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ExxonMobil Corporation (XOM)

Q2 2006 Earnings Conference Call

July 27 2006, 11:00 am ET

Executives

Henry Hubble - Vice President, Investor Relations and Secretary

Analysts

Douglas Terreson - Morgan Stanley Dean Witter

Doug Leggate - Citigroup

Bruce Lanni - A.G. Edwards & Sons, Inc.

Robert Kessler - Simmons & Company International

Mark Flannery - Credit Suisse First Boston

Jennifer Rowland - JPMorgan Chase & Co.

Arjun Narayana Murti - Goldman Sachs

Nicole Decker - Bear, Stearns & Co.

Neil McMahon - Sanford C. Bernstein & Company, Inc.

Paul Sankey - Deutsche Bank

Paul Cheng - Lehman Brothers

Daniel Barcelo - Banc of America Securities

Mark Gilman - Benchmark Capital

John Herrlin - Merrill Lynch

Presentation

Operator

Good day and welcome to this Exxon Mobil Corporation second quarter 2006 earnings conference call. Today’s call is being recorded.

At this time for opening remarks, I would like to turn the call over to the Vice President of Investor Relations and Secretary, Mr. Henry Hubble. Please go ahead, sir.

Henry Hubble

Thank you, and welcome, everybody, to Exxon Mobil's teleconference and webcast on our second quarter 2006 financial and operating results.

As you are aware from this morning's press release, we have had another strong quarter as we continue to benefit from the performance of our world-class investments through good operations, production growth, and strong industry conditions.

Although our company benefits from these conditions, we do recognize the impact today's high energy prices have on consumers and family budgets. Therefore, before I begin and comment on the business line results, I will share with you some of the milestones that include work we have done that will bring more product to the market and ease supply pressure.

At this point, I would like to draw your attention to our cautionary statement. Please note that estimates, plans and projections are forward-looking statements. Actual results, including resource recoveries, volume growth and product outcomes could differ materially due to factors I will discuss and factors noted in our SEC filings.

Please see the factors affecting future results in the Form 8-K we furnished this morning, which are available through the Investor Information section of our website. Please also see the frequently used terms, the supplement to this morning's 8-K, and the 2005 financial and operating review on our website.

This material defines certain financial and operating terms I will use today, shows Exxon Mobil's net interest in specific projects, and includes information required by SEC regulation G.

I am pleased to turn your attention to the specific results.

Exxon Mobil's second quarter net income and normalized earnings were $10.4 billion, or $1.72 per share. This was a record second quarter, and represents an increase of $2.5 billion, or 32% versus second quarter 2005 normalized earnings.

This performance was driven by strong crude prices and refining margins, as well as by continued focus on operational excellence and cost-containment.

Before discussing the business line details, I will highlight some of the key milestones that occurred since our last earnings call.

Within the up-stream, we started operations at the Guntong E gas compression platform in the South China Sea to help meet increasing gas demands in Malaysia. The platform is the first phase of the Guntong hub development and when combined with the existing Guntong D production and compression platforms, will have gas handling capacity of more than 800 million cubic feet of gas per day, to process production from current and future gas developments offshore peninsular Malaysia.

The Guntong E platform is located approximately 130 miles off the East Coast of peninsular Malaysia, in water depths of 210 feet, and is operated by Exxon Mobil Exploration and Production Malaysia, Incorporated.

In July, Exxon Mobil, the State of Qatar and Qatar Petroleum announced the launch of the Al Khaleej Gas Phase-2 project. AKG-2 is being developed to supply natural gas to domestic markets while recovering associated condensate and natural gas liquids for export. Phase-2 start-up is scheduled for late 2009.

Phase-1 of Al Khaleej Gas, with a capacity of 750 million cubic feet per day of gas, began production in November, 2005. Exxon Mobil has 100% interest in the project.

The East Area Additional Oil Recovery Project, located 17 miles offshore Nigeria, started up in June. Mobil Producing Nigeria is the operator and has a 40% interest.

The project involves the re-injection of natural gas to mitigate production decline in East Area reservoirs and increase ultimate oil recovery. It is expected that the project will produce 530 million gross barrels of additional oil reserves and provide a peak volume of 120,000 barrels a day of oil. The development will also further reduce routine flaring at the facilities.

