Hess Corporation Q4 2008 Earnings Call Transcript

Jan.28.09 | About: Hess Corporation (HES)

Hess Corp. (NYSE:HES)

Q4 2008 Earnings Call

January 28, 2009 10:00 am ET

Executives

Jay Wilson – Vice President Investor Relations

John B. Hess – Chairman of the Board & Chief Executive Officer

John P. Rielly – Chief Financial Officer & Senior Vice President

John O’Conner – President Worldwide Exploration

Analysts

Mark Flannery – Credit Suisse

Robert Kessler – Simmons & Company International

Erik Mielke – Merrill Lynch

Arjune Murti – Goldman Sachs & Co.

Paul Cheng – Barclays Capital

Paul Sankey – Deutsche Bank North America

Doug Leggate - Citigroup

Mark Gilman – Benchmark Company LLC

Operator

Welcome to the Hess Corporation fourth quarter 2008 earnings conference call. My name is [Letrice] and I will be your coordinator for today’s conference. At this time all participants are in a listen only mode. We will be facilitating a question and answer session towards the end of this call. (Operator Instructions) At this time I would like to turn the call over to your host for today’s conference Mr. Jay Wilson, Vice President Investor Relations.

Jay Wilson

Thank you for participating on our fourth quarter earnings conference call. The earnings release was issued this morning and appears on our website www.Hess.com. Today’s conference call contains projections and other forward-looking statements within the meaning of the federal securities laws. These statements are subject to known and unknown risk and uncertainties that may cause actual results to differ from those that are expressed or implied in such statements.

As usual, with me today are John Hess, John O’Conner and John Rielly. I’ll now turn the call over to John Hess.

John B. Hess

Welcome to our fourth quarter conference call. I would like to discuss the current financial environment, review key achievements of 2008 and provide guidance for 2009. John O’Conner will then discuss our exploration and production business and John Rielly will review our financial results.

We’ve been experiencing a severe global economic crisis that has greatly reduced the demand for energy and has led to a precipitous drop in crude oil and natural gas prices. We have responded to this reduction in our projected cash flow from operations by sizing our 2009 capital and exploratory expenditure budget to $3.2 billion compared with $4.8 billion in 2008.

The purpose of our investment program in 2009 is to maintain financial strength in this time of uncertainty while protecting our long term growth options. As in previous years the majority of our 2009 spending will be targeted to exploration production with $1.4 billion budgeted for production operations, $900 million for development and $800 million for exploration. In 2009 we forecast that crude oil and natural gas production will average between 380,000 and 390,000 barrels of oil equivalent per day.

We begin 2009 having delivered strong financial performance in 2008. Full year results benefited from strong commodity prices which were partially offset by higher industry costs. Corporate net income for the year was a record $2.3 billion. Exploration production earned $2.4 billion and marketing and refining earned $277 million. In 2008 we also strengthened our financial position with debt to capitalization improving to 24.3% compared to 28.9% at the end of 2007.

With regard to operations, exploration production achievements in 2008 included growing proved reserves to 1.43 billion barrels of oil equivalent, replacing 171% of production and an FD&A cost of about $19 per barrel of oil equivalent and achieving our reserve life target of 10 years, marking the 6th consecutive year in which we lengthened our reserve life.

During 2008 we advanced our field developments including the Shenzi field in the deep water Gulf of Mexico and Pangkah Oil & LPG project in Indonesia, both of which are on schedule to commence production in the second quarter of 2009. We also continued to make progress in our onshore US Bakken Shale and Seminole ROZ projects.

In exploration we executed a successful program in 2008 which resulted in offshore discoveries in Australia, Libya and Egypt. We conducted successful appraisal drilling on our pony field in the deep water Gulf of Mexico. Also during the year we made significant additions to our exploration acreage including the acquisition of 47 new blocks in the deep water Gulf of Mexico and the Semai V Block in Indonesia.

With regard to marketing and refining, our 2008 financial results were similar to 2007. Refining results were negatively impacted by the significant decline in refining margins. However, marketing results were up compared to last year. In retail marketing, higher margins more than offset weaker gasoline sales. In energy marketing results reflected volume improvement and stronger margins.

While we have taken prudent steps to appropriately size our capital and exploratory expenditures program for 2009 in response to the weak economic environment we remain committed to our strategy of investing in exploration production to profitably grow our reserves and production on a sustainable basis. We are proud of our organizations ability to deliver performance and remain confident that our future investment opportunities will create value for our shareholders.

