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Here’s the entire text of the Q&A from ConocoPhillips' (ticker: COP) Q3 2005 conference call. The prepared remarks are 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.

Question-and-Answer Session

Operator

OPERATOR INSTRUCTIONS Gentlemen your question come from Arjun Murti with Goldman Sachs.

Arjun Murti

Thank you Jim. You just to the natural gas agreement in Alaska. Are there any additional details you can provide on that and what it is about that agreement that gives you more confidence and I guess essentially moving forward with the project, maybe what additional steps need to be taken if Exxon and BP have to come to an agreement as well. And is there any better estimate of the time when that might gets start moving forward or even start out.

James Mulva

Arjun Thank you. As you know the producing companies have been negotiating and discussing with the State of Alaska for a very, very long time period in way which we can move forward with the development of the Arctic gas resources of North Slope. And we made a lot of progress and which led to the announcement by our company obviously we look forward to ExxonMobil and BP reach an agreement with the State of Alaska here shortly. And we certainly would like to look forward to that. The State of Alaska, the Governor we have to keep the information somewhat confidential at this point of time because I believe the Governor intends to lay out all the details of this to the legislature which ultimately then will be considered by the legislature so I can’t really give out any more details that what we have announced because this is in agreement with the Governor and the State and all of us will be made known over the next several weeks for full review and discussion by the legislature and everyone within the State of Alaska, so that really what I can pass on to you.

Arjun Murti

Jim, would it only be the Alaska legislature body that needs to signoff in this or there any Federal approvals at least in terms of the primary agreements that are needed?

James Mulva

No the agreements that we are talking about, agreement in principle is between our company and eventually the other producers and the state of Alaska, so it’s really the state of Alaska, not other states or the Federal government.

Arjun Murti

And then just finally, does moving forward possibly with Alaska gas in anyway impact moving forward with Mackenzie gas which I know you did mention in your prepared remarks, you still, would you still also like move forward with Mackenzie gas.

James Mulva

Absolutely, we certainly want to move forward with the Mackenzie Delta gas. We would expect that Mackenzie Delta project would come before the Alaska North Slope project because it is further developed. It’s a large project but somewhat certainly somewhat smaller than the Alaska North Slope gas. So we would expect, we are very interested, we expect Mackenzie Delta to come first. This makes sense for all reasons and we certainly want to not be trying to do both high points at the same time. So the Canadian Mackenzie Delta comes first and then the Alaska North Slope.

Arjun Murti

That’s great. Thank you very much Jim.

Operator

Your next question is Doug Terreson with Morgan Stanley.

Doug Terreson

Good morning Jim, and congratulations on another record result. Your are welcome and in Refining and Marketing U.S. Petroleum product sales were well above that of the year-ago period in 2004 but within then quarter I want to see if there were meaningful differences in consumption growth between the different months meaning where demand trends considerably different in relation to the year-ago period for instance in July, August and September on kind of a comparable outlook basis whether you have in retail or wholesale and also if you guys have any updated consumption trends for October, that would be appreciated as well.

James Mulva

Well Doug its somewhat difficult for use to really respond to that, what I will say is obviously as you know, you know even before hurricane the supply demand situation was very, very tight and then with the impact of the hurricanes it has quite an impact with respect to supply and therefore had an impact obviously on the pricing environment. What we have done throughout all the time period of prior years and certainly through 2005 and now after the hurricanes all of efforts are directed and dedicated to getting our facilities up and running and maximizing the availability supply so as to meet the needs of consumers and to modulate the price impact in the environment. So what we see is not really any impact on in terms of how we run our operations, everything that we can make the market certainly wants to see the supply so it does have an impact pricing but in terms, if we don’t see anything unusual or strange in terms of demand for what we produce and the different channels by which we sell our refined product.

Doug Terreson

Okay. Great and then on the top of Arctic gas coming, is the development project in Russia is the project where above partners have been announced but there has been some favorable commentary toward your company and few others as it relates that outcome. Can you just give us an update there as well is the working expectation that partners will be announced by the end of this year or 2006 Autumn or is just to know?

James Mulva

Well, our company is been named one of five on the shortlist, we working on review of the study and development of Shtokman project, what gas Gazprom?. Gazprom is a very specific good program and time line by once they want go forward with the projects and the expectation is that the partners in this project and it will more than just one company in this project, there will several companies participating because it is a very large technically challenging and all. That will be done more in the March time period as I recall Gazprom has announced. So it wont be the end of the year but the study work continues such that it reaches to selection of the participants in the March 2006 time period. And then there is a quite aggressive program by which to technically and commercially move forward with the Shtokman so as to accelerate the time period in which production can be started and delivered to the North American markets specifically the U.S. can occur.

