Nov 3, 2009
Executives
Janet Clark – Executive Vice President & Chief Financial Officer Gary Heminger – Executive Vice President, Downstream Dave Roberts – Executive Vice President, Upstream Garry Peiffer – Senior Vice President of Finance & Commercial Services, Downstream Howard Thill – Vice President of Investor Relations & Public Affairs
Analysts
Douglas Terreson – ISI Group Robert Kessler – Simmons & Company International Paul Cheng – Barclays Capital Doug Leggate – Howard Weil Paul Sankey – Deutsche Bank Securities Evan Calio – Morgan Stanley Faisal Khan – Citi Mark Gilman – The Benchmark Company Pavel Molchanov – Raymond James Neil McMahon – Sanford Bernstein Blake Fernandez – Howard Weil
Operator
Good day and welcome to Marathon Oil's 2009 Third Quarter Earnings Call. As a reminder, this call is being recorded.
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, [Kerrie], and I too would like to welcome everyone to Marathon Oil Corporation's Third Quarter 2009 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 Janet Clark, Executive Vice President and CFO; Gray Heminger, Executive Vice President, Downstream; and Gary Peiffer, Senior Vice President of Finance and Commercial Services Downstream. Slide two contains a discussion of forward-looking statement 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, 2008 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 also note that in the appendix to this presentation there is a reconciliation of quarterly net income to adjusted net income for 2008 and for the first three quarters of 2009, preliminary balance sheet information fourth quarter and full year 2009 operating estimates and other data that you may find useful. Slide three provides net income and adjusted net income data both on an absolute and per share basis.
Our third quarter 2009 adjusted net income of $436 million reflects a 74% increase from the second quarter of 2009, and a 78% decrease from third quarter of 2008. The increase from the second quarter was largely driven by the improvement in liquids prices and lower E&P expenses which more than offset a decrease in E&P sales volumes.
The decrease from the third quarter of 2008 reflects income declines across all segments. The largest of which was in our downstream operations as a result of lower refining and wholesale marketing gross margins.
Slide four steps through the changes from the second quarter 2009 adjusted net income of $251 million to the $436 million earned in the third quarter. As shown in the waterfall chart pre-tax income increased for all segments.
Please note that the activities of our Irish and Gabon operations are reported as discontinued operations and have been excluded from E&P results for all periods. As shown on slide five, we had a 136% quarter to quarter increase in E&P segment income growing from $208 million in the second quarter, to $491 million in the third quarter.
Higher crude oil prices together with decreases in DD&A and other costs more than offset the impact of the lower liftings in the third quarter. Additionally, during the third quarter we began to credit certain foreign taxes that were previously deducted.
Partially offsetting this positive affect was evaluation allowance recorded on certain deferred tax assets that we do not expect to realize. These items contributed to the 38% E&P effective tax rate for the third quarter.
Slide six shows our historical E&P realizations and highlights the $4.08 per BOE increase in our average realizations which moved from $39.97 per BOE in the second quarter to $44.05 per BOE in the third quarter, driven by an $8.24 per barrel increase in liquids realizations while natural gas realizations were made relatively flat quarter-to-quarter. Moving to slide seven, production volumes sold in the third quarter decreased 14% from the second quarter to 366,000 BOE per day as a result of the over lifts we discussed in the second quarter.
Compared to third quarter under lifts in Europe and Libya and increased gas storage in Alaska. Property dispositions also contributed to the decline.
Third quarter production available for sale decreased 3% from the second quarter to 393,000 BOE per day, primarily a result of the planned EG turnaround as well as property dispositions during the quarter, but increased 5% compared to last year's third quarter. Slide eight shows the trend over the last seven quarters for field level controllable costs and exploration expenses per BOE.
While exploration expenses were flat on a per BOE basis during the third quarter, field level controllable costs per BOE decreased 9% from the second quarter. This decrease was primarily driven by lower liftings in the UK as well as in Norway and the resulting change in sales volume mix compared to the second quarter.
We have continued to focus on controlling costs and as a result we have achieved a 10% reduction in operating costs per BOE for the first nine months of 2009 compared to the same period in 2008, excluding production taxes in DD&A. Turning to slide nine, third quarter E&P segment income was $14.56 per BOE a 172% increase compared to the second quarter of 2009.