In the down-stream, we completed the transition of our facilities to meet ethanol blending requirements in the U.S. The transition was completed smoothly without any supply disruptions.

Similarly, we are pleased with the progress to meet ultra-low sulfur diesel requirements. We completed terminal and pipeline construction projects, and began producing ultra-low sulfur diesel from our refineries in the U.S. and Canada.

Our plans are on track to meet regulatory deadlines and we do not anticipate any supply disruptions associated with the transition of our remaining facilities.

In July, we announced plans to construct a new co-generation unit at the Antwerp integrated refining and chemical complex in Belgium. This unit will have the capability to produce 130 megawatts of power, or the equivalent of electricity to supply 300,000 Belgian households. It will also decrease carbon dioxide emissions by approximately 200,000 tons per year, or the equivalent of taking about 90,000 cars off the road.

Co-generation, the simultaneous production of electricity and heat or steam, has been a significant factor in improving energy efficiency at Exxon Mobil facilities around the world while reducing air emissions. Exxon Mobil now has interest in 85 co-generation facilities in more than 30 locations worldwide.

We have previously discussed our process of continuously and rigorously assessing our global portfolio of businesses and their opportunities for growth, restructuring, or divestment.

In July, we announced plans to divest the Ingolstadt Refinery, the Bavarian industrial wholesale business, and Esso Bayern, which primarily runs the home heating oil direct business. The change of ownership is expected to be complete by early 2007, pending approval from authorities.

In chemical, there are two milestones I will comment on now.

We introduced a line of compounded polypropylene that is used in external and internal automobile applications, such as bumpers and internal trim. These new products complement our existing polypropylene production lines, providing customers with a complete line of products for automotive interior, exterior, and under-the-hood applications.

Our ongoing investment in technology and compounding expertise provides us competitive advantage and highlights our commitment to the global automotive market.

Regarding the Singapore chemical project, we continue to make good progress on our detailed study for a potential world-scale steam cracking complex that would be located at our existing Singapore refining and chemical site.

In June, we announced the award of front-end engineering and design contracts for derivative units associated with the project, including polyethylene, polypropylene, aromatics extraction, oxo alcohol and specialty elastomers.

Over the next 10 years, we expect over 50% of key commodity petrochemical demand growth to occur in Asia, with over a third in China alone. Exxon Mobil's established world-scale, fully-integrated refining and chemical facilities in Singapore and Saudi Arabia are well-positioned to supply these demands and this potential second steam cracker complex would further strengthen our advantage in supplying these growing markets.

Turning now to the business line results, please refer to the earnings reconciliation in the IR supplement.

Upstream normalized earnings in the first quarter were $7.1 billion. This represents an increase of $2.2 billion versus the second quarter of 2005. After tax, upstream unit earnings were also strong at $18.84 per barrel.

Worldwide crude realizations were $64.93 per barrel, up $17.77 from second quarter 2005. The higher realizations were responsible for $2.1 billion of the increase in earnings from the second quarter of 2005.

Other items, primarily higher property sales, more than offset an unfavorable change in volume mix.

Oil equivalent volumes increased 6% versus the same quarter last year, with increases in Africa and the Middle East more than offsetting natural field declines and divestments in North America and Europe. Excluding the impact of divestments and entitlements, production increased 9%.

Liquids production increased 230,000 barrels per day, or over 9% versus the same quarter last year. Excluding entitlements and divestments, liquids production increased 14%.

The Kizomba B and Erha start-ups and the addition of Upper Zakum were the biggest sources of the additional liquids volumes.

Gas volumes increased 60 million cubic feet per day, or about 1% versus the second quarter of 2005. Higher production in Qatar was offset by natural field decline and planned maintenance in North America and Europe.

Turning to the sequential comparison, upstream earnings increased by $750 million versus the first quarter of 2006. Improved realizations were essentially offset by normal seasonal declines in natural gas sales. Other factors, including higher property sales, Canadian tax changes, and lower litigation expenses increased sequential earnings.

Liquids production was essentially unchanged from the first quarter of 2006, while gas production was down about 20% due to normal seasonal variations.

For further data on regional volumes, please refer to the press release and IR supplement.

Turning to the downstream.

