康菲 (COP) 2002 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by.

Welcome to the Conoco second quarter results conference call.

At this time, all participants are in a listen only mode.

Following the formal presentation, instructions will be given for the question and answer session.

If anyone needs assistance at any time during the conference, please press the star followed by the zero for an operator.

As a reminder this conference is being recorded, Tuesday, July 23, 2002.

I would now like to turn the conference over to Mr. Steve Lawless.

Please go ahead, sir.

Good afternoon to most of you and good morning to the west coast.

Welcome to Conoco's 2nd quarter 2002 investor relations teleconference.

I am Steve Lawless, Director of Investor Relations for Conoco, and I will be conducting today's call.

Joining me are my colleagues in Investor Relations, Tom Henkel and Jean Hunter.

As usual, we will once again aim to keep this call short.

Covering only the highlights and areaa that call for further explanation.

We won't be going over a lot of numbers in the prepared remarks since we've already e-mailed to you three documents that cover those items.

The first is an Excel spreadsheet with the guidance analysis for the second quarter of 2002 versus the second quarter of last year and the second quarter of 2002 versus last quarter.

The second document is our quarterly fact book with financial and operational details.

And third, our quarterly press release which is also posted on our web site.

Additionally, a copy of the text of these scripted marks will be posted on our web site after this call.

And this webcast will be available on our web site until August the 6th.

We will be making forward-looking statements this afternoon and regarding the risk inherent in those statements, we refer you to our Safe Harbor paragraphs in our annual report, this morning's press release or this teleconference text on our Internet site.

Before we get into the quarter, I want to give you a quick update on what the composition of the new investor relations department will be for Conoco Phillips after the merger is final.

Clayton [INAUDIBLE], currently with Phillips, will head up the effort as General Manager.

Mark Kelly, also with Phillips, and myself will make up the remainder of the three-person team.

Clayton and Mark will be in New York and I will be based in Houston at least for the immediate future.

As most of you probably know both Tom and Jean have elected to retire from Conoco and pursue other priorities.

We will definitely miss them both and wish them all the best in their new endeavors, whatever those may be.

Please feel free to call and give them some grief about deserting me to do all the work.

Thanks a lot.

Okay, moving on.

I am pleased to say that our guest speaker is Phil Frederickson, Senior Vice President of Corporate Strategy and Business Development at Conoco.

Phil is currently co-leading the merger integration effort with John [INAUDIBLE] Phillips and will become Executive Vice President for Commercial in the new Conoco Phillips organization.

We thought it would be timely to have Phil give us an update on the integration progress.

Unfortunately, Phil needs to get back to the integration effort and won't be a able to stay for the Q and A.

Now, let's briefly discuss the quarter's results.

My first observation, is that it's a hard act to follow when you have the record second quarter we had in 2001.

The story for Conoco this quarter versus the same quarter last year is simple.

Significantly lower refining margins in what has been a difficult downstream environment and much lower natural gas prices.

Nonetheless, operationally, Conoco's assets once again performed well this quarter and we increased our production almost 25% and our -- our refining volumes by 26%.

The production increase is closely related to our Gulf Canada acquisition from last year and having a full quarter of the UK Humber refinery operation, supported our refining input increase.

This very brief recap of the press release, net income before special items for the quarter totaled $141 million or 22 cents per diluted share.

Some 77% below the record second quarter of 2001.

Along with poor gas prices and a weak downstream environment, which account for the vast majority of the drop, higher exploration expenses and the adverse impact of foreign currency movement also affected us.

I will talk more about these in detail later.

Additionally, as you might remember, last year, we benefited from attractive gains associated with our corporate hedge program, as well as significantly higher transportation margins.

Compared to last quarter, our earnings improved 156% as both upstream and downstream turned in improved numbers by 76% and 63% respectively.

This was largely a function of improved oil and gas prices and downstream environmental factors.

Along with the continuation of the strong operational performance from the first quarter.

Before we launch any further into the individual business segment, I have asked Phil Frederickson to provide us with an update on the Conoco Phillips merger integration effort and what day one will feel like for the new company.

Phil, over to you.

Thank you, Steve.

Good afternoon, everyone.

I am pleased to have the opportunity to update you on our merger with Phillips Petroleum.

Let me begin by saying that we are very excited about the possibilities that lie ahead for Conoco Phillips.

