Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
FORM 10-Q
(Mark One)
 
 
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the Quarterly Period Ended June 30, 2018
 
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 1-5153
mro_logoa57.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, TX  77056-2723
(Address of principal executive offices)

(713) 629-6600
(Registrant’s telephone number, including area code)
 
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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
(Do not check if a smaller reporting company)
Smaller reporting company o   
Emerging growth company o
 
 
 

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 o No þ
 
There were 854,147,498 shares of Marathon Oil Corporation common stock outstanding as of July 31, 2018.




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 2017 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
 
Six Months Ended
 
June 30,
 
June 30,
(In millions, except per share data)
2018
 
2017
 
2018
 
2017
Revenues and other income:
 
 
 
 
 
 
 
Revenues from contracts with customers
$
1,447

 
$
902

 
$
2,984

 
$
1,775

Net gain (loss) on commodity derivatives
(152
)
 
56

 
(254
)
 
137

Marketing revenues

 
35

 

 
69

Income from equity method investments
60

 
51

 
97

 
120

Net gain (loss) on disposal of assets
50

 
6

 
307

 
7

Other income
12

 
9

 
16

 
23

Total revenues and other income
1,417

 
1,059

 
3,150

 
2,131

Costs and expenses:
 

 
 

 
 
 
 

Production
205

 
178

 
422

 
331

Marketing, including purchases from related parties

 
38

 

 
72

Shipping, handling and other operating
126

 
111

 
256

 
200

Exploration
65

 
30

 
117

 
58

Depreciation, depletion and amortization
612

 
592

 
1,202

 
1,148

Impairments
34

 

 
42

 
4

Taxes other than income
65

 
45

 
129

 
84

General and administrative
105

 
90

 
205

 
187

Total costs and expenses
1,212

 
1,084

 
2,373

 
2,084

Income (loss) from operations
205

 
(25
)
 
777

 
47

Net interest and other
(65
)
 
(86
)
 
(110
)
 
(164
)
Other net periodic benefit costs

 
(1
)
 
(3
)
 
(11
)
Income (loss) from continuing operations before income taxes
140

 
(112
)
 
664

 
(128
)
Provision (benefit) for income taxes
44

 
41

 
212

 
75

Income (loss) from continuing operations
96

 
(153
)
 
452

 
(203
)
Income (loss) from discontinued operations

 
14

 

 
(4,893
)
Net income (loss)
$
96

 
$
(139
)
 
$
452

 
$
(5,096
)
Per basic share:
 

 
 

 
 

 
 

Income (loss) from continuing operations
$
0.11

 
$
(0.18
)
 
$
0.53

 
$
(0.24
)
Income (loss) from discontinued operations
$

 
$
0.02

 
$

 
$
(5.76
)
Net income (loss)
$
0.11

 
$
(0.16
)
 
$
0.53

 
$
(6.00
)
Per diluted share:
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
0.11

 
$
(0.18
)
 
$
0.53

 
$
(0.24
)
Income (loss) from discontinued operations
$

 
$
0.02

 
$

 
$
(5.76
)
Net income (loss)
$
0.11

 
$
(0.16
)
 
$
0.53

 
$
(6.00
)
Dividends per share
$
0.05

 
$
0.05

 
$
0.10

 
$
0.10

Weighted average common shares outstanding:
 

 
 

 
 

 
 

Basic
854

 
850

 
853

 
850

Diluted
855

 
850

 
854

 
850

 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
 
Six Months Ended
 
June 30,
 
June 30,
(In millions)
2018
 
2017
 
2018
 
2017
Net income (loss)
$
96

 
$
(139
)
 
$
452

 
$
(5,096
)
Other comprehensive income (loss)
 
 
 

 
 

 
 

Postretirement and postemployment plans
 

 
 

 
 

 
 

Change in actuarial loss and other
13

 
8

 
17

 
12

Postretirement and postemployment plans, net of tax
13

 
8

 
17

 
12

Derivative hedges
 
 
 
 
 
 
 
Net unrecognized gain (loss)

 
(14
)
 

 
(13
)
Derivative hedges, net of tax

 
(14
)
 

 
(13
)
Foreign currency hedges
 

 
 

 
 

 
 

Net recognized loss reclassified to discontinued operations

 

 

 
34

Income tax provision (benefit)

 

 

 
(4
)
Foreign currency hedges, net of tax

 

 

 
30

Other, net of tax
4

 

 
4

 

Other comprehensive income (loss)
17

 
(6
)
 
21

 
29

Comprehensive income (loss)
$
113


$
(145
)

$
473


$
(5,067
)
 The accompanying notes are an integral part of these consolidated financial statements.


3




MARATHON OIL CORPORATION
Consolidated Balance Sheets (Unaudited)
 
June 30,
 
December 31,
(In millions, except per share data)
2018
 
2017
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,667

 
$
563

Receivables, less reserve of $8 and $12
1,176

 
1,082

Notes receivable

 
748

Inventories
117

 
126

Other current assets
92

 
36

Current assets held for sale
35

 
11

Total current assets
3,087

 
2,566

Equity method investments
788

 
847

Property, plant and equipment, less accumulated depreciation,
depletion and amortization of $22,336 and $21,564
16,881

 
17,665

Goodwill
98

 
115

Other noncurrent assets
860

 
764

Noncurrent assets held for sale
157

 
55

Total assets
$
21,871

 
$
22,012

Liabilities
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
1,428

 
$
1,395

Payroll and benefits payable
109

 
108

Accrued taxes
99

 
177

Other current liabilities
405

 
288

Current liabilities held for sale
3

 

Total current liabilities
2,044

 
1,968

Long-term debt
5,497

 
5,494

Deferred tax liabilities
237

 
833

Defined benefit postretirement plan obligations
311

 
362

Asset retirement obligations
1,364

 
1,428

Deferred credits and other liabilities
194

 
217

Noncurrent liabilities held for sale
92

 
2

Total liabilities
9,739

 
10,304

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 and 937 million shares (par value $1 per share,
1.925 billion shares authorized at June 30, 2018 and 1.1 billion shares authorized at December 31, 2017)
937

 
937

Held in treasury, at cost – 83 million and 87 million shares
(3,137
)
 