Doug Terreson

Okay. Congratulations again on great results.

James Mulva

Thank you.

Operator

The next question is from Bruce Lanni with A G. Edwards & Sons

Bruce Lanni

Yeah, same thing Jim and Gary congratulations on a great quarter. I have two questions you know basically the first one Jim is on your debt reduction in respect to the share buybacks. First do you have any targeted debt level on which you will go down to number one and how you are going to balance that out against share repurchases? And the second part of the question, some of your competitors now starting talk about high inflationary pressures. Could you go into any discussion on that and what you are seeing if you can quantify it, it would be great and will it impact your capital spending going into ‘06 and ‘07.

James Mulva

First with the respect to net debt reduction share repurchase. We are looking at some modest debt reduction as we go through the rest of this year and into ‘06 and ‘07. We don’t to, it’s not a priority objective for us to accelerate that reduction but we said overtime over the next several years to slowly let the debt come down to I would say that maybe a minimum of about $10 billion makes a lot of sense for us, but we don’t have to, cost by debt is very reasonable and so what we will do is slowly like we are this year maybe over the next several years a billion or so a year is what we have in mind. And then we want to be quite aggressive and very competitive on dividends. So with good strong earnings and cash flow we think that good discipline of having annual increases and dividends. And so the remainder then through cash availability really goes towards shares repurchase. Now what I would say though our capital spends for this year. Capital spends on organic growth and investment and all purchasing shares will grow. We are going to be spending in the neighborhood of ’05 $10 to $11 billion in this program. If you look at 2006 when we have November Analyst meeting you are going to see a similar amount of capital on investment spending going forward into the next year. So what I really coming to tell you we have as unique situation in our company. Yes we are strong in this environment, strong cash flow but we redeployed a good share of most of our cash flow right back into the growth and development of our businesses and when we talk about our businesses at both E&P and refining and marketing. With respect to the impact of inflation, inflation is having an impact on our cost structure and our capital spend and we intend to pretty thoroughly go through that in each of our businesses when we have our November presentation in New York city with the analyst. It is certainly is having, inflation is having an impact on operating cost and capital spends. But these are incorporated in our operating plans. We will talk about them and they are incorporated into the numbers when I talk about capital spending of $10 to $11 billion a year.

Bruce Lanni

Jim, but just going back to debt question, I mean, you quantify a minimum $10 billion but on a net debt basis what is the level that you are willing to go down to I guess as part from a capital efficiency standpoint?

James Mulva

I think what we’ve really said is the company is done very, very well over the last several years. Its beneficiary of various strong pricing environment, upstream and down stream. But also we have operated well and we’ve had the synergies and all of how we do our operations. We initially said we want to get that ratio down to 25% then the 20%. I don’t think we want see our debt ratio going below 15% to 20%. If already now almost 21% headed towards 20%. But I think the guidance I would say is we don’t want to maintain a hold a lot of cash so what we really see is bringing that debt down slowly towards $10 billion in absolute terms not holding too much cash and so we going to be quite aggressive in terms of capital program but our competitive dividend then will accelerate share repurchases.

Bruce Lanni

Perfect thank you very much and congratulations again.

James Mulva

Thank you.

Operator

Your next question is from John Herrlin with Merrill Lynch.

John Herrlin

Just a quick one on U.S. gas. You did have sequential production up even with the hurricanes predominantly onshore is my question? Was it gains?

James Mulva

Well we certainly were impacted by the hurricanes, but we do not have a great deal of offshore Gulf of Mexico production. So the impact to us probably relatively to the industry and our profile of gas production in Lower 48 offshore in the Gulf is less than other companies. So that is really why we probably work a little better in terms of our production in the third quarter.

John Herrlin

Great. One other one, you had spoken downstream is spending an incremental $3 billion downstream and over the next five years or so, given all that’s happened in the Gulf of Mexico, post hurricanes, do you think the industry will have the capacity to service your needs or will this be more protected?