When the merger is completed we will be a new integrated and highly competitive global energy company.

Conoco Phillips will be built upon five significant strengths.

We will have a very strong portfolio of legacy ENP assets [Phonetic].

A global presence in refining and marketing.

A strong management team, technological leadership, and the joining of significant capabilities, including highly skilled workforce, very strong relationships globally and financial strength.

This will be great company we envisioned last November when the deal was struck.

I am pleased to say that at every passing week that we have spent planning this integration, the integration with Phillips, it has only reinforced that vision.

And our counterparts at Phillips feel the same way.

Those of us that are on the new management team are very pleased with our progress, and recognize now that we share many of the same values, same goals and aspirations for the future.

We do intend to create significant shareholder value.

We will have a swift and smooth integration and capture significant synergies.

We will have operating excellence.

We have tremendous complimentary capabilities that we can now apply to a broader set of assets.

We'll execute an aggressive growth strategy.

We have an outstanding growth portfolio.

Capital and financial discipline.

We will be able to leverage the technology, people and the relationships in the combined company with very clear accountabilities for success.

The integration planning process has been extensive and quite detailed.

The process began with the formation of seven transition teams, structured to provide business unit functions -- business unit focus and functional support.

Roughly 70 sub teams that were organized either geographically or functionally were created by these transition teams, and together these teams were composed of hundreds of Conoco and some Phillip's strongest people.

In fact the common thread running through our mutual discussions is how impressed we are with the talent that each company is bringing to the merger.

The teams' work include the identification of significant synergies and plans to capture synergies in excess of $750 million.

Organizational design work, best practice identification, and then, certainly, plans to ensure smooth day one as ConocoPhillips.

The new management team has accepted full accountability for executing the plans that have been developed by these transition teams.

We are working very hard to develop specific action plans with clear accountabilities to capture the synergies we expect to realize from the merger and we plan to deliver much of that value in 2003.

We have the highest confidence in the leaders that we are naming for ConocoPhillips.

To date, we have announced nearly 900 appointments in the new organization.

We are on track to meet our goal of being fully staffed within 30 to 45 days of day one.

Finally, the regulatory approval process is progressing quite well.

We are reaching agreement with the SEC on key issues and are on track for closure in the second half of 2002 as previously announced.

We believe we have a very good chance of closing this transaction in the third quarter.

We are prepared and anxiously awaiting day one.

We feel we are very -- we are ready and very, very well prepared.

In closing, I just want to say that at this threshold moment, that we are all enormously proud of what is soon to be ConocoPhillips.

We're bringing together great talent, great assets and cutting-edge technology as we join the ranks of the top international energy companies, we are looking forward to a great future.

Thanks again for your time.

And Steve, back to you.

Thanks, Phil.

Let's move directly to a discussion of the segment results.

First upstream.

There is one big factor that explains a large part of the variance between our results for this quarter and the same quarter last year.

By far, the most important factor is the decline in natural gas prices.

As you can see on the variance analysis, this accounts for well over half of the reduction when you combine the realized gas price impact with the price-related portion of the CG&P gas processing business.

Three other factors to a large extent make up the rest of the variance.

The Gulf Canada hedge program, although it had a minimal impact for the quarter, was down relative to the nice gain that was achieved last year when the hedges were put in place before the closing.

Exploration expenses were also up compared to last year.

Two seismic survey acquisition programs in Canada make up the majority of the increased expenditure here.

Finally, we no longer have the Syria construction project as a source of significant earnings, as it was completed in 2001.

Between these four items, we can explain over $200 million of the $220 million variance.

The remainder of the variance is attributable to a wide variety of lesser factors.

Comparing the second quarter to the first quarter this year, upstream earnings improved by $118 million or 76%.

As mentioned earlier, the value of the Gulf Canada hedge program changed very little during the quarter, giving us a relative lift compared to the big hit we took in the first quarter.

Also, a significant improvement was gained from the 39% increase in the MYA [Phonetic] price over the quarter, which our Petrozuata operation enjoyed tremendously.

Petrozuata's net income went up almost 200%, or $27 million due to this price increase over the last quarter.

In the remaining of this upstream discussion, I'm going to talk about three important areas that will be of interest to you going forward.

First, production, as expected, total production including Canadian Syncrude was up significantly versus the second quarter of last year.