(3,325
)
Additional paid-in capital
7,227

 
7,379

Retained earnings
7,146

 
6,779

Accumulated other comprehensive loss
(41
)
 
(62
)
Total stockholders' equity
12,132

 
11,708

Total liabilities and stockholders' equity
$
21,871

 
$
22,012

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

4



MARATHON OIL CORPORATION
Consolidated Statements of Cash Flows (Unaudited)
 
Six Months Ended
 
June 30,
(In millions)
2018
 
2017
Operating activities:
 

 
 

Net income (loss)
$
452

 
$
(5,096
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 

 
 

Discontinued operations

 
4,893

Depreciation, depletion and amortization
1,202

 
1,148

Impairments
42

 
4

Exploratory dry well costs and unproved property impairments
93

 
45

Net (gain) loss on disposal of assets
(307
)
 
(7
)
Deferred income taxes
(6
)
 
38

Net (gain) loss on derivative instruments
254

 
(140
)
Net settlements of derivative instruments
(166
)
 
3

Pension and other postretirement benefits, net
(51
)
 
(25
)
Stock based compensation
28

 
26

Equity method investments, net
27

 
61

Changes in:
 
 
 

Current receivables
(256
)
 
(15
)
Inventories
(17
)
 
(5
)
Current accounts payable and accrued liabilities
133

 
(41
)
All other operating, net
(12
)
 
34

Net cash provided by operating activities from continuing operations
1,416

 
923

Investing activities:
 

 
 

Additions to property, plant and equipment
(1,300
)
 
(775
)
Additions to other assets
(129
)
 

Acquisitions, net of cash acquired
(25
)
 
(1,828
)
Disposal of assets, net of cash transferred to buyer
1,183

 
1,726

Equity method investments - return of capital
32

 
49

All other investing, net
7

 
(5
)
Net cash provided by (used in) investing activities from continuing operations
(232
)
 
(833
)
Financing activities:
 

 
 

Debt repayments

 
(1
)
Purchases of common stock
(11
)
 
(10
)
Dividends paid
(85
)
 
(85
)
All other financing, net
18

 

Net cash provided by (used in) financing activities
(78
)
 
(96
)
Net increase in cash and cash equivalents of discontinued operations (Note 5)

 
130

Effect of exchange rate on cash and cash equivalents
(2
)
 
2

Net increase in cash and cash equivalents
1,104

 
126

Cash and cash equivalents at beginning of period
563

 
2,488

Cash and cash equivalents at end of period
$
1,667

 
$
2,614

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

5

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 2017 Annual Report on Form 10-K.  The results of operations for the second quarter and first six months of 2018 are not necessarily indicative of the results to be expected for the full year.
As a result of the sale of our Canadian business in 2017, we reflected this business as discontinued operations in all historical periods presented. Disclosures in this report related to results of operations and cash flows are presented on the basis of continuing operations unless otherwise stated. See Note 5 for discussion of this divestiture in further detail.
Reclassifications
In the first quarter of 2018 we adopted the new Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers using the modified retrospective method. To conform the historical presentation to our current presentation, we reclassified gains/losses arising from our commodity derivatives out of the revenues from contracts with customers line into a separate line, net gain (loss) on commodity derivatives, on the consolidated statements of income. Additionally, in the first quarter of 2018 we adopted the new pension accounting standards update on a retrospective basis, and reclassified the required cost elements from general and administrative expense into production expense, exploration expense, and other net periodic benefit costs. See Note 2 for further discussion of the adoption of these accounting standards.
2.   Accounting Standards
Not Yet Adopted
Lease accounting standard
In February 2016, the FASB issued a new lease accounting standard, which requires lessees to recognize most leases, including operating leases, on the balance sheet as a right of use asset and lease liability. Short-term leases can continue being accounted for off balance sheet based on a policy election. This standard does not apply to leases to explore for or use minerals, oil, natural gas and similar non-regenerative resources, including the intangible right to explore for those natural resources and rights to use the land in which those natural resources are contained. This standard is effective for us in the first quarter of 2019 and shall be applied using a modified retrospective approach at the beginning of the earliest period presented in the financial statements. Early adoption is permitted.
We will adopt this new standard in the first quarter of 2019 using a modified retrospective approach and will recognize a right of use asset and lease liability on the adoption date. We plan to apply practical expedients provided in the standard that allow, amongst others, not to reassess contracts that commenced prior to the adoption. We also anticipate to elect a policy not to recognize right of use assets and lease liabilities related to short-term leases.
We continue to evaluate our contracts and are gathering the necessary data to determine the financial impact of this standard on our consolidated financial statements and related disclosures. We installed and are in the process of configuring software that we believe will facilitate the adoption of the standard. We are also evaluating our processes and internal control environment concurrent with the adoption of this standard. While we have yet to finalize the estimated impact this standard will have on our consolidated financial statements, the adoption is anticipated to result in an increase in both assets and liabilities related to our leases.
Hedge accounting standard
In August 2017, the FASB issued a new accounting standards update that amends the hedge accounting model to enable entities to hedge certain financial and nonfinancial risk attributes previously not allowed. The amendment also reduces the overall complexity of documenting, assessing and measuring hedge effectiveness. This standard is effective for us in the first quarter of 2019. Early adoption is permitted in any interim or annual period. The amendment mandates modified retrospective adoption when accounting for hedge relationships in effect as of the adoption date. None of our derivative instruments are currently designated as hedges; as a result we do not expect the adoption of this standard to have a significant impact on our consolidated results of operations, financial position or cash flows.