Again primarily due to the higher liquids realizations, lower costs, and lower income taxes. Total E&P expenses per BOE decreased 7% from the second quarter driven primarily by lower domestic DD&A mainly from Neptune, and lower field level controllable costs due to the previously discussed change in sales volume mix.
Also as discussed last quarter the second quarter included certain expenses that did not recur in the third quarter. Turning to slide 10 and Oil Sands Mining segment income for the third quarter was $25 million, compared to $2 million in the second quarter of 2009.
This improvement was primarily driven by $7.06 per barrel increase in our synthetic crude oil price realizations, increased sales volumes and lowered DD&A partially offset by higher costs primarily related to blend stocks and planned maintenance during the third quarter. Net bitumen production for the quarter was 27,000 barrels per day in net synthetic crude oil sales volumes amounted to 33,000 barrels per day.
Moving to our downstream business as noted on slide 11. Third quarter 2009 segment income was $158 million compared to $771 million in the same quarter last year.
Because of the seasonality of the downstream business I will compare third quarter results against the same quarter in 2008. The year-over-year decline was primarily a result of an almost $900 million decrease in our refining and wholesale marketing gross margin which was consistent with the decreases in crack spreads in our markets and the narrowing of the sweet-sour differential over the same period.
SSA's margins declined slightly primarily as a result of lower gasoline and distillate margins, however, our same stored gasoline sales volumes increased 3% and our same-store merchandise sales increased 12%, compared to the third quarter of last year. A reduction in all other items was primarily the result of the disposition of our 50% interest in Pilot Travel Center in October 2008.
Despite the decline in segment income, Marathon's refining and marketing operations once again out-performed our peers in the domestic market. We've also been focused on controlling downstream costs achieving operating cost reduction of approximately 9% for the first nine months of 2009, compared to the same period in 2008, excluding changes in crude oil and refined product purchases, depreciation, energy prices and other variable expenses.
As shown on slide 12, total refinery throughputs for the quarter of $1,190,000 barrels per day were up 4%, compared to third quarter 2008 throughputs. Turning to slide 13 and integrated gas.
Segment income was flat at $13 million compared to the second quarter 2009. Slide 14 provides an analysis of preliminary cash flows for the first nine months of 2009.
Operating cash flow from continuing operations before changes in our working capital was slightly over $3.5 billion. Our cash balance was reduced by working capital changes from continuing operations of $683 million.
Year-to-date capital expenditures have been $4.4 billion and dividends paid to total $510 million, while asset disposals generated proceeds of $573 million. Through the third quarter we have spent $4.6 billion against the total projected 2009 capital investment and exploration spending of approximately $6 billion.
With respect to budget cost for the Garyville Major Expansion we now expect this project to cost between $3.8 and $3.9 billion primarily due to adverse weather conditions affecting construction productivity during the third quarter. As of the end of October, the project is approximately 98% complete and remains on schedule for a fourth quarter start up.
It is important to note that we plan an extended turnaround at the base plant early next year. And, therefore, we expect the entire facility including both the base refinery and the expansion to reach full capacity by the second quarter of 2010.
As shown on slide 15 at the end of the third quarter of 2009, our cash adjusted debt to total capital ratio remained 25%. And a reminder the net debt to total capital ratio includes about $470 million of debt serviced by U.S.
Steel. Also shown on slide 15, we expect the overall corporate effective income tax rate from continued operations to be between 54% and 59% for the full year 2009, excluding special items and the effect of foreign currency re-measurement of our tax balances.
For the third quarter our income tax provision included a $114 million foreign currency re-measurement loss which by definition is an after-tax number. This loss together with the tax items that we previously discussed in the NP segment basically offset in our third quarter consolidated tax provision.
Before we open up the call to questions I'd like to remind you that of our incoming analyst meeting to be held in New York City on Thursday November 19th. If you wish to attend but have not yet responded please call Bonnie Chism at 713-296-4171 to register.
To accommodate all who wish to ask questions we ask that you limit yourself to two questions. You may re-prompt as time permits.
With that [Kerrie] we will now open the call to questions.
Operator
(Operator instructions) Your first question comes from Doug Terreson – ISI Group.
Doug Terreson – ISI Group
I have a couple of questions for Gary about refining and marketing. First on Garyville are there any modifications on the planned crude slate that you guys have for the new facility?
