Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

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

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-and-Answer Session

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 “*” key followed by the “1” on your touchtone telephone. We request that you limit your number of questions to two so that many may have the opportunity to further state as possible. If you are using the speaker phone please make sure your mute function is turned off to allow your signal to reach our equipment. We will proceed in the order that you signal us and we will take many question as time permits. Once again please press “*”, “1” on your touchtone telephone to ask a question. If you find that your question has been answered you may remove yourself by pressing the “*” key followed by the “2”.

We’ll now take our first question from Nikki Decker with Bear Stearns.

Q - Nicole Decker

Hi, Henry.

A - Henry Hubble

Hi, Nikki.

Q - Nicole Decker

I am still having a little difficulty understanding the strength in the international EMP. I was wondering if you could just talk about four effects year-over-year operating costs, tax affects, foreign exchange, and one-time items?

A - Henry Hubble

Well if you start, just looking, the biggest single factor obviously is in the margins year-on-year.

Q - Nicole Decker

Yes.

A - Henry Hubble

But then, if you go and look at the impacts of foreign exchange, they were really minor, it was a negative 50 for the upstream. And then if you go into, what were the other pieces that you were looking at?

Q - Nicole Decker

Operating costs and one time items?

A - Henry Hubble

Yeah. Well when you think about operating costs, we continue to work very hard at offsetting our effects of inflation. And basically if you look at the results we had, kind of look at this across the entire company, but if you look at after you exclude the impacts of energy and For-Ex, we basically delivered operating cost efficiencies. And these are things that come about from a wide variety of different steps, you know, it is technology improvements, it is operating cost control, it is focus on productivity, efficiencies with our people. But if you look at that over $1 billion that we delivered during the year, it basically offset inflation and other impacts. And then the only other impacts on our operating costs are really associated with the new business that we were adding. And then if you look at the other one time items, positive items, there was a, the largest single one in the period-to-period comparison in the fourth quarter versus fourth quarter ‘04 was the property sale in Canada to ARC Energy. That was the biggest factor there.

Q - Nicole Decker

Can you quantify that amount?

A - Henry Hubble

Its, we really haven’t come out with the number from our side on that one.

Q - Nicole Decker

Okay. Thank you, Henry.

A - Henry Hubble

But it’s big piece of that.

Q - Nicole Decker

Okay.

Operator

And we will take our next question from Paul Cheng with Lehman Brothers.

Q - Paul Cheng

Hi, good morning guys.

A - Henry Hubble

Hey, morning.

Q - Paul Cheng

Two question, Henry, one, is there any rule of thumb you can help us to understand what is the $0.81 per gallon change in retail margin and wholesale margin may have an impact on your net income both in US and international for the downstream. Second question is, in Europe, the gas volume is really low no matter how you slice it. Is that all because of the weather or that have an impact, maybe some constraints from the availability of, you know, capacity in the area; because it’s a very mature area. So I’d assume capacity is on the decline. So, and you’re trying to quantify for us that? I mean, how big of the impact is, from the weather and how big is, because of other factor?

A - Henry Hubble

You’re looking at the European gas volumes?

Q - Paul Cheng

Yes sir.

A - Henry Hubble

Fourth quarter versus fourth quarter?

Q - Paul Cheng

That’s it.

A - Henry Hubble

Yeah, if you look at the demand impact there, we were down about, let’s say about 2.4% was associated with European demand. So, it’s about half of that, a little less than half of that total. So, and that’s basically a reflection of warmer weather, you end up seeing that basically going through this period.

Q - Paul Cheng

And Henry, so the rest is presumably, is because of the capacity is down?

A - Henry Hubble

Well you also had down time in there too, you know, we had, we continue to have some impacts associated with, now if you are going, again, if you focusing on Europe, it would be downtime there in Shearwater and some at Brent. Now if you are talking about global gas demand, of course we continue to have impacts from hurricanes and…

Q - Paul Cheng

No, I am just focusing on Europe I mean because that is the biggest number that caught my eye, and I am trying to understand how much is the weather-related and how much is the other factor that we should build in on a continued basis?

A - Henry Hubble

Well, you know downtimes, you know those, there is a scheduled, planned and unplanned, and we ended up with some larger impacts though associated with our Shearwater and Brent operations there.