6

MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)

Goodwill standard
In January 2017, the FASB issued a new accounting standards update that eliminates the requirement to calculate the implied fair value of the goodwill (Step 2 of goodwill impairment test under the current guidance) to measure a goodwill impairment charge. We anticipate the standard to require entities to record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value (measure the charge based on Step 1 under the current guidance). This standard is effective for us in the first quarter of 2020 and shall be applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We plan to adopt the standard on a prospective basis, and do not expect a material impact on our consolidated results of operations, financial position or cash flows for prior periods.
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. The standard requires the use of a forward-looking “expected loss” model as opposed to the current “incurred loss” model. This standard is effective for us in the first quarter of 2020 and will be adopted on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the adoption period. Early adoption is permitted starting January 2019. We are evaluating the provisions of this accounting standards update and assessing the impact, if any, it may have on our consolidated results of operations, financial position or cash flows.
Recently Adopted
Revenue recognition standard
On January 1, 2018, we adopted the new ASC Topic 606, Revenue from Contracts with Customers and all the related amendments ("new revenue standard") using the modified retrospective method. We evaluated the effect of transition by applying the provisions of the new revenue standard to contracts with remaining obligations as of January 1, 2018. No cumulative adjustment to retained earnings was necessary as a result of adopting this standard.
Results for reporting periods beginning after January 1, 2018 are presented under the new revenue standard, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting policies. The primary change relates to the presentation of marketing revenues and marketing expenses from the historical gross presentation to the current net presentation, included within revenues from contracts with customers, for a portion of our international contracts.
We concluded that the adoption of the new revenue standard did not result in any significant changes to our consolidated balance sheet or statement of cash flow. The following tables summarize the impacts of adopting the new revenue standard on our consolidated income statement for the three and six months period ended June 30, 2018.
 
Three Months Ended June 30, 2018
(In millions)
As reported
Adjustments
Presentation without adoption of ASC Topic 606
Revenues and other income:
 
 
 
Revenues from contracts with customers
$
1,447

$

$
1,447

Marketing revenues

43

43

Other income
12

(1
)
11

Costs and expenses:
 
 
 
Marketing, including purchases from related parties
$

$
44

$
44

Shipping, handling and other operating
126

(2
)
124



7

MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)

 
Six Months Ended June 30, 2018
(In millions)
As reported
Adjustments
Presentation without adoption of ASC Topic 606
Revenues and other income:
 
 
 
Revenues from contracts with customers
$
2,984

$
(2
)
$
2,982

Marketing revenues

75

75

Other income
16

(2
)
14

Costs and expenses:
 
 


Marketing, including purchases from related parties
$

$
76

$
76

Shipping, handling and other operating
256

(5
)
251


Pension accounting standard
In the first quarter of 2018, we adopted the new accounting standards update that changes how employers that sponsor defined pension and/or other postretirement benefit plans present the net periodic benefit cost in the income statement. As a result, employers are required to present the service cost component of net periodic benefit cost in the same income statement line item(s) as other employee compensation costs arising from services rendered during the period. We adopted this standard on a retrospective basis, and reclassified the required cost elements from general and administrative expense into production expense, exploration expense, and other net periodic benefit costs. The adoption of this standard did not have a significant impact on our consolidated balance sheet or statement of cash flows. The following tables summarize the impacts of adopting this standard on our historical consolidated income statement for the three and six months period ended June 30, 2017.
 
Three Months Ended June 30, 2017
(In millions)
Previously Reported
As reclassified
Effect of Change Higher/(Lower)
Production
$
176

$
178

$
2

Exploration
30

30


General and administrative
93

90

(3
)
   Income (loss) from operations
(26
)
(25
)
1

Other net periodic benefit costs (a)

1

1

 
Six Months Ended June 30, 2017
(In millions)
Previously Reported
As reclassified
Effect of Change Higher/(Lower)
Production
$
327

$
331

$
4

Exploration
58

58


General and administrative
202

187

(15
)
   Income from operations
36

47

11

Other net periodic benefit costs (a)

11

11

(a) Includes net settlement loss and other net periodic benefit costs, excluding service costs (See Note 16).

Classification in the statement of cash flows
In August 2016, the FASB issued a new accounting standards update which seeks to reduce the existing diversity in practice in how certain transactions are classified in the statement of cash flows. This standard was effective for us in the first quarter of 2018, and was applied retrospectively. Adoption of this standard did not have a significant impact on our consolidated statements of cash flows.

8

MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)

Presentation of restricted cash in the statement of cash flows
In November 2016, the FASB issued a new accounting standards update that requires entities to show the changes in the total of cash, cash equivalents and restricted cash in the statement of cash flows. As a result, we no longer present transfers between cash and cash equivalents and restricted cash in the statement of cash flows. When cash, cash equivalents, and restricted cash are presented in more than one line item on the balance sheet, the standard requires a reconciliation of the totals in the statement of cash flows to the related captions in the balance sheet. This reconciliation can be presented either on the face of the statement of cash flows or in the notes to the financial statements. This standard was effective for us in the first quarter of 2018, and was applied retrospectively. Adoption of this standard did not have a significant impact on our consolidated statements of cash flows.
Accounting for sale or transfer of nonfinancial assets
In February 2017, the FASB issued a new accounting standards update that clarifies the accounting for the sale or transfer of nonfinancial assets and in substance nonfinancial assets to noncustomers, including partial sales. The standard also clarifies that the derecognition of all businesses (except those related to conveyances of oil and gas mineral rights or contracts with customers) should be accounted for in accordance with the derecognition and deconsolidation guidance in Subtopic 810-10. This standard was effective for us in the first quarter of 2018, and was applied using the modified retrospective approach. Adoption of this standard did not have a significant impact on our consolidated results of operations, financial position or cash flows.
Definition of a business
In January 2017, the FASB issued a new accounting standards update that changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities constitutes a business. The guidance requires us to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities would not represent a business. The guidance also requires a business to include at least one substantive process and narrows the definition of outputs by more closely aligning it with how outputs are described in the new revenue guidance. This standard was effective for us in the first quarter of 2018, and was applied prospectively. Adoption of this standard did not have a significant impact on our consolidated results of operations, financial position or cash flows.
Financial instruments updates
In January 2016, the FASB issued an accounting standards update that addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. We adopted this standard in the first quarter of 2018. Adoption of this standard did not have a significant impact on our consolidated results of operations, financial position or cash flows.