Gary Heminger
Well, Doug, I need to answer that in two ways. For how we designed the plant we designed it to be able to run a very heavy slate.
Obviously when you look at the way the markets are and the sweet-sour differentials to date as we start to gear up we would – the way I look at the market today I tend to state that we're going to run a more of a medium slate of crude on the front end just because of where the markets are today.
Doug Terreson – ISI Group
Okay, and Gary, let me ask you one more question on refining. Are there any new strategic [build outs] on the smaller plans in the system given the more challenging conditions that we're experiencing?
That is, what's on your mind these days on Canton, Detroit, Texas City and/or St. Paul if there are any new viewpoints there?
Gary Heminger
Well, obviously Doug, we look every day at the crack spreads and ensure that these plants can run and hurdle the economics for the crude that's available and the markets that we're supplying and today they all do.
Operator
Our next questions comes from Robert Kessler – Simmons & Company.
Robert Kessler – Simmons & Company
I was wondering with respect to Garyville, given that it doesn't sound like we should expect much in the way of margin contribution until maybe the second quarter of next year can I confirm that you would still expect mechanical completion by year-end and as such get the favorable sort of 50% tax deduction or accelerated depreciation for 2009?
Gary Heminger
Yes Robert, we are – as Howard said in his speech we're 98% complete. We're already into sequence start of up of some of our units expect the crude unit to go through that sequence here mid-November and followed by the hydro cracker and the balance of the units by the end of the year.
So the answer to your question, yes, we expect all units to be mechanically complete by the end of the year.
Robert Kessler – Simmons & Company
And in terms of – I'm assuming that will result in a fairly sizable sort of deferred tax cash benefit that would show up in the fourth quarter of 2009 is that fair to say, somewhere in the order of $400 million to $500 million?
Janet Clark
No, we've been –
Robert Kessler – Simmons & Company
Or has it been sort of rattle over the course of the year so it won't be a big bump?
Janet Clark
Yes, we've been anticipating all year and have been booking accordingly.
Operator
Your next question comes from Paul Cheng – Barclays Capital.
Paul Cheng – Barclays Capital
Janet, on the international EMP the tax rate 38% you say is because you start to deducting some items that previously you did not, does that mean on the going forward basis which is also looking at the tax rate instead of historically in the 60%, 65% at least in the coming quarter will be in about the 38%?
Janet Clark
No. Paul, there are a couple of things that went on here in the third quarter.
We did start crediting a foreign tax that previously we'd been deducting and there was a catch up, so there were a couple years there that you will not – so it was a bigger effect in the third quarter than it will have on an ongoing effect but it will have an ongoing affect.
Paul Cheng – Barclays Capital
Any idea on what kind of tax rate we should assume on an ongoing basis in the international EMP?
Howard Thill
In – our goal is 54% to 59% Paul that we've projected and of course that excluding any FX effect on the tax balances but you can look back at what we've done over the past few quarters and kind of balance that out between international and domestic because -
Paul Cheng – Barclays Capital
Howard, can we do it this way by looking at the first three quarter and look at what the average for the first nine months. Is that a reasonable international tax rate going forward?
Janet Clark
Paul, it's going depend upon the mix where it comes from. We've got very different tax rates, Libya is, what, 93%, EG is 25% so us to project any kind of precise rate for the international segment is highly dependent on what happens to oil prices, gas prices and production, and not only that but listings from those countries.
Paul Cheng – Barclays Capital
Along that line, Janet, can you tell me at the end of the third quarter how much under lift you are and where's the under lift, I mean, by region?
Janet Clark
Yes, we were under lifted 21,000 barrels a day in the third quarter.
Paul Cheng – Barclays Capital
At the end of the third quarter right? That is.
Janet Clark
Yes, for the third quarter we we're 21,000 barrels under lifted; on a year-to-date basis we're 5,000 barrel under lifted.
Paul Cheng – Barclays Capital
And the year-to-date you are 5,000 under lift and can you tell me if that 5,000 that how you're spread -
Howard Thill
At the end of the year Paul we're 5 million barrels under lifted.
Paul Cheng – Barclays Capital
Five million barrel, okay.