Overall, second quarter downstream normalized earnings of nearly $2.5 billion were up approximately $260 million over the second quarter of 2005. Industry margins accounted for $790 million of the increase, as higher worldwide refining margins more than offset lower marketing margins.

The volume mix effect was a negative $350 million, due to lower refinery throughput primarily associated with increased turnaround activity. Other factors, primarily higher turnaround related operating costs and the absence of asset sales, further reduced earnings by $180 million.

Sequentially, downstream earnings increased by approximately $1.2 billion, primarily due to higher refining margins. Volume mix effects reduced earnings by $110 million, mainly as a result of additional turnaround work that resulted in lower throughput.

Other factors reduced earnings by $90 million, as higher operating costs, consistent with the additional planned workload, were partially offset by favorable for-ex.

Turning to chemical results.

Second quarter normalized earnings were $840 million, up slightly versus the second quarter of 2005. Higher feedstock costs resulted in lower margins that reduced earnings by $160 million but were more than offset by the impact of higher volumes, lower operating costs, and the absence of unfavorable tax items.

Sequentially, chemical earnings decreased by about $110 million.

Lower margins reduced earnings by $290 million but were partially offset by favorable mix effect, for-ex, and the absence of unfavorable tax items.

Our near-term and long-term outlooks for the chemical business remain strong. We believe our unique business approach, underpinned by our technology leadership, continues to deliver a competitive advantage in this growing business.

Turning now to the corporate and financing segment.

Corporate and financing expenses of approximately $100 million were essentially flat with the second quarter of 2005.

The effective tax rate for the second quarter was 44%.

Our cash balance was $36.7 billion, and debt was $8.4 billion at the end of the second quarter.

The corporation distributed a total of $7.9 billion to shareholders in the second quarter, through dividends and share purchases, to reduce shares outstanding, an increase of 48%, or $2.6 billion versus the second quarter of 2005.

During the second quarter, Exxon Mobil purchased $6 billion of shares in excess of dilution, thereby reducing the number of shares outstanding by 1.7%. As of the end of the second quarter, our share repurchase program had reduced shares outstanding by 15% since they were started in 2000.

As a result of our ongoing financial strength, purchases of shares to reduce shares outstanding will be increased to $7 billion in the third quarter, further demonstrating our commitment to return cash to shareholders.

Cap-ex in the second quarter was $4.9 billion, up $360 million from the second quarter of 2005, primarily due to planned upstream activity. Our year-to-date cap-ex is $9.7 billion. Our full-year outlook for cap-ex has been increased by $1 billion to $20 billion, reflecting increased drilling and development activity, primarily in Africa, Europe, and the United States.

Before we begin the question-and-answer portion of the call, I will summarize a few key factors underpinning our second quarter performance.

The record results that we have reported today are the outcome of the strategies we have shared with you in the past.

Our upstream is focused on maximizing profitable production and capturing and investing in projects that deliver superior returns.

Our downstream objectives are to maintain best-in-class operations, to provide quality, value, products and services to our customers, while selectively investing to grow returns.

The chemical business draws on the synergies available through access to advantage feedstocks and integration across Exxon Mobil operations, while selectively investing in growth opportunities.

Our strong financial position continues to allow to us pursue an unparalleled capital program, while also providing significant shareholder distributions.

That concludes my prepared remarks, but before we begin the questions, I would like to address some apparent confusion about the revenue numbers. There has been a U.S. financial accounting standard change which changed a longstanding industry practice of reporting related party buy-sell transactions.

The accounting is now being reported on a net basis, with no impact on earnings. The change shows up as a reduction in both revenues and total costs.

I would now be happy to take your questions.

Question-and-Answer Session

Operator

Thank you, Mr. Hubble.

(Operator Instructions)

We will take our first question from Doug Terreson with Morgan Stanley.

Douglas Terreson - Morgan Stanley Dean Witter

In E&P, the other factor in relation to the first quarter of 2006 was $710 million, I believe, and that is a number that is even relevant for Exxon Mobil. I wanted to see if you could provide some color and maybe some quantification on the primary components of that figure?

Henry Hubble

Yes, you are looking at the sequential comparison?

Douglas Terreson - Morgan Stanley Dean Witter

I am.

