with the $0.83 per barrel drop in WTI and the $1.21 per mcf decrease in bid week natural gas prices, partially offset by $1.87 per barrel increase in the price of Brent.

Moving to Slide 7. As a result of higher international liftings, our second quarter sales volumes increased 7% to the first quarter to 386,000 BOE per day. During the same period, production available for sale increased 3% to 375,000 BOE per day, primarily a result of the completion of turnaround activity in Equatorial Guinea at the end of the first quarter. The difference in sales volumes and production available for sale was the result of an overlift for the quarter of approximately 1 million BOE, primarily in Europe. At the end of the second quarter, our international operations on a cumulative basis were essentially in a net balance lifting position, with an underlift position of approximately 400,000 barrels in EG and a 400,000-barrel overlift balance in Europe. Domestically, we remained 2.5 million BOE underlifted due to gas stored in Alaska, again, on a cumulative or to-date basis.

Turning to Slide 8. Second quarter E&P segment income was $12.32 per BOE, a 20% decrease compared to the first quarter of 2010, primarily due to lower BOE revenues and higher taxes. While total E&P expenses per BOE were relatively flat first quarter to second quarter, E&P expenses, excluding expiration expenses, declined $0.51 per BOE.

Slide 9 shows the per-BOE trend over the last 10 quarters for field level controllable costs and exploration expenses. Field level controllable cost per BOE increased 5% over the first quarter due to higher international liftings and the related change in production mix compared to the first quarter. The increase in per-BOE exploration expense was largely due to the partial dry haul expense at the Gulf of Mexico Flying Dutchman well.

Turning to Slide 10. The Oils Sands Mining segment lost $60 million in the second quarter compared to a segment loss of $17 million in the first quarter of 2010. The turnaround of both the mine and upgrader at the Athabasca Oil Sands Project decreased net synthetic crude oil sales to 20,000 barrels per day in the second quarter compared to 25,000 barrels per day in the first quarter and increased costs by $39 million compared to the first quarter. The turnaround costs net to Marathon was $99 million, $30 million in the first quarter and $69 million in the second quarter and fell within previous guidance. Realized prices fell from $73.76 per barrel in the first quarter to $65.11 per barrel in the second quarter. Second quarter segment income reflects a $53 million pretax gain on derivative activity compared to a $10 million pretax loss in the first quarter. These contracts continue through the end of this year. The Integrated Gas segment's second quarter income was $24 million, down from $44 million in the first quarter of 2010.

Moving to our Downstream business. As noted on Slide 11, RM&T's second quarter 2010 segment profit totaled $421 million compared to $165 million earned in the same quarter last year. Because of the seasonality of the Downstream business, I will compare our second quarter 2010 results against the same quarter in 2009. Our crude oil and other feedstock costs were lower than the change in the average price of LLS during the second quarter 2010 compared to the same quarter last year. The primary reason for the relatively lower cost was the substantial increase in the sweet/sour differential from an average of $3.98 per barrel in the second quarter 2009 to $8.78 per barrel in the second quarter of 2010. Total throughputs were up about 20% quarter-over-quarter, due primarily to the Garyville Major Expansion being online the second quarter 2010. The completion of this expansion, plus some other work we recently completed to improve the efficiency of our fluid catalytic cracking units, improved results over the second quarter 2009. Partially offsetting these positive effects was the fact that the relevant blended LLS 6-3-2-1 crack spread decreased from approximately $5 per barrel in the second quarter 2009 to about $3.20 per barrel last quarter.

In addition, because of the expanded refinery capacity at Garyville, total manufacturing and other expenses were higher in the second quarter 2010 compared to the same quarter last year. However, on a per barrel of total refinery throughput basis, our Refining, Marketing and Transportation expenses, excluding DD&A, energy-related price effects and bank service charges, were down about 12% in the second quarter compared to the same period last year. Again, primarily due to our expanded Garyville facility, our average data for refinery crude oil throughput increased 28% from the second quarter last year to the second quarter 2002 (sic) [2010] to 1,229,000 barrels per day. And as I previously mentioned, average daily total throughput increased 20% to 1,393,000 barrels per day in the second quarter 2010 as compared to 1,158,000 barrels per day in the second quarter 2009. Our Refinery and Wholesale Marketing gross margin of $0.1337 per gallon is based on a total consolidated refined products volume sold of 1,610,000 barrels per day or about 6.2 billion gallons for the quarter. We estimate that the Garyville Major Expansion contributed in excess of $0.013 to this margin.

