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Loews Corp. (NYSE:L)

Q4 2008 Earnings Call

February 9, 2009 11:00 am ET


Darren Daugherty – Director of Investor Relations

James S. Tisch – Chief Executive Officer and President

Peter W. Keegan – Senior Vice President and Chief Financial Officer


David Edelman – Morgan Stanley

Andy Baker – Jefferies & Company

Stephen Velgot – Fig Partners, LLC

Joshua Jones - Robeco Boston Partners


To welcome everyone to the Loews' Fourth Quarter 2008 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

(Operator Instructions) I would now like to turn the call over to Mr. Darren Daugherty, Director of Investor Relations. Please go ahead.

Darren Daugherty

Thank you, operator. Good morning, everyone. Welcome to Loews Corporation's Fourth Quarter 2008 Earnings Conference Call. A copy of the earnings release may be found on our website, On the call this morning are Jim Tisch, the Chief Executive Officer of Loews', and Peter Keegan, the Chief Financial Officer of Loews'.

Before we begin, I'd like to make a few brief disclosures concerning forward-looking statements. This conference call will include the use of statements that are forward-looking in nature. Actual results achieved by the company may differ materially from those projections made in any forward-looking statements.

Forward-looking statements reflect circumstances at the time they are made, and the company expressly disclaims any obligation to update or revise any forward-looking statements. This disclaimer is only a brief summary of the company's statutory forward-looking statements disclaimer. We urge you to read the full disclaimer, which is included in the company's 10-K and 10-Q filings with the SEC.

I'd also like to remind you that during this call today, we may discuss certain non-GAAP financial measures. Please refer to our security filings for reconciliation to the most comparable GAAP measures. After Jim and Peter have discussed our results, we'll have a question and answer session.

If you would like to ask questions and are listening through the webcast, please use the dial in number to participate, 877-692-2592. I will now turn the call over to Loews' Chief Executive Officer, Jim Tisch.

James S. Tisch

Thank you John and good morning everyone, and thank you for joining us on the call today. As you have seen in our press release this morning, Loews reported a $958 million loss from continuing operations for the fourth quarter and a $182 million loss for the full year. Both of these figures include realized investment losses at CNA and non-cash impairment charges at HighMount Exploration & Production.

While these results come as a disappointment, we are fully confident in each of our businesses and their ability to deliver solid earnings over the longer term. Let me quickly review the performance of our subsidiaries.

CNA is performing well in its core property and casualty business, with its continued focus on underwriting discipline, claims efficiency, and expense management. In its core property and casualty operation, which includes specialty and standard lines, CNA reported a combined ratio of 89.1 in the fourth quarter, and was aided by 11.8 points of favorable reserve development.

The full year combined ratio was 98.0, including 4.4 points of favorable development, offset by 5.7 points of catastrophe losses. CNA's other key operating metrics of premium, rate, and retention in its core property and casualty operations all reflect the company's solid market position.

CNA's investment portfolio has been bruised, but its capital position and the reserves are solid. CNA continues to generate significant positive cash flow and possesses a high degree of liquidity, including at year end, more than $500 million in short-term investments at the CNA holding company level. Furthermore, liquidity is not an issue for CNA's insurance companies because of their strong operating cash flow and because their investment assets and liabilities are well matched in terms of duration.

CNA has the ability and the intention to hold it's available for sale unrealized loss securities until price recovery, or until they mature. When these securities recover in value or ultimately mature, CNA's book value should show a commensurate increase.

Tom Motamed began his new role as CEO of CNA on January 1st of this year. When it was announced that Steve Lilienthal was retiring, we never could have imagined the state of the economy and the financial markets that Tom would have to face in the first day on the job. We were glad, however, to have someone of Tom's caliber to step in and building upon the successful legacy left by Steve.

Since HighMount Exploration & Production began operations as a Loews subsidiary on July 31st of '07, we have already been through an entire natural gas pricing cycle, with natural gas prices going from $7.00 to $14.00 and now back down to having a $4.00 handle. This massive pricing shift over a short period of time illustrates why we chose to buy long lived reserves, because we cannot accurately predict the short-term movement of natural gas prices.