Production averaged 836,000 barrels of oil equivalent a day for the quarter, for a total of 76 million barrels of oil equivalent.

This is up about 25% versus 2001 Q2, based largely on the Gulf Canada acquisition, but slightly down from the first quarter as was forecasted, due mainly to seasonality and planned maintenance.

We were able to bring on a satellite field to [INAUDIBLE] in Russia slightly ahead of schedule in the second quarter, although it is a relatively small addition.

Looking forward to the third quarter, we expect a minor dip in production of about 5% to 10% from the current level, due to lower seasonal demand and the recent temporary shut-in of the Britannia.

In the fourth quarter, however, we expect to benefit from the normal increase in seasonal winter demand and also expect to bring on a significant number of new fields, all of which are in development now.

They are Alba south, [INAUDIBLE] count [INAUDIBLE] in the UK, and the second [INAUDIBLE] gas sale agreement to Malaysia and Gulf Indonesia Sudan field.

All in all, we continue to forecast production to increase by about 10% -- 8 to 10% this year over 2001, just as Rob McKie had forecast at last fall's annual analysts meeting.

Secondly, the significant Cora Cora discovery in eastern Venezuela, continues to be progressed.

Cora Cora finished an excellent appraisal program earlier this year and those results, along with potential development scenarios are being evaluated.

Conoco has determined Cora Cora to be commercial and has received board approved for development.

Our next steps involve getting the partners and the government to agree that we have an economic project and approve the development of phase I.

It is our intent to get their development approval later this year, at which point we would be able to book a portion of the proven reserves.

And finally, a quick note on exploration as it was a relatively quiet quarter with respect to drilling.

I mentioned the acquisition of two seismic surveys in Canada.

One was in the McKenzie delta area and is long term.

The other is in the Canadian foothills and directly supports our recent deep exploration drilling there.

We are on a roll in the foothills with four successful exploration wells in a row.

Although not individually large, the discoveries hold high value gas that is relatively quickly developed.

Our Gulf of Mexico deep water program continues to progress with the drilling of the spa well.

When finished there, the pathfinder drillship will move on to spud the [INAUDIBLE] prospect, likely in August.

On the princess discovery near Ursa, we continue to have excellent success on our appraisal drilling.

The most recent well found a much thicker pace sand than expected, adding roughly 35 million barrels of oil Equivalent more to that accumulation.

We are still very excited about our deep water Gulf of Mexico program.

And, in fact, picked up an additional ten blocks in the eastern lease sale earlier this year.

And speaking of additional acreage, Conoco and our partners were recently awarded block "K" from the Bunai [Phonetic] government in their recent bid round and are in the process of negotiating the PFC [Phonetic].

And on the [INAUDIBLE] in Canada, we have just announced that we farmed into the high potential newburn H 23 well increasing our presence there.

All of these additions are consistent with our exploration strategy of pursuing world-class prospects.

We also continue to pick up acreage to support our core assets.

We were just awarded three blocks in the UK's southern North Sea in the just-announced 20th bid round results.

For your future reference, exploration expenses are back-end loaded again this year as we will be doing most of our exploration and appraisal drilling in the second half of the year.

We should expect to have expenses similar to or slightly larger than the second quarter going forward for the third and fourth quarters.

Moving on.

Here are a number of quick updates on significant upstream events that occurred during the quarter or since the quarter's end.

As I mentioned earlier, our Gulf Canada hedge program was essentially unchanged from last quarter, leaving us with a positive pretax value of roughly $160 million at quarter's end.

We have again included a detailed table as an attachment to today's press release to help you fully understand the impact of this program.

The Gulf Canada acquisition remains accretive to date after reflecting the corporate hedges.

As we have just announced in the press release yesterday, the initial offering period for the minority interest in Gulf Indonesia resulted in the successful tendering of roughly 74% of the outstanding shares.

This is excellent news for our southeast Asia effort.

Conoco Indonesia and Gulf Indonesia will soon be able to combine their efforts and manage just one portfolio, plus we expect some savings from synergies.

As you may have heard, Britanni had a minor incident on July 8th on one of its three generators and the platform was immediately shut in.

It is starting back up as we speak and is expected to get back to full production over the next several days.

We expect the net loss in production to be roughly one million Barrels of Oil Equivalent due to this shut-in.

Also related to the UK gas market, the interconnector pipeline between the UK and the continent is currently down, affecting our ability to provide gas to the continent and lowering the gas prices in the UK due to the additional supply.