9

MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)

3.
Income (Loss) per Common Share
Basic income (loss) per share is based on the weighted average number of common shares outstanding.  Diluted income 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 8 million of stock options for the three and six months period ended June 30, 2018 and 12 million stock options for the three and six months period ended June 30, 2017 that were antidilutive.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In millions, except per share data)
2018
 
2017
 
2018
 
2017
Income (loss) from continuing operations
$
96

 
$
(153
)
 
$
452

 
$
(203
)
Income (loss) from discontinued operations

 
14

 

 
(4,893
)
Net income (loss)
$
96

 
$
(139
)
 
$
452

 
$
(5,096
)
 
 
 
 
 
 
 
 
Weighted average common shares outstanding
854

 
850

 
853

 
850

Effect of dilutive securities
1

 

 
1

 

Weighted average common shares, diluted
855

 
850

 
854

 
850

Per basic share:
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
0.11

 
$
(0.18
)
 
$
0.53

 
$
(0.24
)
Income (loss) from discontinued operations
$

 
$
0.02

 
$

 
$
(5.76
)
Net income
$
0.11

 
$
(0.16
)
 
$
0.53

 
$
(6.00
)
Per diluted share:
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
0.11

 
$
(0.18
)
 
$
0.53

 
$
(0.24
)
Income (loss) from discontinued operations
$

 
$
0.02

 
$

 
$
(5.76
)
Net income
$
0.11

 
$
(0.16
)
 
$
0.53

 
$
(6.00
)

4. Acquisitions
In the second quarter of 2017, we closed on two acquisitions which included approximately 91,000 net acres in the Permian basin of New Mexico. The first acquisition with BC Operating, Inc. and other entities closed for approximately $1.1 billion in cash and the second acquisition with Black Mountain Oil & Gas and other private sellers closed for approximately $700 million in cash. These acquisitions were paid with cash on hand and accounted for as asset acquisitions, with substantially all of the purchase price allocated to unproved property within property, plant and equipment.
5.
Dispositions
United States E&P Segment
In the second quarter of 2018, we entered into separate agreements to sell non-core, non-operated conventional properties, primarily in the Gulf of Mexico, for combined net proceeds of $16 million, before closing adjustments. These transactions met the criteria for assets held for sale which is reflected in the consolidated balance sheet at June 30, 2018, with total assets of $53 million and total liabilities, relating to asset retirement obligations, of $80 million. These transactions closed during July of 2018.
International E&P Segment
In the second quarter of 2018, we entered into an agreement to sell a non-core property for proceeds of $56 million, before closing adjustments. This property is classified as held for sale in the consolidated balance sheet at June 30, 2018, with total assets of $77 million, total liabilities of $11 million and expected to close during 2018.
On March 1, 2018, we closed on the sale of our subsidiary, Marathon Oil Libya Limited, which held our 16.33% non-operated interest in the Waha concessions in Libya, to a subsidiary of Total S.A. (Elf Aquitaine SAS) for proceeds of approximately $450 million, excluding closing adjustments, and recognized a pre-tax gain of $255 million.
In the third quarter of 2017, we entered into separate agreements to sell certain non-core properties for combined proceeds of $53 million, before closing adjustments. We closed on one of the asset sales in the fourth quarter of 2017 and recognized no pre-tax gain or loss on sale. The remaining asset sale is expected to close during 2018 and is classified as held for sale in the consolidated balance sheet as of June 30, 2018, with total assets of $62 million and total liabilities of $4 million.

10

MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)


Canadian Business - Discontinued Operations
On May 31, 2017 we closed on the sale of our Canadian business, which included our 20% non-operated interest in the AOSP to Shell and Canadian Natural Resources Limited for $2.5 billion, excluding closing adjustments. Under the terms of the agreement, $1.8 billion was paid to us upon closing. At closing we received two notes receivable for a combined $750 million for the remaining proceeds, which was received in the first quarter of 2018. In the first quarter of 2017, we recorded a non-cash impairment charge of $6.6 billion (after-tax of $4.96 billion) primarily related to the property, plant and equipment of our Canadian business. This impairment was recorded for excess net book value over anticipated sales proceeds less costs to sell. Fair values of assets held for sale were determined based upon the anticipated sales proceeds less costs to sell, which resulted in a Level 2 classification. As the effective date of the transaction was January 1, 2017, we recorded a loss on sale of $43 million during the second quarter of 2017 due to second quarter results of operations from our Canadian business that were recorded in our financial statements, but transferred to the buyer upon closing.
Our Canadian business is reflected as discontinued operations in the consolidated statements of income and the consolidated statements of cash flows for all periods presented. The following table contains select amounts reported in our historical consolidated statements of income and consolidated statements of cash flows as discontinued operations:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In millions)
 
2018
 
2017
 
2018
 
2017
Total revenue and other income
 
$

 
$
173

 
$

 
$
431

Net gain (loss) on disposal of assets
 

 
(43
)
 

 
(43
)
Total revenues and other income
 

 
130

 

 
388

Costs and expenses:
 
 
 
 
 
 
 
 
Production
 

 
103

 

 
254

Depreciation, depletion and amortization
 

 
1

 

 
40

Impairments
 

 

 

 
6,636

Other
 

 
12

 

 
25

Total costs and expenses
 

 
116

 

 
6,955

Pretax income (loss) from discontinued operations
 

 
14

 

 
(6,567
)
Provision (benefit) for income taxes
 

 

 

 
(1,674
)
Income (loss) from discontinued operations
 
$

 
$
14

 
$

 
$
(4,893
)
 
Six Months Ended June 30,
(In millions)
2018
 
2017
 
 
 
 
Cash flow from discontinued operations:
 
 
 
Operating activities
$

 
$
141

Investing activities

 
(13
)
Changes in cash included in current assets held for sale

 
2

Net increase in cash and cash equivalents of discontinued operations
$

 
$
130


6. Revenues
The majority of our revenues are derived from the sale of crude oil and condensate, natural gas liquids ("NGLs") and natural gas under spot and term agreements with our customers in the U.S. and various international locations.

11

MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)

The following tables present our revenues from contracts with customers disaggregated by product type and geographic areas.
 