The non-cash charges taken by HighMount will lead to goodwill impairment and ceiling tests that are performed periodically by all E&P companies that utilize the full cost accounting method; because the ceiling test uses pricing as of December 31st, it represents a somewhat extreme valuation metric that is taken at one point in time.

Despite these two non-cash impairments, our fundamental thesis that over the long-term, natural gas is a good investment remains unchanged. Not withstanding HighMount's significant gas price hedges in place for '09, with energy prices at their current depressed levels, HighMount plans to cut back on its drilling program.

Our reserves remain in place, however, and HighMount can again boost its drilling when natural gas prices recover to more economic levels.

Boardwalk finished the year by posting good fourth quarter results and announcing continued significant progress on its remaining expansion projects, all of which are in service and flowing GAAP. Final completion is scheduled over the next few months. These pipeline expansions transport natural gas out of the prolific shale and other unconventional [plays] in Texas, Oklahoma, and Arkansas.

As the gas flow through these new pipelines ramps up, there is a positive impact on revenue and operating cash flow for Boardwalk.

In October of last year, we announced our willingness to invest up to $1 billion to fund the completion of Boardwalk's financed expansion projects, and subsequent to that, we invested approximately $500 million in Boardwalk common units.

To finish planned construction projects, Boardwalk now estimates that its remaining financing requirements will be less than $500 million and that the majority of these unfunded capital expenditures can be financed by issuing debt securities.

There are signs that the capital markets are beginning to thaw, and we are hopeful that Boardwalk will be able to raise this capital on its own. If, however, the terms demanded from the public markets prove unacceptable, then our commitment still stands to fund the remainder of these attractive projects.

We know and understand these projects well and we continue to expect that they will generate significant cash flow for years to come. With good cash flow from its expanding asset base, Boardwalk recently announced the 12th consecutive increase in its cash distribution to $0.48 per unit for the fourth quarter.

Diamond Offshore achieved record earnings for the full year, thanks to high utilization rates and record day rates for its offshore drilling rigs. Hampering our enthusiasm is weakening demand, brought about by the fall in oil and natural gas prices. However, Diamond's existing contract backlog of just over $10 billion should help to mitigate the impacts of softening demand in the marketplace.

After making a number of sizable investments in our subsidiaries during the year, Loews finished 2008 with $2.3 billion of cash and investment; and only $866 million of debt at the holding company level. Loews has maintained an ultra conservative financial posture for the past year and a half since the first signs of economic trouble started to appear on the horizon.

Said another way, we remain hunkered down during this time of great uncertainty, when nobody knows when or to what extent we will see economic recovery. Fortunately for Loews, with our liquid balance sheet and conservative capital structure, we are well positioned to weather the current economic crisis, as is each of our subsidiary companies, and with that I will now turn the call over to Pete Keegan, our Chief Financial Officer, Pete.

Peter W. Keegan

Thanks Jim and good morning everyone. For the fourth quarter, Loews reported a loss from continuing operations of $2.20 per share and for the full year a loss from continuing operations of $.0.38 per share. Our GAAP earnings of $9.05 per share for the full year include the non-cash gain related to the Lorillard separation and the after-tax gain from the sale of Bulova.

Loews’ interest in CNA’s realized investment losses, after taxed and minority interest was $283 million for the quarter and $756 million for the full year. The losses include other than temporary impairments of $377 million for the quarter and $865 million for the full year. These impairments relate primarily to corporate and other taxable bonds, asset backed bonds and non-redeemable preferred equity securities.

CNA contributed a net loss of $15 million to Loews’ net operating income for the quarter, versus income of $201 in the fourth quarter 2007. For the full year, CNA contributed operating income of $488 million to Loews’ net operating results, versus $950 million in 2007.

For the quarter, the decline in operating income primarily reflects lower investment income, which includes significant losses from limited partnership investments. For the year, the reduction in income from continuing operations primarily reflects lower investment income, as well as an increase in catastrophe losses of $169 million after tax and minority interest, versus the prior year.

Diamond Offshore’s contribution to net income for the fourth quarter increased to $137 million from $76 million in the prior year fourth quarter. For the full year 2008 Diamond’s net income contribution increased to $612 million from $396 million in 2007.