Speedway SuperAmerica light product and merchandise gross margin combined was about $43 million higher in the second quarter 2010 compared to the second quarter 2009. The increase was primarily due to a higher gasoline and diesel margins, which increased from $0.1051 per gallon in the second quarter 2009 to $0.1328 per gallon in the second quarter 2010. Speedway SuperAmerica's same-store merchandise sales increased approximately 4%, while same-store gasoline volumes increased 5% quarter-to-quarter.

Slide 13 provides historical performance indicators for the Downstream business and previously discussed LLS 6-3-2-1 crack spread.

Slide 14 provides an analysis of preliminary cash flows for the first half of 2010. Operating cash flow from continuing operations, before changes in our working capital, was slightly over $2.3 billion. Our cash balance was reduced by working capital changes of $202 million. Capital expenditures were $2.5 billion, and dividends paid totaled $350 million, while asset disposals generated proceeds of $1.4 billion. And finally, debt was reduced by $625 million.

As shown on Slide 15, at the end of the second quarter of 2010, our cash adjusted debt to total capital ratio was 20%. And as a reminder, the net debt to total capital ratio includes about $239 million of debt service by U.S. Steel. Before we open the call to questions, we remind you that to accommodate all who wish to ask questions, you'd please limit yourself to one question plus a follow-up. You may re-prompt for additional questions as time permits.

Nancy, with that, we will now open the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first to Arjun Murti with Goldman Sachs.

Arjun Murti - Goldman Sachs Group Inc.

Just a question on how you all are thinking about your Gulf of Mexico business in light of the Macondo oil spill? I realize there's a lot of uncertainties in terms of how the regulations and such things will play out. But if smaller or other companies are less interested, is this an area you'd be willing or looking to grow in? Is this an area you want to maintain your presence and your focus elsewhere because risks might be higher? Can you probably comment on how you're thinking about your Gulf of Mexico exposure going forward?

David Roberts

Yes, Arjun, this is Dave. And I think you've put your finger on the problem that we've got is right now, the playing field has not settled down. So until we understand where the regulations are going to go, it's very difficult for us to predict what our response to our own business is going to be. Now, we've said consistently this is one of the most valuable provinces in the world because of the fact that it represents one of the most stable and attractive fiscal regimes. And if that changes, then our outlook, relative to that basin, will also have to change because, obviously, we want to protect our shareholders. That being said, we think we continue to believe this is an incredibly important province for the United States in terms of its energy security. We expect whatever hopefully happens out of the government to be reasonable. And our expectation is that we'll continue to be interested in doing business in the Gulf of Mexico, and I wouldn't speculate on what other operators are going to do and what our appetite might be for those opportunities.

Arjun Murti - Goldman Sachs Group Inc.

Just a related follow-up. This business -- big question on the sense of a liability cap, and I know you probably don't want to speculate on whether there will be one or what it may be. But in the case of BP, there's effectively no liability cap. They're a large prominent company. You all may not be as large as BP, but people know who you are. You got a large Downstream presence. Does a liability cap make any difference to how you think about the Gulf of Mexico, whether we have one or not?

David Roberts

Well, I think definitely does, Arjun. I think one of the things that we've said is we have always understood that for cleanup costs that there is a little bit of liability today. And so I think that's one of the things that all of the companies understand very clearly. The issue is the attached liabilities, should there be some sort of mechanism to limit a company's exposure there unless they are indeed found negligent, in which case, again, the cap doesn't apply. So we're going to watch that very carefully. And I think one of the things that we've been involved in directly with our peers is trying to set up mechanisms whereby the industry can come together to not only work on some of the concerns that the government has in terms of prevention and response in the future, but also making sure that this base scenario remains open to a large number of companies through some sort of shared risk mechanism. We think that's very important because we think not only that supermajors and the majors like Marathon have a lot to offer in this basin but obviously, some of the independents do as well.

