康菲 (COP) 2002 Q3 法說會逐字稿

Good day everyone, and welcome to the ConocoPhillips third quarter earnings release conference call.

Today's conference is being recorded.

At this time, for opening remarks, I would like to turn the call over to the General Manager of Investor Relations, Mr. Clayton Reasor.

Please go ahead, sir.

Good afternoon and welcome to ConocoPhillips' third quarter earnings conference call.

Jim Mulva, ConocoPhillips' President and CEO will give a review of this quarter's performance and outlook for the remainder of 2002.

After his comments, Mr. Mulva will be available for your questions.

Before we get started, I'd like to remind you that in addition to talking about third quarter earnings, there may be forward-looking statements made in response to some of your questions that give our projections and expectations of future results.

Actual results may differ materially from those the company forecasts, and factors that could cause these actual results to differ are found in the company's filings with the SEC and in the earnings release we sent out this morning.

With that said, I'll turn it over to Jim Mulva.

Clayton, thank you and thank you for all those who are joining us for our third quarter conference call.

I appreciate your interest in ConocoPhillips.

You know, we received Federal Trade Commission clearance for the merger that we closed on August the 30th, and we began trading our ConocoPhillips stock on September the 3rd.

With respect to the integration of our merger, we are generally running quite well.

I have a few comments with respect to our upstream and downstream operations.

With respect to the integration plans and the implementation of the merger, all issues and subjects regarding our merger are well developed and we're up and running really quite well.

And I look forward, along with our management team, discussing with you all of our plans going forward at the November 22nd New York analyst meeting.

Now, turning to our media release this morning on our third quarter earnings release, you know that the merger was accounted for using purchase accounting, and the result of that is that our financial results, which were reported this morning for the third quarter includes two months, that's July and August, of heritage Phillips' financial results and operations and one month, September, with combined ConocoPhillips earnings.

And then when you look at the nine months' results, you see eight months heritage Phillips and then one month, September, of ConocoPhillips.

So, as you know, this makes it really difficult for comparison purpose of one quarter earnings with the prior quarter or prior year time period.

And we recognize that, so we have done in our media release, as well as our comments here on our conference call to help you with respect to developing a base, baseline, for you to be looking forward at what the new company will be doing in the fourth quarter and subsequent periods.

So I'll use pro forma production and operating information to help you in this regard.

And when we develop pro forma information, it's really calculated by combining production and operating data from both companies, Conoco and Phillips.

And hopefully this will help you with developing your baseline.

Our first real baseline financial and operating results is going to come in the fourth quarter of 2002, and then of course in subsequent time periods.

Now, turning to our third quarter earnings, as you saw from the press release this morning, our third quarter net operating income was $456 million.

That works out to 94 cents a share.

The E&P side of our business, we were the beneficiaries of higher prices, and we operated reasonably well, but you'll hear in a moment, we could have done even better.

We had some downtime and interruptions relating to some of our

and our Alaska North

operation.

I'll comment more about that in a little bit.

The downstream environment, as you know, in refining and marketing has been a really difficult time period, and we did have some downtime and we ran our refineries close to about 90 or 91 percent ability to

capacity.

Now, if we look at our reported net income for ConocoPhillips, including special items, we had a loss of $116 million.

So we have $572 million in special items in the third quarter, and those were all earmarked in our media release, so I won't go through all of them.

We expect that the special items related to the merger, the bulk of them, the significant part of them, have really been rectified for the third quarter.

In subsequent quarters, we will have some because of certain of these merger-related items we can't rectify until they actually occur.

But I want you to know that most of the significant part of the -- or the bulk of all of the merger-related items are recognized in the third quarter.

Turning to expiration and production upstream performance, the net operating income was $499 million, and the U.S.

E&P earnings were $326 million.

International earnings were 173 million, and of course, you have to remember, as you know, that this is the blend of July and August of heritage Phillips and September of Conoco and Phillips.

So the prices I'm going to quote are that blend of prices.

In our -- realized group price for E&P in the third quarter was $25.96 a barrel.

Realized U.S. natural gas price was $2.60 an MCF.

International gas price averaged $2.37.

Now, if you looked at our E&P on a pro forma operating basis, you can see that during the quarter, the ConocoPhillips upstream pro forma production averaged 1.55 million BOE a day.

Our gas production was 3.3 billion cubic feet a day, and that represents about 35 percent of our production.

The oil, natural gas and thin crude prodcution totals just a little bit more than one million barrels a day, actually 1,005,000 barrels a day.

