Here’s the entire text of the prepared remarks from ConocoPhillips' (ticker: COP) 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.
Gary Russell General Manager Investor Relation.
James J Mulva Chairman, Chief Executive officer.
Doug Leggate, Citigroup
Douglas Terreson, Morgan Stanley
John Herrlin, Merrill Lynch & Company. Inc
Nicole Decker, Bears Stearns
Arjun Murti, Goldman Sachs
Neil McMahon, Bernstein & Co
Bruce Lanni, AG Edward and sons
Gene Gillespie, Howard Weil
Mark Flannery, Credit Suisse First Boston
Ladies and gentlemen and welcome to the third quarter Conoco Philips earnings conference call my name is Jane and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question and answers session towards the end of today’s conference. If at anytime during the call you require assistance, please press “*” followed by “0” and a coordinator will be happy to assist you. I would now like to turn the presentation over to your host for today’s conference Mr. Gary Russell, General Manager of Investor Relations. Please precede Sir,
Gary Russell, General Manager, Investor Relation
Thanks Jane. Good morning and welcome to the Conoco Philips third quarter earnings conference call. I’m here today with James Mulva, our chairman and CEO and John Carrig EVP finance and CFO. During today’s call we will be referring to presentation material which will help us more fully to discuss our third quarter financial and operating performance. This presentation is designed to give you a better understanding of the factors that have a significant impact on this quarters results and could be found on our website conocophillips.com.
On page two you can see and read our safe harbor statement. It says among other things that in response to your questions and in our prepared remarks we will be making forward looking statements actual results may differ materially from those we expect today. A list of items that could cause these changes to occur can be found in our filings with the SEC. With that said, I would like to turn the call over to our chairman and CEO of Conoco Philips, Jim Mulva.
James Mulva, Chairman, Chief Executive Officer
Garry, thank you and I also want to thank every one for joining us today in our third quarter earnings conference call, we all appreciate your interest in our company and I am going to start my comments page 3. You can see from the highlights side commenting at another strong quarter. We generated $3.8 billion net income, $6.1 billion cash flow from operating activities and with the strong result we were able to fund the capital program and improve our financial strength flexibilities.
We reduce the debt level at $516 million to$13.5 billion. Therefore our debt to capital ratio was down 1% from 22% to 21%. During the third quarter, our U.S. Gulf Coast operations were significantly impacted by the hurricanes Katrina, Rita and Dennis. During the third quarter of ‘05 our E&P production missing excluding the LUKOIL segment was 1.52 million BOE a day. And this 1.5 million BOE a day is consistent with our interim updates that we provided to you earlier this month.
Our estimated share of LUKOIL’s production in the third quarter of 266,000 BOE a day as during the third quarter and reflects our increase equity ownership position. As done in past quarters we report net production and earnings using the equity accounting method under a separate LUKOIL’s investment segment for financial reporting.
Earlier in the quarter we finalised our DEFS restructure into our ownership about 50%. And refinery and marketing including hurricane impacts our refineries ran at 95% approved processing capacity that’s down 2% point from the last quarter, this is essentially relates to the impact of the hurricanes. Our average diluted shares outstanding compared to the last quarter was flat at 1.42 billion shares and our adjusted return on capital employed continues to be very competitive with the largest companies in the industry. We have a lot of Slides now we’ll go through to support all these numbers for further comments.
So I am going to move out to page 4 which is contribution in capital employed, we put these in all of our past quarter presentation in the pie chart in the next side of this Slide illustrates proportionate of operating income that our business segments generated during the first three quarters of 2005.
On the right hand side of this page it shows percentage of total capital employed with each segment as of the end of September 2005. You can see E&P generated 59%, the companies first three quarters income from continuing operations well represented 56% of capital employed. You can see the LUKOIL’s segment on the pie chart, more than half of that LUKOIL’s capital employed relates to E&P. So if you would separate that out, our E&P adjusted in our capital employed would be right at 60 to 61%. Refinery and marketing generated 32% of our income from continuing operations and had 29% of the companies capital employed.
