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ExxonMobil Corp. (NYSE:XOM)

Q2 FY08 Earnings Call

July 31, 2008, 10:00 AM ET

Executives

Henry H. Hubble - VP of IR and Secretary

Analysts

Michael LaMotte - JPMorgan

Paul Sankey - Deutsche Bank

Erik Mielke - Merrill Lynch

Neil McMahon - Sanford Bernstein

Mark Gilman - Benchmark Capital

Jason Gammel - Macquarie Research Equities

Paul Cheng - Lehman Brothers

Robert Kessler - Simmons & Company

Operator

Welcome to the ExxonMobil Corporation's Second Quarter 2008 Earnings Conference Call. Today's conference is being recorded.

Now at this time, I would like to turn the conference over to the Vice President of Investor Relations and Secretary, Henry Hubble. Mr. Hubble, please go ahead.

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

Thank you. Good morning and welcome to ExxonMobil's teleconference and webcast on our second quarter 2008 financial and operating results.

As you are aware from this mornings press release, ExxonMobil's net income in the second quarter was a record for the corporation. Our integrated business portfolio and strong operational performance have allowed us to capture the benefits of the commodity price environment. The fundamentals of our business remain strong and we continue to invest at record levels to bring new supplies to the market.

Before we go further, I'd like to draw your attention to our cautionary statement. Please note that estimates, plans and expectations 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 Investors section of our website.

Please also see the frequently used terms, the supplements to this morning's press release, and the 2007 financial and operating review on our website. This material defines key terms I will use today, shows ExxonMobil's net interest in specific projects and includes our SEC Regulation G disclosure.

Now, I'm pleased to turn your attention to the second quarter results. Exxon Mobil's second quarter 2008 net income was $11.7 billion, an increase of $1.4 billion from the second quarter of 2007. Second quarter 2008 net income included a special charge of $290 million related to the Valdez litigation.

Second quarter normalized earnings, excluding the Valdez litigation charge, were nearly $12 billion, up $1.7 billion from the second quarter of 2007. Normalized earnings per share were $2.27 per share, up 24% from a year ago, reflecting strong earnings performance and the benefits of our share purchase program.

During the second quarter of 2008, ExxonMobil distributed a total of $10.1 billion to shareholders, including dividends of $2.1 billion and share purchased to reduce shares outstanding of $8 billion.

Before I discuss specific business results, I'd like to share some of the milestones we achieved since the last earnings call. In the second quarter, we started up production from the East Area Natural Gas Liquids II project, offshore Nigeria, three months ahead of schedule. The project will recover more than 275,000 million barrels of natural gas liquids from several east areas fields, which will help monetize gas resources and significantly, reduce layering. At peak, the project is expected to produce 50,000 barrels per day of natural gas liquids.

In the second quarter, production also started from the Deepwater Gunashli platform in Azerbaijan. The startup of the Gunashli complex completes the third phase of development of the Azeri-Chirag-Gunashli or ACG field in the Azerbaijan sector of the Caspian Sea. At peak, phase 3 production is expected to reach almost 300,000 barrels per day.

These startups bring the total number of major project startups to-date in 2008 to five, demonstrating our commitment to bring new supplies to market.

Also in the second quarter, ExxonMobil announced that the joint venture participants and the PNG state have formerly signed and executed a gas agreement with the PNG LNG project. The agreement establishes the physical regime and legal framework by which a project will be regulated. It sets the terms and mechanisms for state equity participation and allows the FEED stage of the project to begin.

In exploration, we had several notable milestones. We began shooting seismic in the Porcupine Basin of the southwest coast of Ireland, to improve the understanding of the geology and hydrocarbon bearing potential of our significant exploration acreage holdings, totaling about 760,000 gross acres in the area.

In Columbia, ExxonMobil was awarded a technical evaluation agreement or block CPE3 [ph] covering 6.4 million acres in the onshore Yannos heavy oil [ph]. ExxonMobil has significant expertise and technological capabilities in heavy oil resources, and we look forward to assisting in the exploration and possible development of this potential resource.

ExxonMobil continues to lead the industry in our long-term commitment to technology development. In May, we announced the decision to invest over $100 million to build a commercial demonstration plant near LaBarge, Wyoming or ExxonMobil's Controlled Freeze Zone technology to significantly reduce the cost of our moving and sequestering carbon dioxide and hydrogen sulfide for natural gas. This CFZ technology will assist in the development of additional natural gas resources to meet the world's growing demand for energy and facilitate the application of carbon capture and storage to reduce green house gas emissions.