Operator

And we'll move to the next question from Doug Leggate from Merrill Lynch.

Douglas Leggate - BofA Merrill Lynch

I have I guess a follow-up on the Upstream and then I guess I have a second Upstream question. If exploration activity in the Gulf is obviously being slowed down, you guys have a bunch of prospects that you are planning to drill this year. How are you reallocating the capital? And can you maybe frame how the Bakken activity levels might feature in terms of how you might reallocate some of your expenditure? And I've got a follow-up, please.

David Roberts

I think, first of all, I would say that I want to point out that our primary activities in the Gulf of Mexico are not slowing down. Droshky came online in July, and we expect Ozona to be on track for next year as well. So in terms of realtime activities that are going to be immediately value added to our shareholders, it's full speed ahead for us. We, obviously, will be watching, and we'll register the appropriate concerns as we see how this moratorium and potential further extension because it might apply. But clearly, from an exploration discovery to development perspective, we were talking about a five- to seven-year period anyway, and so that's certainly something that we can be slightly more sanguine about if these events were interfering in production activities. We had said previously that we were ramping up in the Bakken. It had nothing to do with the potential reallocation from the Gulf of Mexico. We've added some acreage this year. We're going to six rigs. We've added the fifth. We'll see the sixth here in the next quarter. We're looking at other opportunities as much as other people are, but that's really a part of our business. But clearly, we are focused on Lower 48 liquid activities.

Douglas Leggate - BofA Merrill Lynch

My follow-up, Dave, is also an Upstream question and more project-specific. Can you confirm if the Ozona has its subsea work completed? Can you give us the current production at Droshky? And finally, we're hearing that the subsea trees have [ph] (27:33) potentially a second development in Angola have already been put out to bid. If you could give us some idea as to how you see the time line for the next development in Angola after PVSM (sic) [PSVM]? That would be great.

David Roberts

Well, I'll answer the first two. Right now, we're in the middle of a flow back in Droshky. We're repairing a surface separator on the Bullwinkle Platform that interrupted our flow-back tests. I can tell you that the first well, we saw rates of about 20,000 barrels a day. The second well, we saw 22,000 barrels a day. These are growth numbers, and we've got one more well that we're going to run through the test before we see what we expect will be continuous production by the end of the month. So production area's kind of up and down on a day-to-day basis. The Ozona is a well that's basically drilled and temporarily abandoned. So all we have to go back to do now is set subsea tree, which we expect to have delivery on in the next quarter, and then go back in and actually do the completion work. So there's nothing spectacular that's going to have to happen there. Along the way, before it comes on and till what we're projecting in the third quarter really has to do with some timing issues of rig deliveries and also some of the surface modifications that the host operator has to make on the Auger platform. With respect to Angola, PSVM, we think, is on schedule for 2012. And I think we would ask you to direct any questions about future activities to the operator, BP.

Operator

And we'll take the next question from Doug Terreson from ISI Group.

Douglas Terreson - ISI Group Inc.

To turn back today's initial point on the strategic activity, that there's been a variety of divestitures by your peers in recent months. And on this point, when you consider the improvement in your financial flexibility over the last couple of quarters, do the recent valuations encourage you to consider more sales than might have been the case a few quarters ago? Or has the view really not changed very much?

David Roberts

Well, Doug, I think what we said consistently is we continually look at our portfolio and adjust it, and we think that we made some strong sales into a strong market. And I don't see this as particularly a rising-tide event where we look to get anything else out [ph] (30:21) the door.

Douglas Terreson - ISI Group Inc.

And also, I had a question for Gary. Obviously, Refining and Marketing did very well, partially due to the expansion at Garyville, and it appears that your light products yield may be running a little bit higher than expected. And so my first question is whether or not yields and performance in general have exceeded expectations? And whether they were or not -- have there been any surprises, either positive or negative, as the expansion is streamed over the last couple of months?