Three Months Ended June 30, 2018
United States E&P
 
 
 
Northern
 
 
(In millions)
Eagle Ford
Bakken
Oklahoma
Delaware
Other U.S.
Total
Crude oil and condensate
$
394

$
405

$
111

$
59

$
44

$
1,013

Natural gas liquids
45

17

45

6

2

115

Natural gas
33

8

38

2

5

86

Other
1




6

7

Revenues from contracts with customers
$
473

$
430

$
194

$
67

$
57

$
1,221

 
Three Months Ended June 30, 2018
International E&P
 
 
 
Other
 
(In millions)
E.G.
U.K.
Libya
International
Total
Crude oil and condensate
$
100

$
71

$

$
22

$
193

Natural gas liquids
1

3



4

Natural gas
10

12



22

Other

7



7

Revenues from contracts with customers
$
111

$
93

$

$
22

$
226

 
Six Months Ended June 30, 2018
United States E&P
 
 
 
Northern
 
 
(In millions)
Eagle Ford
Bakken
Oklahoma
Delaware
Other U.S.
Total
Crude oil and condensate
$
760

$
735

$
226

$
114

$
97

$
1,932

Natural gas liquids
87

32

82

12

5

218

Natural gas
66

18

81

7

12

184

Other
3




9

12

Revenues from contracts with customers
$
916

$
785

$
389

$
133

$
123

$
2,346

 
Six Months Ended June 30, 2018
International E&P
 
 
 
Other
 
(In millions)
E.G.
U.K.
Libya
International
Total
Crude oil and condensate
$
171

$
166

$
187

$
45

$
569

Natural gas liquids
2

3



5

Natural gas
19

20

9


48

Other

16



16

Revenues from contracts with customers
$
192

$
205

$
196

$
45

$
638


The pricing in our hydrocarbon sales agreements are variable, determined using various published benchmarks which are adjusted for negotiated quality and location differentials. As a result, revenue collected under our agreements with customers is highly dependent on the market conditions and may fluctuate considerably as the hydrocarbon market prices rise or fall. Typically, our customers pay us monthly, within a short period of time after we deliver the hydrocarbon products. As such, we do not have any financing element associated with our contracts. We do not have any issues related to returns or refunds, as product specifications are standardized for the industry and are typically measured when transferred to a common carrier or

12

MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)

midstream entity, and other contractual mechanisms (e.g., price adjustments) are used when products do not meet those specifications.
In limited cases, we may also collect advance payments from customers as stipulated in our agreements; payments in excess of recognized revenue are recorded as contract liabilities on our consolidated balance sheet.
Under our hydrocarbon sales agreements, the entire consideration amount is variable either due to pricing and/or volumes. We recognize revenue in the amount of variable consideration allocated to distinct units of hydrocarbons transferred to a customer. Such allocation reflects the amount of total consideration we expect to collect for completed deliveries of hydrocarbons and the terms of variable payment relate specifically to our efforts to satisfy the performance obligations under these contracts. Our performance obligations under our hydrocarbon sales agreements are to deliver either the entire production from the dedicated wells or specified contractual volumes of hydrocarbons.
We often serve as the operator for jointly owned oil and gas properties. As part of this role, we perform activities to explore, develop and produce oil and gas properties in accordance with the joint operating arrangement and collective decisions of the joint parties. Other working interest owners reimburse us for costs incurred based on our agreements. We determined that these activities are not performed as part of customer relationships, in accordance with the new revenue standard, and such reimbursements will continue to not be recorded as revenues within the scope of the new revenue standard.
In addition, we commonly market the share of production belonging to other working interest owners as the operator of jointly owned oil and gas properties. We concluded that those marketing activities are carried out as part of the collaborative arrangement, and we do not purchase or otherwise obtain control of other working interest owners’ share of production. Therefore, we act as a principal only in regards to the sale of our share of production and recognize revenue for the volumes associated with our net production.
Crude oil and condensate
For the crude sales agreements, we satisfy our performance obligations and recognize revenue once customers take control of the crude at the designated delivery points, which include pipelines, trucks or vessels.
Natural gas and NGLs
When selling natural gas and NGLs, we engage midstream entities to process our production stream by separating natural gas from the NGLs. Frequently, these midstream entities also purchase our natural gas and NGLs under the same agreements. In these situations, we determined the performance obligation is complete and satisfied at the tailgate of the processing plant when the natural gas and NGLs become identifiable and measurable products. We determined the plant tailgate is the point in time where control, as defined in the new revenue standard, is transferred to midstream entities and they are entitled to significant risks and rewards of ownership of the natural gas and NGLs.
The amounts due to midstream entities for gathering and processing services are recognized as shipping and handling cost, since we make those payments in exchange for distinct services. Under some of our natural gas processing agreements, we have an option to take the processed natural gas and NGLs in-kind and sell to customers other than the processing company. In those circumstances, our performance obligations are complete after delivering the processed hydrocarbons to the customer at the designated delivery points, which may be the tailgate of the processing plant or an alternative delivery point requested by the customer.
We have “percentage-of-proceeds” arrangements with some midstream entities where they retain a percentage of the proceeds collected for selling our processed natural gas and NGLs as compensation for their processing and marketing services. We recognize revenue for the gross sales volumes and recognize the proceeds retained by midstream companies as shipping and handling cost.
Contract receivables and assets
The following table provides information about receivables and contract assets from contracts with customers.
 (In millions)
June 30, 2018
January 1, 2018
Receivables from contracts with customers, which are included in receivables, less reserves
$
836

$
811

Contract asset
$
33

$

The contract asset represents crude oil delivered in the U.K. to a customer for which payment will be collected over time as it becomes due under the pricing terms stipulated in the sales agreement. As a practical expedient, when the balance of this U.K. customer is a contract asset, we do not adjust revenue for the effects of a significant financing element as the period

13

MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)

between when crude oil is delivered to the customer and when payment is expected to be received is one year or less at contract inception.
Significant changes in the contract asset balance during the period are as follows.
 
Six Months Ended
  (In millions)
June 30, 2018
Contract asset balance as of January 1, 2018
$

Revenue recognized as performance obligations are satisfied
86

Amounts invoiced to customers
(53
)
Contract asset balance as of June 30, 2018
$
33


7.    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 it offers.
United States E&P ("U.S. E&P") – explores for, produces and markets crude oil and condensate, NGLs and natural gas in the United States
International E&P ("Int’l E&P") – explores for, produces and markets crude oil and condensate, NGLs and natural gas outside of the United States and produces and markets products manufactured from natural gas, such as LNG and methanol, in Equatorial Guinea (“E.G.”)
Information regarding assets by segment is not presented because it is not reviewed by the chief operating decision maker (“CODM”).  Segment income (loss) represents income (loss) 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 impairments, unrealized gains or losses on commodity derivative instruments, pension settlement losses or other items (as determined by the CODM) are not allocated to operating segments.

