Here’s the entire text of the prepared remarks from Exxon Mobil’s (ticker: XOM) 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.
Henry Hubble, Vice President, Investor Relations & Secretary
Doug Terreson, Morgan Stanley
Bruce Lanni, AG Edwards
Arjun Murti, Goldman Sachs
Doug Leggate, Citigroup
Paul Cheng, Lehman Brothers
Nicole Decker, Bear Stearns
Mark Flannery, Credit Suisse First Boston
Neil McMahon, Sanford Bernstein
Paul Sankey, Deutsche Bank
Mark Gilman, Benchmark Capital
Jennifer Rowland, JP Morgan
John Herrlin, Merrill Lynch
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, Vice President, Investor Relations & Secretary
Good morning and welcome to ExxonMobiles teleconference on our third quarter 2005 financial and operating results. Overall we had a strong quarter, we achieved a number of important milestones while successfully dealing with the many challenges brought about by the Hurricanes. I will have more to say about those in a few minutes.
Before I start I’d like to draw your attention to our safe harbor language. Please note that estimates, plans and projections are forward-looking statements. Actual results including resource recoveries volume growth and product outcomes could differ materially to the factors I discussed and factors noted in our SEC filings. Please see filings stated factors affecting future results and 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 8-K and the 2004 financial and operating review on our website.
This material defines certain financial and operating terms that we use today, shows Exxon Mobil’s net interest in specific projects and includes information required by SEC regulations G.
Now I am pleased to turn your attention to the specific results. It has been a quarter, marked by strong commodity prices, operating and supply challenges due to the hurricanes and the achievement of several important project milestones. Exxon Mobiles third quarter net income was $9.9 billion or $1.58 per share. These results include a $1.6 billion dollar gain from the transfer of our 25% interest in a Dutch gas transportation business.
Excluding this gain normalized earnings were $8.3 Billion $1.32 per share. This was an increase of $2 billion versus the third quarter last year. I know many of you are interested in understanding Hurricane impacts on our business. The focus of our work continues to be on helping the affected communities recover, through rapid response to the needs of our customers and restoring our facilities as quickly as possible to ultimately reduce the impact on every one.
Regarding our operations, on onshore productions facilities did receive some limited damage that curtailed production. Today we’ve restored much of our production but due to the storm’s impact on industry infrastructure it will take more time to reach pre-hurricane production levels. In our refining and chemical operations the hurricanes primarily affected the Shamrock Refinery joint venture in New Orleans. And our refinery and chemical complex in Boma, Texas. At this time Boma has restarted and is in a process of returning to normal operations. Chalmette is completing repairs with a base startup immanent.
Our two other Gulf Coast refineries Baytown and Baton Rouge were each impacted only for a short period of time. Although our operations are returning to normal, reduced volumes and higher cost will also impact the forth quarter.
Focusing now on the industry the hurricanes had a significant impact and resulted in rapid changes in commodity prices. Due to the loss of industry refining capacity refinery margins increased while marketing and chemical products margins were compressed. With the rise in prices consumption was reduced and additional imports were attracted. In short the market worked and in recent weeks prices have to declined.
I’ll discuss additional details of the hurricane impacts when I comment on the results of the business segment. But first I would like to highlight some of the key milestones that occurred during the quarter. Since our last earnings discussion we’ve achieved a number of significant milestones in the planning, development and execution of major products in each of out business units.
Let me start by commenting on the six major projects that achieved milestones in the third quarter. They reflect the discipline of our investment process and I think it is worth noting the decisions to make these investments were made years ago at a different point in the commodity cycle and today we are recognizing the results of what has been achieved. Our performance demonstrates the strength of our project management expertise and our ability to successfully employ our industry leading technology. In the upstream, the first phase of our Sakhalin-1 project in offshore Eastern Russia began production. The financial phase of the project is expected to produce 50,000 barrels of oil per day by the end of the year, and 250,000 per day at by the end of 2006. Initial gas sales of about 50 million cubic feet per day will rise to 250 million cubic feet per day by the end of the decade. Despite the projects complexity and the challenging environment the product start up was on time and the unit development cost is within 10% of expectations.
In July we began production at the $3.5 billion Kizamba B project on Angola Block 15. Exxon Mobile designed the world’s largest floating production storage and offloading vessel for use at this location. The benchmark development came online five months ahead of schedule.