It will probably be early August before it resumes exporting to the continent.

This will adversary impact us in the third quarter roughly $5 to $10 million in ATOI.

Now let's move on to downstream.

Said simply, the market environment for downstream in the second quarter was dreadful as compared to a year ago.

Although it was slightly improved from the first quarter of this year.

Some of the words we used last quarter are still very applicable for this quarter.

In the United States, the gulf coast light oil spread was down 50% versus the same quarter in 2001.

Along with conventional margins, our inland differential decreased by 70% from the unusually high level last year, dropping below $1 per barrel.

And to add insult to injury, the light-heavy differentials continue to drop and were also down around 50% compared to a year earlier.

For example, the WTI Maya [Phonetic] differential averaged only $4.29 a barrel for the quarter below what we would consider to be the normal range of $4.50 to $5.50 per barrel.

As you know, these differentials, these light-heavy differentials are important to Conoco, since we process a high proportion of price-advantaged heavy and acidic crude.

As a sensitivity, a $1 barrel change in the light-heavy differential has an impact of over $50 million to earnings on a yearly basis.

To sum up the U.S., these margins and differentials alone accounted for all of the total negative variance in downstream year to year and resulted in a net loss for U.S. downstream for the quarter.

On a positive operational note, we did increase domestic refinery inputs by some 20,000 barrels per day to 556,000 barrels per day.

And that even included a month-long turn around at the Denver refinery.

The story clearly gets better in international, although margins and spreads were also down significantly from last year.

International downstream earnings improved over $40 million due to a variety of positive items, the largest of which is having a full quarter Humber operation.

In Europe, the Brent cracking [Phonetic] margin finally went positive again for a quarter and averaged 8 cents a barrel, although that is still extremely low on a historic basis and well below the $2.10 a barrel average from a year ago.

There are definitely some bright spots here for the quarter, however, as German retail margins return to more healthy levels and operationally, our refinery inputs were back to normal as compared to the same quarter last year.

And briefly, in Asia, the news gets even better there as retail margins in Thailand increased 17% year over year, and our growing business in that part of the world was able to take advantage of the improvement.

Asia posted break-even earnings for the quarter which is excellent since we are still very much in a growth mode there and the Singapore spread was below $4 a barrel.

Comparing this quarter's downstream results versus last quarter is relatively straightforward.

Even though some of the environment improved in the U.S., the weak WTI Mya [Phonetic] differential and the impact of higher feed stock costs on our core product margins, definitely hurt our domestic downstream performance.

However, the improved international price environment and our strong retail operations there more than made up for this.

Both refining and retail margins improved across the board in both Europe and Asia giving us an earnings improvement of $37 million in international quarter to quarter.

To summarize downstream, our assets continue to perform well and we have every expectation that they will continue to do so.

Given our strong focus on reducing costs, we expect downstream to increase in profitability as demand returns and environmental conditions improve.

Finally, there are some additional items in the quarter that you will also be interested in.

For emerging businesses, the gas to liquids plant is being built as we speak in Ponca City and will be completed later this year.

The earnings variance you see in emerging businesses versus the same quarter in 2001 are primarily due to the increased expenditures associated with that plant as the construction costs are being expensed as R&D.

We continue to anticipate full-year net expenses for the emerging businesses segment to be $100 to $120 million.

In nonoperating, we've included a net after-tax currency exchange loss of $35 million on the variance analysis.

These losses generally resulted from changes during the second quarter in the exchange rate of the U.S. dollar versus European currencies.

And the related impacts of these changes on the after tax financial results of Conoco's European operations.

Our European operations, based their accounting and income taxes in their local functional currencies to better tie earnings with cash flow on a local basis.

Norway had the largest impact on this loss, as the dollar weakened from 8.81 Kroner to the dollar to 7.44.

Over the quarter.

A 1.37 Kroner to dollar change.

As a sensitivity, every change of one Kroner to the dollar has an impact of $35 to $40 million to earnings.

As mentioned in the press release, we were also impacted by the Venezuelan Bolivares devaluation during the quarter.

This impact rises from the revaluation of our Bolivares based assets and liabilities as the exchange rate moves, and are thus noncash impacts.

As the sensitivity for the Bolivares, currently, every 100 Bolivares per dollar movement has about a $4 to $5 million impact.