14

MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)

 
Three Months Ended June 30, 2018
 
 
Not Allocated
 
 
(In millions)
U.S. E&P
 
Int'l E&P
 
to Segments
 
Total
Revenues from contracts with customers
$
1,221

 
$
226

 
$

 
$
1,447

Net gain (loss) on commodity derivatives
(107
)
 

 
(45
)
(b) 
(152
)
Income from equity method investments

 
60

 

 
60

Net gain (loss) on disposal of assets

 

 
50

 
50

Other income
2

 
2

 
8

 
12

Less:
 
 
 
 
 
 
 
Production expenses
153

 
52

 

 
205

Shipping, handling and other operating
117

 
10

 
(1
)
 
126

Exploration
64

 
1

 

 
65

Depreciation, depletion and amortization
556

 
50

 
6

 
612

Impairments

 

 
34

(c) 
34

Taxes other than income
68

 

 
(3
)
 
65

General and administrative
35

 
9

 
61

 
105

Net interest and other

 

 
65

 
65

Other net periodic benefit costs

 
(2
)
 
2

(d) 

Income tax provision (benefit)

 
26

 
18

 
44

Segment income (loss) / Income (loss) from continuing operations
$
123

 
$
142

 
$
(169
)
 
$
96

Capital expenditures (a)
$
641

 
$
16

 
$
5

 
$
662

(a) 
Includes accruals.
(b) 
Unrealized loss on commodity derivative instruments (See Note 12).
(c) 
Primarily a result of anticipated sales of certain non-core proved properties in our International and United States E&P segments (See Note 11).
(d) 
Includes pension settlement loss of $2 million (See Note 16).



15

MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)

 
Three Months Ended June 30, 2017
 
 
Not Allocated
 
 
(In millions)
U.S. E&P
 
Int'l E&P
 
to Segments
 
Total
Revenues from contracts with customers
$
682

 
$
220

 
$

 
$
902

Net gain (loss) on commodity derivatives
13

 

 
43

(b) 
56

Marketing revenues
7

 
28

 

 
35

Income from equity method investments

 
51

 

 
51

Net gain on disposal of assets

 

 
6

 
6

Other income
2

 
4

 
3

 
9

Less:
 
 
 
 
 
 
 
Production expenses
118

 
60

 

 
178

Marketing costs
9

 
29

 

 
38

Shipping, handling and other operating
96

 
13

 
2

 
111

Exploration
30

 

 

 
30

Depreciation, depletion and amortization
495

 
89

 
8

 
592

Taxes other than income
33

 

 
12

 
45

General and administrative
30

 
9

 
51

 
90

Net interest and other

 

 
86

 
86

Other net periodic benefit costs

 
(2
)
 
3

(c) 
1

Income tax provision (benefit)

 
46

 
(5
)
 
41

Segment income (loss) / Income (loss) from continuing operations
$
(107
)
 
$
59

 
$
(105
)
 
$
(153
)
Capital expenditures (a)
$
575

 
$
14

 
$
10

 
$
599

(a) 
Includes accruals.
(b) 
Unrealized gain on commodity derivative instruments (See Note 12).
(c) 
Includes pension settlement loss of $3 million (See Note 16).

16

MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)

 
Six Months Ended June 30, 2018
 
 
Not Allocated
 
 
(In millions)
U.S. E&P
 
Int'l E&P
 
to Segments
 
Total
Revenues from contracts with customers
$
2,346

 
$
638

 
$

 
$
2,984

Net gain (loss) on commodity derivatives
(166
)
 

 
(88
)
(b) 
(254
)
Income from equity method investments

 
97

 

 
97

Net gain (loss) on disposal of assets

 

 
307

(c) 
307

Other income
5

 
3

 
8

 
16

Less:

 

 

 

Production expenses
304

 
119

 
(1
)
 
422

Shipping, handling and other operating
228

 
29

 
(1
)
 
256

Exploration
115

 
2

 

 
117

Depreciation, depletion and amortization
1,084

 
104

 
14


1,202

Impairments

 

 
42

(d) 
42

Taxes other than income
132

 

 
(3
)
 
129

General and administrative
71

 
18

 
116

 
205

Net interest and other

 

 
110

 
110

Other net periodic benefit costs

 
(4
)
 
7

(e) 
3

Income tax provision (benefit)
3

 
196

 
13

 
212

Segment income (loss) / Income (loss) from continuing operations
$
248

 
$
274

 
$
(70
)
 
$
452

Capital expenditures (a)
$
1,252

 
$
22

 
$
10

 
$
1,284

(a) 
Includes accruals.
(b) 
Unrealized loss on commodity derivative instruments (See Note 12).
(c) 
Primarily related to the gain on sale of our Libya subsidiary (See Note 5).
(d) 
Primarily a result of anticipated sales of certain non-core proved properties in our International and United States E&P segments (See Note 11).
(e) 
Includes pension settlement loss of $6 million (See Note 16).



17

MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)

 
Six Months Ended June 30, 2017
 
 
Not Allocated
 
 
(In millions)
U.S. E&P
 
Int'l E&P
 
to Segments
 
Total
Revenue from contracts with customers
$
1,352

 
$
423

 
$

 
$
1,775

Net gain (loss) on commodity derivatives
17

 

 
120

(b) 
137

Marketing revenues
13

 
56

 

 
69

Income from equity method investments

 
120

 

 
120

Net gain (loss) on disposal of assets
1

 

 
6

 
7

Other income
6

 
14

 
3

 
23

Less:
 
 
 
 
 
 
 
Production expenses
227

 
104

 

 
331

Marketing costs
16

 
56

 

 
72

Shipping, handling and other operating
170

 
28

 
2

 
200

Exploration
56

 
2

 

 
58

Depreciation, depletion and amortization
967

 
164

 
17

 
1,148

Impairments
4

 

 

 
4

Taxes other than income
72

 

 
12

 
84

General and administrative
63

 
15

 
109

 
187

Net interest and other

 

 
164

 
164

Other net periodic benefit costs

 
(4
)
 
15

(c) 
11

Income tax provision (benefit)

 
96

 
(21
)
 
75

Segment income (loss) / Income (loss) from continuing operations
$
(186
)
 
$
152

 
$
(169
)
 
$
(203
)
Capital expenditures (a)
$
924

 
$
23

 
$
11

 
$
958

(a) 
Includes accruals.
(b) 
Unrealized gain on commodity derivative instruments (See Note 12).
(c) 
Includes pension settlement loss of $17 million (See Note 16).