I am very pleased that Greg Hill has joined us as President Worldwide Exploration and Production. He succeeds John O’Conner who is retiring after more than seven years of outstanding leadership. Greg had a distinguished 25 year career at Shell where he had most recently been executive vice president Asia Pacific E&P. He also served in leadership roles in the United States and Europe.

Greg brings global experience and operations excellence, technology, development projects and building world class organizations through investment in people. As this will be John O’Conner’s final conference call, I want to express our deep appreciation for the extraordinary job he has done in building a global franchise in exploration and production. His vision to grow reserves and production on a sustainable and financially disciplined basis has built a strong foundation for the future.

We are grateful to John for his many invaluable contributions over the years. He has been a great partner and friend and we wish him health and happiness in his well deserved retirement. I will now turn the call over to John O’Conner.

John O’Conner

In 2008 crude oil and natural gas production averaged 381,000 barrels of oil equivalent a day which was up 1% versus 2007. Production was underpinned by strong performance at the Hess operated Okume Complex in Equatorial Guinea and the commencement of Phase 2 natural gas sales at the Malaysia-Thailand JDA in November. On the other hand, the hurricanes in the Gulf of Mexico had the effect of reducing our full year 2008 production by 7,000 barrels of oil equivalent a day.

While we have thus far restored some 18,000 barrels of oil equivalent per day, as a result of third party transportation issues we still have about 15,000 barrels of oil equivalent per day shut in. These remaining volumes are expected to be brought back online by the end of the first quarter.

2008 was another year of improved sustainability for E&P. We added proved reserves of 244 million barrels of oil equivalent which resulted in yearend reserves being up 1% to the rest of 2007. We also achieved our reserve life target which was established some six years ago of 10 years.

Turning to exploration, we conducted an active drilling program in 2008 with encouraging results. In the Northwest Shelf of Australia we drilled four exploration wells on our 100% owned WA-390-P license which resulted in three discoveries. We plan to drill and additional five exploration wells during the second half of 2009. In addition, Woodside, the operator of WQ-404-P license in which Hess has a 50% interest will commence its three well program in February.

In Libya we made a potentially significant discovery on our 100% owned Area 54 license located in the Gulf of Sidra. We plan now to acquire 3D seismic and drill at least one appraisal well during the second half of 2009. In Egypt we announced a discovery on our deep water West Med Block which Hess has a 55% interest and is the operator. Further exploratory drilling is planned for the fourth quarter of 2009. In Ghana the Ankobra-1 well on our K-3 South Block was a dry hole. However, we remain encouraged by the potential in the area and we recently acquired 3D seismic over the western half of the block. In 2009 we will process and interpret this seismic data with preliminary plans to drill another well in 2010.

I’m sure that many of you saw that ExxonMobil the operator of Block BM-S-22 in Brazil filed a notice of discovery with the regulators on January 16th. We encouraged by the presence of hydrocarbons in the Azulao well. Logging operations are complete and well will now be drilled to its target depth. Following completion of operations at Azulao, the operator plans to drill a second well on the block.

2008 marked another year of real progress for the company’s exploration and production business. Despite the significant decline in commodity prices experienced in the fourth quarter, our performance objectives for the year were met or exceeded. Promising new exploration acreage was acquired, development projects were progressed on schedule and we achieved record earnings.

As this will my 29th and final conference call with Hess, I want to take the opportunity to say that it has been a fantastic seven plus years during which our business has been substantially transformed. I’m proud of everyone in our organization for the contributions they have made to our company’s success and I’m also especially pleased that Greg Hill has chosen to join us to continue strengthening the business.

Now, I’ll turn the call over to John Rielly.

John P. Rielly

In my remarks today I will compared fourth quarter 2008 results to the third quarter and I will provide additional 2009 guidance. Fourth quarter 2008 consolidated results amounted to a net loss of $74 million compared with income of $775 million in the third quarter.

Turning to exploration and production, exploration and production operations in the fourth quarter of 2008 had a loss of $125 million compared with income of $699 million in the third quarter. The fourth quarter results were impacted by significant declines in commodity prices, volatility in foreign exchange rates, hurricane down time and incremental costs, asset impairments and a net tax charge.

In our earning release we had treated the asset impairments and hurricane costs as special items and now I will discuss the other factors giving rise to the fourth quarter loss and the variance from third quarter earnings. Excluding the special items of $26 million, the after tax components of the decrease in earnings are as follows: lower selling prices decreased earnings by $655 million; higher sales volumes increased earnings by $22 million; increased exploration expense reduced earnings by $68 million; higher foreign currency losses decreased earnings by $74 million; a net income tax charge reduced earnings by $20 million; and all other items net to a decrease in earnings of $3 million for an overall decrease in fourth quarter adjusted income of $798 million.