HighMount reported a fourth quarter loss of $717 million, which includes after-tax non-cash charges of $440 million related to the carrying value of HighMount’s proved reserves and a $314 million charge related to goodwill impairment. As Jim stated, HighMount performs a ceiling test each quarter as do all E&P companies utilizing full cost accounting.

Additionally, HighMount normally performs an annual goodwill impairment test. While this is typically performed as of April 30th each year, the ceiling test impairment represented a triggering event, requiring HighMount to perform an interim period goodwill impairment test as of December 31st.

Using the market approach to calculate its enterprise value and the fair value of balance sheet items, it was determined that HighMount’s goodwill was impaired. One result of the write-down of the carrying value of reserves will be a reduction in future depletion depreciation and amortization expense, which will favorably impact profitability on a forward-going basis.

As of last Friday, February 6th, natural gas prices had declined from year-end 2008 levels by approximately 15%. If HighMount had calculated the ceiling test as of December 31st, using current pricing levels and holding all other assumptions constant, then HighMount would have incurred an additional after-tax ceiling test impairment of approximately $375 million.

I’m not attempting to project any amount for a possible first quarter ceiling test impairment since a number of variables in that calculation can only be determined as of March 31st. However, if natural gas prices remain at current levels, a first quarter ceiling test impairment is possible.

HighMount’s production volumes for the quarter were as follows. Natural gas production was 19.6 billion cubic feet at an average realized price of $7.66 per 1000 cubic feet. Natural gas liquids production was 851,000 barrels at an average realized price of $42.14 per barrel. And oil production was 91,500 barrels at an average prize of $56.23 per barrel.

Revenue for the quarter and the year were $180 million and $770 million. As of December 31st, HighMount had hedges in place for 55% of natural gas production during 2009. At year end, total proved reserves were $2.2 trillion cubic feet equivalent, down from approximately 2.5 trillion cubic feet in the previous year. The majority of the decline in reserves relates to lower natural gas prices as of December 31st. Conversely, if natural gas prices rise, this would similarly increase proved reserves.

Boardwalk’s contribution to Loews’ fourth quarter net income was $27 million versus $32 million in the fourth quarter of 2007. For the full year, Boardwalk contributed $125 million to Loews’ net income versus $106 million in 2007, reflecting the additional revenue from completed expansion projects.

Loews Hotels' reported net income increased to $4 million in the fourth quarter 2008 versus $7 million in the fourth quarter 2007. Net income for the full year was $40 million versus net income of $36 million in 2007. Average room rates for the fourth quarter decreased to $251.52 from $269.74 in the prior year’s fourth quarter, while occupancy decreased to 66% from 70%, resulting in an overall 12.3% decrease in revenue per available room.

The severe downturn in the economy has caused cutbacks in leisure, business, and group travel, putting the entire lodging industry under pressure, which we expect to continue in 2009.

Net investment losses from Loews’ trading portfolio were $78 million for the quarter versus gains of $22 million in the prior year fourth quarter. For the full year, investment losses were $33 million versus gains of $194 million in 2007. These declines were primarily driven by mark-to-market losses in our equity trading portfolio, a lower cash and investment balance during the year resulting primarily from investments in subsidiaries, and lower realized interest rates on money market instruments.

At year-end 2008, holding company cash and investments totaled $2.3 billion. During the year, we spent $1.25 billion to purchase CNA’s senior preferred stock, $700 million to purchase Boardwalk Class B Units and $500 million to purchase Boardwalk common units. We paid out $219 million of dividends and we received $1.263 billion of dividends from our subsidiaries, including $491 million received from Lorillard. We also received $263 million in conjunction with the sale of Bulova.

And now I’ll turn the call back over to Darren.

Darren Daugherty

Operator, at this time we’ll open it up for questions.

Question-and-Answer Session


(Operator instructions) Your first question is from the line of David Edelman – Morgan Stanley.

David Edelman – Morgan Stanley

I just had one question which was, Jim, when you look at CNA’s fourth quarter performance and the marks that they’ve taken, is that performance within the range of expectations you internally had when you sized the preferred investment that you made, the billion and a quarter? And therefore, what’s the likelihood or the reasonable likelihood of CNA needing more capital support from Loews?

