Marathon To Proceed With Setting Up Two Companies

The Board of Directors of Marathon Oil Corporation has approved moving forward with plans to spin off Marathon’s downstream business, creating two independent, highly focused energy companies. Marathon Petroleum Corporation (MPC), to be headquartered in Findlay, Ohio, is expected to be the fifth largest U.S. refiner with a top-tier downstream portfolio of strategically aligned assets concentrated mainly in the Midwest, Gulf Coast and Southeast regions of the U.S. MPC is anticipated to trade on the NYSE under the ticker symbol “MPC”. The spin-off is expected to be tax-free and to be effective June 30, 2011.

Marathon Oil Corporation (MRO) will be a global upstream company with a strong portfolio of assets delivering defined growth leveraged to crude oil production and with exploration upside. MRO will continue to be based in Houston, Texas and trade on the NYSE under its ticker symbol “MRO”.

“The substantial improvement in the global business and financial environments over the last two years has created the conditions under which we believe it is now appropriate to move forward with the formation of two strong independent energy companies. Marathon has a long history of adapting to changing market and business conditions and at this point in our almost 125 year history, there is a compelling strategic rationale for this transformation,” said Clarence P. Cazalot, Jr., Marathon president and CEO.

“Complementary to the much improved economic environment, Marathon has largely completed a program of significant investment in both our upstream and downstream businesses that will provide each company with a solid foundation to be a leader in its respective industry. We expect these two strong and competitive companies will each have a sound platform for continued long-term shareholder value growth.

“Through experienced leadership, highly skilled and dedicated people and excellent assets, these two companies will be poised for continued profitable growth. While we will move forward as two independent companies, Marathon’s long-held core values will continue to underpin the decisions and activities of each company. These values include a focus on operational excellence and reliability, capital and financial discipline, a commitment to health and safety, environmental stewardship, honesty and integrity, corporate citizenship and working as a high performance team,” concluded Cazalot.

According to the company, the benefits of creating these two operationally and financially strong energy companies include enhanced flexibility to pursue tailored strategies – Each company should have a greater ability to make business and operational decisions in the best interests of its business and to allocate capital and corporate resources with a focus on achieving its own strategic priorities. A more focused business strategy should also result in an expanded portfolio of attractive growth opportunities for each company.

Additionally, Marathon said the operation will mean superior transparency – improved investor focus – As independent energy companies, analysis and investment decisions will be more transparent, allow for more specific comparisons against peers, competitors, benchmarks and performance metrics and thus facilitate evaluation assessments which will likely make the two companies appeal to different sets of shareholders seeking to invest in specific segments of the oil and gas industry. With improved investor focus, it is also anticipated each company will realize a reduction in their individual cost of equity.

The company said it will also strengthen the ability to attract and retain talent – More focused business models will enhance each company’s ability to attract and retain individuals with the appropriate skill sets as well as to better align compensation and incentives with the performance of these different businesses.

Commenting on the benefits of spinning off the downstream businesses, Gary R. Heminger, Marathon Oil Corporation downstream executive vice president and designated president and CEO of MPC, said, “With a fully aligned downstream business Marathon Petroleum Corporation will have the ability to pursue a strategy specific to the strengths we have developed over many years. We will remain focused on growing shareholder value, retaining and attracting talented employees, further building the valued relationships we have with our many customers and business partners, and improving the transparency of our business segments.”

Operating Segments

MRO will operate and report through three segments: Exploration & Production, Oil Sands Mining and Integrated Gas. MPC will also operate and report through three segments: Refining & Marketing, Speedway and Pipeline Transportation.

Transaction Details and Tax Status

The transaction is expected to be effective June 30, 2011, with distribution of MPC shares shortly thereafter. A tax ruling request was submitted to the U.S. Internal Revenue Service (IRS) regarding the tax-free nature of the spin-off and Marathon anticipates a response during the second quarter 2011. Beyond a favorable IRS ruling and the completion of a review by the U.S. Securities and Exchange Commission (SEC) of MPC’s Form 10, no regulatory approvals are required. To effect the spin-off, Marathon intends to distribute one share of MPC for every two shares of Marathon held at a record date to be determined.

Debt and Financing Arrangements

MRO and MPC are targeting investment grade ratings with the financial flexibility and resources to pursue their respective business goals. To accomplish this, a fully committed financing plan is currently in place. Prior to the spin-off, MPC plans to incur new debt of $2.5 to $3 billion to establish a minimum $750 million initial cash balance for MPC. All cash above that level will be used to repay existing intercompany debt with MRO, and any remaining proceeds will be distributed to MRO on or before June 30, 2011. Morgan Stanley and JP Morgan have committed to provide a $2.5 billion 364-day bridge facility, to provide MPC timing flexibility for this purpose.

JP Morgan and Morgan Stanley have also committed to provide MPC a $2 billion four-year revolving credit facility. This facility will be further syndicated with other banks in the coming weeks. The new credit facility is expected to be undrawn at the time of the spin-off.

Prior to the spin-off, Marathon intends to reduce its long-term debt by approximately $2.5 billion through cash-on-hand and the proceeds of the debt repayment from MPC. The estimated remaining $5 billion of Marathon’s long-term debt will continue to be serviced by MRO after the spin-off.

Dividend Policy

While the dividend will be subject to quarterly review by the respective boards, MRO and MPC plan to maintain the current $1 per share per annum dividend in the aggregate by allocating the dividend as follows: MRO will pay an initial dividend of $0.15 per quarter or $0.60 per year (based on approximately 710 million shares outstanding) and MPC will pay $0.20 per quarter or $0.80 per year (based on an estimated 355 million shares outstanding).