Howard Thill
Total five million barrel that's under lifted between – Europe's about 1.6 million, then Libya is about a million and the balance is essentially Alaska and the Alaska's gas storage issue not under lift. And the expectation would be by the end of the year we will not have made up much if anything in Alaska and but the likelihood is we'll be closer to a balance position in Europe and Libya.
Where we're today, as I said, about 2.5 – between the two about 2.5 million barrels under lifted between those two areas.
Paul Cheng – Barclays Capital
Can I have a final question? Is the Troy expansion, Gary, is there any update you can give?
Gary
We're at the same place, Paul, we were at the end of the second quarter that we've stretched this project out to the end of 2012 and that's still where we are.
Operator
Your next question comes from Doug Leggate – Merrill Lynch.
Doug Leggate – Merrill Lynch
Couple things, I want to try one downstream and one upstream if I may? You made a point in your commentary that the refining earnings had been remarkably resilient compared to your peers which is absolutely correct.
However, what I'm curious about is you folks still have your midstream earning whereas a lot of your peers don't have midstream anymore as they've either sold or spun them off in some way. Can you give us some idea as to what's happening to the midstream earnings?
Is it material? I know you won't break out the number just quantitatively in terms of how much is that helping your earnings in this tough environment?
And my follow-up is on the upstream.
Gary Heminger
Well Doug, you're right. We don't break them out separately and I can't share that data with you.
I will say that our midstream earnings and our definition – first of all go to definition. Our definition of midstream is our pipeline and logistics businesses.
It doesn't include any trading like some companies in mid stream will include trading and arbitrage on products. So ours is purely pipeline and logistics and they've been steady over time would be the best way for me to answer that.
Doug Leggate – Merrill Lynch
Is it material, Gary, or is not that big of a deal?
Garry Peiffer
Doug, wasn't that material in the quarter-to-quarter change.
Doug Leggate – Merrill Lynch
But in an absolute basis, Garry, is it material?
Garry Peiffer
As Garry said we don't talk about breaking – we don't break out the pipeline or the trading – the midstream assets.
Gary Heminger
I would say Doug, the best way to look at our quarter and if you take a view of pad two margins versus pad three margins they were better, again, as we spoke in the second quarter. They were much better than they were in the Gulf Coast and that is what has led to our value.
And coming back to your question around logistics, we're able to move our product to the markets and probably have some competitive advantage because of our logistics system. That helps us do that.
Doug Leggate – Merrill Lynch
My upstream question is on the back end. One of your competitors, does a slightly bigger acreage position, is getting a lot more aggressive in terms of rig count for the next year or so and some very big production targets have been laid out there.
I am just wondering, first of all, why you're not a little more aggressive from you folks and maybe you could lay out what your plans might be on the back end, let's say, as we look forward beyond 2009?
Janet Clark
Well, Doug, we are going to be adding a fourth rig here later on in this quarter. We do our production forecast bottom up and look at our drilling schedule and look at the results and so we're pretty comfortable with the guidance we've given with regards to the ramp up in the Bakken.
To the extent that our competitors have different forecasts, you need to talk to them about theirs.
Doug Leggate – Merrill Lynch
I guess what I am referring to Janet, is the profitability of the Bakken and obviously is pretty stellar in these kind – this kind of environment and if you've got the assets or the big acreage position, which as I say is not dissimilar why would that not have a bigger call on capital for – as opposed to some of the other assets, maybe, in the portfolio?
Janet Clark
Well Doug, I tell you the other thing too is we're just now going through the planning process for 2010. So I think at the analyst meeting we will probably be able to give you a much better, in-depth discussion of that asset as well as all of our capital allocation on a go-forward basis.
Operator
Our next question comes from Paul Sankey – Deutsche Bank Securities.
Paul Sankey – Deutsche Bank Securities
The announcement on Garyville, in fact it was in the press release today, suggests that it was a relatively recent decision. Is that a mischaracterization and will it have by extension a CapEx impact on next year?
Are you now effectively increasing your downstream CapEx above and beyond what you would have spent – would have thought you'd spent? I know it's going back a long way but back at, for example, at the '08 analyst meeting the guidance was the downstream CapEx would just about halve between 09' and '10.
Gary Heminger
Yes, Paul. Over the last year, talking about the turnaround at Garyville you know that's nothing new.
That has been planned ever since we started this project, to be able to time and to be in sequence as we finish the major expansion then to go into turn around. We just thought it was important that since it's a major event at Garyville and that we didn't want to lead anyone on that we were going to start up immediately with both plants.