And finally, although you may have expected increased interest expense over 2001 quarter 2, due to the increased debt connected to the Gulf Canada acquisition, it remains relatively flat on an after-tax basis.

This is due to the low rates achieved in the Gulf Canada financing and the very tax efficient way that the financing was structured.

So that concludes my prepared comments.

Before we get to the Q and A, I would like to remind everyone of our procedure for taking questions that we implemented last quarter.

Each caller will be allowed to ask one and only one question each time they call in.

After you have asked a question, you are free to rejoin the queue.

We will deem the so-call two-part question as two questions and answer only one part of the question.

We will allow a single clarification follow-up to the original one question, but only if we view it as related to the original question.

And finally, before I end, on a sentimental note, this is very likely the last earnings teleconference call you will get from Conoco as a stand-alone company.

We just want to thank everyone for being such a receptive audience and for being so great to work with.

We hope to continue this excellent relationship as ConocoPhillips.

Okay.

Stephanie.

Let's take our first question.

Thank you, sir.

Ladies and gentlemen, I would like to remind everyone that if you do have a question, please press the star followed by the 1 on your push-button phone.

If you would like to cancel your request for a question, please press the star followed by the 2.

You will hear a three-tone prompt acknowledging your selection.

Your questions will be polled in the order they are received, and if you are on speaker equipment, please lift your handset before pressing the numbers.

One moment please for the first question.

And our first question comes from Tyler Dan, please state your company name followed by your question.

Banc of America Securities.

Hi Steve and Tom and Jean, how are y'all.

Hi, Tyler.

How are you doing.

Tom and Jean, it's been a real pressure and Steve, look forward to working with you in the new capacity.

That is not a question.

[ LAUGHTER ]

On -- as far as my question is concerned, I really want to just dig in a little bit on to the hedging situation, and just please refresh me on exactly what the term of a lot of these market-to-market hedges are.

And basically what you've done since the closing of Gulf Canada and since the primary portion of those hedges were put on in terms of hedging activity, terming it out to -- so to speak.

Well, let me start on this one, and then I will maybe have Jean kick in here a little bit.

Probably the first thing I do is refer you to our hedge IR gram on our Internet site.

You definitely want to see that.

We go through a rather thorough explanation of that program.

But it's basically a program that includes both the market-to-market accounting and the hedges.

And it is oil hedges -- oil -- includes oil and gas, the mark-to-market portion is roughly 75 million Barrels of Oil Equivalent and the hedge portion is 35 million Barrels of Oil Equivalent.

That's been in place since the board of close of Gulf Canada.

There's been very little to no change of that program since we started it, and basically we have worked hard to provide you with a lot of information as to what the impact of that program is.

Definitely would refer to you that IR gram and to the table at the back of the press release that we provided today.

And those are -- Tyler, those are single settle at the end of this year.

That's the main question actually was -- and just to really figure out if you put on anything incremental.

No.

No.

The program as we started it is the program.

And it does end at the end of the year.

That's the main question.

But thank you very much.

Thanks Tyler.

Thank you.

The next question comes from Mark Gilman.

Please state your company name followed by your question.

First Albany.

Hi, guys.

My sense is that there is more in the way of foreign exchange impacts than indicated in the corporate non-op.

I wonder if you could detail what they are by segment, please.

Well, the -- we can brag a little more than what's in the text there.

I mean, basically, we have our -- some assets -- some long term assets held in Norway and basically they go through a -- every quarter an accounting devaluation and the difference in the -- help me out here.

Well, actually, that piece, Mark, is already in there.

The additional piece that is missing that you mentioned, that's Petrozuata.

And the reason you don't see that is because it is an equity company.

So the goal of our reevaluation isn't in there.

Jean, is there anything other than the Bolivares revaluation in the foreign E&P segment in terms of foreign exchange losses.

Not that's not in non op.

In other words, all the currencies in non op--.

O.K., in the operating segment?

No, no.

Just the Bolivares reevaluation that is in the equity earnings of Petrozuata.

And that's how much?

It's $19 million.

After tax your share?

yes.

Thank you.

Thank you.

The next question comes from Paul Ching.

Please state your company name followed by your question.

Hi, guys.

hi, Paul.

Hi.

Well, first of all, Jean and Tom, thanks for all the help over the past several years.

So, good luck with whatever that you decide to pursue.