Finally on July 1st, ExxonMobil announced the completion of the sale of its interest in the natural gas transport business in Northern Germany. The positive after tax earnings of this transaction of approximately $1.6 billion will be reported in the third quarter 2008 results. This transaction does not effect the exploration, production and natural gas sales and storage activities conducted by ExxonMobil affiliates in Germany.

Moving now to the downstream. In refining, we continue to identify and to implement projects which maximize the performance of existing facilities. At our Fawley refinery in the UK, we recently completed deign changes on distillation units to improve yields of jet and diesel fuel, as well as increased feed to our catalytic cracking unit.

Additionally, at Baytown, Texas refinery, we started up new facilities to increase the capacity of our crude distillation and delay coking units. We also continue to utilize our proprietary molecule management technology to rapidly assess and optimally process feedstocks. During the second quarter, we ran 36 crudes that were new to individual refineries, six of which were new ExxonMobil.

Our selective investments and ongoing optimization activities allow us to maximize the capture of available margin and achieve advantage returns even at the bottom of the business cycle. During the second quarter, our flagship engine oil, Mobil 1 was selected as the recommended service-fill oil for the smart fortwo car in the U.S. market. Additionally, Mobil 1, turbo diesel truck, 5W-40 has been reformulated to meet EPA emission standards mandated for new on-highway diesel trucks. Our continued focus on proprietary research and formulation upgrades allows Mobil 1 to remain the world's leading synthetic motor oil brand.

In our Chemical business, we started up facilities at our plant in Baytown, Texas which will increase the bromobutyl rubber production capacity at the site by 60%, allowing us to meet growing global demand for halobutyl rubber. ExxonMobil Chemical is the largest supplier of halobutyl rubber to the global tire industry, and we have expanded our capacity to produce this polymer by 80% in the last decade.

During the quarter, the American Chemistry Council granted ExxonMobil Chemical a total of 13 energy efficiency awards. This is the 11th consecutive year that ExxonMobil Chemical has been recognized by the ACC for energy efficiency.

Now turning to the business line results. Upstream earnings in the second quarter were record at $10 billion, up nearly $4.1 billion from the second quarter of 2007. We continue to capture the benefit of strong industry conditions this quarter with upstream after tax unit earnings of $29 per barrel.

Record crude oil and natural gas realization increased earnings by $6.1 billion. Worldwide crude realizations were up $54.17 per barrel to $119.29 in the quarter. Natural gas realizations were up $3.78 per kcf from second quarter 2007, reflecting higher prices in all major producing regions.

Lower crude oil and natural gas volumes decreased earnings by $1.7 billion. Other effects reduced earnings by $330 million, primarily due to increased operating expenses including the effect of new field startups and higher taxes.

In total, oil equivalent volume has decreased about 8% from the second quarter of last year. Entitlement volume effects including price and spend impacts and PSC net interest reductions reduced volumes by 160,000 barrels per day. Excluding the impacts of lower entitlement volumes, the Venezuela expropriation and the Nigeria labor strike, production was down 2.5%. The reduction principally reflects the impact of higher maintenance activity. As major project ramp ups in the North Sea and West Africa, an increased European natural gas demand largely offset natural field decline in mature areas.

Liquids production decreased about 275,000 barrels per day, or 10% from the second quarter of last year. Excluding impacts related to the Valdez... Venezuela expropriation, Nigeria labor strike and lower entitlement volumes, production was down 2.5%. The reduction principally reflects impact of higher maintenance activity, as major project ramp ups in West Africa and North Sea largely offset natural field decline in mature areas.

Gas volumes decreased approximately 285 million cubic feet per day from the second quarter of 2007. Natural field decline in mature areas, increased maintenance activity and asset management effects were partly offset by higher demand due to colder weather in Europe and new project volumes. New project volumes were below expectations due to slower than anticipated volume ramp up in the North Sea.

Turning now to the sequential comparison. Versus the first quarter of 2008, upstream earnings increased $1.2 billion, due to higher crude oil and natural gas realizations, partly offset by lower volumes, primarily due to seasonally lower natural gas demand in Europe.

Liquids production decreased 3%, due to scheduled maintenance activities in Canada, entitlement volume effects and the labor strike in Nigeria. Natural gas production was down 17%, driven by seasonally lower demand in Europe. Oil equivalent volumes were down about 9% from the first quarter. For further data on regional volumes, please refer to the press release and IR supplement.

Turning now to the downstream results. Earnings in the second quarter were $1.6 billion, down $1.8 billion from the second quarter of 2007. Lower margins reduced earnings by $1.9 billion, driven by significantly lower refining margins. Volume and mix effects increased earnings by $230 million, as margin improvement activities more than offset lower sales volumes. Other effects reduced earnings by $180 million, primarily due to higher operating expenses.