As indicated in the earnings release, fourth quarter production was reduced by 19,000 barrels of oil equivalent a day as a result of hurricane activity in the Gulf of Mexico. We estimate the after tax opportunity costs of this reduced production was lower fourth quarter income of approximately $45 million. The increased foreign currency loss in the fourth quarter reflects the effect of the exchange rate volatility on the re-measurement of assets, liabilities and foreign currency forward contracts by certain foreign businesses.

As indicated in the press release, in the fourth quarter of 2008, the corporation had a net income tax charge of $20 million. This charge principally reflects the reduction of deferred tax assets in Algeria due to a lower statutory tax rate associated with falling oil prices. The overall exploration and production effective income tax rate for the full year of 2008 was 49%.

Turning to marketing and refining, the results of marketing and refining operations amounted to income of $152 million in the fourth quarter of 2008 compared with $161 million in the third quarter. Results of refining operations amounted to income of $27 million in the fourth quarter of 2008 compared with $46 million in the third quarter. The corporation’s share of Hovensa’s results after income taxes amounted to income of $13 million in the fourth quarter compared with $32 million in the third quarter primarily reflecting lower margins.

[Inaudible] earnings were $14 million in the fourth and third quarters. Marketing earnings amount to $138 million in the fourth quarter of 2008 compared with $110 million in the third quarter. Fourth quarter 2008 marketing results principally reflect higher margins in retail gasoline operations. Trading activities generated a loss of $13 million in the fourth quarter compared with income of $5 million in the third quarter.

Turning to corporate, net corporate expenses amounted to $59 million in the fourth quarter of 2008 including after tax losses of $14 million on pension related investments compared with net corporate expenses of $42 million in the third quarter. For the full year of 2008 net corporate expenses were $173 million. After tax interest expense was $42 million in the fourth quarter compared with $43 million in the third quarter. For the full year 2008 after tax interest expenses was $167 million.

Turning to cash flow, net cash provided by operating activities in the fourth quarter including the decrease of $97 million from changes in working capital was $495 million. The principal use of cash was capital expenditures of $1,156,000,000. All other items amounted to a net increase of cash flow of $189 million resulting in a net decrease in cash and cash equivalents in the fourth quarter of $472 million.

At December 31, 2008 we had $908 million of cash and cash equivalents. Our available revolving credit capacity was $2,474,000,000. Total debt was $3,955,000,000 at December 31, 2008 and $3,980,000,000 at December 31, 2007. The corporation’s debt to capital ratio at December 31, 2008 was 24.3% compared with 28.9% at the end of 2007.

Turning to 2009 guidance, in addition to the 2009 production and capital expenditure guidance that John has referred to, I would like to provide further information on certain 2009 financial metrics. Our E&P cash operating costs are expected to be in the range of $15 to $16 per barrel of oil equivalent produced. Depreciation, depletion and amortization charges are expected to be in the range of $13 to $14 per barrel for a total production unit cost of $28 to $30 per barrel.

In our projections for 2009 we are not anticipating any changes in statutory tax rate however, for the full year 2009 we currently expect our E&P effective tax rate to be in the range of 57% to 61%. The increase from our 2008 effective rate largely reflect the impact of Libyan taxes in a lower commodity price environment. Excluding Libya the E&P effective rate was 40% in 2008 and is expected to be in the range of 40% to 44% in 2009.

Concerning our crude oil hedge positions, as noted in the third quarter earnings release the corporation closed its Brent crude oil hedges by entering in to offsetting contracts covering 24,000 barrels per day of production from 2009 through 2012. The deferred after tax loss as of the date the positions were closed will be recorded in earnings as the contracts mature. The estimated annual after tax loss from the closed positions will be approximately $335 million from 2009 through 2012. The pre-tax amounts will continue to be recorded as a reduction of revenue and allocated to the selling prices of our African production.

Net corporate expenses in 2009 are estimated to be in the range of $165 to $175 million. After tax interest expense in 2009 is anticipated to be in the range of $190 to $200 million. This concludes my remarks. We will be happy to answer any questions. I will now turn the call over to the operator.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Mark Flannery – Credit Suisse.

Mark Flannery – Credit Suisse

I have a question about costs, John Rielly just gave us some guidance on the cash operating costs but with regard to let’s assume a $45 world and a world of $5 US natural gas prices are you confident that the corporation can post a net profit in 2009? I think that net loss in the fourth quarter has raised a few eyebrows. Is there anything you can do to maybe get costs down further than the guidance that you’ve given us today?