Thank you, Paul.

Thanks.

My question is actually very simple.

In your press release, you indicate that you guys are forming a joint venture called the Deep Water Composite AS going to do -- maybe I read wrong, it sounds like you're doing a little bit of the oil surfaces stuff in the deep water for the field development or exploration.

Help me understand why you are going to engage in this business?

Well, it's -- of course, a very large portion of our exploration effort now is associated with deep water exploration.

We are doing it in many places.

The -- anything we can do to progress the technology in the deep water and where we feel like we can bring something to the table, we will do that.

I'll give you an example.

We worked with hydro on the deep water sub sea mudlist [Phonetic] system, and that's een tested out and is being -- and is still being progressed largely by hydra at this point in time.

So, there's one example of something that we have done in the past.

It actually is very similar to the partnership that we're doing with [INAUDIBLE] there.

This partnership, is it going to try to commercialize whatever is technology -- like I mean, one that you just mentioned, hydro to the [INAUDIBLE] -- is that what the business model?

[INAUDIBLE] the business model.

I mean, I just want to understand.

Are you guys actually getting into -- become a competitor of some of your supplier for the oil surfaces?

No.

It's not meant to be competitive -- competing with the existing suppliers.

What we do is we bring our technical knowledge from our -- our deep water technology team to those partnerships.

We progress the technology with them, but at the end the day, we actually let them go forward with the technology to a large extent.

We don't really want to be in the business of deep water services.

We want to be providing them with our technical expertise that allows them to progress their business.

And we benefited in the progress.

And, Paul, you know, what we want to do to kind of build on what Steve said is, we want to make successful technologies that are going to help us.

And sometimes that can't just be for us.

And sometimes the way we help that can be a long-term -- you know, thinking about the drilling with casings, there it is not a joint venture but we put in a firm order.

These things look different depending on what the circumstances are.

But are you going to be -- when this -- I mean, maybe I am too slow in understanding.

So this business that when you are trying to sell or that you promote that technology -- when that technology becomes more mature, you sell it to the customer, are you going to get a piece of the profit from that venture?

Um, it can vary, but you know, if it makes good business sense, we will.

But it's -- you know, I guess one thing -- you know I want to be very clear on.

We're -- this isn't Conoco entering into the oil and gas services business.

This is Conoco promoting technology to further our ability to be successful in the deep water.

If it turns into an excellent business venture for us, all the better.

But we intentionally do it to use our -- to combine technologies and progress the -- you know, our understanding and benefit.

Steve, how much much are you invested in --

Paul we are going to have to move on, Paul.

Sure, can I just ask, how much do you invest on the capital?

I don't know at this time.

Thanks.

The next question comes from Mark Flannery.

Please state your company name followed by your question.

It is Credit Suise First Boston.

Goodbye, Jean and Tom.

Thanks, Mark.

Your welcome.

[INAUDIBLE]

In fact it is so bad on this side, perhaps you can take some of us with you.

[ LAUGHTER ]

Anyway, the question is a simple one, on GRL, Gulf Indonesia, what happens next?

And does the closing of the Phillips deal have any impact on the tendering for the -- the retendering for the remaining shares of Gulf Indonesia.

No, there's absolutely no connection with the ConocoPhillips merger at all.

What happens next is that we extend the offer to July 30th, giving those that have not tendered their shares the opportunity to do so such that they expedite the cash that they receive.

We -- we hope at that point to get 90% plus and at that point, it all moves very quickly.

If we don't, then it probably becomes a 30- to 60-day exercise to gain the remaining shares, and -- but -- but it is a done deal.

We are there.

It is just -- it is just a matter of which process we go through now, but it's done.

Right.

I mean, when you say it is a done deal, when you get to 90%, that is a mandatory achievement threshold, I think.

Yes.

And if you get under 90%, say we end up at 80%?

Well, we just go through a little longer process that's all to get the remaining shares.

It doesn't matter at the end Mark, you know, we will gain all of the shares eventually.

Right.

Okay.

Great.

Thank you very much.

Thanks, Mark.

Thank you.

The next question comes from Luca Epolito.

Please state your company name followed by your question.

Hi, I just wanted to clarify in terms of the completion of the Phillips transaction.

You have an agreement in principle with the FTC and you are just hashing out a -- either a consent decree or selling assets, or doing what you need to do?