With Kizomba A these projects lifecycle time records with the lowest unit development cost for products of their scope. Gross production from Angola Block 15 is currently over 550,000 barrels of oil per day. We continue to advance our global LNG strategy with the commencement of several important activities by our Qatar joint ventures.
In August LNG train-4 RasGas 2 project was successfully commissioned. The project is among the largest LNG manufacturing facilities in the world today. And was constructed on time and within budget.
In September RasGas 2 and the Chinese Petroleum Company signed a 25-year 3 million ton per annum LNG supply agreement to commence in 2008. RasGas train 3 awarded the EPC contracts they for trains 6 and 7, two world-scale 7.8 million ton per annum LNG liquefaction trains.
Technology extensions that capitalized on economies of scale had been key factors in making to Qatari LNG cost competitive for export worldwide. In Malaysia Exxon Mobil installed Guangtong-E gas compression platform. Once fully operational in 2006 the new platform along with the two existing nearby platforms will have a combined handling capacity more than 800 million cubic feet of gas per day.
Guangtong E will allow Exxon Mobile to develop additional discovered gas resources in Malaysia.
In Europe we completed the restructuring of our Dutch gas operations, with the transfer of our 25% interest in the Dutch transportation business. The transaction added $1.6 billion to net income in the third quarter. Exxon Mobile’s exportation opportunities were further expanded in two-acre standards.
In September our subsidiary was awarded 20 contiguous blocks in the U.K. North Sea. The award constitutes approximately 1.2 million acres and it is the largest single license award in the history of the U.K. continental shelf.
In October National Oil Corporation of Libya announced that Exxon Mobile has submitted the winning bid for exploration rights in Contract Area 44. This 2.5 million acre offshore block nearly the size of Connecticut marks Exxon Mobiles first commercial venture in Libya in more than two decades. In the downstream we signed a five-year supply agreement in which Exxon Mobile will supply private label oils to Caterpillar factories and dealer worldwide. The agreement continues the long-standing successful partnership between the Caterpillar and Exxon Mobile.
In chemical we announced a plan to increase the production capacity of Isopropyl Alcohol at the Baton Rouge and Louisiana facility, already the largest IPA plant in the world. The expansion project, which is scheduled for completion in late 2006 will increase the Isopropyl Alcohol capacity to 300-kilo tones per year.
Turing to the business line results, may find useful to refer to the earnings reconciliation provided in the IR supplement. Excluding the $1.6 billion gain on the Gasunie restructuring upstream earnings of $5.7 billion were up $1.8 billion or 46% versus the third quarter of 2004. Higher realizations of $2.1 billion were partially offset by lower volumes. The net affect of other earnings events was balance positive. We continue to capture the benefit of strong industry conditions, with upstream after tax earnings of $16.0 and $0.68 per barrel for the quarter.
Worldwide crude sales realizations were $58 per barrel up more than $18. Our oil equipment volumes decreased 4.7% versus the same quarter last year. Entitlement impacts, asset sales and hurricane effects reduced volumes by 3.6%. Lower European gas demand and higher maintenance activities further decrease volumes by approximately 2%. New project divisions more than offset normal field decline.
Liquids production decreased 58,000 barrels per day or 2.3% versus the same quarter last year. Excluding entitlements asset sales and hurricane related downtime liquids productions was up 1.8% at work programs and project divisions primarily in Africa, the North Sea and the U.S. more than offset mature field decline.
Gas volumes decreased 764 million cubic feet per day or about 9% versus the third quarter of 2004. Entitlements, asset sales and hurricane related downtime reduce gas volume by approximately 3%. Primarily lower demand in maintenance activities in Europe accounted for the reminder. Work programs and project divisions offset mature field decline.
Turning to the sequential comparison versus the second quarter of 2005 upstream earnings increased about $820 million excluding the gain on the gas and restructuring. Realizations improved by about $1.2 billion and were partially offset by the $350 million impact of lower volumes primarily due to lower seasonal gas sales, hurricane impacts and plan maintenance activities.
Liquids production declined 1% sequentially as mature field declined entitlements and hurricane related downtime were essentially offset by additions due to work programs and startup of Kizamba B. Gas production was down 11%primarily due to normal seasonal gas fluctuations in Europe and hurricane impacts. Before we move to the downstream results let me summarize the upstream hurricane impacts.