Chemicals generated on a combined basis generated 4% of income represents 5% of capital employed. Then for LUKOIL’s the first nine months earnings were 5% of our income and represents 7% of capital employed, we’ll talk about capital employed in this Slide. I’ll just give you a few numbers, our E&P segment Capital Employed is about $35.7 billion, Midstream 1.7 million, Refinery and Marketing, $18.6, Chemicals $1.8 billion and the LUKOIL segments $4.7 billion. That is the ending capital employed. Now I am going to move on to Slide # 5 which talks about total company net income and compares with the third quarter of ’05 to the previous quarter in 05.
So you can see this sequential quarterly comparison, income from continuing operations. Higher worldwide realize all gas prices along with stronger worldwide refinery margins partially offset by the impact of high natural gas prices on inventory position, were the major sources of improvement which totaled $854 million in earnings compared to the previous quarter. You can see our earnings were impaired by the impact of hurricanes on our volumes, we’ll see this in more detail as we go to the presentations.
During the third quarter our DD&A were $48 million higher than the prior quarter. In addition, the impact of asset sales were $32 million lower this quarter than the previous quarter because the gains from the sale of certain assets in the second quarter didn’t occur in this quarter.
We incurred early debt retirement premium of $42 million in this quarter, other impacts to our earnings for the quarter include lower turnaround cost which were more than offset by higher taxes and utility cost as well as impairment associated with the discontinuation of our marketing incentive program in the downstream.
Result incomes from continuing operations was $3,804 billion, with this continued operations quite small amount generated loss of $4 million during the quarter, decreasing income quite high rate. So I am moving now to Slide #6 which shows the total company cash flow in the third quarter of this year.
As you can see cash from operations was $6.1 billion and we benefited from working capital changes approximately $2.4 billion in the third quarter mainly due to the timing of domestic, international tax payments, we make some domestic international tax payments for early part of the fourth quarter, so we expect this significant portion of this benefit will be offset in the fourth quarter since these payments were made.
The capital expenditure and investments amounted to $3.6 billion during the quarter. Included in these numbers were the acquisition of approximately 2.2% of LUKOIL shares and that represents a 838 million represents the increased ownership and restructuring of the Midstream DEFS. We paid $430 million in dividends, and that reduced to 516 million, and was at 588 million repurchased in 9.4 million shares of a common stock. Year-to-date we have repurchased now 20.9 million shares of our stock for $1.2 billion. Now after including other sources, our cash balance increased approximately $1.3 billion during the quarter.
Now I am going to move to the Slide #7 total company cash flow in September year-to-date and the pie chart will show you the sources used in the cash flow for the three quarters, hard on the left, total cash available was very close to $30.6 billion, 96% was generated from operations. On the right hand side of the chart, it shows that 63% of our cash generated about $8.6 million used to fund our capital investment programs, it shows that we continue to reinvest a significant portion of our cash flow right back to growth and development of all our business. The remaining 37% or about $5 billion in cash sources were spent from the dividends made on debt repurchase stock.
So now I am going to go to Slide #8 ratio improvement, with the strong earnings cash flow, continuing to improve financial positions strength and flexibility our debt capital ratio throughout all these quarters for last several years. The bar chart of the left shows the equity grew to $51.1 billion at the end of third quarter so for the nine months of this year our equity is up $7.2 billion or about 16%. The balance-sheet debt is down to $13.5 billions so the ratio is now 21%.
I am going to Slide #9, we are going to start talking few slides on exploration and production. Our worldwide realized oil prices went up 21% from the previous quarter, the total up was $56.64 a barrel in the third quarter. Our realized global gas prices up 16% to $6.38 per MCF. E&P production in the third quarter was slightly lower than previous quarter down about 1% and that is 16,000 BOE a day and I’ll talk more about that in a moment. The hurricanes Katrina, Rita and Dennis were the major contributors to oil production in the third quarter. I’ll go through this more in subsequent slides, our exploration expenses were somewhat higher but has been constituent with our plans.
I am going to go now to Slide #10 which just goes into total company production and compares the third quarter of ‘05 to the previous quarter, second quarter. And you can see the sequential variance, compared to this past quarter we saw reduced production in the Lower 48 as a result of the hurricanes as well as oil production in Alaska and the United Kingdom due to planned and unplanned downtime. For information purposes in Alaska the planned and unplanned downtime was about 10,000 barrels of oil equivalent a day, about 7,000 of that was planned and about 3000 was unplanned.