Gary Heminger

Doug, let's say on Garyville, the Refinery has operated -- the new part of the plant has operated very, very well, and it has exceeded our expectations in all of the operating components. And when you look at the first quarter and you look at yields versus demand really against all the plants, it's very hard to really glean from the information that's out there the yields by plant. And it really comes down to the asphalt in the recent markets. All of our plants ran very, very well. But as you can expect, there are some markets where maybe asphalt yields were cut back a little bit just because of economics versus some other plants where we may have ran asphalt a little bit harder. But all in all, I would say, Garyville has ran exceptionally well. All the plants are in good shape. But just based on certain markets, we have trimmed back some of our yield components.

Operator

And we'll go next to Evan Calio from Morgan Stanley.

Evan Calio - Morgan Stanley

I had one question, which is a bit of a follow-up from the last question, where you addressed potential asset sales. But I know that Marathon's also been historically a pretty astute buyer. Do you seen opportunity, as a buyer, given the large number of asset packages in the market, as well as some regulatory changes or operational changes in the Gulf of Mexico? Any comments there?

David Roberts

Yes, Evan, I think similar to the comment I made to Arjun, we'll wait and see. I think from my perspective, I don't want to wish any ill luck on anybody about being forced out of say, the Gulf of Mexico. But we would certainly be open to those opportunities because we clearly have the skill set to both explore and develop there. And there's a lot of activity in the asset market. There has been before the recent activities from the company in England. So I think we continue to look at activities to see how they fit with what our core strategies are. And as we see opportunities that work for us, we certainly wouldn't hesitate to execute against it.

Evan Calio - Morgan Stanley

Well, you mentioned earlier with North American liquids focus, I mean, was that explicitly where you're focusing versus potentially, in the unconventional assets?

David Roberts

I think when we talk about North America, but primarily, our opportunities around the world, the vast majority of them are unconventional. And so it's one of the reasons we're very happy with the learning curve that we've gotten out on the Bakken, because we feel like we can be competitive in any of those space anywhere in the world.

Operator

And next, we'll go to Edward Westlake from Crédit Suisse.

Edward Westlake - Crédit Suisse AG

I guess, the net debt to cap is now sort of 20%. You've got an $800 million asset sale hopefully closing towards the end of the year. You also did raise your dividend at Q1. Can you talk a little bit about as that comes down, assuming that some of the macro conditions continue, that your discussions around raising the dividend versus buybacks versus perhaps additional reimbursement?

Janet Clark

This is Janet. Really, our philosophy around use of cash has not changed. First and foremost, we will reinvest our cash in the business to create shareholder value. Obviously, you only create value if the projects which we're investing in yields a rate of return that makes up your cost of capital. So that's number one in terms of the best use of our cash. But to the extent that we have excess cash beyond that, as said, we want to keep a strong balance sheet. But the dividend, we've always said it's a high priority for us. We've got a dividend yield in excess of 3%. And it's something that our board revisits every quarter. I don't foresee the stock buyback coming back on the table anytime soon.

Edward Westlake - Crédit Suisse AG

And then just a small follow-up, this is more an earnings-specific question. But the $51 million of other costs in E&P, Q on Q, what's the main thing behind that? Or was it just a number of different things?

Janet Clark

It is a bunch of different things.

David Roberts

In the $51 million in other, I'll have to get back to you. I don't have the specifics in front of me. But I'll give you a callback.

Operator

And moving next to Paul Cheng from Barclays Capital.

Paul Cheng - Barclays Capital

Two different questions. One is Downstream, one is Upstream. On Downstream, Gary, can you tell us that excluding the inventory, what's the Minnesota sales actual? How much is that? And also, why you take so long until the year end? And from standpoint, with the Minnesota asset sales and also one of your, smaller competitors is exiting Refining. Have you guys revisited the separation of the R&M from the rest of the company or that the opinion towards that idea have not been changed over the last several months?

Gary Heminger

Paul, as you would understand, we're still working through all of the transaction, working through all the due diligence. And we have not been able, nor yet are we prepared to separate how much is working capital and how much are our assets. We'll certainly expect us as we proceed on late third quarter, early fourth quarter, that we should be able to finalize this transaction and then be able to share that with you.

Clarence Cazalot

And Paul, this is Clarence. No change from what we said before, Paul, that back in February '09, we said we were going forward as an integrated company. And that's the way we are managing the business today. So no change.