John P. Rielly

What we have Mark in our projections right now for costs is as you know we have contracts that you enter in to and you’ll fulfill those contracts, especially in the first six months of the year. As these contracts come in we’ll execute those contracts and we’ll incur those costs. As you’re talking about a $45 world or a $5 natural gas price world, obviously then industry costs will come down over time and so those costs will then filter through our operating costs.

Now, trying to give projections of exactly when that will happen I can’t give it to you exactly which quarter and as that will start filter through. But, if there’s a $45 price world, we can be profitable in a $45 price world. As you can see from our results that we gave obviously, there’s lower commodity prices right now, we had to take a look at our whole portfolio to see if there were any impairments in the portfolio. You can see that we had small impairments at two fields and both of those fields were at the end of their life actually, both ceasing production in 2009.

So, at these lower prices our portfolio is resilient and is profitable at these lower prices. Now, the other facts that you have to add in then are exploration expenses. So, are you going to be successful with your wells or not. But again, if you’re just talking about the portfolio and the producing assets, they can be profitable at these prices.

Operator

Your next question comes from Robert Kessler – Simmons & Company International.

Robert Kessler – Simmons & Company International

A couple of questions, firstly on reserves additions I’m just curious how much might be in there for Bakken? I don’t imagine it was a large number but just curious nonetheless given the combination of year end pricing and costs. Then related to that, what your rough number might be for the WTI equivalent price that would be needed for Bakken to be reasonably economic in the long term for Hess. Then, unrelated to that, in exploration I’m just curious on exploration expenses in the fourth quarter, what if any, might have been included for leasehold impairments.

John P. Rielly

I’ll take the second one first, there’s nothing in the exploration expenses related to leasehold impairments. The only impairments mentioned in that special line of $26 million, there’s after tax $17 million related to the impairment of two assets so there’s nothing in the exploration expense line. It is just primarily the Ghana well that we spoke about and then we also had the Australia exploration costs that we spoke about on the last call but, it’s all the fourth quarter portion of that included in the exploration expense.

Robert Kessler – Simmons & Company International

Then real quick, on Australia other than the dry hole component what was in there for Australia exploration expense?

John P. Rielly

It’s just the dry hole component.

John O’Conner

The Bakken contributed about 13% of the total net reserve adds at the end of the year and that’s both a consequence of performance as well as drilling so we’ve been very pleased with our experience in the Bakken. We’ve obviously shifted downwards in the Bakken in terms of drilling activity at this time because we were really ramped up and growing and going during 2008. So, we actually welcome the opportunity to take a more studied approach to the Bakken.

With respect to profitability and the Bakken is profitable right now and I expect that in this environment as we see as John Rielly mentioned pressures on contractors and suppliers to reduce costs, that we will continue to be profitable even should crude prices continue downwards.

Operator

Your next question comes from Erik Mielke – Merrill Lynch.

Erik Mielke – Merrill Lynch

Staying with the question on reserve bookings can you confirm that the numbers you’ve quoted included the effect year end pricing? And if so, can you quantify what the impact was on the end pricing? Then I have a follow up question.

John O’Conner

I can confirm that the reserves do include the impact of price effects. The net effect between the positives and negatives because of course price effected in both directions was a net plus of 77 million barrels.

Erik Mielke – Merrill Lynch

This one is for John Rielly, on depreciation, unit depreciation in the E&P, you guided for $13 to $14 for 2009. If I get my numbers right for the fourth quarter I get you had about $17 in international and about $15 in the US. Can you help me reconcile the fourth quarter with the 2009 outlook?

John P. Rielly

In the fourth quarter the impairments that I spoke about, the pre-tax effects are in the DD&A line so you’ll need to exclude that and that’s $31 million there. So, even when you take that out, the DD&A rate is still higher than what my guidance was for the full year but it’s difficult. Again, when you look at quarter and quarter and you get in to mix issues that happened in the quarter obviously with some of our US production down and some of our higher international production, higher DD&A rates being in there, so again from a guidance standpoint we feel good for $13 to $14 for the full year. The fourth quarter was just effected by mix of production and then the pre-tax effect of the impairment.

John O’Conner

Can I Just amplify the answer I gave you, the 77 I told you about was with respects to the increase on [PSC] contracts on price. The offset is -16 due to price impacts [royalty] regime. So, the net effect of the two things is an add of 60.