Sequentially, second quarter earnings increased by $390 million, reflecting stronger refining margins, partially offset by negative price finalization effects. Other factors increased earnings by $40 million, including higher gains of asset sales, offset by higher operating expenses and foreign exchange effects.

Focusing now on our Chemical results. Second quarter chemical earnings of $687 million were 325 million lower than the second quarter of 2007. Lower margins reduced earnings by $480 million, as higher feedstock costs more than offset increased product realizations.

Other impacts increased earnings by 130 million, reflecting positive foreign exchange and tax effects.

Sequentially, second quarter Chemical earnings decreased by $340 million, driven by lower margins as continued increases in feedstock costs more than offset higher realizations.

Turning now to the corporate and financing segments. Corporate and financing expenses excluding special items were $287 million in the second quarter of 2008, an increase of 188 million from the same period a year ago, primarily driven by tax items and lower interest income.

The effective tax rate for the second quarter was 49%.

Our cash balance was $39 billion and debt was $9.6 billion at the end of the second quarter. ExxonMobil made share purchases in excess of dilution of $8 billion during the second quarter, reducing the number of shares outstanding by 1.7%, and again demonstrating our commitment to return cash to our shareholders.

CapEx in the second quarter totaled nearly $7 billion, an increase of $1.9 billion or 38% from the second quarter of 2007. Spending increased across all business lines as we continue to invest actively in projects to meet global demand for crude oil, natural gas and finished products.

In summary, this quarter's results highlight the quality of our integrated business model, and disciplined investment approach. In the upstream, our outstanding portfolio of producing assets is performing well. While volumes were impacted by the high price environment, operational performance was solid and we delivered record earnings in the quarter.

In the downstream and chemical, ExxonMobil's disciplined integrated operations and continued focus on efficiency improvements and optimization allow us to deliver a differentiated results in a period of lower industry margins.

That concludes my prepared remarks and now I'll be happy to take your questions.

Question And Answer

Operator

Thank you, Mr. Hubble. [Operator Instructions]. Our first will be from Michael LaMotte with J.P. Morgan.

Michael LaMotte - JPMorgan

Thanks. Good morning, Henry.

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

Hi, Michael.

Michael LaMotte - JPMorgan

I was struck by the comments... number of comments actually in the press release about mature field decline and I know that this is an area a focus for a lot of the NOCs today and increasingly focus of your IOC peers. Can you maybe talk about things that are doing differently to address decline maybe acceleration of the EOR activities, application of technology, those types of things?

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

Yeah. That's... we have an active work program that basically is designed to offset declines and have a lot of technology and experience in enhanced oil recovery. But even with the application of those technologies and techniques and the active program that we have we still see in mature areas declines. Nothing that frankly as a surprise, but where we were in or were expecting in the period as we've talked in the past, when we look at our overall decline rates, we've estimated that in the 5 to 6% range and of course we are investing to offset that.

Michael LaMotte - JPMorgan

So, no deceleration of 5 to 6% range then it's really just feeling the impact on the portfolio size broadly?

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

Yeah, that's right. I mean if you look at our overall on average declines, they really have not changed. I mean, but in... and obviously in mature areas, it's somewhat higher and in other areas lower. You know, and as we talked about before it's... the programs that we have and if you looked at the just in general at the volumes projection that we have for this year, we were expecting what we shared at the analyst meeting, we to be down slightly versus 2007.

And as we talked before, that's basically a reflection of the back-end loading of the projects that we have in our pipeline. The biggest change that you see versus our outlook, is associated with the price impacts from this... from the price environment on entitlements.

Michael LaMotte - JPMorgan

Yeah, clearly.

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

And that's what you are seeing flow through in the big changes relative to what we have in that outlook.

Michael LaMotte - JPMorgan

Okay.

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

Obviously, we are capturing value as reflexive, we are capturing value early in those projects, and the economics of them actually are better than originally anticipated. But it has been the major effect.

Michael LaMotte - JPMorgan

Okay. That's helpful color. Thank you.

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

Alright.

Michael LaMotte - JPMorgan

For my second question, maybe you could... I know you all have a very, very large acreage position, here in the Lower 48. But it has been interesting to watch a couple of the European majors move more aggressively into the North American gas market through acquisition and JV. Can you maybe talk about sort of the strategic... Exxon's strategic views on North American unconventional gas and whether you are thinking beyond the Piceance at this point?

