ExxonMobil Q4 2005 Earnings Conference Call Transcript (XOM)

ExxonMobil (XOM)
Q4 2005 Earnings Conference Call
January 30th 2006, 11:00 AM.

Executives:

Henry H. Hubble, Vice President of Investor Relations and Secretary

Analysts:

Nikki Decker, Bear Stearns
Paul Cheng, Lehman Brothers
Mark Flannery, Credit Suisse
Doug Terreson, Morgan Stanley
Paul Sankey, Deutsche Bank
Doug Leggate, Citigroup
Neil McMahon, Bernstein
Daniel Barcelo, Banc of America
Jennifer Rowland, JP Morgan
Mark Gilman, Benchmark Company
Fadel Gheit, Oppenheimer & Company
Bruce Lanni, AG Edwards.
John Herrlin, Merrill Lynch

Presentation

Operator

Welcome to this ExxonMobil Corporation Fourth Quarter 2005 Earnings Conference Call. Today’s call is being recorded. At this time for opening remarks and introductions 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 H. Hubble, Vice President of Investor Relations and Secretary

Thank you. I’d like to welcome you to ExxonMobil's teleconference and webcast on our fourth quarter and full year 2005 financial and operating results. As you are aware from this morning’s press release, we had a very strong quarter. Our portfolio of businesses has performed well and we captured the benefits of the strong industry conditions. Many in the investment community were not expecting earnings of this magnitude. And this morning I will highlight the factors that have contributed to our performance, including those in our international business where results appear to have been most underestimated.

Before we go further 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 project outcomes could differ materially due to factors I discuss and factors noted in our SEC filings. Please see 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’s 8-K, and the 2004 financial and operating review on our website. This material defines certain financial and operating terms I will use today, shows ExxonMobil's net interest in specific projects, and includes information required by SEC Regulation G.

Now I am pleased to turn your attention to the specific results. ExxonMobil's fourth quarter net income was $10.7 billion or $1.71 per share. These results include a $390 million from resolution of the SABIC licensing dispute. Excluding this gain, normalized earnings were $10.3 billion or $1.65 per share. This was an increase of $1.9 billion versus the fourth quarter of last year. As you know, it’s been a quarter marked by strong commodity prices. But our performance is really distinguished by the underlying fundamentals of our businesses, underpinned by the hard work of our people. Operations are run safely and reliably. Investment decisions are based on long-term fundamentals. A key component of the corporation’s competitive position is its ability to successfully manage projects and costs, and improved efficiency in all aspects of its business. For example, while our earnings are driven in part by world commodity prices, our upstream earnings were at record levels in the fourth quarter because we also consistently delivered projects on time while successfully controlling cost.

I know many of you are interested in understanding the effects of the recent Gulf Coast hurricanes on our results. Our personnel in the US responded admirably, and our facilities both offshore and onshore by and large weathered the extraordinary challenges from the hurricanes. While our people managed our facilities to minimize the impact of the storms, they also worked to protect and help others. By the end of the year we had restored about 80% of our liquids production and about 90% of our gas production in those areas affected by the storms. All of our refineries affected by the hurricanes were started up by the end of October and were back to normal operations in November.

I’ll touch further on the hurricane effects when I comment on the business line results. But first I’d like to highlight some of the key milestones that occurred in the fourth quarter. Since our last earnings discussion we’ve achieved a number of significant milestones in the planning, development and execution of major projects in each of our business units. Let me start by commenting on the four major upstream projects that achieved milestones in the fourth quarter.

In Eastern Russia the first phase of our Sakhalin I project began production in October. This initial phase of the project is producing about 50,000 barrels of oil per day gross, and is expected to produce 250,000 barrels per day by the end of this year. Current gas sales of about 70 million cubic feet per day will rise to 250 million cubic feet per day by the end of the decade. Despite the project’s complexity and the challenging environment, the project start-up was on time and within 10% of the unit development cost expectations.

In Nigeria, the Bonga development began crude oil production in November, located in 3,300 feet of water, almost 100 miles off the Nigerian coast, the field is expected to produce 225,000 barrels of oil and 150 million cubic feet of gas per day. ExxonMobil's working interest is 25%. Bonga is an important contribution to oil production in Nigeria and is expected to increase total Nigerian oil production by 10%. We continued to progress our global LNG growth strategy in the fourth quarter. In November, we announced the launch of Ras Laffan III with Qatar Petroleum. This $14 billion, two train expansion projects will bring the total number of LNG trains operated by RasGas to 7, and increase LNG production at RasGas by 70%. Ras Laffan III includes two, 7.8 million ton per annum trains scheduled to begin production in 2008 and 2009. The fourth quarter also saw the start-up of production from the Al Khaleej Gas Project in Qatar. The $1 billion initial phase of this project will supply over 600 million cubic feet per day of natural gas to market.

ExxonMobil’s exploration opportunities were further expanded in December when the company signed an exploration and production sharing agreement with Libya’s national oil company to begin exploration activity offshore Libya. The agreement covers the large Cyrenaica Basin Contract Area 44, which was awarded to ExxonMobil in October. This 2.5 million acre block is located in water depths ranging from 10 feet to more than 10,000 feet.