Henry Hubble

Yes, the biggest piece, as I mentioned, is associated with property sales, and there were various sales in there. It included Four Corners and some others. If you would like more detail on that, we can follow up with you.

There was also a favorable tax impact in Canada, about $200 million, and then there is the absence of litigation we had in the first quarter associated with the Grefer case, and that was about $160 million.

Douglas Terreson - Morgan Stanley Dean Witter

One more question, in E&P, it appears that the Gorgon Project in Australia may be faced with rising estimates for capital investment and environmental issues. To my knowledge, Exxon has not announced any sales agreement on that project either. I wanted to see if you could provide an update on the status of that project, as well as any new timetables that may have materialized, if any new timetables have, as it relates to commercialization of that project?

Henry Hubble

We continue to work with the operator -- and as you know, Chevron is operating that one -- to progress an environmentally and economically-sound project.

There was some advice that we are disappointed with from the EPA to the government, and we are appealing that recommendation. Further questions, I really cannot get into the specifics. It is probably better to address that back to the operator.

Operator

We will take our next question from Doug Leggate from Citigroup.

Doug Leggate - Citigroup

A couple of things on the -- it seems much more exhausting than it really is. A couple of questions on the downstream, please. First of all, the utilization rate on refining was a little lower than I was expecting. Can you quantify the planned versus [inaudible] down-time, and maybe give an outlook for the back-half of the year?

Henry Hubble

If you look at the bulk of the impact on the throughputs, it was basically turnaround related. Most of that input, 299-plus, was associated with turnaround. The turnaround workload normally is higher in the first-half of the year, and this year was a little higher than normal. Some of it associated with the ultra-low sulfur diesel implementations.

If you look at the turnaround workload, it is about 75% complete for this year, so we have seen the bulk of it is behind us.

Doug Leggate - Citigroup

That is very helpful. The only follow-up I have is marketing. Can you give us some idea of the marketing delta sequentially and year-over-year, if that is possible?

Henry Hubble

If you are looking at the delta…are you talking volumes or…

Doug Leggate - Citigroup

No, just the earnings impact would be fine.

Henry Hubble

As we talked about, the bulk of the marketing impact in the year-to-year numbers is about -- on a sequential basis, it was about $60 million in margins, and then quarter on quarter, it was about 150, a little more, in margins, down -- down.

[Multiple Speakers]

Henry Hubble

I beg your pardon?

Doug Leggate - Citigroup

Were U.S. and international still positive for the quarter?

Henry Hubble

In terms of absolute earnings? We do not really get into the specifics on that, but if you looked -- margins in general were down across the world, and really that reflects the lag effect you see from rising crude prices and subsequent feedstocks through the refinery. That is what most of that is -- compression due to the rising crude prices.

Operator

We will now take our next question from Bruce Lanni with A.G. Edwards.

Bruce Lanni - A.G. Edwards & Sons, Inc.

Actually a question that piggybacks on what Doug was asking on the downstream, basically I was wondering -- could you give some further clarification on the refined product sales numbers? Obviously they were down year over year, and I was looking, the throughputs were down too. Was most of the decline in product sales due to the lower throughputs year over year?

Henry Hubble

Yes.

Bruce Lanni - A.G. Edwards & Sons, Inc.

Was it primarily in distillates rather than gasoline? I am trying to get a fix on what you are seeing on the gasoline side.

Henry Hubble

If I look at the overall petroleum product sales, we were down about 2% in total, and if you look at the actual -- I am talking sequentially now, first quarter versus second quarter -- we were down about 2% overall. The bulk of that associated with the turnaround activities.

If you look at mix, we were actually up some on gasoline, down some on diesel, across that timeframe. That is normal, seasonal kind of stuff.

If you looked at it on a year-to-year basis, we were down about equally -- gasoline and heating oil, again reflecting the turnaround effects.

Bruce Lanni - A.G. Edwards & Sons, Inc.

In the U.S. then in particular, what are you witnessing right now as far as the gasoline sales go? Anecdotally, are you seeing relatively strong sales in…

Henry Hubble

If you look -- a general question about demands, it is really hard to get behind what is going on on a short-term basis, because there is a lot of moving around on consumption numbers.

We continue to see demand grow year on year. We are running our capacity full. We are selling everything we can make.