Q - Paul Cheng

Okay. And how about the first question I had related to the impact to your earnings on the retail and wholesale margin changes on the International and US downstream?

A - Henry Hubble

Well, we don’t really have any rules of thumb that I can give you in terms of how those impact us. It’s very dependent on the geographic mix and the changes that are occurring around the world. Probably the best thing to do is looking at trying to track the various margins around the world and adjust that toward our mix of business. But if you look at, if you look, again, you are looking at fourth quarter versus, or sequentially what are your...?

Q - Paul Cheng

No, I mean, Henry I am not even looking at it from that standpoint. I am just trying to understand, let’s say if we know the quarter; the retail margin is up say a penny per gallon across all the markets. I am trying to understand, I mean how big of an earnings impact to your quarter is it going to be and if it is a penny per…

A - Henry Hubble

Yeah, I don’t really have a rule of thumb for you on that. I mean you can go through and look at, we’ll give you the individual product sales by area, and then you have to go and look at the impact on margins in those areas. And that’s probably going to be the best you have.

Q - Paul Cheng

Okay, very good. Thank you.

A - Henry Hubble

Yep.

Operator

We will go next to Mark Flannery with Credit Suisse.

Q - Mark Flannery

Hi, Henry.

A - Henry Hubble

Hi, Mark.

Q - Mark Flannery

I have got two questions, one is simple, for the Africa oil volumes for this quarter about 795,000 barrels a day, is there anything unusual in there or is that simply reflective of the Bonga startup and one or two other things ramping up at the same time? In other words, is that a ratable number for going forward or is there other unusual positive in there?

A - Henry Hubble

Well, I mean, of course we did have, the big piece of that was the project add, so basically Kizomba A and B.

Q - Mark Flannery

Right.

A - Henry Hubble

And then, you continue to have some declines, but that’s really the big impacts there, were those increases. And then you have work programs that are also adding to that.

Q - Mark Flannery

Right. Okay, and just widening that out a little bit, do you expect any change in your PSC exposure, I mean for global volumes in ’06 versus ’05? In other words, are you becoming more PSC or PSA heavy in ’06 versus ’05, or is it fairly steady?

A - Henry Hubble

Well, we end up, we are about 15%. There is, and as you bring on projects, we’ll have a slight increase, but it doesn’t build rapidly here when you look at our global portfolio.

Q - Mark Flannery

So a slight increase in ’06 versus ’05?

A - Henry Hubble

Yeah, I would say that’s right.

Q - Mark Flannery

Great.

A - Henry Hubble

I don’t really have a number for you.

Q - Mark Flannery

Okay, great. Thank you very much.

A - Henry Hubble

Yep. But I would just come back on all of this, and what we are seeing is obviously the results of the very strong program that we’ve had in Africa and adding the volumes as we’ve basically brought on these new projects.

Operator

And we will go next to Doug Terreson with Morgan Stanley.

Q - Douglas Terreson

Hi, Henry, congratulations on your results.

A - Henry Hubble

Thanks.

Q - Douglas Terreson

My question regards the Asian downstream and some of the trend that you guys are seeing demand in that, your view of the market is obviously fairly advantaged out there given your competitive position. And specifically, while economic growth seems to be doing fine, there’s also been some changes to government fuel policy in the region and in the market’s that you guys are involved as well. And so if you could just kind of provide some color or an update on the market dynamics that you guys are experiencing between the developed and the less developed countries, and also what that may portend for the future? I would appreciate it.

A - Henry Hubble

Yeah, well you haven’t, basically when you look out on Asia-Pacific you have got a couple of types of markets there. You have got some very mature markets in Japan and Australia that basically are going to be low, flat growth kind of environment and they are going continue to that way. And so there is going to be a lot of focus there on efficiencies, continuing efficiencies, and lowering costs of those operations is really the focus. And then as you look around rest of AP, Southeast Asia, and China, India, those are growing more rapidly. And we’re participating in that growth, and we are actually very well positioned. And you know that we are also looking at the project or studying the project in Fujian, China. So that really is about as much color as I can give you. And that’s one of things that, coming back to some earlier comments about how you track margins in this business. It is important even when you are looking at Asia-Pacific, not to focus just on Singapore, but to really be looking at those various markets there because you can get quite different signals from them.