Operator

Your next question comes from Arjune Murti – Goldman Sachs & Co.

Arjune Murti – Goldman Sachs & Co.

The question is for John, you mentioned the Brazil well finished logging, you were going to start drilling again. Can you just remind us what total depth is, how long you think it might be to get there and the presence of hydrocarbons in the Exxon filing, can you confirm or not whether that was outside of the target horizons or within the target zones you were looking for here?

John O’Conner

At the back end of the question, certainly the hydrocarbons as indicated were picked up in target intervals that were targeted. With respect to the TD of the well, there’s about another 1,000 meters to go and bottom hole assembly is back in the hole headed towards the bottom. There is some conditioning to do and I think I have to say the drilling operations have gone extremely well on this well so I would expect two or three days to get to TD then presumably logging at TD.

Arjune Murti – Goldman Sachs & Co.

Just two or three more days to get to TD?

John O’Conner

I would think so yes. About 1,000 meters to go to program total depth. Now, as you know, things can change along the way and this is not coming from the operator so I am winging it here. But, I do know it’s about 1,000 meters to program TD and assuming that’s the case and recognizing how well the operator has drilled the well thus far, I thought it was about three days of drilling. There is substantial logging at the end of that obviously too.

Arjune Murti – Goldman Sachs & Co.

To I guess any of the Johns, the debt levels are now at much healthier levels, can you just maybe talk about what your comfort is on things like debt to cap and debt? You have taken down the cap ex and depending on the wall price, we’re probably not too far from cash flow but how you’re thinking about do you want to maintain within cash flow or would you be willing to lever up the company a little bit.

John B. Hess

Arjune, a very good question. As you know, our goal is to live within our means to fund our investment program. As prices fell precipitously in the fourth quarter and with the weak economic environment we’re in we sized our capital and exploratory expenditure program accordingly at $3.2 billion. As the year unfolds if we have to make further adjustments we have the financial flexibility to do so and depending on prices, depending upon some of these costs rolling off, we will continue to have the objective to maintain our financial strength.

We really want to stay a strong investment grade and keep our balance sheet strong and yet at the same time protect our growth options. So, we will stay flexible as the year unfolds and we have further flexibility to make adjustments if warranted.

Arjune Murti – Goldman Sachs & Co.

It’s obviously very early days in Brazil. I suppose the thought process is let’s see what you have. If it does turn out to be a good discovery and one does have development some day it is going to be a year or two of [inaudible] before you have to spend any consequential income or capital and we’ll just see what oil price environment you’re in, what kind of cashes you have at that point before one considers what you may or may not have to do from a financing standpoint. Is that fair?

John B. Hess

Yes, it’s a high class opportunity and as you know we have some other exploratory successes that we’re appraising now and God willing also will be future development opportunities. But, obviously in today’s price environment and financial environment we will be prudent how we allocate capital going forward but, we’re happy to be in an opportunity rich strong position.

Operator

Your next question comes from Paul Cheng – Barclays Capital.

Paul Cheng – Barclays Capital

A number of questions, John can you refresh my memory what is the development plan for the West Med?

John O’Conner

West Med is actually now quite interesting because of course with the establishment of liquid hydrocarbons in the newer horizon that we drilled last year. This causes us to revisit the prior development concept which was based around development of dry gas subsidy development and transportation to shore and gas processing on shore. So, as we take in to effect the existence of the liquids we have established together with the recognition in seismic that there are other similar prospects on the block I think it’s causing us to step back and take a more holistic view of what we may have on the block.

Paul Cheng – Barclays Capital

So should we assume that it’s great that you found hydrocarbon but that probably means that we’ll probably see a little bit more of a delay for the project to come on stream.

John O’Conner

I would think that’s exactly right Paul. I think it will be bigger in scope and it will be changed in terms of technical content and I think it will benefit everybody if we take a more steadied approach.

Paul Cheng – Barclays Capital

John, on the reserve addition you had indicated that Bakken represented about 13% of the addition and I think maybe I got you wrong you said yearend price effect is a positive $77 million, right?

John O’Conner

Offset by a negative -$16 for a net overall of plus $60.

Paul Cheng – Barclays Capital

Can you also tell us what other major items, or is there any major item?

John O’Conner

Actually, it’s quite interesting, we have as you know been upgrading and enhancing our technical capability with respect to the subsurface understanding of all of our assets. This is showing through in the reserve adds for 2008 particularly because we had only modest new project sanctions so much of the reserve adds have actually came through petroleum engineering and reservoir engineering work in the subsurface so it’s pretty much across all of the assets Paul.