In the downstream, the 2004 benchmarking results done through the third party Solomon survey are now available. ExxonMobil continues its industry leading position. We have higher capacity utilization, higher clean products yields and lower operating costs in the industry, allowing us to get more value out of our refining facilities. The downstream won acclaim this quarter for its superior operating record. For the fifth consecutive year, our marine transportation company was awarded the Sword of Honor by the British Safety Council, recognizing our safety systems as among the best in the world. And our Port Allen lube plant oil blending plant was awarded Star status in the OSHA Voluntary Protection Program for its excellent safety record.

In December, the Climate Protection Partnership Division of the US Environmental Protection Agency awarded our Beaumont refinery a 2005 combined heat and power certificate of recognition for its 473 megawatts onsite cogeneration unit that started up in 2005. In presenting the award, the EPA noted ExxonMobil’s exceptional leadership in energy management, estimating that the Beaumont co-gen unit reduces CO2 emissions by 2.4 million tons per year. Worldwide, we have over 80 cogeneration facilities with 3,700 megawatts of power capacity. Overall, relative to 1999, our energy savings initiatives have resulted in greenhouse gas savings equivalent to taking over 1 million cars off the road.

In chemical, we continue to advance plans to expand our Singapore plant. The project’s scope includes a world-scale steam cracker and associated derivative unit, including new polyethylene, polypropylene and specialty elastomers plants. It also includes an aromatics extraction unit and oxo-alcohol expansion. The new steam cracker would be integrated with ExxonMobil's existing refinery and chemical plant in Singapore and would significantly increase our supply capability in Asia.

In November, ExxonMobil Chemical announced that it is doubling its production capacity for its proprietary Expro specialty elastomers used in the construction of tire inner liners. The multimillion-dollar investment in Expro capacity at the company’s Baytown, Texas plant is targeted for completion in the fourth quarter of this year.

In October, we announced a plan to increase the production capacity of isopropyl alcohol at our Baton Rouge, Louisiana facility, already the largest IPA plant in the world. The expansion project, which is scheduled for completion in late 2006, will increase our isopropyl alcohol capacity to 380 kilotons per year. In addition to project start-ups and new initiatives, each of our businesses continues to find new ways to deliver savings to the bottom line through operating cost efficiencies. In 2005, we delivered in excess of $1 billion in before tax operating cost efficiencies. We will be providing more details at our upcoming analyst meeting in March.

Now turning to the business line results. Upstream earnings in the fourth quarter were $7 billion. This represents an increase of $2.2 billion, or 44% versus the fourth quarter of 2004. Higher realizations of $2.3 billion and positive one time items were partially offset by lower volumes. We continue to capture the benefit of strong industry conditions with upstream after tax unit earnings of $17.93 per barrel for the quarter. Worldwide crude sales realizations were strong at $52.89 per barrel, and were up more than $13 from fourth quarter 2004. Oil equivalent volumes decreased 1% versus the same quarter last year. Excluding hurricane effects fourth quarter oil equivalent volumes were up slightly. When entitlements and asset sales are also excluded, oil equivalent volumes were up 2%. New project additions more than offset normal field decline resulting in an increase of 5%, but were partially offset by lower European gas demand and higher maintenance activities in the North Sea.

Liquids production increased 64,000 barrels per day, or 3% versus the same quarter last year. Excluding entitlements, asset sales and hurricane related downtime, liquids production was up about 6% as work programs and project additions more than offset mature field declines. Gas volumes decreased 608 million cubic feet per day, or about 6% versus the fourth quarter of 2004. Entitlements, asset sales and hurricane related downtime reduced gas volumes by approximately 3%. While work programs and project additions more than offset natural field decline, lower demand and maintenance activities in Europe resulted in overall lower sales.

Turning to the sequential comparison versus the third quarter of 2005, upstream earnings increased about $1.3 billion, excluding the gain on the Gasunie restructuring. Realizations were up by $160 million, with strong natural gas prices offsetting falling crude prices. Increased volumes contributed about $800 million due to the startup of several new projects and the seasonal increase in natural gas demand. One-time items accounted for the remainder of the increase. Liquids production increased 7% sequentially, with the startup of multiple projects. Gas production was up 27%, primarily due to normal seasonal gas fluctuations in Europe, and the start up of the two new projects in Qatar that I mentioned earlier.

Now looking at the full year results. Excluding special items, full year 2005 upstream earnings were $22.7 billion, an increase of $6 billion, or 36%, over 2004. Significantly higher crude and natural gas realizations added $8 billion to earnings for the year. Volume effects reduced earnings by $2 billion. Full year oil equivalent production was down 3.6% versus 2004. Excluding hurricanes, divestments, and entitlement effects, oil equivalent production was down by less than 1%. Full year 2005 liquids volumes were down 2% versus 2004, primarily due to hurricanes, entitlements, and asset sales. When these items are excluded, liquids production was up by more than 1%.