Third quarter volumes were down approximately 50,000 oil per equivalent barrels per day due to hurricanes Rita and Katrina. Today we’ve restored 70% of the production impacted by these two hurricanes. We estimate the fourth quarter upstream volume metric impact will be approximately 80,000 oil equivalent barrels per day. For further data on regional volumes please refer to the press release in IR supplement.
Turning to the down stream, despite the hurricane effects third quarter 2005 refinery throughput and petroleum product sales remained strong. U.S refinery margins grows rapidly do to the hurricanes but marketing margins were break to negative in the U.S. for much of the quarter. Overall third quarter downstream normalized earnings of $2.1 billions were up the approximately 725 million over the third quarter of 2004.
Year-on-year higher industry refinery margins of $1.1 billion were partially offset by weaker marketing margins of 250 million. Marketing margins were the lowest point of the year. Year-on-year the net volume and refinery operations impact was a negative $140 million. As stronger refinery operations were more than offset by hurricane impacts. Following the hurricanes Exxon Mobile maximized gasoline production from all of our refineries which were operating in the U.S. and increased imports from the overseas of affiliates to meet U.S demand.
Our refineries outside of the hurricane impacted areas achieved best ever reliability performance for the quarter. We set 38 new monthly unit rate or production records during the quarter and ran seven crude to new Exxon Mobile and 40 new to individual refineries. We continue to economically increase our refining capacity to improving the reliability of our operations and making selective capital investments to grow capacity. Sequentially third quarter earnings decreased by about $100 million. Higher refining margins contributed an additional 360 million and were offset by lower marketing margins.
Volume and operational impacts largely due to the hurricanes reduced earnings by approximately $60 million versus the second quarter. Looking directly at the impacts of the hurricanes on our downstream operations, refinery throughputs in the third quarter were reduced by about 140,000 barrels today. In the fourth quarter of 2005, we expect all refinery operations to return to normal and anticipate hurricane impact at about the same level as the third quarter.
Turning to chemical, as I mentioned earlier the loss of refining capacity led to a compression of the chemical margins, however demand remains strong. Third quarter normalized earnings of $470 million were down by nearly $530 million versus the third quarter of 2004. Primarily as a result of lower margins, the rapid increases in feed stock cost outpaced the increase in product prices. Against the background of unprecedented industry outages demand remained generally firm as customers continue to restart ahead of announced price increases.
Third quarter sales volumes were the highest quarter year-to-date although down versus the third quarter of 2004. The product mix resulted in a positive earnings impact. Excluding the gain from the sale of shares sign effect year-to-date earnings in chemicals now stand at $2.6 billion, nearly 400 million more for earnings generated in the first three quarters of last year. These year-to-date results demonstrate the strength of our chemical business model featuring integrated operations and advantage feed stocks.
Sequentially third quarter chemical earnings decreased by about $350 million. Weaker margins accounted for 460 million of the decline. Our sales volumes of nearly 6 % versus the second quarter added a $110 million.
Turning now to the corporate and financing segment. Corporate and Financing expenses of $29 million were down about $18 million from the third quarter of 2004. Primarily due to higher interest incomes. Our cash balance was $34 billion and debt was $8.5 billion at the end of the third quarter. During the third quarter, Exxon Mobil purchased $5 billion worth of shares to reduce shares outstanding. Overall during the quarter we purchased 91 million shares of our common stock for the treasury at a gross cost of $5.5. billion.
CapEx in the third quarter was $4.4 billion up $780 million from the third quarter of 2004. Primarily due to planned upstream activity. At the end of the third quarter you did a CapEx spending total $4.4 billion approximately 1.7 billion higher than the CapEx level at the end of the third quarter of 2004.
Additional capital spending in our OBL projects and the acceleration of Qatar LNG activities will result in full year CapEx of approximately $18 billion. The effective tax rate for the third quarter was 42%. Before we move to the Q&A’s I’d like to take a moment to summarize the key messages from this morning’s call.
Our records third quarter results reflect the strong commodity prices and our fundamental business model that is disciplined, straightforward and focused on generating value while managing risk. Despite challenging industry conditions we have maintained our focused on operating safely and efficiently. We are proud of our people and the businesses we are responding to unprecedented events caused by the hurricanes. Evidence of our superior project management skills continues to be displayed by our delivery of startups on time we are ahead of schedule, had cost on budgeted better. Our broad and diverse portfolio projects, creates ongoing opportunities to continue to bring new resources online. That concludes my prepared remarks and I’d now be happy to take your questions. Thanks.
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