Paul Cheng – Barclays Capital

Is [inaudible] a particular region?

John O’Conner

It’s Valhalla, it’s Okume, it’s Libya, it’s [Natsume], each one of our regions; North Sea, Southeast Asia, Africa and the U.S.

Paul Cheng – Barclays Capital

John, have you guys already seen any meaningful or sizeable downward trend on the spot rate on order surfaces?

John O’Conner

No, I think John Rielly was alluding to that because of course most of these contracts that we are involved in certainly were longer term contracts and where we would expect to see that affect –

Paul Cheng – Barclays Capital

Oh I understand, I’m just talking about in the spot market.

John O’Conner

Even the services from logging companies or [inaudible] we’ve not seen it yet but what we have seen is a willingness to come negotiate with us. So, I think what you would say now is we’re in a period of negotiating with suppliers and the environment is one that leads us to believe that we will see downward trends.

Paul Cheng – Barclays Capital

Normally, how long is your contract terms? Is it 12 months or longer?

John O’Conner

It’s all over the place Paul?

Paul Cheng – Barclays Capital

Other than the deep water rig.

John O’Conner

Normally, for a deep water rig it’s probably two years standard with an option for another one. Now, we don’t have new contracts, we have an existing contract on the [Baroness] which has about somewhere between 12 and 14 months left on that contract. That’s more typical frankly.

Paul Cheng – Barclays Capital

I was talking about outside the deep water rigs is it more within one year to two years?

John O’Conner

More typically one year.

Paul Cheng – Barclays Capital

Final question for John Rielly, on the hedging I’m just trying to make sure I understand, I think unrealized losses of $335 million and that was spread between 2009 and 2010 and that’s after tax, so I assume pre-tax about $515 million. Can we just assume to be about [inaudible] $65 million in the quarter and so whatever is the realized price and then we assume no hedging in that, assume a $65 million hit on the realization?

John P. Rielly

That’s correct. It’s kind of a straight line amortization of that $335 annual, that’s after tax, just like you said so you take the pre-tax.

Paul Cheng – Barclays Capital

$335 is annual? I thought that was both 2009 and 2010 together.

John P. Rielly

[Inaudible] then you were saying divided by four within the quarters. No, it’s $335 million each year for 2009 through 2012. Then you would just take it over the four quarter, just divide it over.

Paul Cheng – Barclays Capital

The $335 million is after tax so pre-tax each year is about $515?

John P. Rielly

Correct.

Operator

Your next question comes from Paul Sankey – Deutsche Bank North America.

Paul Sankey – Deutsche Bank North America

In the spirit of the call John, I wondered what you consider your greatest achievements have been and your greatest regret as you leave.

John O’Conner

I’m always afraid Paul to jump in to greatest regret because there’s no way I could answer it adequately. Probably my greatest regret is that I’m leaving right now at a point in time where the company is poised to deliver even more exciting outcomes. In terms of successes I think to start six years ago at what I considered to be a very dangerous reserve life ratio for the portfolio of hitting on six, just about six plus and to see it drive every year upwards on the basis of both technical work, sound acquisitions and competent development.

Actually, we had set ourselves and internal targeting getting to a reserve life of 10 by the end of 2009, it’s really quite extraordinary that we managed to accomplish that a year early. Having said that the other thing that I am tremendously pleased about is the caliber of people who both stayed with us during the tough times in the early period and who choose to join us. Both mid career people, outstanding professional petro techs and really smart young kids that we managed to recruit from college. It’s quite extraordinary that we’ve been pulling in 30 kids a year for the past four or five years that have chosen to join us.

Paul Sankey – Deutsche Bank North America

Can you talk a little bit about your successor and what led the company to choose him?

John O’Conner

Yes I can, I’d be delighted to do that. We have an annual offsite for E&P in February of each year where we set demand and goals and metrics for that year. One of the things that came up last year from a number of the VPs who were present was a concern that I might be thinking of going and how was I going to find a replacement. I committed to the organization that I would find a replacement as good as if not better than myself and I take that obligation seriously.

So, fort the past nine months or so I, together with some extraordinary capable people in the HR community have been going through the top qualified E&P people worldwide and we’ve interviewed a number of those people who were quite keen to be part of this extraordinary adventure. But, when I met Greg Hill and had an opportunity to talk with him and have dinner with him in Singapore I realized we had found exactly the right person.