18

MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)

8.    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 7.

For the second quarter and six months ended June 30, 2018 and 2017, our effective income tax rates from continuing operations were as follows:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Effective income tax expense (benefit) rate from continuing operations
 
31
%
 
37
%
 
32
%
 
59
%

The following items caused the effective tax rates from continuing operations to be different from our U.S. statutory tax rate of 21% and 35% for 2018 and 2017:

Income taxes for the second quarter 2018 were impacted by foreign currency revaluation. During the six months ended June 30, 2018 income taxes were impacted by tax expense in Libya of $162 million, and we maintained our valuation allowance on our net federal deferred tax assets in the U.S.
Income taxes for the second quarter 2017 were impacted by tax expense in Libya of $32 million. During the six months ended June 30, 2017, we incurred tax expense in Libya of $77 million, settled our 2011-2013 Alaska income tax audit resulting in a tax benefit of $13 million, and maintained our valuation allowance on our net federal deferred tax assets in the U.S.
Excluding Libya, the effective income tax expense and benefit rates from continuing operations were an expense of 10% and a benefit of 1% for the six months ended June 30, 2018 and 2017. As a result of the sale of our Libya subsidiary in the first quarter of 2018, see Note 5 for further detail, we do not expect to incur further tax expense related to our Libya subsidiary. During 2018 and 2017, income taxes for Libya were recorded as a discrete item due to the uncertainty around the timing of future production and sales volumes.

On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Tax Reform Legislation”). Tax Reform Legislation, which is also commonly referred to as “U.S. Tax Reform”, significantly changes U.S. corporate income tax laws by, among other things, reducing the U.S. corporate income tax rate to 21% starting in 2018, and repeal of the corporate alternative minimum tax ("AMT"), and a one-time deemed repatriation of accumulated foreign earnings. In the fourth quarter of 2017, we remeasured our deferred taxes at 21%, in accordance with U.S. GAAP standards. We plan to finalize certain tax positions when we file our 2017 federal tax return, and subsequently conclude whether any further adjustments are required to our net tax position as of December 31, 2017. Any adjustments to these provisional amounts will be reported as a component of income tax expense (benefit) in the reporting period in which any such adjustments are determined, which will be no later than the fourth quarter of 2018. As of the second quarter of 2018, there are no material impacts on tax expense with respect to the finalization of tax positions taken due to Tax Reform Legislation.
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.
 
June 30,
 
December 31,
(In millions)
2018
 
2017
Crude oil and natural gas
$
11

 
$
9

Supplies and other items
106

 
117

Inventories
$
117

 
$
126



19

MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)

10.  Property, Plant and Equipment, net of Accumulated Depreciation, Depletion and Amortization
 
June 30,
 
December 31,
(In millions)
2018
 
2017
United States E&P
$
15,953

 
$
15,867

International E&P
846

 
1,710

Corporate
82

 
88

Net property, plant and equipment
$
16,881


$
17,665

Exploratory well costs capitalized greater than one year after completion of drilling are associated with one project in E.G. with costs of $32 million as of both June 30, 2018 and December 31, 2017.
11. Impairments
The following table summarizes impairment charges of proved properties from continuing operations. Additionally, it presents the values of assets, by major category, measured at fair value on a nonrecurring basis in periods subsequent to their initial recognition.
 
 
 
 
 
 
 
 
 
Three Months Ended June 30,
 
2018
 
2017
(In millions)
Fair Value
 
Impairment
 
Fair Value
 
Impairment
Long-lived assets
$
69

 
$
34

 
$

 
$



 
Six Months Ended June 30,
 
2018
 
2017
(In millions)
Fair Value
 
Impairment
 
Fair Value
 
Impairment
Long-lived assets
$
69

 
$
42

 
$

 
$
4

2018 - During the first six months of 2018 we recorded pre-tax non-cash proved property impairments of $42 million, to a fair value of $69 million, primarily as a result of anticipated sales proceeds for certain non-core proved properties in our International and United States E&P segments. The related fair value measurement utilized the market approach, based upon anticipated sales proceeds less costs to sell which resulted in a Level 2 classification. See Note 5 for discussion of the divestitures in further detail.
12. Derivatives
For further information regarding the fair value measurement of derivative instruments, see Note 13. All of our commodity derivatives and historical interest rate derivatives are subject to enforceable master netting arrangements or similar agreements under which we may 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.
 
June 30, 2018
 
 
(In millions)
Asset
 
Liability
 
Net Asset (Liability)
 
Balance Sheet Location
Not Designated as Hedges
 
 
 
 
 
 
 
   Commodity
$
9

 
$

 
$
9

 
Other long-term assets
   Commodity

 
231

 
$
(231
)
 
Other current liabilities
   Commodity

 
6

 
$
(6
)
 
Deferred credits and other liabilities
Total Not Designated as Hedges
$
9


$
237

 
$
(228
)
 
 

20

MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)

 
December 31, 2017
 
 
(In millions)
Asset
 
Liability
 
Net Asset (Liability)
 
Balance Sheet Location
Not Designated as Hedges
 
 
 
 
 
 
 
     Commodity
$

 
$
138

 
$
(138
)
 
Other current liabilities
     Commodity

 
2

 
(2
)
 
Deferred credits and other liabilities
Total Not Designated as Hedges
$

 
$
140

 
$
(140
)
 
 

Derivatives Not Designated as Hedges
Terminated Interest Rate Swaps
During the third quarter of 2016, we entered into forward starting interest rate swaps to hedge the variations in cash flows related to fluctuations in long term interest rates from debt that were probable to be refinanced by us in 2018, specifically interest rate risk associated with future changes in the benchmark treasury rate. During the second quarter of 2017, we de-designated the forward starting interest rate swaps previously designated as cash flow hedges. In the third quarter of 2017, the forecasted transaction consummated and we issued $1 billion in senior unsecured notes. As a result, we terminated our forward starting interest rate swaps during the third quarter of 2017.

