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Marathon Oil and The Pantry Report Quarterly Results

HOUSTON and SANFORD, N.C. -- Marathon Oil Corp. reported second quarter 2005 net income of $673 million, or $1.92 per diluted share, compared to $352 million, or $1.02 per diluted share, in the prior quarter.

Net income adjusted for special items was $755 million, or $2.16 per diluted share, in the second quarter of 2005, compared to $407 million, or $1.18 per diluted share, in the second quarter of 2004.

"A key contributor to Marathon's strong second quarter results was the consistent and successful execution of the company's strategy and business plans. While we continued to realize the benefits of high commodity prices and margins throughout the quarter, our results were also positively impacted by the strong operating performance of each of our businesses," said Clarence P. Cazalot, Jr., Marathon president and CEO.

"In particular, the solid results of our exploration and production operations demonstrate the improvements being made, which are positioning Marathon for long term value growth. These upstream results were complemented by our downstream operations, which achieved outstanding results through strong operational performance and by optimizing our refining and marketing network's ability to realize the benefits of favorable crack spreads, sweet/sour differentials and strong wholesale and retail margins."

During the quarter, Speedway SuperAmerica LLC (SSA), the company’s marketing arm, continued to achieve strong same store merchandise sales, which increased approximately 10 percent compared to the second quarter 2004.

Marathon achieved a strategic milestone during the second quarter 2005 with the completion of its acquisition of Ashland Inc.'s 38 percent interest in Marathon Ashland Petroleum LLC (MAP), which will change its name to Marathon Petroleum Company LLC (MPC) effective Sept. 1, 2005, as well as two complementary businesses. With the completion of this transaction, Marathon now wholly owns one of the premier downstream businesses in the United States.

"The completion of this transaction reinforces Marathon's strategic intent to remain a fully integrated company," added Cazalot. "This segment of our business has distinguished itself as a leading refining, marketing and transportation organization and we look forward to the many opportunities and contributions it will provide in our drive for sustainable value growth."

Total segment income was $1.610 billion in second quarter 2005, compared with $1.007 billion in second quarter 2004.

In other earnings news, Sanford, N.C.-based The Pantry Inc. announced preliminary financial results for its third fiscal quarter and nine months ended June 30, 2005.

Revenues for the third quarter were $1,166.5 million, up 25.7 percent from $928.3 million in the corresponding period a year ago. Net income was $16.7 million, a 25.9 percent increase from $13.2 million in last year's third quarter and diluted earnings per share were $0.75, up 17.1 percent from $0.64 a year ago.

"Operating performance in our core stores remained strong in the third quarter, with solid growth in comparable store merchandise sales and gasoline gallons sold, as well as a substantial increase in our merchandise gross margin," said Peter J. Sodini, president and CEO of The Pantry. "These results reflect the positive impact of our store conversion and rebranding programs, as well as our increased focus on higher-margin merchandise categories such as food service and private label products."

Merchandise revenue for the quarter increased 7.0 percent overall and 4.1 percent on a comparable store basis. The merchandise gross margin of 36.6 percent was up 50 basis points from last year's third quarter. Total merchandise gross profits rose 8.5 percent to $118.6 million, and again accounted for more than 70 percent of the company's total gross profits.

Comparable store gasoline gallons increased 5.6 percent from a year ago, and total gallons sold rose 15.2 percent. Gasoline revenues were up 34.7 percent, partly due to a 17 percent increase in the average retail price per gallon to $2.13. The gross margin per gallon was 12.3 cents, compared with 13.0 cents in last year's third quarter. Gasoline gross profits for the quarter totaled $48.4 million, up 9 percent from a year ago.

During the third fiscal quarter, the company completed the acquisition of 53 Cowboys convenience stores, located mostly in Georgia and Alabama. In addition, it announced a definitive agreement to acquire 23 convenience stores in Virginia, currently operating under the Sentry Food Mart banner. That acquisition is expected to close in the fourth fiscal quarter.

"Both of these transactions are excellent examples of our strategy of focusing on tuck-in acquisitions that leverage our existing market presence across the Southeast, and both are expected to be immediately accretive to our earnings per share," said Sodini.

The company also announced its intention to restate certain of its prior period financial statements to correct its accounting for transactions it characterized as sale-leaseback transactions. The change will not affect the company's cash flow and will have a minimal impact on earnings per share and retained earnings. The restatement recharacterizes the transactions as financing transactions, with the assets and related financing obligation carried on the balance sheet.

As a result, approximately $177 million in additional debt will be recorded as of June 30, 2005, with a similar increase in assets. While the company is in compliance with all of the financial ratio covenants of the loan agreement under its credit facilities, the increase in debt will put it in default because of provisions that limit the company's ability to incur additional indebtedness.

The expected annual impact of the restatements on the company's previously reported diluted earnings per share for fiscal years 1999 (the earliest year affected by the restatement) to 2003 ranges from approximately $0.01 to $0.03. The company expects the restatement to reduce fiscal 2004 net income and diluted earnings per share by approximately $1.7 million and $0.08, respectively. For the first nine months of fiscal 2005, the impact is partially offset by reversing certain straight-line rent charges recorded earlier in the year, resulting in a decrease in net income of approximately $400,000, or $0.02 per share.
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