He had the personality and the leadership capabilities that I was looking for that would fit our company, not necessarily all companies but our company. He had had historically experience in extensively onshore in the US which is a wonderful forcing ground for people to learn this industry with their sleeves rolled up and get their hands dirty and then he had had extraordinary success internationally in difficult times in the North Sea and more recently in a very broad portfolio in Southeast Asia.

So, in many ways at his age and stage his experience resembled mine at a similar point in time. He has a lot of strengths in areas where I am weak and I think he will bring new eyesight to the opportunities at the current portfolio that presents. So, I have no doubt that that he’s going to take the E&P business to a new higher level.

Paul Sankey – Deutsche Bank North America

What are the strengths were you are weak?

John O’Conner

I shouldn’t give you an opening should I. That might be indicting some of my legacies, I’m not going there Paul. Maybe I’ll have a drink with you someday.

Paul Sankey – Deutsche Bank North America

Specifically can you just update us on Pony? Then, one very final one for me is when do you think we’ll see first oil from the BM-S-22 in Brazil?

John O’Conner

I have absolutely no idea about BM-S-22 quite frankly. I mean, I think the operator has said how pleased they are to participate in this pre-salt discovery which really nobody has really mapped out fully yet, nobody knows the full extent of it yet. There’s a lot more technical work to be done and there’s no better operator than ExxonMobil to do the technical work here. So, I think we’re very confident that we will end up in the right space in the right point of time.

Paul Sankey – Deutsche Bank North America

But it’s probably reasonable to say that it’s five years away, right?

John O’Conner

By the time you appraise come up with a development plan and then go to construction, that would be fast tracking in my view. That’s just my view, I want to be careful not to get crossed over with the operator.

Paul Sankey – Deutsche Bank North America

Pony that’s the last one for me.

John O’Conner

Pony, we’re very excited about. We have done all of the feeds, we have concepts that we think are extremely viable and we are waiting to see if refinements to a number of issues will allow us to go to sanction in 2009. But, that’s conceptually where we are.

Operator

Your next question comes from the line of Doug Leggate – Citigroup.

Doug Leggate – Citigroup

I’ve got a couple of quick ones and a larger strategic question. I’ll go with the strategic one first, that 10 year reserve life target was kind of a long standing thing for the company. You’ve got there as you said a little earlier than you originally thought and I think in light of what Paul was saying about BM-S-22, how does the strategy now change in terms of your approach to exploration? Are you more likely for example to look upon discoveries as assets that could be sold? Just give us an overview of how you see that moving forward?

John O’Conner

First of all with respect to 10 as a target, when you’re reserve life is 6.5 or 7 you say 10 that’s a big mountain to climb. Now, I think when you get to 10 you reset the target and you try to add a little more comfort factor in to the reserve life because it’s the best indicator of sustainability. So, I would not expect that we would rest our laurels at 10. I think that was an appropriate target at the time and what I would think we would shoot for would be to have a reserve life that would be first [inaudible] when compared with our competitors so that might be 11 or 12 so there will be some more work to be done there I think.

With respect to the exploration strategy I think it would be wrong of me to anticipate what Greg might want to do as he gets his hands around the portfolio. So, what I would suggest is perhaps on your next conference call you might want to ask Greg about that.

Doug Leggate – Citigroup

The other questions are quite related to that, can you just elaborate a little more on what the plans are in Ghana going forward? The only other one I have really is Valhalla was mentioned as one of the things contributing to the reserve replacement. How do you now that you’ve got the contract extension there, what are the implications in terms of reserve additions in indeed you did see that lease extension over the next couple of years?

John O’Conner

No, we have not gotten the lease extension done Doug. It is something that is out there. There have been initial conversations with the regulator but the answer typically is when you get within a shorter time frame of the initial expiry of the license then come talk to us. I think that’s perfectly reasonable and we have no reason to assume that at that point and time, given the current performance and competency that we will get an extension. But, it hasn’t occurred yet although we’ve had initial conversations.

Doug Leggate – Citigroup

And Ghana, John?

John O’Conner

Ghana is really interesting because we only have seismic over the eastern part of the block which showed up a very attractive prospect which we went and drilled which was dry. The offsetting discoveries in Jubilee on the nearer shore block offset the western part of our block and we are currently shooting seismic there right now as we speak. So, my expectation is that once that seismic is acquired, processed and interpreted we will certainly be looking at wild cat locations in that part of the block which we would preliminarily pencil in to be drilled in 2010 Doug.

Operator

Your next question comes from Mark Gilman – Benchmark Company LLC.