Q - Douglas Terreson

Absolutely. And also on West Africa, and you may not have this information yet, but do you have average annual production figures for ’05 for Angola, Chad, Nigeria and AG? And also on Chad, could you spend a minute talking, just providing an update there, are you guys happy with performance, why or why not, and the plan of action for ’06 as well?

A - Henry Hubble

Yeah, you know if you look at the overall, we don’t go through country by country breakdown on the production. But Chad, some of the more recent news that you’ve seen no doubt with the discussions around the agreement there between World Bank and the Government of Chad, that’s one that we’re focusing or basically encouraging discussion. And we then we would like to see that agreement continue because we think it is beneficial and that revenue management plan. But in terms of the operations, they have not been impacted by that.

Q - Douglas Terreson

Okay. Okay, well, thanks a lot Henry.

A - Henry Hubble

Thanks.

Operator

And we will next go to Paul Sankey with Deutsche Bank.

Q - Paul Sankey

Hi, Henry.

A - Henry Hubble

Hey Paul.

Q - Paul Sankey

Good morning.

A - Henry Hubble

Good morning.

Q - Paul Sankey

Henry, in the past on your buyback you’ve indicated whether you had reached a kind of recent ratable level of buyback. I wondered if the 5 billion, which was flat in the fourth quarter, is a level we should think about going forward or how you’ll sustain that.

A - Henry Hubble

Yeah that’s tough. Well as you know the buyback is a flexible component of our distribution to shareholders, more flexible component of our distribution to shareholders. And so we basically look at that on a regular basis, and I wouldn’t read anything into being flat from one quarter to the next. I mean, if you look back at the history, you know, a couple of years ago we were basically 1.5 billion a quarter. We stayed at that level until we raised it to 2.5 billion, stayed at that level ‘til we raised it to 3.5, stayed and then raised it to 5, and we are at that level now. And it will depend on how the cash generation and uses of, and that balance as we go forward.

Q - Paul Sankey

Okay. And, talking about the cash generation in the fourth quarter, the variance there does seem to be down from Q4 ’04?

A - Henry Hubble

Yes, yes…

Q - Paul Sankey

Could you talk a little bit about that?

A - Henry Hubble

You know, what you really see there is change in crude payables. That’s the big factor, has some working capital effects. So you had higher payables in the third quarter and lower payables in the fourth quarter at period-end with the, this fluctuation of the crude prices, and that’s the biggest chunk of that. Then there were other minor, or smaller, impacts on timing of tax payments and that kind of thing.

Q - Paul Sankey

Okay. So, we could see a bounce-back in Q1, I guess, on the cash flow from what…

A - Henry Hubble

Yes. You know, how it varies, I mean it’s going to depend on a lot of factors. But again, tax payments are typically lower in the first quarter so that’s one factor that rolls in there.

Q - Paul Sankey

Okay, great. And, the last one from me, the commentary highlights the active investment program…

A - Henry Hubble

Yes.

Q - Paul Sankey

The rate that you are currently running at, at 17.7, is ahead of I guess the guidance from the analyst meeting. Can we expect, should we just upgrade our viewpoints according to the current run rates, or how should we think about that going forward?

A - Henry Hubble

Well, I mean, yes as you know, during the year we raised our guidance reflecting the addition of activity, basically, you know the biggest pieces, the BG equity, additional drilling in Nigeria, acceleration of projects in Qatar. So all those things contributed, and basically it’s in line with the guidance that we gave at the last call. Now, as we look forward, we’ll be updating that with the analyst meeting. As you know, we had projected out in the last analyst meeting in March in the ’07 through ’10 timeframe that would be about this $18 billion level. So we’ll be updating that and we’ll talk more about it then.

Q - Paul Sankey

Okay, thank you Henry.

A - Henry Hubble

Yep.

Operator

We’ll go next to Doug Leggate with Citigroup.

Q - Doug Leggate

Thank you, good morning Henry.

A - Henry Hubble

Hi Doug.

Q - Doug Leggate

Couple of questions on the upstream if I may, and maybe following up on some of the things you’ve already touched on but…

A - Henry Hubble

Yes.

Q - Doug Leggate

To help us understand the, maybe the outlook moving forward in ’06? Obviously, you normally refer us back to the strategy presentation here, but could you give us an idea of the year-over-year PSC impact in the fourth quarter, and what underlying decline rate we should assume going forward, both US and international?