Full year 2005 natural gas volumes were down 6% versus 2004. Natural field decline offset new production; hurricanes, asset sales and entitlements, maintenance activity in the North Sea and lower demand in Europe account for the decrease. For further data on regional volumes, please refer to the press release and IR supplement.

Turning now to the downstream results. Overall, the fourth quarter downstream normalized earnings of $2.4 billion were up approximately 50 million over the fourth quarter of 2004. Higher refining and marketing margins were partially offset by hurricane impacts on refinery volumes and operations. Several other items further reduced earnings, with the largest factor being negative foreign exchange effects of nearly $200 million. Sequentially, fourth quarter earnings increased by about $260 million. In the fourth quarter, worldwide marketing margins increased and contributed an additional $600 million to earnings. After declining to their lowest levels in most regions of the world in the third quarter, the improved marketing margins were the main factor behind the sequential increase in both domestic and international downstream earnings.

Volume and operational impacts reduced earnings by approximately $130 million, primarily due to lower refinery throughput associated with the hurricanes, and increased turnaround workload. Other factors reduced earnings by about $200 million, as positive LIFO impacts were more than offset by seasonally higher operating costs and other earnings events. Record full year 2005 downstream normalized earnings of $7.9 billion were up $1.6 billion from 2004. The positive margin impact of $2.3 billion reflects higher refining margins partially offset by lower marketing margins. Volume and refining operations impacts were negative $110 million. The benefit of improved refining operations was more than offset by lower US throughput due to hurricane related shutdowns. Other factors reduced earnings by $515 million, primarily the negative effects of foreign exchange, higher operating costs associated with the hurricanes, and increased workload.

Going forward, we know that near-term strong margins will drive further industry capacity increases. This together with continued productivity improvements and technology advancements within the industry will ultimately lower long-term margins. We work hard to improve in all these areas ourselves. For example, in 2005 refinery throughput was at its highest level post-merger. We refined over 5.7 million barrels of oil per day. When you exclude the impact of the hurricane our throughput was up 1.4% year-on-year, and light product production was up 94,000 barrels per day, or 1.9% year-on-year.

We also continued to develop greater raw material flexibility to allow us to use lower cost crudes. We ran over 120 new crudes in our refineries, 21 of which had never been processed in ExxonMobil’s refinery circuit. Within the industry typically 85% of downstream revenues go to pay for raw materials. Our ability to get higher value out of lower cost raw materials is something that we believe no one else can copy anytime soon.

Now let’s turn to the Chemicals results. Fourth quarter normalized earnings of $835 million were down by nearly $415 million versus the fourth quarter of 2004, primarily as a result of lower margins. Fourth quarter volumes were somewhat lower primarily due to hurricane impacts. Sequentially, fourth quarter Chemical earnings increased by nearly $365 million, primarily due to higher margins partially offset by lower volumes. Full year 2005 normalized earnings in Chemical were $3.4 billion about $25 million lower than our record 2004 earnings. Full year 2005 net income includes gains from the sale of shares of Sinopec and the fourth quarter settlement of royalty litigation with SABIC.

Full year chemical prime products sales volumes declined by, about 4% with nearly two-thirds of the decline attributable to hurricane impacts on our domestic operations. The overall strength of the 2005 results confirms our belief that our unique portfolio of chemical business lines integrated with our downstream and upstream facilities provide a business model that is both resilient flexible, and very difficult to duplicate.

Turning now to the corporate and financing segment. The company recorded $57 million of earnings in the Corporate and Financing segment, up 116 million from the fourth quarter 2004, mainly due to higher interest income. Full year 2005 corporate and finance charges of $154 million decreased by approximately $325 million from 2004, also due to higher interest income. Our cash balance was $33 billion, and debt was $8 billion at the end of the year.

During the fourth quarter, ExxonMobil purchased about 92 million shares of its common stock for the treasury, at a gross cost of $5.3 billion. In 2005, we reduced the shares outstanding by over 4%. Last week, the Board announced a 10% increase in the quarterly dividend. ExxonMobil has paid a dividend for more than 100 years, and has increased its annual dividend payment for 23 consecutive years. Capital expenditures in the fourth quarter were $5.3 billion, up 1.1 billion versus the fourth quarter of 2004. CapEx was $17.7 billion for the full year, an increase of 2.8 billion from the previous year. The effective tax rate for both the fourth quarter and full year was 41.5%.

In summary, we had a very strong year. Normalized earnings of nearly $33.9 billion were a record. In 2005 we distributed $23 billion of cash to our shareholders via dividends and share purchases, which reduced shares outstanding. We continue to identify and progress world-class projects at industry-leading returns and are well placed for continued growth in our businesses. These record results show that our disciplined long-term approach, while operating to the highest standards and developing and applying industry leading technology, continues to deliver superior value to our shareholders. That concludes my prepared remarks and I’d now be happy to take your questions.

Questions & Answers

Operator

Thank you, Mr. Hubble. The question and answer session will be conducted electronically toady. If you would like to ask a question please register by pressing the “*