Mark Gilman – Benchmark Company LLC

A couple of things if I could please. John O’Conner, I guess I’m wondering what kind of inference one could draw from the fact that the first well in the Ghana block was not really targeted at a Jubilee analog type prospect given all of the encouragement and enthusiasm with respect to the size of that discovery?

John O’Conner

As far as Ghana is concerned, it just really is one of those things I would say. I mean, we were tight for rig slots, we had seismic over one part of the block, the seismic indicated a very attractive prospect but as I made clear before we ever spud the well, as you know Mark, this was not in the same target horizons as the Jubilee discovery. So, a lot of things have been said in [inaudible] and really before Jubilee was a discovery and announced we did not have seismic adequate to pick a prospect offsetting the Jubilee discovery.

It looked like we had a very viable discovery. We certainly were encouraged in many ways by the information we obtained from [Cobra] well. The one thing that was missing was reservoir but lots of other things worked. So, it’s part of the learning process and as I said I expect we will identify analogs to Jubilee once we process the seismic. That’s my expectation at this stage, I may be getting ahead of myself but that’s the reason why we did what we did.

Mark Gilman – Benchmark Company LLC

John O’Conner, also certain press reports regarding the filing with the ANT in Brazil on the BM-S-22 well, used the words traces of hydrocarbon. Was that a correct reference to the actual report that was filed or was that some editorializing by the journalist involved?

John O’Conner

That was editorializing Mark. That’s not what my translation of the submission says.

Mark Gilman – Benchmark Company LLC

Just a few other quicker ones if I could please. John Rielly, I’m confused by the $20 million tax charge which I believe you said was associated with a reduction in the Algeria statutory tax rate. Did I get it right?

John P. Rielly

Yes, you did. It’s a bit unusual but in Algeria we have a net deferred tax asset in Algeria. Because of the way the windfall profits tax works in Algeria, when there were higher commodity prices the tax rate when higher because it went by the bands of the commodity prices. So now you come to December 31st and the oil price drops down, the tax rate drops down so you have to apply a lower tax rate to determine your deferred tax asset which is just a non-cash charge reducing the value of that deferred tax asset on the balance sheet.

Mark Gilman – Benchmark Company LLC

The comment with respect to the 2009 E&P tax rate, John I just don’t understand why in a fixed margin environment such as Libya that the price decline really has such an impact, has any impact frankly on the effective E&P tax rate. Can you help me?

John P. Rielly

Sure. I can give you certain examples. If you’re in Libya right and you earn $100 and you have a 90% tax rate you have $90 of tax on that. If you have $100 loss somewhere else be it exploration, dry hole, there now you have zero pre-tax income, that tax benefit is say usually at 40%, you’re going to be left with $50 of taxes with zero dollars of pre-tax income.

So again, as the commodity prices come down our unit costs in Libya are very low so our pre-tax margin percentage in Libya is our best country pre-tax margin so Libya becomes just a higher part of pre-tax income and therefore with the high rate just mechanically increases the E&P effective rate. That’s why I was trying to say without Libya we were I think 41.7% in 2007, we were 40% in 2008 and we’re ranging between 40% and 44%, again the range is due to where the liftings are and depending on exploration expenses.

Mark Gilman – Benchmark Company LLC

Just one final one, the difference in the quarter between liftings and production John?

John P. Rielly

It was immaterial. It had a small net under lift but it is immaterial.

Operator

Our final question comes from Erik Mielke – Merrill Lynch.

Erik Mielke – Merrill Lynch

My question also relates to liftings, not whether there is an under lift or over lift but the timing of liftings. Given the sharp change in prices during the quarter were you lifting at sort of an average pace throughout or was there sort of a bias towards the end of the quarter?

John P. Rielly

What it turns out, nothing from pure mechanics or what we were doing with liftings but we did have a bias towards the end of the quarter because let’s just take the US. In the US you had the hurricanes, basically we had our 33,000 to 34,000 barrels a day shut in at the beginning of the fourth quarter so we started to restore 18,000 barrels of it during the quarter. That restoration came more in November and December so just from the timing of that lifting we’re more towards the end of the quarter. Outside of that I wouldn’t say there’s anything unusual from the timing of lifting.

Erik Mielke – Merrill Lynch

Can you quantify the volumes over the three months?

John P. Rielly

For the US you mean?

Erik Mielke – Merrill Lynch

Yes.

John P. Rielly

Just in general? Again, you’re picking up I would say from a US standpoint if you looked at our production we’re not really under lifted or over lifted but I can say that our sales volumes were basically up 10,000 barrels a day from October in November and December.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect and have a great day.

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