So am I correct in assuming that you have an agreement in terms of what you need to do?

Well, you know, Luca we are not going to comment on the negotiations with the FTC here.

You know, I think you heard Phil describe definitely close in the second half -- we are very confident in closing in the second half of '02.

We are cautiously optimistic about it being in the third quarter and we are doing everything we can towards that end.

But I think that's about all we'll say on that right now.

Thank you and good luck.

Thanks.

Thank you.

The next question comes from Bob Goodoff.

Please state your company name followed by your.

Luma Sales.

We are going to miss some of you, I guess.

Which ones Bob?

Which one?

No, I actually I will miss both of you.

Thanks a lot, Bob.

I have a question on this line on the variance.

The sequential quarterly variance on the UK gas contracts.

Could you talk about what accounting mechanism led to that and whether that's one of these typical end-of-quarter things or something else?

Yeah, it is.

We had that first impact last quarter when we applied some FAS 133 accounting to some of our UK gas contracts.

It's a market-to-market adjustment.

It is done at the end of the quarter.

It's actually very similar to our Gulf Canada hedge program, in terms of market-to-market impact at the end of the quarter.

It has that.

There should be an expectation on all of our parts now that we will go through FAS 133 rules on certain UK gas contracts that require it every quarter.

Just a follow-up, what changes drove $45 million?

Can you give me a sensitivity or something like that?

Well, that's a variance.

It's largely a price change.

Let me -- yeah, it's -- I mean it is largely a price change.

I believe it -- yeah, we had -- if you look last quarter, we had a very positive -- you know, we had a positive gain from that mark-to-market change and this quarter it is negative, and so the variance becomes large but it's only because of the gain in the first quarter and the loss in the second quarter.

To the end of quarter price or -- the current price, is that --

forward, yes.

Forward price.

Thank you.

Thank you.

The next question comes from Matthew Warburton.

Please state your company name followed by your question.

UBS Warburg.

Good afternoon, everybody.

Tom and Jean, best of luck in the future.

Just a quick question on the merger.

Earlier Jim said that the Woods Cross refinery data room has been established and had seen some good interest from the industry.

How similar data room been established for Denver, [INAUDIBLE] if so what level of interest have you seen given the specific issues surrounding that refinery.

Well the answer is definitely yes, data room has been set up for that.

And we are not -- we are not aware of the level of interest around that at this point in time.

O.K., thanks very much.

Thank you.

The next question comes from Don Neiman.

Please state your company name followed by your question.

ICAP.

Tom and Jean, I guess I would wish you good luck, but since you have never invited me down to the babe boat -- [ LAUGHTER ] --

You are always invited, Don.

Okay.

Question, one thing that didn't appear to show up in the variance analysis was the change in the UK tax regime.

Could you indicate how much of a penalty that was in the quarter, please?

Sure, Don, there was actually no impact from that as it has not -- it won't show up until the third quarter.

There is no second-quarter impact.

And at that point in time you are looking for an impact of ....

Well, we have talked about a yearly impact of $40 to $50 million, you know, and a one-time impact of $125 million.

That is a -- that will be a special item, yeah.

Thanks.

But going forward, $45 million is roughly a good number per year earnings impact.

Okay, thanks.

We will get a little relief from the royalty evolution that they are talking about, but it is not much.

Thank you.

The next question comes from Bruce Lanny.

Please state your company name followed by your question.

Yeah, AG Edwards.

And, Tom, Jean, good luck to you two.

Thank you, Bruce.

I have a question for you and it kind of goes back to what Mark Gilman had asked about the foreign currency exchange law.

I just want to make sure I understand it clearly.

The $19 million associated with Petrozuata, is that above and beyond what the variance of the $35 million you commented to earlier?

Yes, it is different.

It falls under our equity companies, and as compared to the other exchange loss of $35 million, which is falling under non-op.

O.K.

So the $35 million with primarily Norway, then you add the $19 million on there to get up to about $54 million or so.

Is that what you are saying?

Correct.

O.K., great, thank you.

Thank you.

The next question comes from Michael Mayor.

Please state your company name followed by your question.

Prudential.

I just want to know where the retirement party is, Tom and Jean.

My backyard.

[ LAUGHTER ]

Okay, all right.

I do have a real question.

I would like to know what the Company's 2003 oil and gas production estimate is as a stand-alone company and what portion of that is U.S. gas.