When we step back from it, normally it correlates best with GDP growth, and we see economies are still performing well around the world. You see the strong margins, which is basically being driven by clean products demand growth. That is what we are really seeing here.

Operator

Our next question will come from Robert Kessler with Simmons & Company.

Robert Kessler - Simmons & Company International

You have no doubt seen the announcement on Shell's Pearl GTL project this morning and the revised implied cost there. I was wondering if you might provide us with any update you could on your preliminary $7 billion estimate for your own GTL project in that country.

Henry Hubble

We signed the Heads of Agreement in July of 2004, as you probably know. Our project is about 154 KBD plant and we are working with Qatar Petroleum to finalize the DIPSA associated with it, and to complete the other commercial agreements associated with the project.

We still have some appraisal well activities that we have to do on that. We will be updating the costs as we get closer, but this project, the technology we have here is a bit unique too, in that the yields that we get are a lot higher in terms of the distillate yield or the [LU-base] stock yield, which is one of things that advantages the project that we are looking at.

Robert Kessler - Simmons & Company International

I appreciate you still have some more fine-tuning then on the cost estimates, but roughly speaking -- above or below two times the $7 billion?

Henry Hubble

We are still in the mode of updating that and I do not have a number to offer you at this time.

Just in general, obviously everybody is seeing cost pressures. We are working cost pressures, we work these things hard -- we do a lot to offset them, but we are really just not in a position to come back with a number at this point.

Operator

We will now move to Mark Flannery with Credit Suisse.

Mark Flannery - Credit Suisse First Boston

Two unrelated questions, the first is about the increase in cap-ex. You seemed to indicate in your prepared remarks that was all or substantially due to higher activity. Is any of it due to higher costs or not?

Henry Hubble

We have cost pressures just like everybody else has cost pressures, when you look at the pressure on op-ex and other things. When you look at those, the primary piece, the bulk of that is associated with drilling activity in Nigeria -- we are accelerating. We have worked through some of the issues on Kizomba C and have been able to accelerate that.

We also have increased drilling in Europe and the U.S., so when you look at the overall numbers, there are still some cost inflation associated with that, but it would be less than a third of what we are seeing there.

Mark Flannery - Credit Suisse First Boston

The second question is about renewables. There have been various announcements from industry participants about their interest in getting into renewables, be that in a corn-based ethanol in the States or bio-diesel in Europe. Do you have position on that? Are you looking at anything? What is your general take on those?

Henry Hubble

Most of the bio-fuels that are out there, in fact, there are very few that are economic without subsidies. The current generation of technology has limitations due to their costs, when you look at fertilizer requirements, land-use impacts, so our focus has really been that you are going to have to do things to reduce those costs, so we are investing in breakthrough technologies to find transportation fuel options that would successfully meet the supply requirements and demand challenges for the future.

Right now, the technology that is out there basically requires subsidies for the long-haul. We do not think that makes sense to invest in at this point.

We are a major buyer and blender of ethanol, so we are using those products. We also blend bio-diesel in Europe.

Operator

We will now move to Jennifer Rowland with JP Morgan.

Jennifer Rowland - JPMorgan Chase & Co.

I have a question on the share buyback program. I know you had said you planned on doing $7 billion in the next quarter. Can you just provide some guidance going forward as far as how we should think about the pace of your share buyback program? I know you are obviously committed to increasing it, but I did not know if there were any targets that you have as far as either a percentage of cash flow or a goal as far as reducing the amount of shares outstanding -- anything you could provide to help us.

Henry Hubble

We do not have a target on that. We do not really provide forward guidance on that. We will update you as we are changing it, as we have been.

If you step back and look at how we think about it, we are distributing cash to shareholders through dividends and the share repurchases. We tend to think about the dividends in the longer-term, and think of that more as a payout that we want to be able to increase steadily over time. We have had a 10% increase this year.

Then, on the share buyback, it really is the more flexible component. Of course, the growth in it that you have seen is a reflection of the strong cash generation that we continue to deliver.

Jennifer Rowland - JPMorgan Chase & Co.

Great. Lastly, on the cap-ex, any change to your outlook for 2007 to 2010 guidance, given that you plan on spending $20 billion now in 2006?

Henry Hubble

Not at this point. We will be updating that, normally in our analyst meeting. There is a range, of course, in there even with those numbers, because you are going to look at what advances or changes there are to those projects, but we will be updating that in the March timeframe.