Paul Cheng - Barclays Capital

Can I sneak in the second question? For Upstream days for Droshky, can you tell us once that they reach the peak, how long they will be able to sustain the peak? And what will be the expected decline rate, subsequent that when they start declining in the first 12 to 18 months?

Clarence Cazalot

Well, I wish I knew. We'll see as the wells come on, Paul. But I think the view for us is that we will probably get to a peak rate in the next 30 to 90 days. I wish I could narrow it down. But again, as I've said in these calls before, if the wells tell you how you could get there, and I think what we're expecting is it will be able to have a peak probably for the better part of two quarters. And then I would expect you'd see a pretty normal Gulf of Mexico decline, in excess of 10% from there.

Operator

And we'll take the next question from Blake Fernandez from Howard Weil.

Blake Fernandez - Howard Weil Incorporated

I had a question for you on the Downstream. The throughputs and utilization on the R&M segment seemed very strong, obviously, benefiting from Garyville. I'm just curious now that that's online, if the strategy going forward is changing at all with regard to potentially running that system all out, and now that it's more competitive to essentially let some of the more marginal players kind of bear the brunt of any potential future run cuts on the second half of this year.

Gary Heminger

Yes, this is Gary. Everyday, we run our economics per plant to determine what the economics are versus our alternative. And you're right, in the second quarter here, we did run very well, about 101% or so of utilization, so had a strong quarter. As I mentioned earlier, I believe it was on Doug Terreson's question, of course, we look each and every day and week at the yields of different products to determine what would give us the best economic return. But that's how we have run historically, and that's certainly how we plan to run in the future.

Blake Fernandez - Howard Weil Incorporated

And Gary just, I guess, a follow-up then. On St. Paul, can you just talk about the divestiture, the rationale behind it and how it fits into the portfolio?

Gary Heminger

St. Paul, along with almost an 80,000 barrel per day plant, 166 convenience store operating units and a crude pipeline, that supports the refinery, we have always looked at this as a very strong niche asset, but not a strategic asset. When you look at, I've mentioned several times, how we operate our facilities, we really operate the other six refineries as one unit. And because of our very strong logistics systems, we can move crude feedstocks, refined product into the refineries, out to the terminals, using our pipelines, using our marine facilities, and then into our retail network. When we made the decision on investing to run heavier crude in the Midwest, we've made that decision to upgrade Detroit. So that is our long-term strategic decision because that refinery being the only refinery in the State of Michigan, really complements all of our operations across the rest of Marathon's Downstream. So we made that decision, as I said, to invest in Detroit and then left us to look at our strategy and decided to move forward and sell the St. Paul assets.

Operator

And we'll go next to Faisel Khan from Citi.

Faisel Khan - Citigroup Inc

I think I got the details on the benefit to the Refining margin of the sweet/sour differential, and I think, Garyville, you said was $1.03 in terms of the benefit to gross margin. Could you also give us an idea of what the benefit was from blending of ethanol?

Gary Heminger

Faisel, we do not ever release our benefit from ethanol down to that level. So I'm sorry, I can't share that with you.

Faisel Khan - Citigroup Inc

And then my second question on the Upstream side is, I guess, your sequential production growth in the Bakken went from roughly 11,000 to almost 13,000 a day. Is that a linear sort of trajectory? And as you've been a rig online, do you expect that sort of to ramp up at the same pace into next year?

David Roberts

Well, I think what we said, Faisel, is that we're going to get to 21,000, 22,000 barrels a day in 2013. And I think you'd expect to see that continuing on that normal pace. We've got 175 wells that we've drilled. We can do 50 or 60 a year. The high end side of that would be six rigs. And so I think -- I'm not saying it's exactly linear. But it's not going to be too choppy getting to the 22,000.

Operator

And we'll take the next question from Mark Gilman from The Benchmark Company.

Mark Gilman - The Benchmark Company, LLC

Two questions for Dave, if I could, call on for a follow-up if you like. Dave, now that Volund is essentially fully on, how long will the plateau at Volund be sustained, and what kind of Alvheim-Volund combined decline ratio looking like?