A - Henry Hubble

Yeah. If you look at fourth quarter versus fourth quarter on the combination of entitlements, divestments, asset sales, they were about a percent each, or in that range. So that, we continue to have an active divestment program, and that, and you continue to see the impacts associated with that.

Q - Doug Leggate

Okay, just split it three ways I guess?

A - Henry Hubble

Yes, yeah, I mean that’s a way to think about it. The other thing that happened, when we look at our full year impact, we did see that the lower demand too associated with the gas and that accounted for the remaining variance that we saw versus the guidance that we’d given earlier.

Q - Doug Leggate

Okay, and on the decline rates?

A - Henry Hubble

Really no surprises there. You know, if we look, if we step back from and take kind of a broader picture of this, our projects, they came in on budget and on schedule, so that was according to our plans. The decline rates, really across the board, were in line with our expectations. Our maintenance activity those kinds of things, were about the same. So the variances that you saw are really those things that we talk about price impacts, or entitlement impacts, and which are, you know, again, are not a bad thing. I mean they are basically improving the returns associated with those projects and of course the asset sales that we have made again, not a bad thing. We feel very good about the values we are capturing in the current market, and we’ve sold more properties in the period than we had anticipated at the beginning of the year. And obviously hurricanes, demand kind of impacts are really not predictable.

Q - Doug Leggate

Okay. Henry, do me, one other one I have is the corporate guidance again is, I think last call you gave us about 100 million a quarter.

A - Henry Hubble

On Corp then?

Q - Doug Leggate

Yeah on the corporate charge, is that number still good going forward?

A - Henry Hubble

I think, you know, at this point I would adjust it to 50 to 100, we are seeing continuing benefit or, you know, positives from the interest income. So I’d move in that direction.

Q - Doug Leggate

Okay, that’s great. Thanks Henry.

A - Henry Hubble

Yeah.

Operator

And we will go next to Neil McMahon with Bernstein.

Q - Neil McMahon

Good morning. I’ve got a few questions as well. I think first of all, want to try and get an idea of what your divestment program might be going forward into 2006? And related to that, what your guidance is going to be on finding and development costs? It sort of looks like you are divesting only properties with higher finding and development costs. And then I’ve got a follow up question as well.

A - Henry Hubble

Well, you know, we will be talking about our overall program at the analyst meeting, but you know, we don’t really give forward guidance on our divestments. But we’ve had a pretty active program and been working through a bit of an inventory of properties that are, been very attractive, and have gotten very good values on them. And then, the F&D, when we look again, we look at our projects on barrels developed and the cost of developing those barrels, and it’s, and we are able to basically hold that in, continue targeting at our $3 a barrel kind of overall for the portfolio. Now there will be projects that are higher and lower than that in there, but we feel very good about the inventory of projects that we have going forward. It is an industry leading pipeline, and so it allows us to be selective; and of course one of our prime focuses is in how to make those development costs even more efficient.

Q - Neil McMahon

And just the second question I have is really around the production of gas in the US. Are you bringing on any new properties there, like how is the Piceance Basin doing, and what have you been doing to stem the decline in natural gas production if you look at fourth quarter over third quarter? And also, have you got any comments to make on reserve replacement rates this year?

A - Henry Hubble

Well, on the reserves we’ll be coming, as per typical, we will come out with our announcement in February here. And so I don’t really have any comment on that at this point, we’ve obviously had a strong program in the past. And as you look at the US gas, and we have a active work program or set of work programs there, we are very active in the Piceance, and that’s, we have been growing that. And that will continue to grow over the next 3 to 7 years. And then when you start looking out beyond that, of course, we are working Alaska Gas, we are working Mackenzie; we have got a number of potential gas projects that are also, so we feel quite optimistic about the future of gas in the US in our portfolio.

Q - Neil McMahon

But, we should expect ’06 relatively flat production in the US with the Piceance coming on to offset declines?

A - Henry Hubble

I think what you are going to see is continuing, we are not going to get into a regional by region decline rates, but we typically talked in that 4% to 6% on the overall portfolio.

Q - Neil McMahon

Okay.

A - Henry Hubble

Yep.

Operator

We will go next to Daniel Barcelo with Banc of America.

Q - Daniel Barcelo

Hi. Good morning.

A - Henry Hubble

Hi.