Operator

We will now move to Arjun Murti from Goldman Sachs

Arjun Narayana Murti - Goldman Sachs

Thank you. Henry, just a question on your ultra deep shelf drilling in the Gulf of Mexico, just wondering if you have any update related to either Blackbeard West, which has been drilling, or any future drilling plans in that area of the world.

Henry Hubble

Our Blackbeard project is continuing to drill. It is a tight hole, so we do not really have any information that I can provide you on it at this point, and...

Arjun Narayana Murti - Goldman Sachs

Do you have follow-up drilling plans? Maybe not on that prospect, but for other prospects that are firm? Or is it contingent on the outcome of that well?

Henry Hubble

That is the activity that we have there -- no other plans at this point. That is it.

Operator

We will now move to Nicole Decker with Bear Stearns.

Nicole Decker - Bear, Stearns & Co.

Your capture rate on your U.S. crude realizations, relative to the benchmark, seems to be higher this quarter than it has in the past. Would that be a reflection of the geographic mix, or maybe changes in your portfolio? Could you comment on that?

Henry Hubble

If you look at the totals, with the numbers I quoted in the $18.84 per barrel, that really reflects, similar to the correlations that are based on the rise in the commodity prices. We are seeing that on the overall portfolio, staying about in line with the things we provided in the past.

In the U.S., I am not aware of anything that would have shifted that. Again, we look at it on a portfolio basis. There is not anything I can point to for you there.

Nicole Decker - Bear, Stearns & Co.

Secondly, what did Erha contribute to second quarter production?

Henry Hubble

I do not know if I have that. We may want to take that off-line. I do not really have it. It is currently running about 200,000 barrels a day, but I do not know what the actual delta was for the quarter.

Nicole Decker - Bear, Stearns & Co.

Which day did that start, Henry?

Henry Hubble

The date of start-up?

Nicole Decker - Bear, Stearns & Co.

Yes.

Henry Hubble

Again, we can get you that detail off-line, if you want to come back.

Nicole Decker - Bear, Stearns & Co.

That is fine. Thank you.

Operator

We will now take our next question from Neil McMahon with Bernstein.

Neil McMahon - Sanford C. Bernstein & Company, Inc.

Two things -- could you offer some guidance on the U.K. tax rates that I presume you are going to be taking in the third quarter? Seems that some of your competitors have been doing that just to help with earnings.

Secondly, maybe you could give an update on when you think wells will be drilled in the wildcat exploration wells in the Orphan Basin and offshore Caribbean/Columbia. I am presuming Madagascar is an '07 well.

Henry Hubble

If you look at U.K. effects, we are still finalizing calculations there, but we estimate that we will take a one-time charge in the third quarter of $0.01 to $0.02 per share.

On the drilling, Orphan will be in the fourth quarter of '06. I would have to get back to you on some of the other specifics. Madagascar I believe is '07, but I would have to get you -- it is ’07.

Neil McMahon - Sanford C. Bernstein & Company, Inc.

Columbia, is that '07 as well?

Henry Hubble

No, off the top of my head, I do not know. I would have to get that you.

Operator

We will now move to our next question from Paul Sankey with Deutsche Bank.

Paul Sankey - Deutsche Bank

Henry, with these kind of profits, you are going to attract negative attention from Washington, D.C. Could you comment generally on the risks that you face from lawmakers, particularly in this election year? Could you comment specifically on the potential impact of two pieces of legislation that are out there, firstly on price gouging and secondly on LIFO, FIFO? Thank you.

Henry Hubble

The real focus of helping to reduce the pressure that is in the market today is to get additional supplies. So we look at things, windfall profits and some of the other ideas that have been kicked around that basically are going to reduce the funds available for increasing supplies. Again, we are sharing the impacts of the investments that we have been making here to bring supplies on line, which is really going to be the key.

There were investigations around price gouging, and really nothing that was -- for one, it is hard to define what that means -- but there was nothing they could come back to that really pointed at any issues that certainly we were involved with.

The LIFO, FIFO, it has been one of those ideas out there. Certainly it has been a longstanding practice, a LIFO industry practice, and it is not just an impact on the oil industry. Again, that is one that I do not know where it is going to go, but we do not think it is a very good idea.