James S. Tisch

I am certainly hopeful that CNA will not need any more support from Loews. The investment was made in mid-November. The markets bottomed on December 15th and actually starting moving up between December 15th and the end of the year, and when you look at all of our capital ratios, they are indicative of a company that is in fine shape.

So I cannot imagine the credit markets are going to such a level that – let me start over the credit markets today are at extraordinary levels in high yield, in mortgage-backed securities and it’s difficult for me to see them going dramatically lower from here.

I guess anything is possible, but right now if you think that stocks are attractive, then you ought to take a look at what’s going on in the credit markets because there’s enormous amounts of value to be had there.

David Edelman – Morgan Stanley

And then if I could just a second thing perhaps for Peter. Can you go through on page 8 of the release, the $123 million net income loss – the investment income loss in the fourth quarter – the principal components of that again are?

Peter W. Keegan

It’s all across the portfolio. The biggest piece of it is in our – we had less cash, one. We took a hit on our equity portfolio which at the beginning of the quarter was around $500 million and took a decline. Those are the two single biggest factors in the quarter.

David Edelman – Morgan Stanley

Okay, thank you.


Your next question is from the line of Andy Baker Jeffries & Company.

Andy Baker – Jeffries & Company

Just wondering if you could give us a little – some of your thoughts on the hotel industry going forward? Obviously, you talked about the tough market, so can you tell us a little bit how you’re reacting to the tough markets, both in the short run and then how you think the best way to react to these tough markets is over the long run?

James S. Tisch

Yes, well, first of all I would tell you that Congress has done a great job of killing the resort hotel business with the way they’ve criticized the number of financial firms from having conferences. In fact, I just heard this morning of another investor conference that was canceled by another major investment firm, because of fear of being criticized by members of Congress.

So the current outlook for the business is certainly not good. As for Loews, we are – we have just as with our other businesses, we are hunkering down and cutting expenses where we can and we feel confident that our business, which is not highly levered at all, will get through this economic crisis.

We are also expect that there will be a number of attractive hotel properties that are not able to make it through this economic storm that we’re in, and we will be looking to see what kind of attractive property acquisitions we can make in this environment.

We believe that the world is cyclical and that when things go down, at some point they hit bottom and they go back up again, and right now we have the cash and the cash flow at the holding company level in order to be able to take advantage of opportunities as they present themselves.

Andy Baker – Jeffries & Company

If I could just drill down there a little bit. At the hotels – I mean is there – what sort of margin improvement do you think there is available to you in – from cost cutting measures alone? Is this something meaningful or is this more of a – the economy is largely going to drive this story and...

James S. Tisch

No, the economy is definitely going to drive this story, definitely. It’s – the hotel business is primarily a fixed cost business, because you’ve got to keep the lights on and the restaurants open and you have to keep people at the front desk, but nonetheless, you still have to have a focus on all of your costs and so that’s exactly what we’re doing and my guess is it’s what just about every other hotel operator is doing.


(Operator Instructions) Your next question is from the line of Steve Velgot Fig.

Stephen Velgot – Fig Partners, LLC

Yes, a couple questions on High Mount. Could you give us an idea of what you’re thinking about for the drilling program, where prices are today and then I had a follow up question about the assessment you do in terms of valuation whether – is that something that’s typically done on a quarterly basis or more is it just extraordinary that you'd be considering looking at it again first quarter?

James S. Tisch

Well, first let’s talk about where we are in our drilling program. Currently, spot natural gas prices are at about $4.83 for March deliveries. That price is below the level that is economic for our nation as a whole to replace the gas that is being consumed, and so, what you’ve seen is a very significant decline in gas drilling rigs.

They’ve gone from about $1,600 now down in a straight line to about $1,100 and they are still dropping. Analysts believe that they will probably have to go to $800 before the supply and demand equation changes. The good news is that there is a fairly rapid response to a decline in drilling rigs.