Although we generated good earnings on the E&P side, as I said earlier, performance could have even been better had we run to our full capabilities.

And what I'm referring to is during the quarter our oil and gas production was impacted by downtime, disposition, OPEC curtailment,

weather.

Let me go through that, that downtime equates to, for all those items, about 50,000 BOE a day.

We had a shutdown at Britannia in the U.K. sector of the North Sea, and that worked out for the quarter of an average of about 18,500 BOE a day.

We had a scheduled Alpine maintenance up on the north slope, worked out to 5000 barrels a day for the quarter, average.

The

Netherlands disposition of heritage Conoco assets was 12,000 barrels a day.

OPEC curtailments were 9,600 barrels a day.

The Prudhoe Bay well shut in as a result of their incident up at Prudhoe Bay averaged 200,600 barrels a day through the quarter, and tropical storms in the Gulf was 1,100 barrels a day.

It all adds up to about 50,000.

What I'd like to make a point is that if we look back at about this time three months ago, if you took the combined projections of heritage ConocoPhillips, we thought we'd produced in the third quarter 1.575 million BOE a day, and we actually produced 1.547.

Now, we did plan the Alpine shutdown, and we knew the OPEC curtailments, but if you adjust for all of this, had we handled the other items that didn't have for shutdowns the time as we experienced as much as Britannia and the Prudhoe Bay well

and the tropical storms, we actually would have done just about 10,000 BOE a day better than we had forecasted.

So, pretty much right on target.

Maybe, at best, one percent better than what we said we were going to do in the third quarter.

I'd like to turn to different operations, geographic areas, Alaska.

In spite of our well being shut in at Prudhoe Bay, I thought we had a really good quarter up in Alaska.

We made $252 million, net operating income in the third quarter, and this is pretty strong.

Our Alaska assets produced 362,000 BOE a day during the third quarter.

In addition to the normal seasonal declines that we experience in the third quarter, as I said earlier, our production was adversely impacted by the operating interruptions at Prudhoe Bay, 2600 barrels a day, and we had our scheduled downtime at Alpine.

But, as we previously outlined and forecasted, we're right on track to average, this year, 375 thousand, 400 thousand BOE a day from Alaska for the entire year.

In fact, through the third quarter and moving into the first part of October, our average so far this year is 385,000 BOE a day.

So there's no -- we don't see any problem in meeting our forecast for the year.

Alaska -- it's by the financial results -- the production number is really an important contributor to our success in growing our production over the past several years.

And this is a result of bringing on the good performance of Alpine and the satellite fuel productions goes a long way towards really offsetting the normal

decline we see in the large fields prior to Prudhoe.

Up until the operating incident at Prudhoe, though, we'd really done well up at Prudhoe throughout the year.

Turning to the lower 48, explorations and production, we made $74 million in the third quarter, average realized prices were $2.65 MCF for gas, and for oil in the lower 48 was $26.87 a barrel.

Our projected gas production, as we look forward in the lower 48, will continue to be flat at 1.4 billion cubic feet a day.

That's what we've been doing, and we expect to be doing in the fourth quarter.

Liquids production during the third quarter was 82,000 barrels a day, and as I said earlier, we did lose about 1100 barrels a day, on the average, in the third quarter as a result of the tropical storms in the Gulf of Mexico.

Now, turning to international E&P, we had strong performance and then weak in the North Sea, where there's 208,000 BOE a day.

Volumes were higher than we've had in the last several months.

Our exporters, much better performance at the

facility.

At U.K.

, we produced 166,000 BOE a day.

That's 65,000 barrels of liquids, crude oil, more than 600 million cubic feet a day of gas.

Production, as I said earlier, in Britannia we were down from Britannia in the third quarter, and this reduced, obviously, our projection.

And the result was -- well, lost production on the average was about 20,000 BOE a day as a result of a shutdown and our downtime at Brittania.

And turning towards Canada, our production, including thin crude, was around 163,000 BOE a day.

And that's made up of 78,000 barrels a day of liquids and 512 million cubic feet a day of gas.

Venezuela, we did 78,000 barrels a day.

Higher production from Hamaca and good performance from our Petrozuata project.

OPEC curtailments, as I said, reduced production in Nigeria about 6400 barrels a day, and then a slight amount more OPEC curtailment related to our Venezuela production.

Indian, Asia, and far Eastern production remained essentially flat from one quarter to the next.

Turning to refining and marketing, our

business, we generated 79 million in net operating income.

