Marathon focuses on long-term projects TO CREATE VALUE

OGFJ: With the increase in revenues the past couple of years, has Marathon done any stock buybacks or do you plan on future repurchases? What is the rationale for this?

JC: Our objective is to create value for our shareholders. Our first priority for using cash is to invest in value-accretive projects. Because we have a long lead time business we have to maintain our financial strength. We need to maintain flexibility on the balance sheet. However returning cash to shareholders is an important part of shareholder return. Since July 2003 we have increased the quarterly dividend four times resulting in a 74% increase during this period.

In addition to these dividend increases, on January 30 of this year, we announced a stock repurchase program under which we could purchase up to $2 billion of Marathon’s common stock over a two year period. As of the end of the first quarter of this year, we have repurchased approximately $230 million worth of stock under this repurchase program.

OGFJ: Do you expect a significant increase in capital expenditures in the coming year(s)? How much of this will go into exploration?

Janet Clark: We’ve announced a $3.4 billion capital, investment and exploration budget for 2006, which represents a 13% increase over our actual 2005 spending of $3 billion. The 2006 budget excludes payments totaling $732 million associated with our reentry into Libya.

OGFJ: What are production possibilities this year?

JC: We estimate our 2006 production available for sale will be in the range of 365,000 to 395,000 barrels of oil equivalent per day, excluding the impact of any asset acquisitions or dispositions.

OGFJ: Do you see any challenges for 2006 that you did not face in 2005?

JC: The first one that comes to mind is the constraints on the system in terms of people. Attracting, retaining, and growing our employee base so that we can execute on all the projects that we have is a big challenge, not only for Marathon, but for the entire oil and gas industry. Part of the problem is the number of petroleum engineers being graduated by colleges is small. We have to do more to encourage people to pursue math and science degrees.

Marathon is trying to do its part. The company is a sponsor of a scholarship program with the United Negro College Fund. The Marathon Oil Corp./United Negro College Fund Inc. (UNCF) Corporate Scholars Program is a four year, $1.5 million commitment that will provide scholarship and internship opportunities for approximately 30 outstanding minority, full-time undergraduate and graduate students studying earth sciences, engineering, mathematics, and physics.

In addition, we have a number of other programs designed to encourage students to pursue degrees in the sciences that are essential to our future success.

OGFJ: Many companies are experiencing the challenge of rising drilling and acquisition costs. How does this factor in to Marathon’s operations?

JC: Rising costs are certainly a factor that will impact our business during 2006 and beyond. However, we were fortunate to be able to lock in some of the major projects we currently have underway before construction prices began to rise dramatically.

For example, Marathon and GEPetrol (Compania Nacional de Petroleos de Guinea Ecuatorial) signed a turnkey contract with Bechtel for the construction of the LNG project in Equatorial Guinea that I mentioned earlier. If you were to have signed that contract today, it would have cost much more.

On the exploration side of our business, we’ve got rigs lined up for our exploratory and delineation drilling in Angola and for Norway. So we’re in pretty good shape for the next year or so in that regard.

OGFJ: In terms of total revenue, Marathon is the fourth-largest US-based oil company - right behind ExxonMobil, Chevron, and ConocoPhillips. Net income has soared in the past year or so. Are the company’s profits where you want them to be with respect to revenues, and what is Marathon doing to maximize shareholder value?

JC: What’s interesting if you look at the margin that we as an oil company realize in terms of percent of revenues… it’s single digit…even last year. Our adjusted net income last year was $3.3 billion and our revenues were close to $60 billion. In terms of sales margin it’s a pretty skinny business. What we focus on is the return on investment not necessarily as a percentage of sales…but you get back to -what can we control- we’ve got a great inventory of projects under development and we’ve got to ensure we execute on our plans and at the same time maintain operational excellence and financial discipline. Doing those things really well will serve as the foundation for continued earnings and value growth.

OGFJ: Can you discuss the various business segments of Marathon and where you think most future growth will come from?

JC: Marathon has three business segments - exploration and production, integrated gas, and refining, marketing, and transportation (RM&T). All three have good organic growth opportunities. We’ve expanded our international upstream portfolio in recent years and we’ll continue to look for new opportunities to access new resource and expand that segment.

Our RM&T business is strategically located primarily in the Midwest where our refining, marketing and transportation network has been structured to maximize our flexibility and efficiency, making our downstream business one of the most competitive in the US.

Our integrated gas segment is adding value through the development of opportunities created by the growing demand for natural gas. We are using gas commercialization technologies such as LNG to link the vast quantities of stranded gas that exist around the world with the consuming markets where this premium, environmentally friendly energy source is needed.

OGFJ: How does Marathon plan to increase its reserves - through acquisition or through the drill bit? Can you elaborate?

JC: Certainly, that’s how we create value…we grow our reserve base. There’s a couple ways to do that…organically through the drill bit. We have an active exploration program; however; in today’s world it’s very difficult to grow your reserves just through exploration. How else do you augment your growth? Through the acquisition of resources.

In terms of acquisitions, we look at them, but what drives us is acquiring resources. We’re not really interested in acquiring someone else’s decline curve, someone else’s existing production. How do you add value by buying someone else’s production? You add value by buying resource opportunity and then applying technical and commercial skills to create added value from those opportunities. A prime example of this is our assets and operations in Equatorial Guinea where we acquired access to resource through an asset purchase in 2002. Since then we have transformed those assets into a world-class gas processing operation that is poised for further growth.