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

Yeah. Well, I mean as we talked last quarter, of course Piceance is one of our major opportunities within the Lower 48, but we also have large acreage position in other areas as well, where Arkoma, we also picked up acreage position in Canada but the Horn River Basin and then and of course because we look at this on a global basis, we are looking also at those opportunities around the globe and you've seen us pickup the acreage positions then in Hungary as well as in Germany both unconventional gas plays, large unconventional gas plays. So between, we're quite active in this area and frankly we're looking at a lot of these different opportunities and so.

Michael LaMotte - JPMorgan

How should we think about the rate of change on exploitation of that acreage second half '09 first half, sorry, second half '08, first half '09 versus where we've been in the first half of '08?

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

Well, if you look at... I mean, most of these... we're in the early days, the Piceance is producing as we talked about 55 million cubic feet per day, but most of these other acreage positions that we have, basically we're going through evaluation phases and then as we look at the next phase of Piceance of course we have 250 or another 200 that will bring on as part of that first phase with an ultimate capability of getting up nearly a billion.

Michael LaMotte - JPMorgan

Okay. So no real change in the timetable relative to what you laid out at the beginning of the year?

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

No, these are long-term projects.

Michael LaMotte - JPMorgan

Yes.

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

You will see as in... we are going to make sure we execute them very efficiently and that our cost, we focus a lot of attention on getting this cost of development right. And so the opportunities that you see us going after are really focused on areas where we can get significant acreage positions, and then we're going to approach it with a very disciplined development approach to maintain a low cost of development or banded cost development.

Michael LaMotte - JPMorgan

Thanks, Henry.

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

Yeah.

Operator

We'll next go to Paul Sankey with Deutsche Bank.

Paul Sankey - Deutsche Bank

Yeah. Hi, Henry. For my first question, I could just go back to the volumes sort of high level part specific, on the high level view at the analyst meeting outlined as you said a slight fall in '08?

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

Yeah.

Paul Sankey - Deutsche Bank

Followed by slight rise in '09. Now that we've had something of a sharp fall in '08. Do we work off this lower base assuming flat oil prices from here or do we expect to see a fairly short comeback as over the course of 2009? And the follow-up to that naturally becomes, could you update us on the specific projects and when you expect them to start up now for the second half or first half of '09?

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

Yeah.

Paul Sankey - Deutsche Bank

Thanks.

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

If you look at... we provided in the supplement material a bridge on the volumes, recognizing this was going to be an area and tried to put in some of the notable effects versus where we were last year and today. And if you look at that, you know that we talked already about the 160 kbd associated with PSC or entitlement effects. 95 of that is net interest reductions and those that is interest reductions are basically tranche changes that are permanent. So they roll through in, and each year when we update in our March analyst meeting we're basically reflecting updates to that as well as course updates for the various project outlooks.

But you ought to think about that as rolling forward. And then as you look at the price spend effects, that's basically a reflection of crude prices and spend levels. And if crude is at $100 and you spend the $100, you get one barrel, if it drops to 50, we'll get two. So it really coming back to your guess at and my guess at what the future price of oil is going to be, but if you're looking at you assume the same kind of prices that we've had these effects could be at the same level going forward if the price maintains to that same level.

And then if you look at the other effects in the bridge relative to last quarter there was 29 a day associated with Venezuela, there is 29 of Nigerian strike that was highlighted in there, those are the Nigerian piece is basically a one-time effect. And then the balance this 104 or 2.5% that we talked about Exo's effects is if you look through it, it's largely maintenance. The... if you look at net interest, I mean the decline rates, no surprises there. The projects that we have coming on and the growth in European demand basically they offset each other, and so the impact that you're left with this is maintenance, primarily maintenance.

Paul Sankey - Deutsche Bank

That's great. Henry, thanks. It is really very helpful indeed. If I could jut follow up on two brief things; first, how much are you down in Nigeria right now. And secondly, could you give us an idea of the sensitivity of that PSC price spend element, let's say for a dollar change how much should we expect that price spend effect to be?

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

Yeah I don't really a rule of thumb to give you, you know because these things are... you hit these different tranches, you have a whole series of different contracts, different tranches, the price spend effect you can kind of look at as... I know as we talked about in terms of impact. But basically, if you see prices, crude prices maintaining at these same kind of levels, we see similar kind of impacts going forward. And based or slightly higher if we maintain at these price levels into the second half.

And if you look at what the Nigerian strike impact and the maintenance that we had that is above the original plans here. I mean even excluding the price effects, we're slightly behind our outlook and it's going to be a challenge to catch that up during the year. So that maybe about as much as I can give you going forward in terms... and we'll be updating obviously again in March when we come back to you through the analyst meeting.