Sixty-five million came from the U.S. operations, and 14 million from international business.

Our third quarter U.S. refining and marketing operation came predominately from the marketing side of the business.

Our refining part was essentially right at break even.

As you know, we've experienced very low crack spreads in most regions of the country during the third quarter, and we also, on an operating side,

Wood River and the Alliance refineries ran at reduced rates or at turnarounds or reduced rates as the result of the tropical storms as an impact on our U.S. refining results.

Our turnaround expenses reduced net operating income $30 million, and this was in line with what we told you you could expect in the third quarter.

had a planned, extended shutdown for more than month, and

had an extensive turnaround.

And so we ran at about 91 percent of our crude capacity.

Within our financial results, our earnings really came from U.S. marketing, international refining and marketing, and U.S. refinery results were essentially at break even.

If I turn to chemicals, our chemical joint venture with ChevronTexaco, we continued to experience really trying times in terms of market conditions.

We operate well, we continue to reduce our cost structure, and our share of the joint venture earnings in the quarter were $5 million.

This is better than what we've been doing in the past, the prior quarters, or compared to certainly a year ago.

And it comes from better

and

results.

But we did see here in the third quarter less performance from aromatics and

operations.

Turning to the midstream joint venture with Duke Energy, our earnings from our midstream business were $11 million, and this is a decline compared to prior periods or prior years, primarily as a result of how reserves are booked for gas imbalances, adjustment for gas inventories, and other charges.

One thing we point out, the natural gas liquids have not kept up originally through prices.

They're down about 58 or 60 percent of west Texas intermediate, where historically they've been closer to 70, 75 percent of WTI, and this obviously has an impact on financial results.

Moving to the corporate cash flow debt to balance sheet situation, corporate charges for the company in the third quarter are $122 million.

In the third quarter, we generated about 1.8 million in cash from operations.

Now, on a pro forma basis for capital expenditures in the third quarter, it was about $1.6 billion.

You can expect in the fourth quarter the capital expenditures will be in the neighborhood of $1.8 billion, and on a pro forma basis for the entire company for 2002, capital expenditures around $6.5 to $6.6 billion.

We just announced, as a result of a board meeting here earlier this week that the new ConocoPhillips dividend will be 40 cents a share.

Quarterly, 40 cents a share.

Now, turning to debt, we're very pleased we had a $2 million bond issue several weeks ago, and it allowed us to lock into very favorable long term rates, and this helps with our long term financing, as well as our -- certainly expecting further improvement on our

position.

Proceeds were used essentially to pay down short term commercial paper.

Our debt level at the end of the third quarter was $20.4 billion, and our debt ratio was 40 percent.

At the end of the second quarter, our debt ratio was 39 percent, so we're up a percent.

But there are a few points I'd like to make known, and that is, our debt level and increase was affected by a number of items.

First, as a result of the merger, the mark to market of the heritage Conoco debt, using purchase accounting, we wrote up the liabilities of the debt by $700 million.

And during the third quarter, also, there was the acquisition of minority interests at

in Asia, and that was around $300 million in

debt.

Our net, there was $200 million for heritage Conoco co-generation project, which has been brought onto the balance sheet from off-balance-sheet financing.

So these are items, you might say, that are special items that impacted the increase in the debt.

And the equity was reduced because of the special items related to the merger, and the result was that our debt ratio went up by a percent.

Now, if you eliminated those special effects, which you really can't do, but I mean, if you did, or could, then our debt to capitalization structure would have maybe a slight impact or improvement from the 39 percent that we had at the end of the second quarter.

Turning to goodwill, there was a $1.7 billion increase in goodwill, as showed in our 8-K filed in October, and that's $1.7 billion more than we had indicated when our S-4 was filed earlier this year in February.

So the increase in goodwill was caused really by two items.

First, there was a lower fair value appraisal for the asset base, and there were higher values assumed with respect to the liabilities.

The liabilities were higher primarily due to the pension liabilities, higher accounts payables, and the increase in the debt that I just mentioned here earlier as the result of the purchase accounting and bringing a co-generation project off balance sheet to on balance sheet.

The appraisal values being $1.1 billion lower relate primarily to the valuation of Canadian assets.

And the net operating income effective tax rate is around 54 percent.

Now, I'd like to turn my comments and direction toward the fourth quarter of this year.

For the fourth quarter, our E&P production volumes on a barrel oil equivalent basis, we expect that we will be about eight percent higher than what we achieved pro forma in the third quarter of '02.