James Mulva

Well. I didn’t know exactly where you are going with your question but we’ll again share with the financial community and the analyst in November, we are going to spend atleast an additional $3 billion in terms of our enhancing our capacity and capability of our refining system around the world. But definitely in the Lower 48 states because we have good opportunities but furthermore we also recognize the supply demand situation so we are going to be adding capacity. We had this in mind before the hurricanes. We came out and announced that we are going to significantly do whatever everything we could add capacity because we do have the opportunities and we are going to add capacity in many of our refineries we have 12 of them in the United States and we’ll share with you at the November Analyst. But we are also increasing our capability by which we can handle the lower quality group feedstock’s, that’s a good investment return for us, but more importantly also we will make greater proportion of transportation fuels. So it is a win-win to our company in terms of investment opportunities in the downstream but it also win for the country and for the consumers, because we’ve recognized several years ago the need for adding capacity and capability in our downstream part of our business. I think your question is concern we have, we are going to be able to do all of these things obviously the availability of contractors and service industries to perform and help us. That is a question for us but a lot of our projects have already been on the drawing board, we’ve lined up a lot the capability to help to do these things but no doubt you make a good point. As you go into the subsequent years this is question for us and that is the availability of the construction and service industries to serve what we are doing not only upstream but certainly downstream and because we have to got to make sure that we deliver our projects on schedule and within the cost constraints. But again (3926) is with you when we go through our views on it, they are very thoroughly upstream and downstream in November.

Operator

Your next question is from Nicole Decker with Bears Stearns.

Nicole Decker

Good morning Jim, just a couple of questions. First I haven’t seen any repaired cost, or cost associated with hurricane, can you quantify what that might’ve been in the third quarter?

James Mulva

In the third quarter it would be very modest because we were in the assessment stage alliance Nicky, and we shutdown our refineries at Sweeney and Lake Charles in advance for the hurricane so they would be more in the nature just operating cost. So we will have the substantial cost that we have will start appearing in the fourth quarter and though we think it is better that we update you on that in the November 16, at the analyst presentations.

Nicole Decker

Secondly as this project Iyambo, may be you could talk on what you anticipate in terms of timing of construction there and potential configuration of the plant?

James Mulva

Okay, I think your question relates to the new (4058) refinery to be built on west coast of Saudi Arabia?

Nicole Decker

That’s Right

James Mulva

Well. We are actively working with the Saudi Aramco, we are very interested in the project. We have commercial and technical teams working. We know that there are other companies who are quite interested in doing the same. We were encouraged and we also very interested in this investment opportunity because it fits very nicely with what we are trying to do in the downstream part of the business around the world globally. And it fits in quite nicely not only on refining side but fits nicely with our commercial attributes of what we are trying to do in terms of moving refined products both to the North American markets, Europe and Asia. But there is strong competition and I think the plans for the Saudi Aramco is to finalize determination of who in the company’s side they are going to participate in this as we through right this year and early into the year. But this is an opportunity that we take very, very seriously and we are quite very interested in doing and working with Saudi Aramco.

Nicole Decker

Is this intended to be a complex refinery?

James Mulva

It’s not right for me to get up and talk about this at this point of time. But I think what I really want to say is our company is obviously working, reviewing working with the Saudi Aramco, we are very, very interested in it, but it’s not yet been determined by Saudi Aramco which companies they are going to select to participate in this project and we expect that to be late this year earlier next year. John do you have something, do you have something more on this?

John Carrig

I was only going to just add that precise configuration of the refineries is not yet determined, that is something that, the technical teams are discussing and we’ll be determined when they make the selection of the party that is going to help them.

Nicole Decker

I see, okay. Thank you.

James Mulva

The other thing that I would say is it is very important given the current environment that we operate not only in the United States but around the world. When we are looking at adding, refining capacity, certainly we need to and want to do that in the United States and one of best ways of doing that is to add capacity and capability where we already have refineries. We are encouraged by the legislation that is passed, the new energy bill, the legislation passed because that is going encourage not only adding capacity in the refinery but hopefully newer refineries in the United States. But when you look at the opportunity of adding capacity and new refineries in Saudi Arabia while they may not be in the United States, it does provide over time more supply to worldwide market and refined product. Whether that facility is build in the United States or else, we need to do everything we can to add capacity and supply not only in our country, but Europe, Asia and certainly in the Middle East.

Operator

Your next question comes from Neil McMahon with Bernstein & Co.

Neil McMahon

Hi. Good two questions for you. The first one is really just looking at the jump in natural gas prices in the start of the fourth quarter, could you give us a sense of you mentioned higher utility both in terms of refining possibility, whether the increased cost of hydrogen, what pressures are you seeing in terms of refining profitability in the fourth quarter due to the higher commodity cost.