Paul Sankey - Deutsche Bank

Okay, Henry, thanks a lot. Could I just ask a follow up and then call up my second question on the downstream.

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

Yes, yeah.

Paul Sankey - Deutsche Bank

Its notable, you don't separate it out. You got the regional demand and then you got the byproduct demand, but it's notable that gasoline demand in your numbers is down 9% and distillate up 5%.

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

Yes.

Paul Sankey - Deutsche Bank

Is there any additional noise in that or is that just a mega trend and I'll leave it at that. Thanks.

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

What you're seeing in the gasoline, I mean it basically reflecting... there's some divestments in that. It's a significant piece of it as we've been going through this process. But the other piece there is, we did have higher conversion unit, planned maintenance that largely impact gasoline production and so affects that. We are seeing if you look at the U.S., we'd say, we are down 1%, 1.5% or 2 or it's hard to actually determine in a short period of time, what that demand is. And you'll see those numbers were biased over time, that we would say, we are seeing something in that kind of range 1 to 2%.

Paul Sankey - Deutsche Bank

So is that gasoline or oil product?

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

Gasoline, well, actually it's... you kind of see it rolling though in that. I would say it's in the total demand, but gasoline is a piece of that, the bigger piece of that in the U.S. In the distillates we are seeing growth year-on-year. And so there's actually been from a production standpoint a shift to try to maximize the distillate production, diesel production and so you see us emphasizing that. That's why you see some of the growth there. The Mo gas has been well supplied inventories as you know are pretty high. And so that's been the push in the demand there.

Paul Sankey - Deutsche Bank

Thanks, Henry. I will let someone else have a go. Thank you.

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

Alright, very good.

Operator

Our next question then is from Erik Mielke with Merrill Lynch.

Erik Mielke - Merrill Lynch

Yeah. Hi, Henry.

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

Hi, Erik.

Erik Mielke - Merrill Lynch

In the upstream, I think we are getting better forecasting volumes with production more or less we expected. But the contribution coming through from, I think from international E&P was lower than what we had?

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

Yeah.

Erik Mielke - Merrill Lynch

despite volumes and realized prices been aligned. It's obvious; the high tax is part of the answer. But it also seems that the cash flow is significant during the quarter. Can you help us understand what's your place with custom taxes and how we should think about that going forward with any new tax thresholds that you hit because of the high oil price in the quarter, any significant exponential expense and so forth?

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

Yeah. I mean the bridge, if you look at the bridge from the second quarter '08 to last year, I mean we have this 330 impact in other, you know that basically OpEx and tax effects were the two big components there. It's always made up of a number of different factors that are offset, but those were the two big that contributed to the increase.

If you look at that, about a third of that was taxes, some of that, the biggest chunk of that was the Alaska tax effects. So that's really what's going on there. Then on the OpEx side, we continue to see inflationary effects in our OpEx, we also are seeing higher non-cash kinds of cost associated with new projects start ups and the capital investments that we are making. So that is reflecting through.

And you know... but we have a very active program to be able to offset a lot of the escalation that we see. We are just not able in this environment to offset all of it.

Erik Mielke - Merrill Lynch

Okay, thanks. And I think Paul asked this before, I'm not sure you gave a complete answer on the outlook for production in the second half in some of the key projects?

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

Oh yeah, I'm sorry.

Erik Mielke - Merrill Lynch

Particularly on Kizomba [ph], Tengiz and Thunder Horse and so forth?

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

Yeah. If you look you know on the... in our outlook for the year, we had 12 major projects that we were planning on, was getting up during the year. Five of those have started up as I mentioned in the call, we still have the Malaysia, Jerneh B Kizomba C, Saxi/Batuque, those we should be hearing or announcing some things shortly and those. Thunder Horse, I think you know the status so that it's up initial oil and we'll be ramping that up as we go through the year, rest of the year. And then Qatar Gas Train 2, the first of the 7.8 Qatar Gas 2 Train 4, the first of the 7.8 million ton per annum trains; that will be starting up in basically supplying into the demand for the winter of '08. So we'll be giving that up in the fourth quarter.

RasGas Train 6, basically we will be starting the commissioning of that at the end of the year and it will start contributing in the first quarter. So that's the big production startups and then of course we also have the terminals that are moving along on schedule.

Erik Mielke - Merrill Lynch

And is there a lot of pickup from the second quarter, particularly from places like Nigeria and so forth where you lost some volumes and...