OGFJ: What is the single biggest challenge that you, as CFO, have faced?

JC: I’ve only been here just over two years. I came from the upstream side…investment banking before that. For me personally it was a pretty steep learning curve to understanding the downstream and to understand the LNG business. But I recognize that as one of the attributes that makes it so rewarding to work at Marathon. It allows for business strategies that really have differentiated us from our like-sized peers and gives us better opportunity to grow. It’s that much more interesting.

I walked into an organization that was working very well. It didn’t need someone to come in and stir the pot. The biggest challenge is how do we continue to secure new opportunities, access resource in a value accretive way.

OGFJ: What are your views on Sarbanes-Oxley compliance at this point in time, after measures have been implemented? Was it a good thing to regulate corporate accountability to this degree, and how expensive/difficult was it for Marathon to implement?

JC: I’d answer that question by giving you an analogy…you’re driving and someone next to you is going 70 so you speed up. Pretty soon everyone around you is going 70. Prior to Sarbanes-Oxley, the atmosphere was one of everybody going a little further because everyone else was doing it.

We have better controls now than we did before. A lot of those controls in the 70’s were done away with in the 80’s when prices went so low…at least for the oil industry…you had to cut costs wherever you could. We found ourselves updating process manuals, etc. from 20 years ago. We’ve got better controls today. We understand our processes better.

Do you have to go all the way to a 404 and the way it was implemented? I have a lot of issues with the way it was implemented. We didn’t get final rules until very late in the year 2004, which created all kinds of confusion and unnecessary costs. And you combine that with this hammer over your head. It was a very heavy handed approach

Conceptually I agree with it. I don’t think it was very well thought through before it was pushed through. Now that we have that behind us…it’s incumbent upon companies as well as regulators to think about the value in this versus the trappings or the appearance of political controls and I would hope that we come back to center, and that the costs that we incur will be ones that create value. And I think that improving controls creates value. We paid PriceWaterhouseCoopers $4 million alone for the Sarbanes Oxley work that they did. That’s the tip of the iceberg. If you think of all the internal time that was spent, all the consulting time, contract worker time that was spent it was a lot more than that.

OGFJ: What are your immediate and long-term plans for the financial operations at Marathon? What do you hope your legacy will be as CFO?

JC: I just got here so haven’t actually given much thought to “my legacy”…it all keeps coming back to value creation because we’re here to make money for our shareholders. How do you do that…good controls and getting the accounting right is critical. I believe my role is to apply my skills and to channel the skills of our finance and accounting team toward creating value.

Another part that sometimes gets lost, and that is creating value by creating a work environment that is very positive and inclusive. We’ve got a diversity initiative that’s very active and effective to create a culture that we celebrate differences. We go beyond that to make each employee feel comfortable and appreciated. And we learn from one another. That’s how you compete. The only way to be at the top of the heap is to draw from the largest pool possible. We’re focused on that.

I’m a big believer in process improvement. You create a better environment if you make the work more efficient so people don’t get frustrated. There are all kinds of ways to improve processes so that people’s work is more satisfying and more fulfilling and it frees them up to do more thinking. That’s another focus I have…how do we make the work environment more satisfying for our employees because I think a happy employee is a productive employee.

OGFJ: It’s 2006. There are still only a handful of women CEOs and CFOs of the Fortune 500. Why? Women have been starting their own businesses in large numbers for years and doing very well as entrepreneurs. Is that movement in part because companies still aren’t flexible about work-life balance? Finally, do you think there is a glass ceiling in the oil and gas industry?

JC: This is a hard one to answer. You have to recognize that to be a CFO or a CEO you have to be in your 40s or 50s right? Back when I was in high school I remember making the statement that I’m going to have a career…I’m not going to get married. It was a decision back then…were you career oriented or not. The pipeline is not all that full of women in my age group.

I also think that the environment early on was more difficult that it is today. There has been enormous change in terms of women’s acceptance in the workplace. You can’t compete if you decide you’re not going to have women in your pool. If you take that approach, you’re taking half the population and in effect saying I’m going to put myself at a disadvantage because I’m not going to include them in our talent pool. So a lot has changed. A lot of it is filling the pipeline…it just takes time.

I think that one thing you can’t get away from is that clearly today women take on more of the responsibilities at home…taking care of the children. I think that’s an issue that clearly needs to be recognized. If you look at women who are CEO’s and CFO’s of big companies probably most of them don’t have a lot of kids. You do make a lot of sacrifices to get to this level job and there are tradeoffs. Companies are now recognizing that you have to be flexible with work/personal life balance programs like 9/80 schedules, telecommuting, part time employment, and other options that give more flexibility to retain those women.

I don’t think there’s a glass ceiling. There might be other things that prevent me from being a CEO but my gender isn’t one of them.

OGFJ: Thank you for taking the time to talk with us.OGFJ

Side Note

After 27 years, the State Department recently announced that the US is restoring full diplomatic relations with Libya and removing the country from its list of state sponsors of terrorism.

Marathon Oil currently has one of the largest interests in the country. According to a company spokesperson, the recent news out of Washington, while a “positive step between the two countries,” was not a necessary factor in the company’s ability to re-enter the country and resume production and activities there.

The sanctions that prohibited them re-entering the country were lifted a few years ago and Marathon signed a re-entry agreement in December of last year with the Libyan government and Libyan National Petroleum Corp. The company is already “in the process of ramping up production and re-engaging with Libyan colleagues in the development of substantial resources.”