James Mulva

Well obviously, Neil, what you are seeing is important, we do recognize the cost of utilities, the cost of natural gas and all, and that we have all of our operations, not only downstream but upstream, cost of hydrogen, I think that is, I am not really the right one to respond to that, maybe we could do that offline and I know when we are in New York, Jim Nokes and the downstream people can certainly answer that question a lot better than I can.

Jim Nokes

Yeah. Neil, we can circle back with you.

Neil McMahon

Okay. Just the second question then. It is basically when you see the increase in terms of the LUKOIL investments on your productions profile, what seems to be happening from our numbers atleast is that you are loosing a bit of leverage of higher oil prices, the components of Russian production has got a higher tax rate, a few thoughts or advise going forward in terms of your upstream business, where the role of M&A, or major asset acquisition might sit into your strategy as it doesn’t seem that you are replacing reserves from a exploration point of view and areas of lower tax regimes are the fasten up pace to keep your leverage high with the higher oil prices.

James Mulva

Well. You made a good point. One of the things we do know is access to new areas of exploration. It is something that is become more and more difficult for our company in our industry and this access is not only around the world but it is also in the United States. A lot of things that obviously we are working on is what we can we do to increase our production, as an industry we need more access. So it is true what you are saying, more and more of the reserves recently have been replaced by companies based on all the exploration acreage that they have been working on apprising and developing, but we need new exploration acreages not only our company but others. So we are looking at business development opportunities where we go in and we know standard gas for LNG projects or there is heavy oil projects potentially in another place in the world but we pick our technology and financial resources and people to help get it up. But you made a good point then, when you look at all other things, exploration, business development, standard gas where we can go in with our capabilities to add reserves and production. We also look at the M&A market. What assets may be available for acquisition. That is very very competitive. As you know it is a pretty much a seller market, not a buyers market. We look at everything, we look for the opportunities but we also have to make sure that when we look at these things as a way of growing and developing the company, it is not in the way of support of what evaluation creation for the shareholder.

Neil McMahon

Just on the back of that, any updates on Libya?

James Mulva

Libya, I routinely go through Libya, working on the negotiations for reentry, our partners of the Oasis Group Amerada Hess and Marathon, we continue to have very good dialog and discussion with the authorities in Libya and it has taken us quite a bit more time but we are very interested in the opportunities and hopefully over the next several months we’ll have something positive to report going back in. Reentry of the Oasis Group in the oil concessions.

Neil McMahon

Great thanks a lot.

Operator

Next question comes from Doug Leggate with Citigroup.

Doug Leggate

Thank you and good morning everybody. Jim apologies for initial ratio, I think there was couple of minutes late getting on the call, the domestic gas realizations versus the indicators rising quite a bit, can you just remind us our goal again perhaps why that was?

James Mulva

Okay. May be John or Gary, can you answer that one?

John Carrig

There is nothing unusual about that I am aware of, I think it is a mix, we’ve a of course a lot the same on gas production. We’ll have to come back to you, it is that not something that is really talked out to a large degree.

Doug Leggate

Okay. I guess, Jim the only other question I have is a probably a follow-up to one of news, it kind of relates to your exploration and the outlook for 2005 as things have progress so far this year. Our understanding is that you’ve had some changes in the exploration team internally and obviously there has not been a great deal of news flows this year, can you give, a kind of fuel for hold, how comfortable you are with the exploration portfolio you have right now, furthermore, do you think you need to take some kind of more significant action to address the I guess a fairly small base of exploration successes and perhaps can you give us a feel for how you feel the exploration, reserve replacements might look this year, in the absence of any major projects?

James Mulva

Well when we come back precise, I think we’ve addressed some of this in earlier comments. Our company is no different from others, our exploration success could always be better and we are looking to certainly do everything we can to improve it. One of the things that very, very important is access and we do not have access to new acreage and new prospects that we’ve had historically over the past decades. And the other is that we do have some nice explorations success that has recently been announced and come forth in Asia, specifically in the Timor Sea of Asia. So I think really the changes we make are just routine changes of personnel from time to time and to different parts of the organization of the company, our exploration success is never good enough, we always can do better and we are emphasizing that, we do need access and we will share with you the successes and where we are going to exploration when we meet in November.

Doug Leggate

Okay. Just one point of clarifications. Major projects sanctions this year, am I missing anything or is there?

