Here’s the entire text of the prepared remarks from Amerada Hess’ (ticker: AHC) Q3 2005 conference call. The Q&A is here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.
Jay Wilson, Vices President IR
John Hess, Chairman & CEO
John O'Connor, President Worldwide Exploration & Production
John Rielly, SVP & CFO
Arjun Murti, Goldman Sachs
Doug Terreson, Morgan Stanley
Doug Leggate, Citigroup
Bruce Lanni, AG Edwards
Nicole Decker, Bear Stearns
Mark Flannery, Credit Suisse First Boston
Paul Sankey, Deutsche Bank
Jennifer Rowland, JPMorgan
Paul Cheng, Lehman Brothers
Mark Gilman, Benchmark Company
John Herrlin, Merrill Lynch
Ted Ivatt, Bear Stearns
Paul Tice, Lehman Brothers
Good day ladies and gentleman and welcome to the Third Quarter 2005 Amerada Hess Earnings Conference Call. My name is Kelly and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will be conducting a question-and-answer session towards the end of this conference.
OPERATOR INSTRUCTIONS. I would now like to turn the presentation over to your host for today's call, Mr. Jay Wilson, Vice President Investor Relations.
Jay Wilson, Vice President IR
Good morning, everyone, and thank you for joining us for our third quarter 2005 conference call. As usual, with me today is John Hess, Chairman and Chief Executive Officer; John O’Connor, President of Worldwide Exploration & Production; and John Rielly, our Senior Vice President and Chief Financial Officer. I'll now turn the call over to John Hess.
John Hess, Chairman & CEO
Thank you, Jay, and welcome to our third quarter conference call. I would like to make a few brief comments after which John O’Connor will provide an update of our exploration and production operations; then John Rielly will review the financial results for the quarter.
Turning first to exploration and production. Our third quarter results benefited from record oil and natural gas prices. Production averaged 312,000 barrels of oil equivalent per day. Hurricane related downtime in the Gulf of Mexico and temporary facilities issues at several non-operated fields in the North Sea resulted in production being 3% below the year ago quarter. As of today we have restored about 50% of our total Gulf of Mexico production of 51,000 barrels of oil equivalent per day impacted by the hurricanes. We expect to have over 85% of our production restored in November and more than 90% in December.
Despite these short-term production effects, our exploration and production business is progressing favorably. Our development projects are on schedule and on budget, and we will drill some key exploration wildcats over the next two quarters.
Two weeks ago we announced an agreement with Apache Corporation to acquire its 55% working interest in the deepwater section of the West Mediterranean Block 1 concession in Egypt for $413 million. In a separate transaction Apache will acquire, subject to the exercise of preferential rights, Amerada Hess' interest in eight fields located in the Permian Basin in West Texas and New Mexico for $404 million.
This West Med acquisition fits with our strategy to grow our international natural gas business and we believe that our deepwater and sub sea experience will be a significant advantage as we develop the existing gas discoveries. In addition, we see further exploration potential on the block, which will enhance our global exploration portfolio. Also in October our Russian venture, Samara-Nafta, acquired two additional leases in the Volga-Urals region bringing Amerada Hess' investment in Russia to approximately $230 million.
With regard to refining and marketing, our operations performed well during the third quarter. The Hovensa joint venture refinery benefited from a strong margin environment but operated at somewhat reduced throughput as a result of a scheduled turnaround of the number six crude unit. Our marketing activities were negatively impacted by lower margins during the quarter. I will now turn the call over to John O’Connor.
John O'Connor, President Worldwide Exploration & Production
Thanks, John. Good morning, everybody. As with other operators in the Gulf of Mexico, we continue to make progress recovering from the effects of the two storms. Katrina destroyed our shore base at Venice, Louisiana and severely damaged production facilities in the Main Pass Breton Sounds area, which had been producing 4,000 barrels of oil equivalent per day. Hurricane Rita didn't harm our production facilities, but we've been impacted by the damage to downstream gathering and processing infrastructure. We're grateful, however, that none of our people were injured.
Overall the hurricane-related reduction to third-quarter production averaged 9,000 barrels of oil equivalent a day. Hurricane-related production effects will continue into the fourth quarter which may cause as much as an average of 17,000 barrels of oil equivalent per day to be deferred.
The third quarter is typically a period of intense maintenance activity in the North Sea and West of Shetlands. This year was no exception. However, several partner-operated turnarounds took longer than expected, the net effect of which was a deferral of some 5,000 barrels a day for the quarter. In addition, the buyer on BP's Schiehallion facility in July resulted in a deferral of some 4,000 barrels a day of production during the third quarter.
In the fourth quarter a major turnaround is now scheduled at the Schiehallion Field. This, together with a number of short-term facilities issues in the region, will likely lower production by an additional 10,000 barrels of oil equivalent per day. At the Malaysia-Thailand JDA the buyers of the gas remain in the commissioning phase with their onshore gas plant. While the gas is contracted with take-or-pay agreements, thus keeping us whole economically, we're reducing our production forecast for the fourth quarter by 12,000 barrels of oil equivalent per day. In consideration of these issues, we've revised our fourth-quarter production forecast to a range of 320,000 to 330,000 barrels of oil equivalent per day.