David Roberts

Mark, I think that, first of all, we're producing on a gross basis, between 130,000 and 140,000 barrels a day. But I'd like to answer your question in terms of where we see it relative to the 120,000. We're going to continue, at the current rate, this 130,000-ish through this year and the majority of next year, and we will be over the capacity FPSO 2010, 2011, dropping just below that in 2012. So it looks to me to be about a 5% to 8% decline rates, dropping pretty substantially into 2013. So we've got three good years ahead of us.

Mark Gilman - The Benchmark Company, LLC

And Dave, my follow-up on Droshky. What type of initial DD&A rate you're going to book?

David Roberts

Right now, we're expecting, you can look at about $25 a barrel.

Operator

And we'll move next to Pavel Molchanov from Raymond James.

Pavel Molchanov - Raymond James & Associates

I think you said last quarter that you're doing some seismic in your Polish shale play with -- or I guess, planning that for 2011 and currently looking for partners. Can you just give us an update on how the partnership process is going?

David Roberts

Yes, we basically have put together what amounts to our data room, and we'll start entertaining people to look at our assets there within the next month. And so it's early days there. Obviously, we're anxious to see the results of some of the offset activity there. Not in a rush because we believe that our position obviously, is quite attractive. But we don't have a timing for when we might expect to announce or even select a partner.

Pavel Molchanov - Raymond James & Associates

And then as a follow-up, more of a macro question. So we've seen, along with you guys, of course, many other companies putting pretty large refining asset packages for sale in the last six months. Do you think there is demand out there for all those assets? Or are we still in a kind of the bottom of that down cycle?

Gary Heminger

This is Gary. I would say we're still at the bottom of the down cycle. It's been seen in the press recently, a couple of plants have struggled to find buyers and we're very pleased with a very high-quality plant and the high-quality retail assets with our St. Paul Park plant. We're very pleased that, that transaction is proceeding forward. But I would say it still appears to be kind of a bottom of the market.

Operator

And we'll take the next question from John Herrlin from Societe Generale.

John Herrlin - Merrill Lynch

With Indonesia, how long will it take you to TD the well? And could you describe the prospect a little bit more?

David Roberts

I'll refer you to some of our presentations around passing value, the one we'll draw first is probably -- it's a fairly large closed structure that we think is 1 billion barrel unrisked potential. But there's multiple play types on the acreage because it is a multimillion acre block. And so the Romeo prospect that we drill a little bit later is of a different geological quality. It's not related to the offset exploration activities that have been conducted in the area, which were basically carbonate pinnacles. So it's a very different play type. The rig is on sale to the bubble prospect right now. We'll probably be spreading in gas in the next seven to 10 days. Anticipate these to be two-month wells. And so we'll probably have something to say about it a little bit later this quarter.

John Herrlin - Merrill Lynch

So you're implying it's a plastic rather than a carbonate?

David Roberts

Well, yes. I think I can say that. I did imply it, yes.

John Herrlin - Merrill Lynch

Next one, any issues regarding processing or transport of Bakken oil? Any problems getting it out of the basin?

David Roberts

Again, because of our very solid Downstream business, we have great relationships. And our people in the basin are doing a great job of being able to handle our crude largely in the basin, and we continue to have a very favorable impact in terms of getting our crude out processed at lesser cost than our competitors.

Operator

[Operator Instructions] And we'll go to a follow-up from Paul Cheng.

Paul Cheng - Barclays Capital

Garry, in the Refining, on the margin realization, can you share with us what is the Contango benefits and also the price finalization related to the Saudi contract, the benefit for this quarter?

Garry Peiffer

This is Garry Peiffer. On the Contango, benefit in the quarter was really pretty minimal. Last year second quarter, the Contango was about $2 on average. This year, it's about $1.50. So there's a little bit of a biometric change quarter-to-quarter. So really, it was pretty immaterial. With the change in how a lot of our foreign crudes were priced, effective last year, the Saudis changed their price mechanism. We really don't have any in-transit effects to speak of at the moment. So both are immaterial or nonexistent in case of the foreign in-transit.

Paul Cheng - Barclays Capital

A second question is you have an impairment charge related to the call it receivable. What's the nature of the understandings? The guy who bought it could not pay, or what's the nature?