Q - Daniel Barcelo

I have a question regarding volumes in West Africa was strong also Sakhalin I start-up.

A - Henry Hubble

Yep.

Q - Daniel Barcelo

I don’t know if you could conceptually give us some bit more detail on what those realizations would be, or cash flows per barrel, as it relates more to the existing portfolio?

A - Henry Hubble

Well, if you look at, again, what I point you toward is our overall net income per barrel. We don’t get into specifics field-by-field kind of breakdown. So, we look at all of these as a portfolio quite focused on making sure that all of these projects deliver a good net income per barrel as a portfolio. And its industry leading, and if you look at the results for the quarter we’re at what, 17, over 17, or 1793, I think the number was in our, in this quarter, so continued to have strong performance there. Credit these new project additions.

Q - Daniel Barcelo

And also just on European natural gas, can you give any guidance for percent sold in the UK under contract or under spot exposure?

A - Henry Hubble

No. I don’t really have a split for you on that.

Q - Daniel Barcelo

Okay. Great. Thanks very much.

A - Henry Hubble

Yep. Thank you.

Operator

And our next question it comes from Jennifer Rowland with JP Morgan.

Q - Jennifer Rowland

Thanks. I have got 2 questions First on the downstream, I am wondering if you could just classify what 2006 might look like for turnaround activities, so they’re not going to be an average year or above normal year for turnaround activity?

A - Henry Hubble

Yeah, it’s slightly higher than our typical, but you know kind of within our, kind of the normal variations, but higher than typical.

Q - Jennifer Rowland

Okay. And then just a question on the asset sales that were talking about earlier. Could you quantify how much production has been sold either in the quarter and the whole year as well?

A - Henry Hubble

Well, if you look at the impacts associated with volumes due to divestments for the fourth quarter versus, and again I’m doing, this is a fourth quarter versus fourth quarter comparison; you’re looking at about a 1.5%. You know a little over a percent that were associated with, well excuse me, yeah right around 1% for the assets sales in that period. And then if you look at a full year affect it’s about the same thing, you’ve got about a percent for the entire year. And of course, when you sell properties, you’ve got all the cash, those things; you’ll have a full year effect for the remaining quarters from whenever those finally executed.

Q - Jennifer Rowland

Right, okay Thank you.

A - Henry Hubble

Yep.

Operator

And our next question is from Mark Gilman with Benchmark Company.

Q - Mark Gilman

Hi, Henry good morning

A - Henry Hubble

Hey Mark.

Q - Mark Gilman

Couple of things, if I could? First, with respect to Gulf of Mexico volumes, can you specifically quantify the oil and gas production deferred in the fourth quarter, splitting it between oil and gas? And also provide a base number to which we might apply those percentage restored numbers that you indicated in your direct remarks?

A - Henry Hubble

You are speaking just to the hurricane impacts?

Q - Mark Gilman

That’s correct.

A - Henry Hubble

Yeah, I mean, as we mentioned last quarter we were anticipating about 80 KBD of impact in the fourth quarter and it turned out to be right at that level. And so then as we look forward we have got as I said gave you the percentages that we had, as we look out into 2006 full year impacts is going to small, under 10 a day. So, you know, obviously somewhat more oriented toward the earlier part of the year.

Q - Mark Gilman

Can you split that 80 oil and gas, Henry, please?

A - Henry Hubble

Yeah, I can, it’s about half and half on a OEB basis.

Q - Mark Gilman

And the base number which you indicated in your direct remarks that you now have 80% liquids and 90% gas restored?

A - Henry Hubble

What are the?

Q - Mark Gilman

The base numbers?

A - Henry Hubble

I am not sure what you are getting at Mark.

Q - Mark Gilman

You capacity in the Gulf of Mexico, you mentioned that you have restored by the end of ’05 80% of the liquids and 90…

A - Henry Hubble

Yeah, it’s about a 120 KBD total liquids and about 1 million cubic feet of gas.

Q - Mark Gilman

Okay. One other one if I could, what other asset sales occurred in the fourth quarter that contributed to the 1.4 billion in proceeds indicated in your supplemental statements, other than the ARC Energy?

A - Henry Hubble

Give me that again, what was that?

Q - Mark Gilman

What other asset sales occurred in the fourth quarter, if any that contributed to the 1.4 billion of asset sales proceeds which were indicated in your supplementary schedules this morning?