The depletion rate in the United States is somewhere between 25 and 30%, so if all drilling were to stop, production would decline in the United States by about 30% over the coming year, so we need to do drilling just to maintain production, and my guess is that in order for us to – us as a nation to have enough incentive for people to drill, we need gas prices that are about $2.00 to $2.50 higher than the current levels.

With that said there still are a few areas like Haynesville, where even at sub $5.00 gas it’s still profitable to drill.

With respect to HighMount, we don’t operate in Haynesville and we don’t operate in any areas where on a fully allocated basis it makes sense to drill. So we are in the process of reducing the number of rigs that we have working for us, especially in Sonora, which is our largest field and we’re going to take a time out, assess the situation, and then we’ll – as the market improves, we’ll begin to drill once again.

Stephen Velgot – Fig Partners, LLC

Okay and then just on the question of valuation and assessment, whether you would typically do that on more of annual basis or is the idea that there could potentially be another write-down first quarter. Is that something extraordinary or would you normally look at the valuation on a quarterly basis?

Peter W. Keegan

Ceiling tests you would look at it quarterly; the good will normally annually, but if you had a ceiling test impairment in any given quarter, you'd also probably look at the goodwill in that quarter.

Stephen Velgot – Fig Partners, LLC


Peter W. Keegan

So as I indicated in my comments, if gas prices stay where they are, which are 15% lower than where they were on December 31st, at least where they were last Friday, then it is possible that we’d have a ceiling test write-down in the first quarter.

Stephen Velgot – Fig Partners, LLC

Right and then I suppose it’s possible that if natural gas were back to $7.00 or $8.00, that those assets could be written up?

Peter W. Keegan

They wouldn’t be written up but you’d – but the likely result is you'd have more proved reserves at the end of year because you’d have more wells that were economically producible.

Stephen Velgot – Fig Partners, LLC

Okay, thank you.


You have a follow up question from the line of Andy Baker Jeffries & Company.

Andy Baker – Jeffries & Company

Hi, thanks, just wanted to circle back to Boardwalk Pipeline. I mean we’re talking about another quarter of increasing the dividends. Just remind us about your thoughts on the value of a general partnership interest as those dividends particularly where you’re sort of triggers are that increase your percentage of the free cash flow?

James S. Tisch

Well we are currently receiving incentive payments – incentive distribution rights on our general partnership interest. We’re at the 25% level and we get to the 50% level once the distribution gets to $0.525.

Andy Baker – Jeffries & Company

And do you see their current capital needs, obviously the increases have slowed over time, increases to their dividend, how do you – how long do you see their current extension and in capital needs negatively impacting their ability to raise the dividend more quickly?

James S. Tisch

Well the capital program is just about over. As I said in my comments, Boardwalk had in place a $4.8 billion capital program that we think that the company will need to raise less than $500 million, and that at least half of that amount that it needs to raise would be equity. So, my sense is that there should not be significant pressure on the thought from its need to raise equity over the coming quarters.

Beyond that, Boardwalk is looking at a few different opportunities that should serve to increase its cash flow, but will not require significant amounts of capital in order to be able to do that. So, I mean I don't know if you're asking when will the dividends for Boardwalk accelerate from here, I don't know that I can answer that for you, but I can tell you that there are opportunities for Boardwalk, number one, and number two, that the weight of equity offerings has been dramatically mitigated.


Your next question comes from Josh Jones - Robeco Boston Partners.

Joshua Jones - Robeco Boston Partners

Related to HighMount, was absent price-related revisions was your reserve replacement greater than 100% last year?

James S. Tisch

I think it was about 100%.

Joshua Jones - Robeco Boston Partners

Okay and so of the 300 BCF decline, was a lot of that related to proved undeveloped locations, or was it some proved developed?

James S. Tisch

Could we get back to you a little later on that?

Joshua Jones - Robeco Boston Partners

Sure. That would be great. Thank you very much.


There are no further questions at this time. I'll turn the floor back over to Mr. Darren Daugherty for any closing remarks.

Darren Daugherty

Thank you for joining us on the call today. A replay and a downloadable MP3 file will be available on our Website in approximately two hours. That concludes today's call.


Thank you for participating in today's Loews' Fourth Quarter 2008 Earnings Conference Call. You may now disconnect.

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