David Roberts

Paul, when we did that sale, we structured it to have a contingent payment based on when natural gas would actually be produced there. And what we're saying is we think that we're going to realize the end date before production actually occurs. So it has nothing to do with quoting the buyer. It's really how we structure the sale. And that is detailed heavily in our filing.

Operator

And we'll take another follow-up from Doug Leggate.

Douglas Leggate - BofA Merrill Lynch

The contribution from Refining, I just wanted to get some clarity here. You were kind enough to give us $1.03 was the contribution, if I heard you correctly. That said, it was 13%, Howard?

Howard Thill

Out of the 13.37%, in excess of $1.03 of that was GME.

Douglas Leggate - BofA Merrill Lynch

So my question is, if I did the math right, on the gross margin, does that mean that Garyville expansion contributed about 25% of the gross margin total in terms of absolute million of dollars? Is that about right?

Howard Thill

No.

David Roberts

No.

Douglas Leggate - BofA Merrill Lynch

Can you quantify the contribution? I'm looking at your chart on Slide 11. Is that the volume metric?

Howard Thill

It's 6.2 billion gallons, Doug, with the $1.03, we said in excess of $1.03 margin.

Douglas Leggate - BofA Merrill Lynch

So that should be...

Howard Thill

That's a pre-tax contribution. And we said it would -- we expect Garyville -- it's not an exact science because it is tied in with the existing facility. But we think it's in excess of $1.03 that it contributed on the 6.2 billion gallons of sales for the quarter.

Douglas Leggate - BofA Merrill Lynch

I guess what was the guts of my question was, can you tell me how you've changed your crude slate with the Garyville expansion online, given where light/heavy differentials or sweet/sour differentials have gone and how that's likely to continue let's say, through the third quarter? Any guidance on the crude slate would be great.

Gary Heminger

Sure, Doug. This is Gary. In fact, it's probably a little bit contra in what it would affect. And it's just because of the yield of the products. Once you fill out the croaker, then you switch to a different slate, if the asphalt markets are not returning good-enough economics for you to run heavier crudes. So as I say, when you look at on a -- and this is on a total basis, but we ended up running 56.4% sour crudes in Q2 versus almost 54% Q2 of '09. So our sour crude throughputs were up a little bit. But that's going to be offset by running more LLS than -- historically, we've run very little LLS at Garyville. But again, just the yield pattern and the demand patterns, give us better economics to run more LLS that would be to run heavier crudes, once you filled up the coaker.

Operator

And we'll take one final follow-up from Mark Gilman.

Mark Gilman - The Benchmark Company, LLC

One more, if I could, for Dave. When you talk about the plateau rates at Droshky, is that net of both the basic royalty, as well as the overwrite that's in place, I believe, there?

Gary Heminger

We talk about 50 kbd. That is our true net.

Mark Gilman - The Benchmark Company, LLC

After the overwrite, Dave?

Howard Thill

Net-net.

David Roberts

Net-net. When we say net, we mean net.

Mark Gilman - The Benchmark Company, LLC

Per your third quarter production guidance, which I assume, takes Droshky into consideration, is the gas piece of that delayed? Or is that going to come later on? How does that work?

Clarence Cazalot

No, it's a single stream of production. I think the only thing that -- we're expecting a pretty significant contribution from Droshky. I think for the quarter, we're just saying that the load-up of it from the flowback could be 30 days, could be 60 days. And so that's why you're seeing the variance in the guidance. But there is no difference from gas and oil here. It's a single stream.

Mark Gilman - The Benchmark Company, LLC

I want to go back to the GME yield question that was addressed earlier on. Gary, how close do you think one can get the actual 2Q yields at GME to the 211 that you've been talking about?

Gary Heminger

You're saying how close do they correlate to the 211?

Mark Gilman - The Benchmark Company, LLC

Yes, how close do they actually correlate with the 211?

Gary Heminger

I think, they're very, very close in Q2. It's very close.

Operator

And that does conclude today's question-and-answer session. At this time, I'd like to turn the conference back over to our speakers for any additional or closing remarks.

Howard Thill

Thank you, Nancy. We just appreciate everyone's interest in Marathon Oil, and talk to you soon.

Operator

That concludes today's presentation. Thank you for your participation.

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Source: Marathon Oil Q2 2010 Earnings Call Transcript
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