We wanted to inform you that we would immediately go into a major turnaround on the base plant. So again, that's been our planning all along.
We just wanted to ensure we had everyone on the same page. As far as capital then, Paul, we don't see – we're still right in line with what we said we would be on capital, significantly down from where we are in '09 as we go in to 2010.
Paul Sankey – Deutsche Bank Securities
And just to be totally clear on it Gary you are going to be running the new units but taking down the original, so that the refinery will be not quite half but essentially half running.
Gary Heminger
That's correct.
Paul Sankey – Deutsche Bank Securities
And just to follow up on the market in the quarter. It seemed that marketing, I know you don't [solicit out] and everything else, but it did seem that marketing was very strong indeed.
I think it is fair to say. And I was really wondering what was the driver behind that because obviously we didn't have the big move that we would typically expect?
For example in pump prices, that would generate that kind of profitability. Any sort of color you could provide us on that?
I'd like to follow up on Doug's question, any sort additional granularity you can give us on what the contribution for marketing was would be great and then on top of that if you could just explain some of the drivers.
Gary Heminger
Let me explain the drivers. As you know it's been our practice not to go into the granularity of segment reporting at this time.
But the key, going back to Howard's speech, we're up nearly 3% on same store gasoline and that was while we looked at the market. That's probably just a little bit better than what some of the overall market indicators show us on a gasoline volume basis which says we're probably taking a little share and I think we continued to improve taking some share in Q1 and Q2.
The biggest driver though comes down to two things, merchandise sales – our merchandise sales being up approximately 12% quarter-on-quarter. But the margin increase that comes along with those merchandise sales when you average around 25% or so.
It is a big improvement to our retail. And lastly, I think [Tony Kenny] and his team have just performed from an operating standpoint and a control standpoint at a very high level.
They have kept their operating expenses in check. They've been able to improve retail sales inside their stores when the markets overall are down.
And I think within this sector, they probably have sector leading results. While we don't break them out, I can just share with you that my observation of how they're performing, they're sector leading results across the entire convenience store chain.
Paul Sankey – Deutsche Bank Securities
Does that mean that the majority of the driver was in the pumps – pump retail stations as opposed to in the midstream?
Gary Heminger
Well, no, what I'm just saying is they performed very, very well quarter-on-quarter. I'm not – I can't get into how they performed versus the midstream, but I can just tell you that [Tony's] team had an outstanding quarter.
Garry Peiffer
If you looked at the waterfall that Howard described. If you look at SSA's product merchandise margin was actually down quarter-over-quarter by 10 million bucks and a lot of it had to do with the lower per gallon margin on our light products.
So if you are looking for margins you are seeing that it was actually down quarter-over-quarter SSA.
Gary Heminger
And that's really due to last year, there were some hurricane effects in the third quarter and some other storm effects in the third quarter that led us to a little higher margin but we have had a significant increase in merchandise sales and margins inside the stores this year. It just wasn't the third quarter and we've had, I think, double digit merchandise sales increases every quarter this year.
Operator
Your next question comes from Evan Calio – Morgan Stanley
Evan Calio – Morgan Stanley
I've got a question on the asset sales. I know in 2008 you guys had gutted $2 to $4 billion in asset sales as part of you ongoing portfolio review and as of 3Q and its $3.5 billion.
Should we assume that the sale program is coming to an end or were your initial estimates conservative or better yet higher prices than expected?
Janet Clark
If you recall, when we gave that range out about a year and a half ago we said that we expected that program to be announced by mid-2009, so we have achieved that objective. But as you know optimizing the portfolio is something that you really need to be doing continuously.
So we're going to continue to look at our portfolio to the extent that we have assets that aren't strategic to ours, perhaps are mature where you can't add further value to that asset, or if in fact that asset is worth more to somebody else it is certainly an asset that then we would consider monetizing. So while this program, per se, has been achieved it's going to be an ongoing effort to continue looking at how do we create value by monetizing assets?
Evan Calio – Morgan Stanley
I mean, so might we expect another program or is it just considered part of continuing operations to make asset sales going forward?
Janet Clark
I think we had in the three or four years leading up to that 2008 announcement we had not been optimizing portfolio. We hadn't been monetizing assets.