Paul Sankey - Deutsche Bank

Are you -- you are not taking any provisions for these risks, I guess? You must be feeling that the likelihood of actual action is quite slim.

Henry Hubble

You have to be able to estimate what they are in order to take them and we cannot do that.

Operator

We will take our next question from Paul Cheng with Lehman Brothers.

Paul Cheng - Lehman Brothers

Two questions -- one, sequentially from the first to the second quarter, is there any big-time impact due to the price finalization, inventory gain or loss, or FX change?

Henry Hubble

If you look at the price finalization impacts, the absolute numbers in the second quarter, basically we had $95 million overall, and that was split about 50/50 between U.S. and non-U.S. on an absolute. If you look at the comparison, quarter on quarter, it was about $50 million negative, with most of that in non-US.

Paul Cheng - Lehman Brothers

How about inventory, and also FX?

Henry Hubble

The only adjustment we have on inventory comes at the end of the year, so there is no LIFO effects in these kinds of numbers.

If you look at the for-ex, we had, quarter versus quarter, it was about $41 million positive…

Paul Cheng - Lehman Brothers

Hello?

Henry Hubble

Yes? Sorry, there was somebody else on the line. It was $41 million positive overall…

Paul Cheng - Lehman Brothers

Hello?

Henry Hubble

Hello? Yes, somehow we have some interference on the call here. It sounds like we have a crossed line.

Paul Cheng - Lehman Brothers

I guess we should just continue.

Henry Hubble

Yes, right. Anyway, $41 million in total, 73 of that positive in the downstream and about $50 million negative in the upstream.

Paul Cheng - Lehman Brothers

Perfect. The second question is that we have heard, some of your competitors were talking about they have seen signs of a slowdown in the cost pressure for the upstream area in [inaudible] and other area. I am wondering if you have anything you can share with us. Have you guys seen a slowdown in the cost pressure or are they still as [ripe] as they have been?

Henry Hubble

As you know, this is an area where we work very hard, through existing contracting strategies and other things, technology, to reduce the impacts. We do an awful lot to offset these pressures.

Things are still high and the pressures are still out there, but we have been successful in offsetting, and continue -- if I look at overall op-ex, we have self-help kinds of improvements, other things that have allowed us to offset inflation. In our project management, we are doing a lot of things to mitigate the cost pressures here.

Rate of acceleration or deceleration, it is hard to say. It may be moderating a bit.

Operator

We will now move to our next question from Daniel Barcelo of Banc of America.

Daniel Barcelo - Banc of America Securities

A question on gasoline, if I could. You mentioned you are one of the larger handlers of ethanol. There are a lot of expectations for supply to increase almost by 30% over the next year or so. How an advantaged position are you in logistically to take advantage of that arbitrage, if indeed the ethanol price is advantageous to gasoline?

Also as it relates to gasoline, [inaudible] sulfur credits are also kind of running out. How advantaged are you in that position also to take effect of that?

Henry Hubble

We are generally buying on a delivered basis for the ethanol, and we are one of the largest blenders of it. We have had a long history, actually, of blending ethanol when it has been advantaged. So we end up taking advantage of that as it presents itself. I do not see any particular advantage that I would say we have over industry.

We are in good shape on gasoline sulfur and we are in good shape on the ultra-low sulfur diesel that is coming. I do not see any issues on that front.

Daniel Barcelo - Banc of America Securities

Then if I could on production, it was very strong, even if you exclude Upper Zakum year-over-year. In terms of the start-ups, I do not know if you could provide any sort of update from the February meeting. I know you had seven to eight scheduled for this year. How is rig cover for this year and next, and going forward? Do you have any color on that?

Henry Hubble

If you look at the project start-ups, it has been a very good list of [inaudible].

We are still benefiting, of course, year on year with Kizomba B, AKG-1, Ross Gas Train 4, Erha start up this year, Bonga, Yoho, ACG benefits coming in, [Socklan 1] -- so we have a very strong set of projects that are all contributing.

If we look ahead, we have a great portfolio. The only one that we have right now that has slipped some is on Thunder Horse, and I think you have heard something about that already. It is probably best to talk to the operator about it.

Operator

Our next question will come from Mark Gilman with the Benchmark Company.