In addition to production, the hurricanes have impacted rig availability and thus the timing of our Gulf of Mexico wildcat program. Ouachita and Barossa are now scheduled to spud near year-end, and Turtle Lake is now moved to mid 2006. The Pony well, however, remains on schedule for a November spud and will take 100 to 120 days to reach total depth. I'll turn the call over now to John Rielly.
John Rielly, SVP & CFO
Thanks, John. Hello, everyone. Our earnings release was issued this morning and it appears on our website. In my remarks today I will compare third quarter 2005 results to the second quarter. Net income for the third quarter of 2005 was $272 million compared with $299 million in the second quarter. Included in the third quarter 2005 earnings are charges of $31 million related to the repatriation of foreign earnings under the American Jobs Creation Act of 2004 and $14 million related to hurricane activity in the Gulf of Mexico.
Turning to exploration and production, income from exploration and production operations was $235 million in the third quarter of 2005 including the $14 million hurricane-related charge compared with $263 million in the second quarter. Second-quarter earnings included income tax benefits of $11 million reflecting a tax rate reduction in Denmark and a tax settlement in the United Kingdom. Excluding these items E&P earnings were $249 million in the third quarter of 2005 compared with $252 million in the second quarter.
The after tax components of the decrease are as follows, average crude oil and natural gas selling prices increased by $67 million; crude oil and natural gas sales were lower by $65 million; all other items net to a decrease in earnings of $5 million for an overall decrease in third quarter adjusted income of $3 million.
The Corporation incurred incremental third-quarter expenses related to the hurricanes of $14 million after income taxes. The pretax amount of this charge is $21 million and is recorded in production expenses in the income statement. It is estimated that future hurricane-related repair costs will be approximately $10 million before income taxes and will be expensed as incurred. As indicated in the press release, lost production amounted to 9,000 barrels of oil equivalent per day, which is estimated to have reduced earnings in the third quarter by approximately $25 million.
The effective income tax rate on exploration and production earnings for the first nine months of 2005 was 42%. The full-year 2005 effective income tax rate is expected to be 43% to 45%. The after tax impact of crude oil hedges reduced third quarter 2005 earnings by $294 million compared with a cost of $231 million in the second quarter. The press release provides details on the portion of our future production that is hedged and the related contract prices. The after tax deferred hedge loss included in accumulated other comprehensive income at September 30, 2005 amounted to $1.7 billion. Of this amount $45 million was realized.
Turning to refining and marketing. Refining and marketing earnings were $125 million in the third quarter of 2005 compared with $98 million in the second quarter. Refining earnings consisting of Hovensa and Port Reading operations, interest income on the PDVSA note and other miscellaneous items were $144 million in the third quarter of 2005 compared with $77 million in the second quarter.
The Corporation's share of Hovensa's income after income taxes of $58 million was $93 million in the third quarter compared with $66 million in the second quarter. Port Reading earnings increased significantly in the third quarter of 2005 compared with the second quarter. After-tax interest income on the PDVSA note amounted to $3 million in both the third and second quarters. The balance of the PDVSA note at September 30th was $212 million and principal and interest payments are current.
Marketing operations principally consisting of retail and energy marketing activities had a loss of $22 million in the third quarter of 2005 compared with income of $14 million in the second quarter. The decrease was primarily due to lower margins reflecting the higher cost of post-hurricane product supply. After-tax trading results amounted to income of $3 million in the third quarter of 2005 compared with income of $7 million in the second quarter.
Turning to corporate. Net corporate expenses amounted to $54 million in the third quarter of 2005. The third-quarter results include an income tax provision of $31 million relating to the repatriation of foreign earnings to the United States under the American Jobs Creation Act of 2004. The Corporation's Board of Directors has now approved repatriation plans at the maximum level permitted under the Act. No further tax provisions for the Act are required.
By the end of the third quarter, $1,655,000,000 was repatriated under the Act. Second quarter net corporate expenses were $28 million including $7 million after-tax for premiums on bond repurchases. Excluding the tax charge and bond repurchase premiums, net corporate expenses were $23 million in the third quarter of 2005 and $21 million in the second quarter.
Turning to cash flow, net cash prodded by operating activities in the third quarter, including a decrease of $80 million from changes in working capital, was $484 million. The principal use of cash was capital expenditures of $657 million. All other items resulted in a net increase in cash of $15 million. We had a net decrease in cash and short-term investments in the third quarter of $158 million.
At September 30, 2005 we had $760 million of cash and short-term investments. Our available revolving credit capacity was approximately $2.1 billion at quarter end. The Corporation had debt maturities of only $1 million during the remainder of 2005 and $78 million in 2006. This concludes my remarks. We will be happy to answer any questions. I'll now turn the call over to the operator.
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