So we have a little bit of catch up to do. I would say on a go-forward basis it would be more business as usual but with a very keen eye to – looking for opportunities to create value.
Evan Calio – Morgan Stanley
Second question, on your cost control program squeezing 10% out of operating costs per barrel in the upstream. How much room is left there to run costs lower or any comments on a go forward basis or cost reduction on the downstream side?
Howard Thill
Well, we're looking across the entire business, Evan. Not just upstream, not just downstream but we're looking across every piece of business that we're doing today.
So I would just say that we have room to go there in moving our cost further down.
Evan Calio – Morgan Stanley
Any estimate on how far down?
Howard Thill
I wouldn't – I'm not going to get out ahead of us to try and to pin a number on it. I would just say that we've got a sharp pencil out looking at taking cost further down.
Operator
Our next question comes from Faisal Khan – Citi.
Faisal Khan – Citi
Can you guys talk a little more about the discovery in Norway, the size of the discovery and how many more prospects you might have in the neighboring area that you might be able to tie into online?
Howard Thill
And you're talking about the Marihone discovery that we've just had? We haven't given a specific size on that to my recollection, but I'll just tell you it's probably in the 20 million to 40 million barrel kind of number without giving out any specifics or not.
It'll be a nice tieback. It's not obviously a stand alone.
And we have a – I'll just say, several additional – 2, 3, 4, additional prospects that we're going to be drilling in that area that could also be tiebacks to the Alvheim FPSO. So they're designed to keep the FPSO at a relatively full level for a longer period of time than just the Alvheim and Vilje developments would do on their own.
Faisal Khan – Citi
And then just on the Droshky development what do to hear minus what you expect peak production to be at, after you bring that –
Howard Thill
Yes, Droshky will come on kind of mid-year next year in 2010, and it will peak at somewhere around 50,000. I think we've actually put in the presentation about 51,000 will be the peak BOE a day rate.
Faisal Khan – Citi
And still on the downstream side, you guys benefit from any sort of discretionary blending of ethanol or some of the lower ethanol prices versus the gasoline prices this quarter?
Garry Peiffer
This is Garry Peiffer. Actually when you look at the quarter we actually were a little bit hurt quarter-over-quarter because the spot price of gasoline quarter-over-quarter was down about $1.30 a gallon.
The spot price of ethanol was only down $0.70. So actually if you look to last year third quarter versus this year third quarter we made less money on ethanol blending just because the ethanol prices didn't drop as much as gasoline prices did.
Faisal Khan – Citi
How about sequentially?
Garry Peiffer
It would be actually a little bit lower this quarter versus last quarter as well. A little bit lower earnings.
Operator
Your next question comes from Mark Gilman – The Benchmark Company.
Mark Gilman – The Benchmark Company
Howard, I believe you referenced Neptune as being the reason for the decline in U.S. DD&A.
What led to that, was it a – is it a decline of DD&A rate or is it a production oriented decline?
Howard Thill
It was actually – we made the comment we added back some reserves. We got maybe a little aggressive in removing reserves in the second quarter, and in June we put some of those back on the books.
So the rate went down because of that reserve booking.
Mark Gilman – The Benchmark Company
So we should assume that the rate will be stable going forward?
Howard Thill
We still expect the U.S. rate – overall rate now, Mark, is to be in that $17.50 to $20 of BOE [inaudible] range which is where it was in the third quarter.
So yes, we expect it to be in that range.
Mark Gilman – The Benchmark Company
If I could shift to the tax area for a second, Janet, can you possible help me understand what it was that gave rise to the change as it related to going to a credit mode as opposed to a deduction mode? And if possible quantify the valuation allowance which kind of cut the other way in terms of the tax rate in the third quarter?
Janet Clark
Mark, I'll say the important things is that those discrete items largely offset one another along with a myriad of other small items. We have elected to credit rather than deduct that because it's consistent with industry practice and it's the appropriate way to do it, and –
Mark Gilman – The Benchmark Company
Why didn't you do it all along?
Janet Clark
We did it now, Mark. I think that's the answer I can give you, okay.
Mark Gilman – The Benchmark Company
Can you quantify the valuation piece specifically?
Janet Clark
No, I don't think there is any real merit in that. Every quarter we look at our valuations and adjust them accordingly.
