With a market cap of approximately $24 billion, Marathon Oil Corp. marches forward as a new, pure-play E&P company, having spun off its downstream operations at midnight on June 30.

The Houston company joins the ranks of the large independents, with net proved reserves of more than 1.6 billion barrels of oil equivalent (BOE) as of year-end 2010. Its operations are in the U.S. and nine other countries: Angola, Canada, Equatorial Guinea, Indonesia, Iraq's Kurdistan region, Libya, Norway, Poland and the U.K.

Just before the spinoff, Marathon announced it will buy the Eagle Ford assets of Hilcorp Resources Holdings LP for $3.5 billion cash, doubling its acreage in that play overnight to about 285,000 net acres. Marathon estimates some 1,230 drilling locations, not counting dry-gas opportunities.

Right out of the box, this new E&P reported its second-quarter adjusted earnings from continuing operations rose 56.6%, to $689 million. While Clarence P. Cazalot Jr., chairman, president and chief executive officer, was not completely satisfied with this performance, he says he has strong confidence in the company's ability to create long-term value growth.

"In the Bakken alone, we have increased our production-growth target and now expect to average 33,000 net BOE per day by 2016. With our plans to significantly increase rig activity in key U.S. resource basins to more than 40 rigs over the next 18 months, we see approximately 175,000 BOE per day of net production across our substantial North America unconventional portfolio by 2016," Cazalot said in the company's first earnings press release after the spin-off.

"Additionally, we expect our strong base assets to deliver the cash flow and earnings to fund this growth while we continue to maintain a solid balance sheet and competitive dividend."

Cazalot, a geologist by training, graduated from Louisiana State University in 1972 and immediately joined Texaco, where he had a 26-year career. By 1994 he was president of Texaco Exploration & Production Inc. and by 1999, president of worldwide production. In March 2000, however, he joined USX Corp. as vice chairman and Marathon Oil Co. as president. Following the separation of USX's steel and energy businesses in January 2002, Cazalot was named president and CEO of Marathon Oil Corp.

He vividly remembers working on his first discovery well for Texaco in late 1974, on West Delta Block 109, just offshore the Mississippi River Delta. He sat the well for a definitive logging run and from his post in the logging unit, "I saw pay sand after pay sand being recorded. That was a good day."

We sat down with him when the "new" Marathon he helms was just three weeks old.

Investor: No more trips to Findlay, Ohio, to see the refining employees?

Cazalot: I'll still go there on occasion, perhaps for the retirement parties of people on the downstream side that I value and want to recognize. There are many good people there that we've come to know and are our friends.

You know, most of us have worked for integrated companies all of our careers. I was with Texaco for 26 years before I joined Marathon. I've always enjoyed the downstream as much as the upstream, although I am a geologist by training. We have given up something we enjoyed being part of, and there is the "loss" of my friends, and the brand. The former Marathon logo went with the downstream business and so we had to design a new one for our upstream business. All of that is real change and we can't deny it. Marathon is a 125-year-old company, after all.

Investor: What was the business rationale for this?

Cazalot: It is compelling. We had two strong businesses, but our downstream component was relatively larger for our size than that of our peers with downstream operations. We were closer to an even balance of upstream and downstream here at Marathon, and from an investor standpoint, it wasn't as attractive. Plus, less than 5% of our crude input was our own equity crude. We felt separating the businesses and letting each one focus on what they do best was the way to go, and the marketplace agrees with us. I think ConocoPhillips now believes it as well.

I'm not saying the integrated business model is no longer valid—and a strong downstream industry is very critical to this country. But each company has to look at what is best for them and make its own decision.

Investor: How did the transition go to separate the companies?

Cazalot: We first talked about this back in July 2008, when we told the market we were evaluating this step. But then you know what happened in the global economy in the fall of 2008, so we indicated in early 2009 that we would not proceed with the separation at that time. Then in January of 2011 we announced we would move forward with the spin-off and, by June 30, we had done it. I'm really proud of our people. This took up a lot of their time and we did it with minimal disruption. Of course, if you work in a refinery or out on a rig, for the most part this didn't touch you on a day-to-day basis. It was really more the support staff in Houston and Findlay—legal, HR, accounting—who dealt with the transition.

Marathon Petroleum had to develop several of its own corporate and other staff functions that had been done for them out of Houston. Our board of directors split pretty evenly across the two companies, and each company has since named new directors. We recently announced that Linda Cook, a former Shell senior executive, has joined our board.

Investor: What is the first thing on your agenda as a pure E&P company?

Cazalot: I believe we have to demonstrate that we are not simply an E&P company in name only. We are going to operate, grow our production and reserve base and be competitive in the E&P sphere. We've got to put the numbers on the board, in growth and value, and do it on a consistent basis. People have a "show-me" mentality.