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

Yeah. Well, we did... of course we had the strike there and then we've had maintenance. Basically most of that maintenance, we talked a little bit about it previously but is in the JV area, it's about a little over 50 a day impact as we're going through that now. Some of that will continue into the third quarter. Basically, we have an ongoing and active maintenance program and we're upgrading our facilities associated with that. But we will have in addition of course the absence of the strike, but still some ramp up associated with the well sort of come back on.

Erik Mielke - Merrill Lynch

Thanks, Henry.

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

And then the only other thing I might mention is, of course, this is... I mentioned the first two of those trains, we do have the last two of the 7.8 million ton per annum trains will also be starting up in 2009.

Erik Mielke - Merrill Lynch

That's great, thank you.

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

Alright.

Operator

Our next question is from Neil McMahon with Sanford Bernstein.

Neil McMahon - Sanford Bernstein

Hi, Henry.

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

Hi, Neil.

Neil McMahon - Sanford Bernstein

Just a few questions.

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

Sure.

Neil McMahon - Sanford Bernstein

First of all, I am scratching my head to try and think of you at times before in the past when second quarter U.S. refining and marketing was down on first quarter, as you reported, maybe you could just give us a bit more detail on that and maybe... ?

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

Yes. One of the things that you see, whenever you see a real rapid run up in crude prices like we saw, there is always some compression that goes on and that generally will have a negative impact in the margins that we are able to capture. One of the other impacts that we also see, is a more of an accounting one, is on price finalization. And if you look at the price finalization impact in the first quarter... I mean, in the second quarter here, in total it was about $300 million, the vast majority of it in the U.S. So that was a larger impact that I think may not have been picked up.

Neil McMahon - Sanford Bernstein

And just generally on demand in the U.S. and worldwide, normally it's a something you are not as exposed to as others given the diversified nature of the business and the different product lines. Has that changed much this time around from last quarter?

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

We do a... when we look at our own demands, we're pretty much surrogate for the industry global demands picture. And when we look at the global demand, in the past... if you look at the 10 year average growth rate for petroleum liquids demand, it's been about 1.4 million barrels a day per year growth.

We and others, as we've been looking at this and the impact of the economic activity as well as prices on the demand, we're now projecting that somewhere around 0.7 million barrels a day. So about half... still growing, but about half the rate that we would have seen in the past.

And if we look around to where that's happening, the bulk of it is in the developing parts of the world, Middle East; Asia-Pac, and we actually see demand declining in the U.S. and in the OECD areas during this year.

Neil McMahon - Sanford Bernstein

Okay. Just a quick second question, something that's been quite noticeable, especially looking at your year-to-date share price performance is really the lack of impact of the buyback program on your share price. I know it's something that you definitely have a strategy to stick with. When do you think the buybacks will catch up with the liquidity in the market? When do you... have you done any work to suggest that if you take enough shares it will actually start to impact liquidity for your stock and therefore potentially see a price rise?

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

If you look at... I mean the way we think about the buyback, it's a distribution, and we view it as nothing more than a distribution. So we don't time it based on price, we don't... we buy ratably and we buy continuously in the market. And so we view it just as a distribution. So we are not really focusing as an investment or timing based on price. But if you look it from a liquidity standpoint, it's such a small percent of the volume overall and the shares outstanding for our company were over 5 billion shares with a lot of trading on a daily basis. We are not concerned about from a liquidity standpoint.

Neil McMahon - Sanford Bernstein

I was just thinking more from the fact that given your very large retail shareholder base and therefore... and on top of that adding in lots of family funds and things that have owned Standard Oil stock maybe, way-way back. That at some point, the actual overall share count may not fully reflect the liquidity of what's effectively in the market.

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

Yeah, I mean, we do have, as you point out, a strong retail shareholding. But I wouldn't... they participate in the market like the institutions and we see that. So, I wouldn't consider that as basically effective reduction of shares outstanding. They're loyal. We do have some long-term shareholders, but it's not a big impact in the liquidity end of the equation.

Neil McMahon - Sanford Bernstein

Great, thanks, Henry.

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

Yeah.

Operator

Our next will be from Mark Gilman with Benchmark Capital.

Mark Gilman - Benchmark Capital

Henry, good morning

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

Hi, Mark. How are you?

Mark Gilman - Benchmark Capital

Good, thanks. Hey, thanks very for much for what you call the production bridge, very helpful. If I could just follow up on that for a SEC.

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

Yes

Mark Gilman - Benchmark Capital

The net interest reductions indicated on the chart.