Mark Gilman - Benchmark Capital

A couple of things, if I could. Should I infer from your prior comments that the asset sale gains on an absolute basis in the second quarter were $350 million or more, and primarily U.S. E&P?

Henry Hubble

I was just giving some pieces of the total. There are up’s and down’s and other factors.

Mark Gilman - Benchmark Capital

Let me ask specifically -- what were the asset sale gains in the second quarter and where were they located segment-wise?

Henry Hubble

Just looking for the data, you can call us for some details on that, if you would like to go through the specifics.

The big piece, as I said, was we had a number of various sales in U.S. and other, outside the U.S., and Four Corners was one of the big pieces. We can get you more specifics. There were a number of them.

Mark Gilman - Benchmark Capital

Okay, I will follow-up off-line.

Secondly, tax rate dropped down to 44.2%. I assume part of that was the Canadian deferred tax adjustment, which I would appreciate if you could quantify. Is there anything else other than change-in-mix effects that is responsible for moving it down to the 44.2%?

Henry Hubble

It is kind of in line with the guidance we provided. There are a lot of factors that affect the tax rate and it is difficult to project exactly what those impacts will be going into the quarter. I had mentioned that Canadian was about $200 million, and that is a piece of it.

But it is in line with the guidance. We are expecting about this same level going forward.

Mark Gilman - Benchmark Capital

Of 44%?

Henry Hubble

Yes, about.

Mark Gilman - Benchmark Capital

The $200 million on Canada, you said was an upstream number, I believe. Is there not a downstream piece also?

Henry Hubble

The bulk of it is upstream, but that it about the total on it.

Mark Gilman - Benchmark Capital

In the release, you talk about new project contributions of 243,000 a day in the second quarter. That relates to projects over what period of time, Henry?

Henry Hubble

That is a net number. You have declines in there, you have maintenance in there, you have a number of different factors. That is a net positive that comes from all of that. Again, we can go through the bridge with you off-line, but that is the net.

Mark Gilman - Benchmark Capital

Just one final one for me. If there were a front-end payment on the Upper Zakum entry, would that be included in either your prior or your upward revised capital budget estimate?

Henry Hubble

It is in our capital expenditures, yes.

Mark Gilman - Benchmark Capital

Thank you.

Operator

We will go next to John Herrlin with Merrill Lynch.

John Herrlin - Merrill Lynch

Just two quick upstream ones -- could you repeat the current production on Erha again? It sounded like you said 200,000 barrels a day, Henry, but I thought it was only supposed to be producing 190.

Henry Hubble

That is about what it is at right now. It is actually above the expected volumes.

John Herrlin - Merrill Lynch

Does that include the north satellite?

Henry Hubble

No. It has been performing very well. We are real pleased.

John Herrlin - Merrill Lynch

Next one for me is on U.K. gas. Even for seasonality and maintenance, it looked a little bit lower than in past years, so is that normal field declines, asset rationalization -- what is going on there?

Henry Hubble

There was some demand impact associated, weather-related impacts quarter on quarter for the two years. Of course, you also have planned maintenance that is a little higher than it was last year right now, or in the second quarter.

John Herrlin - Merrill Lynch

Last one for me, no issues getting equipment or anything for your upstream projects?

Henry Hubble

We continue to work that, and we have not had to delay anything that I can point to because of lack of availability, but it does impact forward schedules as you are trying to get access. That is really how we are working it through, but I cannot point to anything that is moving out of our schedule because of those issues.

Operator

Mr. Hubble, at this time there are no further questions. I will turn it back over to you for any closing remarks.

Henry Hubble

Thank you. Just before we end the call, I would like to summarize a few main points.

Exxon Mobil remains committed to providing product to the market safely, reliably, efficiently and responsibly.

As you can see from the results announced today, we are delivering on the commitments to our shareholders, customers, employees, and the communities in which we operate. We understand this is an important role entrusted to us by millions of people around the globe who rely on this supply every day, and we believe that our strategies and strengths will help us continue to deliver on that promise.

I would like to thank you for participating in the call.

Operator

That does conclude the conference for today. Thank you for your participation, and have a great day.

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Source: ExxonMobil Corporation Q2 2006 Earnings Conference Call Transcript (XOM)
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