Well, the -- at this point in time I'd have to refer you back to the 2001 annual analyst meeting for our projection on what the production would be.

Let me -- I can -- I can get that here in just a second because it actually won't have changed at this point.

We will update that later this year normally.

You know that's probably when we go through our profit objectives.

So does that imply that after asset sales and all that you are still on track to meet that original forecast?

At this point in time, yes.

You know, and I think you heard Jim Mogel describe this morning that the next date -- the next update that will be meaningful will be the November annual analyst meeting and I think we will probably repeat that here too.

All right, thank you.

Thank you.

The next question comes from Paul Ting.

Please state your company name followed by your question.

O.K., Salomon Smith Barney.

Hi, Steve, Tom and Jean.

Hey Paul.

Hey Paul.

Hey Paul.

Good.

I have a question on the comment I believe Steve made about the fact that Asian retail margin went up if I catch the number 17%.

Just curious about what do you view as the drivers behind that?

Is there some demand pickup or just a matter of the weakness in the dollar or some other technical event?

You know, I -- we believe it's demand.

I mean we believe the -- you know, it's Thailand, our retail operations there have been very successful for us and we are growing that business but we think it is largely demand.

But I don't see that in the bottom number.

I might look at the wrong thing.

No, I think the -- we had increasing volumes.

Nothing substantial anyway.

The volumes -- what -- [INAUDIBLE].

I was going to say, I was looking at the fact sheet here and Asia Pacific, it's page 12.

Asia Pacific motor gasoline went from 15 to 23.

And then up middle [INAUDIBLE] also.

I -- I think it is really -- that's where it is coming from.

That's pretty good improvement.

Yeah, percentage wise I guess it is.

Okay, thanks a lot and Tom and Jean, just want to let you know I really enjoyed working with you and best wishes for the future.

Thank you.

Thank you.

The next question comes from Nick Griffin.

Please state your company name followed by your question.

Hi guys, Nick Griffin at Deutsche Banc.

Hi Nick.

Hi Nick.

Tom, Jean, it's been great, but good luck.

A quick question, a simple one.

Gas volumes have obviously declined due to the disposals this year versus last year.

Do you have a like-for-like number, last year, this year in U.S. gas?

Yeah, all of -- almost all of the decline is disposal.

You've got -- you got reduced [INAUDIBLE] recount as well here in the various --.

Yeah, there's some of that.

We went from 10 rigs at lobo to 8.

So that's going to have a little impact.

But most of it's distribution.

And particularly, we had those positions in the lower 48 and we also got rid of that equity company [INAUDIBLE].

In third quarter of last year, so you really see that change too.

That was all gas.

So what are we saying, sort of less than 2% has been natural decline.

Would that be a fairly decent estimate?

Or -- because it's 15% on the clear number.

Probably worth the numbers, but I bet it is pretty small, Nick.

Okay, cool.

Good luck and I appreciate all the help.

Okay.

Thanks a lot.

Thanks.

Thank you

The next question is a follow-up from M ark Gilman, please go ahead.

Hey, guys.

What did you pay for the additional interest in Norway?

What was the production associated with it and how much of it was reflected in the second quarter?

Oh, we aren't -- Mark, we're not going to release the price.

I can't help you there.

The effective date, I believe, was May 1st of this year for production so that we actually started achieving production in the second quarter.

I -- I am looking for the -- for the information on what the amount was, what the production amount was.

Hold on just a second.

Well, 6% of Heidrun and 15% in -- [ INAUDIBLE ] -- that's probably going to come to -- well -- we are probably going to get about four million barrels this year out of it.

I am not sure what that comes up to on kind of on a rate, but it will be about 4 billion barrels for this year and that's a little bit over half a year.

Those numbers you mentioned, that's incremental in those fields?

Yes.

O.K., was there any catch-up on the second quarter?

Any retroactive piece or did you just start booking it as of May 1st.

Just May 1st.

O.K., thanks a lot.

Thank you.

And I do show that was your final question.

Please continue with any further comments.

O.K., thank you, Stephanie.

That does conclude our call today.

We thank you very much for your attention and your interest in Conoco.

And we'll be talking to you next quarter as ConocoPhillips.

Thanks again.

Bye.

Thank you, sir.

Ladies and gentlemen, this does conclude the Conoco second-quarter results conference call.

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