A - Henry Hubble

Well the biggest single piece was the ARC Energy, and that is the biggest single item that’s in there. There are lots of other small things that basically add up to it.

Q - Mark Gilman

Okay. Are there production numbers associated with that, Henry, please?

A - Henry Hubble

No, I don’t have those for you.

Q - Mark Gilman

Okay. Thanks very much.

A - Henry Hubble

Yeah, very good.

Operator

And, our next question comes from Fadel Gheit with Oppenheimer & Company.

A - Henry Hubble

Hello, Fadel?

Operator

Sir, your line is open. Go ahead please. Check your mute function. Make sure you un-mute it.

Operator

We’ll move on to our next question from Bruce Lanni with AG Edwards.

Q - Bruce Lanni

Yeah. Good morning Henry. Congratulations on a good quarter.

A - Henry Hubble

Thanks a lot.

Q - Bruce Lanni

Just a little follow-up question, a couple of them actually. First one on Sakhalin, you may be covering this in your presentation coming up, but do you have a general ramp up schedule from the 50 to 250 for this year? And, then the next question in regard to that is, I noticed you just said currently, obviously, the oil is being sold to the domestic market. What mix do you expect to be sold to domestic and international markets after it ramps up?

A - Henry Hubble

Well, the current and probably the best, if I were looking at it how to project this going forward is, I would use linear, I guess, as probably the best way to do that from where we are today to the end of the year. But there are going to be some steps in there obviously, in December of this year.

Q - Bruce Lanni

Okay. And, again, once you get passed the initial phase, is all this going to result to international markets or still a percentage of it, and if so what, to the domestic markets?

A - Henry Hubble

Most of that is international after the 250,000.

Q - Bruce Lanni

Okay. So, we can assume the bulk of it?

A - Henry Hubble

Yeah. And really, when you, probably Mitch spoke on the way you ought to think about that and versus linear, is really the bulk of it will come later in the year, in the fourth quarter.

Q - Bruce Lanni

Okay. And the other thing just anecdotally is there something you can provide us with US downstream gasoline sales? I think I heard you correctly; you said excluding the hurricanes that your throughput volumes would have been up 1.4% is that correct?

A - Henry Hubble

Yeah, that’s right.

Q - Bruce Lanni

Okay. So, then obviously…

A - Henry Hubble

That’s a global number.

Q - Bruce Lanni

That’s a global number, how about, so, the number in the US though, gasoline sales look to me relatively strong considering that you did have a lot of downtime?

A - Henry Hubble

Yeah. And what that reflects is basically that we are able to one, we are restoring the operations, but we also were importing to meet those needs. So, there was, that’s one of the benefits of having an international group here is that we are able to move things from Europe and elsewhere to basically to be able to meet those demands.

Q - Bruce Lanni

Okay. And if I could just ask one follow-up on that, do you see any potential problems with the new fuel regs and also ethanol, this year. Do you think you are pretty well positioned for it?

A - Henry Hubble

Well, we are in good shape. We’ve obviously been planning for it. And so, we’ve gone ahead and basically looking at starting up facilities, production, to be able to meet the mandated schedules and we don’t really see any issues associated with being able to do that.

Q - Bruce Lanni

Excellent. Well, congratulations again. Thanks.

A - Henry Hubble

Well, thanks a lot.

Operator

And we’ll go next to John Herrlin with Merrill Lynch.

Q - John Herrlin

Yeah, thanks Henry. Downstream, you talked about having about a $600 million marketing profit in the fourth quarter. Can you give us a breakdown geographically of where that was? Or was it all predominantly US?

A - Henry Hubble

Well, the variation there, if you are thinking, what I was describing as the impact from third quarter, sequential third quarter to fourth quarter.

Q - John Herrlin

Yes.

A - Henry Hubble

And that was, that was marketing, it was about 50, 50 between US and overseas. And if you look at that, what was happening, marketing margins were very compressed in the third quarter when we first saw the impacts of the hurricane. Prices, wholesale prices shot up and the retail lagged. And then you basically saw some restoration of margins, but they were about the same levels as what we saw last year. So, but the comparison in the sequential is quite large.

Q - John Herrlin

Okay, and last one for me. Obviously, the industry is experiencing a lot of oil field services cost inflation. You spoke about getting $1 billion in efficiencies upstream from changing operations; how easy is it going to be to get similar type cost savings going forward? How are you approaching it?