So it's this kind of noise that's in the numbers every quarter.
Mark Gilman – The Benchmark Company
Given my success up to this point, let me try one more. Of the downstream cost reduction, Gary Heminger, how much of it roughly might just say actually flowed into the growth refining and supply margin versus let's say other areas of the downstream?
Gary Peiffer
Mark, this is Gary Peiffer. I would say roughly half.
Operator
Your next question comes from Pavel Molchanov – Raymond James.
Pavel Molchanov – Raymond James
Just a quick call on Angola Block 32, obviously you guys signed a deal with the Chinese back in July, but it looks like the Angola government is trying to exercise their pref rights. Can you give us an update on that?
Gary Peiffer
Well we haven't commented, Pavel, on that one way or the other. Other than to say that obviously, just like all other operations, there are preferential rights for all the partners and our anticipation is that we will close that sometime around the end of the year one way or the other.
Pavel Molchanov – Raymond James
And regardless of who the purchaser ends up being, is $1.3 billion still going to be the transaction a value?
Howard Thill
That is the transaction value that we've announced. That's correct.
Operator
Your next question comes from Neil McMahon – Sanford Bernstein.
Neil McMahon – Sanford Bernstein
One, actually turning back to Angola and your relationships with the Chinese; is there anything more broadly going on there with yourselves, other than in your African acreage or some of your other positions such as refineries or oil plans in Canada where you could see further hook-ups with Chinese companies?
Howard Thill
I guess anything's possible, Neil. I mean, but we don't come in on, I mean, that would be pure speculation at this point to step out and say anything like that.
Neil McMahon – Sanford Bernstein
I suppose where I was going was in terms of Angola's lost 32, was that a relationship that started or were they just top of the bidding list when they came to go after that acreage?
Howard Thill
Well, there was a bidding process.
Neil McMahon – Sanford Bernstein
The second question was really on the exploration catalysts over the next six months. You've got some wells in the Gulf of Mexico and then into next year you've got your Indonesian program probably starting up.
Maybe you could just outline certain time points we should be aware of with significant wells going down?
Howard Thill
Well, I think you've landed on the key there, that we will be drilling a handful of wells in the Gulf next year, both operated and non-operated and we'll drill depending on when the rig makes it makes it to Indonesia. We'll drill one or two wells in Indonesia.
As far as timing, I think since we're just about two weeks away from the analyst meeting, I'd prefer to let [Annell Bay] I don't want to take her powder. So I'd rather just let her give you an update on it at that time, when she and several of Dave Robert's key lieutenants will be making presentations on their pieces of the business just as Garry his team will on the downstream.
Operator
Your next call comes from Blake Fernandez – Howard Weil.
Blake Fernandez – Howard Weil
The first question I have is on strategy with regard to your North American shale plays. It seems like you have a relatively small position in three of the kind of more attractive plays.
And I'm just curious if there is any thought to maybe consolidating down onto one or two plays with a more significant position?
Howard Thill
Well we've said since we've moved into those that we would continue looking at expanding 1, 2, or all 3 of those shale plays. Is it possible?
Sure it's possible to move from one to another. I'd just say when you look at what we have in Oklahoma, there that's essentially held by production.
That's an area that has grown up beneath us. About 50,000 acres that is probably going to be a little harder to grow, but in the Marcellus and the Haynesville where we have, respectively, 70,000 and about 25,000 acres in those two areas, those are places that we are looking to expand, but looking for the right opportunity, but not in any huge hurry.
You know we're in the process now, of this year, drilling probably three wells, spudding a total of four wells this year in the Marcellus and we'll drill our first Haynesville well later this year to look at the 25,000 or 30,000 acres that we have there, so it's something that we are going to continue to look at, but we are not in any hurry.
Blake Fernandez – Howard Weil
And then Howard the only other one I had, it sounded like when you were providing the retail same store sales up 3%, it sounded like a gasoline number. Do you have a diesel comp.?
Gary Heminger
On the diesel side, within our Speedway stores, we sell very, very little diesel. We were off 0.3%, but it is on a very, very small amount of [volume].
Most of our diesel, remember, we put into the combination with Pilot and sold that off. So this is just auto diesel that we sell.
Operator
(Operator Instructions). Now we do have a follow-up question from Paul Cheng – Barclays Capital.