In the U.K we had about 34,000 BOE a day that was down primarily attributed to Britannia. About 30,000 BOE a day of the 34,000 BOE was planned and 4000 was unplanned. Looking at the slide the reductions were almost offset by higher production from what we realized in the Timor Sea, Vietnam and our offshore Gulf Coast production Magnolia. And then you have the 266,000 BOE a day of LUKOIL production to our E&P segment reporting production and you can see the total ramp for the company is 1.79 million BOE a day.
I am going to the next Slide #11, we compare sequentially the net income for E&P. And you can see in the third quarter it had increased $359 million dollars over the previous quarters so we are up at $2.3 billion. To the benefit of higher realized commodity prices partially offset by the impact of higher natural gas prices. Our inventory positions and increased production taxes as a result of a high commodity prices. All of this will improve this quarter’s income $487 million.
Putting this in perspective, the higher crude oil prices accounted for nearly 80% of this improvement to one quarter to the next. A higher DD&A reduced our E&P income about 48 million and our Lower productions as a result of the hurricanes further reduced our EMP income by $21 million. Other factors that reduced our third quarter E&P income as compared to the higher quarter or higher taxes and utilities as well as the absence of favorable settlements in gains on asset sales that we had in the second quarter that did occur in the third quarter.
I am going to Slide #12 we are now moving to refining and marketing. We benefited this quarter from higher worldwide refining margins. In the U.S. our third quarter realized spread rose $3.38 a barrel to a $14.61 a barrel and our international crack spread rose $1.65 a barrel to $10.44 a barrel. In the U.S our refining system ran at 93% of stated capacity that down from 98% previous quarter. It’s a century old as a result of the impact of hurricanes in our Gulf Coast refineries alliance by Charles Sweeney.
Our international refining system ran just a little bit over stated capacity. U.S. wholesale and international marketing margins were significantly lower than the previous quarter and our turnaround expenses amounted to $53 million before tax during the third quarter. And this is in line with our expectations and are $53 million lower than we realized and with turnaround expenses in the previous quarter.
I am going to Slide #13 which is with comparison of refining income, net income the third quarter and over the second quarter. And you could see we generated $1.4 billion net income during the third quarter, that’s up 25% from the prior quarter. The higher oil worldwide crack spreads partially offset by oil worldwide marketing margins that I spoke about earlier, resulted or contributed $339 million of increased net income from the second quarter to the third quarter. The volume impact of the hurricanes on our U.S. Gulf Coast refineries decrease our net income by $103 million. The rest of our refining system ran quite well, running higher volumes than in the previous quarter and this led to an increased net income sequentially about $81 million. There are a number of other facts to the sequential earnings, they include oil turnaround costs which are more than offset by higher taxes and utilities, impairment resulting from the discontinuation of our marketing and incentive program. In the absence of gains on the sale of assets in the second quarter that did not reoccur in the third quarter.
Now I am going to Slide #14 which shows a little bit more information on refinery and marketing earnings sequentially. You can see the relative contributions of refinery marketing’s business segments during the first three quarters of this year, you can see essentially all of our earnings are coming from refining. As I mentioned earlier, our refineries are round the world were not impacted by the hurricanes, ran very, very well, it’s reflected here. In the third quarter of ‘05,our U.S marketing margins were significantly impaired and international marketing margins were lower than the previous quarter.
I am going to give you some numbers that give you an indication of just where the earnings come from associated with this slide. If you look at just refining, in the United States, our income was $1,296 billion, international refining income is $270 so that adds up to $1,566 Billion. On marketing in the United States we’ve lost $209 million, a positive income in marketing and international about $20 million so from marketing the net worldwide is a loss of $189 million. If we add refining and marketing then the total refinery and marketing in U.S net income was positive of $1,96 billion and international it is $294 million. So that total of U.S, and International is a $1,390 billion. These numbers do not add up perfectly because included in our refinery marketing business, we have some other businesses. Smaller impact, our specialty business is included in our downstream results as well as we have some cost associate with the headquarters associated with the operation of our downstream business.
I am going to Slide No.15, which is a LUKOIL investment. Earlier we increased our equity ownership by 2.2%, we are now up to 14.8% ownership. As a result our average ownership for the third quarter was 14.2%. Our equity earnings for the third quarter from this segment $267 million dollars, up from $148 millions in the second quarter.