The following table sets forth the net impact of the terminated forward starting interest rate swap derivatives de-designated as cash flow hedges on other comprehensive income (loss).
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In millions)
2018
 
2017
 
2018
 
2017
Interest Rate Swaps
 
 
 
 
 
 
 
 Beginning balance
$

 
$
61

 
$

 
$
60

Change in fair value recognized in other comprehensive income

 
(14
)
 

 
(13
)
Reclassification from other comprehensive income

 
(1
)
 

 
(1
)
Ending balance
$

 
$
46

 
$

 
$
46

Commodity Derivatives
We have entered into multiple crude oil and natural gas derivatives indexed to NYMEX WTI and Henry Hub related to a portion of our forecasted United States E&P sales through 2020. These commodity derivatives consist of three-way collars and 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/Henry Hub price plus the difference between the floor and the sold put price. These commodity derivatives were not designated as hedges. The following table sets forth outstanding derivative contracts as of June 30, 2018 and the weighted average prices for those contracts:
 
 
 
 
 
 
 
 
 
 

21

MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)

Crude Oil
3Q 2018
4Q 2018
FY 2019
FY 2020
Three-Way Collars
 
 
 
 
Volume (Bbls/day)
95,000
95,000
50,000
Weighted average price per Bbl:
 
 
 
 
Ceiling
$57.65
$57.65
$71.74
Floor
$52.11
$52.11
$56.01
Sold put
$45.21
$45.21
$48.91
Basis Swaps (a)
 
 
 
 
Volume (Bbls/day)
10,000
10,000
10,000
15,000
Weighted average price per Bbl
$(0.67)
$(0.67)
$(0.82)
$(0.94)
 
 
 
 
 
Natural Gas
3Q 2018
4Q 2018
 
 
Three-Way Collars
 
 
 
 
Volume (MMBtu/day)
160,000
160,000
 
 
Weighted average price per MMBtu:
 
 
 
 
Ceiling
$3.61
$3.61
 
 
Floor
$3.00
$3.00
 
 
Sold put
$2.50
$2.50
 
 
(a) 
The basis differential price is between WTI Midland and WTI Cushing.

The mark-to-market impact and settlement of these commodity derivative instruments appears in net gain (loss) on commodity derivatives in our consolidated statements of income for the three and six month periods ended June 30, 2018 and 2017. The mark-to-market impact for the three and six month periods ended June 30, 2018 was a loss of $45 million and a loss of $88 million compared to a gain of $43 million and $120 million for the same respective periods in 2017. Net settlements of commodity derivative instruments for the three and six month periods ended June 30, 2018 was a loss of $107 million and $166 million compared to a gain of $13 million and $17 million for the respective periods in 2017.
13.  Fair Value Measurements
 Fair Values - Recurring
The following tables present assets and liabilities accounted for at fair value on a recurring basis as of June 30, 2018 and December 31, 2017 by fair value hierarchy level.
 
June 30, 2018
(In millions)
Level 1
 
Level 2
 
Level 3
 
Total
Derivative instruments, assets
 
 
 
 
 
 
 
     Commodity (a)
$
48

 
$

 
$

 
$
48

Derivative instruments, assets
$
48

 
$

 
$

 
$
48

Derivative instruments, liabilities
 
 
 
 
 
 
 
     Commodity (a)
$

 
$
(276
)
 
$

 
$
(276
)
Derivative instruments, liabilities
$

 
$
(276
)
 
$

 
$
(276
)
(a)  
Derivative instruments are recorded on a net basis in our balance sheet. See Note 12.


22

MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)

 
December 31, 2017
(In millions)
Level 1
 
Level 2
 
Level 3
 
Total
Derivative instruments, assets
 
 
 
 
 
 
 
Derivative instruments, assets
$

 
$

 
$

 
$

Derivative instruments, liabilities
 
 
 
 
 
 
 
     Commodity (a)
$
(20
)
 
$
(120
)
 
$

 
$
(140
)
Derivative instruments, liabilities
$
(20
)
 
$
(120
)
 
$

 
$
(140
)
(a)  
Derivative instruments are recorded on a net basis in our balance sheet. See Note 12.
Commodity derivatives include three-way collars and basis swaps. These instruments are measured at fair value using either a Black-Scholes or a modified Black-Scholes Model. For basis swaps, inputs to the models include only commodity prices and interest rates and are categorized as Level 1 because all assumptions and inputs are observable in active markets throughout the term of the instruments. For three-way collars, inputs to the models include commodity prices, and implied volatility and are categorized as Level 2 because predominantly all assumptions and inputs are observable in active markets throughout the term of the instruments.
Historically, both our interest rate swaps and forward starting interest rate swaps were measured at fair value with a market approach using actionable broker quotes, which are Level 2 inputs. See Note 12 for additional discussion of the types of derivative instruments we used.
Fair Values - Goodwill
As of June 30, 2018, our consolidated balance sheet included goodwill of $98 million. Goodwill is tested for impairment on an annual basis, or between annual tests when events or changes in circumstances indicate the fair value may have been reduced below its carrying value. Goodwill is tested for impairment at the reporting unit level. Our reporting units are the same as our reporting segments, of which only International E&P includes goodwill. Our policy is to first assess the qualitative factors in order to determine whether the fair value of our International E&P reporting unit is more likely than not less than its carrying amount. Certain qualitative factors used in our evaluation include, among other things, the results of the most recent quantitative assessment of the goodwill impairment test, macroeconomic conditions; industry and market conditions (including commodity prices and cost factors); overall financial performance; and other relevant entity-specific events. If, after considering these events and circumstances we determined that it is more likely than not the fair value of the International E&P reporting unit is less than its carrying amount, a quantitative goodwill