Paul Cheng – Barclays Capital
Hey guys. Janet, in Norway, do we still have any tax laws [carry] or has it been used up now?
Janet Clark
I think, Paul, we are going to have that pretty much used up, yes, your guess is as good as mine, but within the next few months.
Paul Cheng – Barclays Capital
So that before the year-end would be pretty much done?
Janet Clark
This winter for sure.
Paul Cheng – Barclays Capital
Okay, and maybe this is for Garry. Garry, why do always send DD&A from the second to the third quarter would be down in the oil sand, is it because of, what is the reason?
Gary Heminger
Yes. Paul, that is because remember, just at the end of the second quarter we had an agreement on what was known as Shark Bite.
So we brought the Shark Bite reserves that were ready for production, we brought those into the mix, and we just had the month of June that would have had DD&A. We would have had one month of affect in the second quarter for Shark Bite, and here in the third quarter it had the total effect of that.
Paul Cheng – Barclays Capital
And when I go through the very simple calculation, it looks like, based on your realization and based on your pre-tax income, it suggests your all-in unit cost is about $51 or $52 per barrel after synthetic oil sales, comparing to maybe about $55 or $56 in the second quarter. It jumped by about $3 to $4.
Is it all related to the lower unit DD&A, or is it related to the cash cost drop also?
Gary Heminger
Well, let me give you a different number. I have always looked at cash operating expense, and in the second quarter of '09 I think I mentioned that it was $35.63.
Here the third quarter it's $34.56. Again, that's just our cash operating expense, and when I look at those changes we had a little more turn around expense in the second quarter of '09 than we have had in the third quarter, so that dollar, I guess it is about $1.07 difference, was mainly due to lower turn around and some improvements in reliability, which helped the denominator.
Paul Cheng – Barclays Capital
I see, great. Janet, on the 10% E&P cost saving, year-over-year from the first nine months of this year to the nine-month of last year, can you tell us how much is energy and fuel related?
And how much are of them is sustainable on a going forward basis?
Howard Thill
This is Howard, Paul. It was about one percentage point that was energy related.
It would have been 9% instead of 10% if you take out the energy.
Paul Cheng – Barclays Capital
Howard, is it the remaining 9%, is that sustainable on a going forward basis or some of them may be a some are a one-time benefit and may not be sustainable?
Howard Thill
We believe it's a sustainable savings.
Paul Cheng – Barclays Capital
And how much of that 9% is related to the industry winter, where there are negotiation, or how much of them are the other self-help program that contribute?
Howard Thill
I don't have it that fine, Paul, to be able to tell you. I think to give the combination of the two, because not everything that we're doing is actually leading to an absolute dollar cost savings.
You know, like one of the examples, I don't remember whether Dave gave this last quarter or not, is when we're drilling and completing wells the completion costs are down 25% or 30%, but we are just doing larger fracs, so we are spending the same amount of money, we are just getting a larger production rate. So it really just depends on an area by area basis, but I would just tell you that our anticipation is, that is a sustainable – it is as sustainable as any is, depending on what happens with oil prices and cost pressure, but we think it has been driven out permanently, so to speak.
Operator
We have a follow-up question from Mark Gilman – The Benchmark Company.
Mark Gilman – The Benchmark Company
Thanks guys. Gary Heminger and Garry Peiffer, RM DD&A jumped 10 million bucks in the quarter, although that doesn't sound like a lot, when you think about it from an annualized perspective and what the incremental and service capital would have to be, it could be a pretty big number.
What was responsible for that?
Garry Peiffer
Mark, this is Garry Peiffer, I believe – I don't precisely know. I will have to get back to you on that.
Maybe we are starting to, as Gary said, start up some of the GME units and we are getting a little bit of GME depreciation. I don't know how much of that was responsible for it, but that would be some of it.
Gary Heminger
And we will get back to you, but I, too, I think that is the majority of it. But we will get back to Howard with the number and he can get it to you Mark.
Operator
And we have no further questions.
Howard Thill
Okay [Kerrie]. Well, I appreciate it and I appreciate everybody's attention and again if you have not signed up for the analyst conference that we are having November 19th, you can please call Bonnie Chism at 713-296-4171 to register and we look forward to seeing you then.
Thank you.
Operator
Ladies and gentlemen that does conclude today's conference. We thank you for your participation.