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

Yes

Mark Gilman - Benchmark Capital

Little smaller than, frankly, what I would have thought it was. Could you identify where those were hit and potentially talk a little bit about where you anticipate encountering similar effects in a price environment, let's say, equal to where we are today?

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

Well, I could tell you the... if you look at that 95 of net interest hit, about half of that's in Africa. And then there is a little less than half actually in the Russian Caspian area and that's basically associated with Azerbaijan. And those were the two big areas. So in the piece in Africa, as we've talked before, the East project is ring fenced in the Africa projects. So you are seeing different tranches hitting at different points for different projects. And to be honest with you, I can't give you a feel for it. We've moved through... if you look at some of our overall projects, we have moved through a lot of those tranches, but there is still some out there.

And just to put into some perspective, I think, there is about 20% of our overall production that has these... has the potential for these kinds of impacts. They are in a PSC kind of arrangement.

Mark Gilman - Benchmark Capital

20% of your PSC production or your global production?

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

No, no, no, 20% of the total production is... has PSC type contracts.

Mark Gilman - Benchmark Capital

Well, not all of those have net interest reduction elements to them. Do they.

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

No, no, absolutely, there are a lot of different terms for those, they have a lot of different... some of them don't have much price effect at all in them. Right, you are right.

Mark Gilman - Benchmark Capital

Okay. If I could just for a second question, tax-oriented. The effective tax rate for the quarter for the corporation was essentially equal to the first quarter.

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

Yes, yeah.

Mark Gilman - Benchmark Capital

Yet from a mix... from an earnings mix standpoint...

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

Yeah.

Mark Gilman - Benchmark Capital

Taking into consideration the higher price environment and also some of the commentary as you went through your quarterly review regarding the impact of tax effects, particularly in the corporate segment, I would have expected it be a higher effective rate. Was there an offset somewhere?

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

No, actually there aren't... it's a pretty clean number that you are looking at there. And so there weren't a lot of effect... or very little in the way of one-time effects that are in this. So it just basically you do see a reflection on the mix of earnings, we have had... we have and a big piece of that is mix of earnings between upstream and downstream chemicals, as well as, of course, then in the mix of our upstream, where the upstream earnings are occurring. So it's a pretty clean number, but there is nothing really major in there that's a factor as a one-time effect.

Mark Gilman - Benchmark Capital

Okay, Henry. Thanks a lot.

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

Yeah, no problem.

Operator

Our next question is from Jason Gammel with Macquarie.

Jason Gammel - Macquarie Research Equities

Thank you. Hi, Henry.

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

Hi, Jason, how are you?

Jason Gammel - Macquarie Research Equities

Good, thanks. You've done a pretty job. I am pretty far down in my question list here. Maybe you could talk a little bit about chemical margins. This is one of the lower quarters in quite some time in terms of chemical earnings?

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

Yeah.

Jason Gammel - Macquarie Research Equities

Are you seeing any changes to margin activity right now or does it look like the next quarter or two is going to be fairly similar?

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

Well, I mean, if you look at margins, they have been under pressure just like we see in the refining side of the business. I mean, as you have these very rapid run ups in feedstock costs and so on, that's rolled through. But you also... I mean, we have seen this in the past too where there... what we'd almost called mini-cycles in the business where people see prices running up and they back off on purchases. So you will see swings in sales associated with that.

We continue... if you look at long-term in this business, as we've talked many times, we see the chemical business as a growing business. It grows a couple of percent above GDP, it's had a long-term profile, we don't see that really changing. There are in the current environment though an impact associated with this very rapid run up in prices and we are seeing some of that really reflecting through in specific projects, I mean, in product areas, Aromatics in particular was hit relative to last quarter.

Jason Gammel - Macquarie Research Equities

Yes, that makes sense.

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

But overall, I mean, it's robust given the environment. If you look at the benefits we have in this area, we feel pretty good about the way our chemicals business has been performing.

Jason Gammel - Macquarie Research Equities

Okay, thanks, and that's helpful. And if I could ask a second one. On the PNG/LNG project, now that you have the fiscal regime and the regulatory regime pretty much firmed up with the governments, are there any other hurdles to reaching final investment decision or do you think that's something that could occur fairly quickly?

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

Well, we're working through the FEED at this point. So... I mean, there's always things you learn in that process. So, we'll be taking it through that stage and basically of course we have to get the necessary permits and the licenses and then of course also sales agreements that we're working. But I would say overall we feel very good about the project and are moving it ahead. So.

Jason Gammel - Macquarie Research Equities

Okay, that's terrific. Thanks a lot, Henry.

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

Yeah.

Operator

Next question is from Paul Cheng with Lehman Brothers.