A - Henry Hubble

Yeah, I may have been misunderstood there. That $1 billion is really across the corporation, so that’s Upstream, Downstream, and Chemicals as well. So it’s, so that’s an across the board savings. But there, but upstream is doing their piece of that, and so when you look at those impacts and the kinds of things that we do to offset costs and things like the multizone-fracing that we are able to do in the Piceance, and the fast drill technology that we have; all of these things are techniques that we are using to and technologies that we are using to help reduce costs as we go forward. And frankly, that really is a key to staying ahead and maintaining profitability is to be able to bring these, continually bring these improvements to your system.

Q - John Herrlin

Are you going to try to lock in any other equipment so you can manage your timing better on these projects, or?

A - Henry Hubble

Well, we always are evaluating our contracting strategy. And this, the market is volatile. And right now, the prices have increased, whether you are going to choose this time to lock on longer-term is a question. And we have some that are extending in that we have locked up earlier, but we’ll be, continually looking at our strategy going forward as to take advantage of that.

Q - John Herrlin

Okay. Thanks a lot, Henry.

A - Henry Hubble

Yep.

Operator

We’ll go next to Paul Cheng with Lehman Brothers.

Q - Paul Cheng

Hey, Henry.

A - Henry Hubble

Hi, Paul.

Q - Paul Cheng

Just two quick follow-up questions. Do you have any over-lifting in the fourth quarter for your international oil and gas operation?

A - Henry Hubble

Over-lifting?

Q - Paul Cheng

Yeah, it means that is your sales volume comparable to your production or is actually higher than your production in the fourth quarter?

A - Henry Hubble

No. It’s pretty ratable. So, I am not aware of any significant changes there.

Q - Paul Cheng

Okay. Is there any preview you can give us about the reserve replacement, what that may look like for this year?

A - Henry Hubble

No, good try, but we’ll be bringing that up in February, a little later.

Q - Paul Cheng

Okay. Thank you.

A - Henry Hubble

And we’ll talk about it then.

Q - Paul Cheng

Okay, very good. Thank you.

A - Henry Hubble

Yep.

Operator

We’ll go back to Mark Gilman with The Benchmark Company.

Q - Mark Gilman

Henry, two rather specific questions. You mentioned a LIFO benefit, I believe, in your discussion of the Downstream.

A - Henry Hubble

Yeah.

Q - Mark Gilman

Quantify that in the fourth quarter with an absolute number and whether it’s US or foreign?

A - Henry Hubble

If you look the LIFO impacts for the fourth quarter this year absolute, it’s about 215 total. That’s, you know, split between Upstream and, I mean Downstream and Chemicals, about 160 Downstream, 50 some-odd in Chemicals. And then if you look at the split of that in the Downstream, 40 about in the US for the Downstream, or positive about a little less than 30 in the US in Chemical.

Q - Mark Gilman

Okay. Were there any price finalization effects in the fourth quarter, and if so, could you quantify them in absolute terms?

A - Henry Hubble

Yeah, there were. If you look at the quarter on, for fourth quarter ’05, absolute was about 80, you know $90 million positive, and that was split about 25 of that in the US on an absolute basis.

Q - Mark Gilman

Thanks very much, Henry.

A - Henry Hubble

Yep.

Operator

At this time, we have no further questions. I would like to turn it back to Mr. Hubble for some closing remarks.

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

Yeah, thank you very much. First off, I would just like to thank everybody for listening to the overview and our results. But before I end the call today, I’d really like to come back to a couple of points that thread their way through all of the earlier remarks. First, I would like to highlight the really extraordinary commitment of our people, who dedicated themselves to reduce the impact of the hurricanes on our customers, our neighbors, and our operations. And secondly, our earnings reflect our ability to capture the strong industry conditions within all of our business lines. But more importantly, I believe the nature of the results also underpin the things that we do particularly well. We focus on delivering flawless operations. We invest with discipline for the long-term. All of that to meet our customer’s needs and grow long-term shareholder value. Thanks.

Operator

This does conclude today's conference call. We would like to thank you for your participation. And you may disconnect at this time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: ExxonMobil Q4 2005 Earnings Conference Call Transcript (XOM)
This Transcript
All Transcripts