James Mulva

No. I don’t think your missing anything, you may, what is the common terms of adding reserve and get book this year verses next year.

Doug Leggate

Yeah. I am just trying to get feel for how the reserve replacement, how it might be for the current year?

John Carrig

Well I think we’ll share that with you in November but it is something premature for us, as we talking about this point of time what the reserve replacement will be this year.

Doug Leggate

All right so thanks very much indeed

John Carrig

Yeah. We normally do that early next year, late this year early next year.

Neil McMahon

Thanks.

Operator

Your next question comes from Gene Gillespie Howard Weil.

Gene Gillespie

Jim and Gary, again congratulations on a great quarter. Jim the freight price continues to or continues to see a lot of negative comments and inflammatory political comments regarding Venezuela, and I guess my question is basically, does this give you pause, given the fact that you do you have a large commitment there in number of future developments on the board that, in the past you’ve expressed the desire to pursue.

James Mulva

Gene, thank you, yes we are significant investor in Venezuela that comes by our heavy oil projects that we have with Petrozuata, Hamaca as well as the new offshore oil development Corocoro, and we had with partners exploration success. Our relationship with the, we understand following the questions that have come in terms of what you call, relationships in all Venezuela and United States and as we have a base with where we operate around the world. I would say this, that irrespective of the political situation between countries our relationship with Venezuela, Pedevesa that administering the authorities is very, very good. And we continue to do what we really do best. Which is to operate and commercially maximize with our partners, the other international oil companies as well as Pedevesa and the Venezuelan government. Good relationships by which we do we do best, and that is to operate oil and maximize the value of the oil. We also in discussion and work for the opportunities by which we can further enhance the capability and capacity of Petrozuata and Hamaca, with Pedevesa and ministers and with the other partners. So wherever we go, we have these issues and political risks but our investments and our returns have been good experience in Venezuela, we work very very hard, as I said relationships are good and we don’t see too much difference than what we said in the past quarters about continuing to work that hard and look for the new opportunities.

Gene Gillespie

We are basically more of the same, on the surface, the political stuff in the press, we do characterize that as being worse in reality.

John Carrig

No. Gene, I wouldn’t, it is not really appropriate for me to make a comment on what the political situation maybe between countries because that is really not our area. What I would I say is not just more of the same in terms of what we do, operationally in investment wise in Venezuela. We have very good operations, acceptable returns, we have additional opportunities, as I said a moment where we can expand and enhance our capabilities and investments there and we continue to work closely in good relationship with the minister and the authorities there that try to make this happen.

Gene Gillespie

Thank you.

Operator

Gentlemen your last question comes from Mark Flannery of CSFB.

Mark Flannery

I just wanted to get a little bit clarity on the Indonesian price impacts on volumes and also what you expect from, that is in the third quarter and the fourth quarter, what do we expect from hurricanes, into the fourth quarter, I am sorry if I missed that earlier in the call?

James Mulva

Well, obviously with expect to the hurricanes, the sooner we get our refineries up and running the less impact that has in terms of financial net income to the company and obviously we want to get them up and running for that purpose but also we increased supply that’s made available to our consumers in the southeast and throughout the country. So that we’ll share with you because we do have cost in terms of repair but we also have cost misinterpretation in the refineries. With respect to production levels as I said earlier production in the fourth quarters is going to be higher than the third quarter, you can then average all in, because we say we effectively began, for all of these different reasons be flat ‘05 compared to ‘04 in terms of the impact of the higher price structure for crude oil and its impact on production in Indonesia, as we said it does have an impact because the production here in contracts, I don’t know maybe Gary may have or John may have the numbers associated with that but if we don’t have today on the call, we’ll just circle back and give to you later.

John Carrig

Yeah thank you Mark. If you look at the supplemental information majority of the change in Indonesia related to the PSC impact from high prices.

James Mulva

And because we continue to grow and add new projects by which we can increase production, we do get the impact on the higher prices in November Mark, we plan to give a full year outlook for price reduction for Indonesia. For 2005 and also our product development, there will be some variation in ’06.

Mark Flannery

Okay thank you

James Mulva

Okay I guess this raps up our discussion on the third quarter results for ConocoPhillips. Once again I thank everybody for your interest in the company. You could find the slides that we went through as well as a transcript of the presentation we’ve made this morning on our website conocophillips.com.
Hope you all have a good day.

Operator

Ladies and gentlemen, we thank you for your participation in today’s conference. This concludes the presentation and you may now disconnect. Have a great day.

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