I am going to Slide #16 which is kind of a consolidated side of our Midstream chemicals emerging business segment. You can see the earnings from the Midstream business is $88 million in third quarter, it is up $68 million in second quarter. The sequential increase in earnings is primarily due to higher natural gas liquids prices and increased ownership and DEFS. This was partially offset though by the volumes that related to oil volumes that related to the disposition of the Canada Empress System.
In our chemicals joint venture with Chevron our earnings fell $30 million in the third quarter from $63 million in second quarter. The decrease in chemical earnings in the second quarter is slightly due to lower margins fro olefines and polyolefines and the effect of hurricane related shutdowns and higher utility cost. If you look at the decline in income from the second to the third quarter, nearly 80% of this decline is attributed or associated with the impact of the hurricanes in the Gulf Coast. Emerging businesses results were slightly positive compared to the second quarter and it is primarily due to stronger financial performance from our domestic and international power operations.
I am going to Slide #17 which reviews the corporate segment. And you could see its impact on continued operations was a loss $242 million in the third quarter compared to a loss of $179 million in the second quarter. We did have slightly lower interest expense in the third quarter as compared to the previous quarter, but we occurred an early debt retirement premium of $42 million dollars in the third quarter. We had some higher benefit related charges and unfavorable foreign exchange impacts to the third quarter. The losses from discontinued operations were $4 million, its mainly related to the marketing assets held for sale.
I am going to Slide #18 I’ll just include this in our conference calls Return of Capital Employed, you can see that if the numbers are not available for the third quarter for the peer group. When we talk about the peer group we are talking about public trading companies that are larger than Conoco Phillips. You can see our return on capital employed continues to be very competitive with the largest companies in the industry. In the third quarter of ’05 our ROCE adjusted for purchase accounting was 35%. Improvements in pricing commodity price and margin environment, it was good operating performance, continue to have positive impact on return on capital employed. If you look at the third quarter and you analyze return on capital employed in the third quarter by segment, associated with combine 35% and the numbers for E&P are 42%, Refining and Marketing 43%, the combined Midstream chemicals is 14%, LUKOIL 25% and when you look at the total as you see on the slide is 35%.
So now I am going to the last file that we have on our opening comments in our presentation Slide #19 which is the outlook. Our overall strategy objectives, financial goals we have laid out our operating plans, consistent remain unchanged. The hurricanes did have an impact on what we’ve achieved in the third quarter and what we expect to achieve then for the entire year of 2005. We expect our fourth quarter E&P production in barrel of oil equivalent be higher than the third quarter and anticipate our entire year of 2005 production to be flat for 2004. And it would have been up if we did not have the impact of the hurricanes.
This is not different from what we’ve indicated earlier several weeks ago in our interim update. Our increased production in the forth quarter versus third quarter will come primarily from the UK, Norway, Vietnam and Alaska. And if you include LUKOIL we expect total BOE production will be approximately 1.80 million BOE a day for the year.
Turning to the refining side of business our efforts to restore our Gulf Coast refining operation continue, Sweeney Refinery returned to normal operations very quickly after hurricane Rita. And we expect our Lake Charles refinery to be at normal operations by next week in the process of starting up part of our operations. The Company’s alliance refinery is expect to begin partial operation in December and return to normal operation early 2006. As business conditions permit we plan to continue to repurchase company stock until we retire debt. The company continues to pursue opportunities to increase our domestic energy supply through our LNG gas projects, the Canadian Oil Sands projects and projects aimed at developing Alaska, Mackenzie Delta gas resources. Specifically, last week the company and the state of Alaska recently announced an agreement in principle on base fiscal terms for a natural gas pipeline contract that will progress the development of Alaska’s North Slope gas. Additionally, we are advancing our plans to expand our overall refining capacity and clean fuels capabilities. And all of these sites, all of these projects strategies and operating plans will be thoroughly reviewed with you at our November Analysts meeting in New York city so this concludes my prepared remarks and so we are willing to entertain questions that you might have. James? I’ll turn it over to you to start questions.
Ok Jane, why don’t you bring up the first question if you would please?
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