As Marathon embarks on being an E&P company, I recognize there is some skepticism out there, some who question whether we can do it. We've encountered skeptics in the past, such as those who said we couldn't build a 3.4-million-ton, greenfield liquefied natural gas plant in Equatorial Guinea. We did it, and did it on budget and ahead of schedule.

Investor: How do you intend to impress the skeptics now?

Cazalot: In the E&P sector, so much of the value investors ascribe to companies is about volumetric production growth. But that's evolving now and I think people are looking at debt-adjusted production per share. Our view is, we'd prefer to show sustainable growth of 5% to 7% over several years. It's doable. We can do it with internally funded cash flow, and not have to go to the markets, and we can grow the dividend. We'd been spending $3.5- to $4 billion a year on E&P capex, and now it's going to be $4.5- to $5 billion. And a lot of that increase you'll see going to the Eagle Ford shale. That piece of business adds about a billion dollars to our annual spending. But, we are not going to outrun our cash flow.

Investor: Are more acquisitions part of that total?

Cazalot: We believe we now have the right portfolio in hand to achieve substantial growth. We are 65% to 75% weighted to liquids in terms of reserves and production, and that's right where we want to be. We're much more bullish about liquids than natural gas, and we think natural gas prices are going to be under pressure for a while. The gas assets we have in the U.S. are largely held by production; so when the price does change, we've got the resources to develop.

I don't see ourselves making another large Hilcorp-size acquisition, but to the extent that we can make smaller, bolt-on deals in the Bakken, Eagle Ford, Anadarko Woodford and Niobrara, we can build on the strength we already have. I'm not looking to develop any more new core areas via acquisitions, but we have the potential to do so through exploration, such as in Kurdistan, Poland or West Africa.

Investor: What kind of capital are you applying to the portfolio?

Cazalot: The allocation is going into four core areas: Eagle Ford, Bakken, Anadarko Wood-ford and Niobrara. We also have over 20 prospects in the deepwater Gulf of Mexico. First, we'll resume drilling on the Innsbruck well—it was suspended after Macondo. We have two other permits being submitted. We hope to be back drilling in the Gulf in the fourth quarter or early 2012.

Investor: Which U.S. asset will have the most impact in the near term?

Cazalot: The Eagle Ford. By far. When we close on the Hilcorp transaction in November, we expect to have nine rigs operating, with plans to be at 20 or more by this time next year. We plan to increase our frac crews there, too. I believe the geology of the Eagle Ford is superior to any of the other resource plays we've seen. The Bakken certainly has some sweet spots, but we think the Eagle Ford can be better. By the end of this year we expect to have close to 200,000 net acres. The EURs (estimated ultimate recoveries) and recoveries are strong, with a very solid liquids component—and a lot of running room.

When the Hilcorp transaction closes, we will be one of the top five acreage holders in the core area of this play, where higher pressures and a thicker pay zone result in the best recoveries. It's a great play and will create thousands of new, higher-paying jobs.

Marathon’s production places it squarely amidst its E&P peers.

Investor: Which of your international assets will be most important?

Cazalot: Our international asset base provides a lot of cash flow and significant growth ahead. We have a very large business in Equatorial Guinea that produces condensate, liquefied petroleum gas and methanol, and we've got a sizable LNG operation as well.

The Angola Block 31 PSVM development, in which we have a 10% interest, will provide immediate growth in 2012. In Norway, the Marathon-operated Alvheim floating production, storage and offloading unit generates substantial free cash flow, and we're continuing to develop satellite fields around it, to sustain production as long as possible.

Investor: What about your assets in Libya?

Cazalot: At the Waha concession, the national oil company of Libya has 59% and the three U.S. partners have 41%. That's ConocoPhillips, Hess and Marathon. It was producing about 350,000 gross barrels a day prior to the current conflict, and that's 45,000 net to us. But we have no real insights at this point as to the status of our assets. We still believe there's substantial potential to grow our assets there. We're just very pleased that all of our expats were evacuated in February and are safe, and that our local employees remain safe.

Investor: And, you're in another high-risk area, Kurdistan.

Cazalot: The Kurdistan region of Iraq represents high potential and relatively low geologic risk; it sort of takes us back to yesteryear, in that it has large anticlines you can see at the surface.

Perhaps more challenging is the aboveground risk, but we believe there will be a hydrocarbon law passed in the near future. We have four blocks and two are operated by others. In each of those, one well has been drilled and is producing. The other two blocks are ours 100% and are undrilled.

We're acquiring seismic now with a view to drill a well on each block later this year or in 2012. I think we were the first U.S. company to go in after Ray Hunt (CEO of Dallas-based Hunt Petroleum).

Investor: What final message do you have for Wall Street and investors?

Cazalot: We have absolutely the right people and the right assets. The measure of success is simple: the best leadership teams put numbers on the board, and we intend to do it, consistently, and within our core values that define our company.