Paul Cheng - Lehman Brothers

Hi, good morning.

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

Hey, Paul. How are you?

Paul Cheng - Lehman Brothers

Very good. Henry, you talked about the PSC impact on the production.

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

Yes.

Paul Cheng - Lehman Brothers

But you got to have a corresponding impact on your unit expense rate, unit costs, as well as the tax rate. Can you quantify on those two item?

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

Well, I mean...

Paul Cheng - Lehman Brothers

Because I mean, when you string your production, but you still have to show that the full costs, I mean, your unit costs go up. Wondering that is there any number that you can share that, how big is the impact in the second quarter?

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

I mean. when you... if you look at the... probably the best way to look at that though is if you look at our net income per barrel and we have... you can develop and most of guys have correlation looking back at capture rate relative to crude price. You will see... I mean, we are pretty much on that correlation, we are capturing. So, there is not a big shift there. That wasn't a big factor. I mean, there some, as you see, just more moving overseas or higher percentage overseas, but it really... that hasn't been a big shift for us. And we recover those costs in the PSC kinds of projects and of course we recover those costs directly through barrels that we are incurring.

Paul Cheng - Lehman Brothers

And Henry, you mentioned earlier that Alaska, the tax increase and that's from last year, obviously the rise in oil price that we have significant. How big is the incremental tax in Alaska in hitting you sequentially from first to second quarter?

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

First to second, I don't think there was... I don't know, I don't have a figure on it. If you look at the... I know that's not your question. If you look at from the second quarter year-on-year, it was about 100 million. But I don't know what it is sequentially, it wasn't a big factor, for sure.

Paul Cheng - Lehman Brothers

It shouldn't or it should be?

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

It is not, it is not. No.

Paul Cheng - Lehman Brothers

Oil price-wise, quite substantially in the second quarter.

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

I mean, there is some incremental effects. But it's not a major impact, and not in the reconciliation here.

Paul Cheng - Lehman Brothers

I see. Can I just ask a quick one? Do you have any number in terms of the inventory gain or loss in the quarter, any meaningful number, any trading, commercial trading or hedging losses or --?

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

We don't have... we really just don't have anything there. I mean, it's... we don't... we basically... our trading is basically for physical movements. So we are not doing a lots of... in fact, we do very, very, very little derivatives kinds of trading.

Paul Cheng - Lehman Brothers

Okay. FX, any big impact this quarter?

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

FoxEx, yeah, it's... if you look across the total business, it was like $50 million or something that range. The upstream negative, downstream had about a 100 negative, upstream about 25 negative, chemicals was actually positive about 80 something.

Paul Cheng - Lehman Brothers

Is it year-over-year or sequential, this number?

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

That's a year-over-year.

Paul Cheng - Lehman Brothers

Do you have a sequential number?

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

Yes and there it's about 60 for the total corporation, about 100 positive for upstream, about 200 negative for downstream and those were the big effects.

Paul Cheng - Lehman Brothers

Very good, thank you.

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

Yes.

Operator

[Operator Instructions]. We'll go to Robert Kessler with Simmons & Company.

Robert Kessler - Simmons & Company

Henry.

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

Hi, Robert. How are you?

Robert Kessler - Simmons & Company

Not bad. A couple of quick project updates, if I might. Can I ask what current production is at deepwater Gunashli noting a startup in the quarter? And then secondly just for an update on Sakhalin. Where is production today at that development?.

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

Yeah. Let's see if I have. I don't have something right on my finger tips here. Actually it would be about 80 on Gunashli.

Robert Kessler - Simmons & Company

Okay.

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

Sorry, that's ACG total. Yeah, that's ACG total. Our net, that's our --

Robert Kessler - Simmons & Company

That's your net in ACG total.

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

No, that's... I'm sorry, that's gross. And then we have an 8% interest in that.

Robert Kessler - Simmons & Company

That's gross for Gunashli then, right?

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

Yes. And then Sack is about 200.

Robert Kessler - Simmons & Company

200 today. And where would you expect kind of managed decline on Sakhalin going forward, what kind of rate per year?

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

It's not... we don't really have a number that I can... that I have available on our go forward field by field. We don't typically get into that. But we do... we are working, of course, the next phases, but it's not one that's fallen off cliffs here.

Robert Kessler - Simmons & Company

Okay, fair enough. Thanks, Henry.

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

Yeah.

Operator

And with that, there are no further questions. I'd like to turn the conference back for any additional or closing comments.

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

I'd just like to thank everybody for participating and for the questions this morning.

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Source: ExxonMobil Corp. Q2 2008 Earnings Call
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