So that's an increase going from 1.55 million BOE a day to 1.67 million BOE a day.

Now, where does this come from in the fourth quarter?

First, we see an improvement of nearly 98,000 BOE a day coming from full operation of Britannia,

field,

, as well as increased domination from new and existing fields as we go from the second and the third quarter into the fourth quarter.

We also expect the Alaska to see new improvement of about 30,000 BOE a day from the third to the fourth quarter.

And we expect to see our first oil from our new projects

in China, and as I said, the

field in the U.K.

North Sea.

And the lower 48, our gas production expected to be 1.4 billion cubic feet a day.

We have

rates running in the

trends, so Texas

in the San Juan basis.

Our basic approach is to do our drilling program is to offset the natural decline of our existing fields and productions.

We do look very closely at particular areas where the basis differential we see much lower gas prices.

We question whether we are going for volume or going for value, and in those cases, we may -- so we elect to not be going for volume if we can't see weighing down the production with

, obviously shareholders and financial results.

the downstream.

By the fourth quarter, refinery runs expected to be in the low 90 percent level, 90 to 93 percent, and this is a result of the

refinery, we had a power outage, refinery went down in the U.K.

And then we had a number of issues.

We took advantage of smaller turnarounds and startup issues but the

refinery is down about three weeks in the fourth quarter.

The other is, there will be market conditions that we will just take a look at how strong we run our refineries to determine we're at 90, 91, 92 or 93 percent.

It's really directly towards what value we can see by running at different -- each refinery at different volumes.

You know the new ConocoPhillips sensitivities to a dollar change in oil prices, gas prices, crack spreads and wholesale marketing margins is much more than the heritage either Phillips or Conoco.

And the fourth quarter for pro forma

purposes, you can expect corporate charges will be in the neighborhood of $170, $190 million.

We are making reductions in our corporate charge, as well as all of our operations as a company.

You will start to see more of a significant reduction impacting the financial results as we go through the early part of 2003.

Looking further, as we put together and we really are finalizing all of our operating plans for 2003 and longer term strategic plans, there will be significant cost reductions from the synergy capture.

It's all integrated to all of our plans and our budgets, as well as our capital spending is being sorted out for 2003, and with the strategy of what if we're going to do the

in 2003.

We had a lot of opportunities for higher returning projects, 75 percent or more of our capital will go to the upstream part of the business.

Our financial plans and operating plans will certainly be directed toward the capital risk fund, capture synergies and reducing our debt level.

We have a strong and flexible balance sheet and we want to make it even more strong and more flexible.

And the overriding point is just all support and directed towards improving our returns on capital

.

The management team, and I'm going to say, myself personally, are really excited about the plans that really

together and we're going to share with you with the entire management team in New York on November 22nd.

Clayton, that really concludes the prepared remarks.

I think we're ready to go and handle whatever questions or comments folks participating on the call would have of us.

Great, so

the lines for questions for us?

Thank you.

The question and answer session will be conducted electronically.

If you would like to ask a question, please do so by pressing the star key followed by the digit one on your touchtone telephone.

If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment.

We will proceed in the order that you signal us, and we will take as many questions as time permits.

Once again, please press star one on your touchtone telephone to ask a question.

And we'll pause for just one moment.

Our first question will come from

of First Albany.

Good afternoon, guys.

Wonder if you can provide an update on where things stand on the Alpine facilities expansion project and how any NPRA developments might be integrated into it.

I've seen some stories recently associated with some remarks

gave to a recent conference up in Alaska.

Mark, with respect to Alpine, to the best of my knowledge and understanding, what we're doing in terms of

, and our ability to handle more gas, which will ultimately have a beneficial impact with respect to production and hopefully also reserves is right on schedule.

We can give you more of those details after the conversation.

I think you asked me the same question on NPRA last conference call, and for competitive reasons, because we have some lease sales coming up, we think it's probably best for us to not be saying anything to not be saying anything at this point time.

And then after the lease sale and all, we can certainly comment much more.

But that's our reason for not saying any more about that.

That's really the response that I have,

.

OK, let me try one other one.

In looking at the Chevron-Phillips petrochemical joint venture perofrmance, I guess I'm struck a little bit, Jim, by the fact that margin conditions, for whatever set of reasons in the third quarter, seem to be in and about midcycle kinds of levels.

Yet, the performance, despite what has seemed to be pretty good synergy capture in the joint venture, is marginally above break even.

I wonder if you could help reconcile those two, or maybe you just don't agree that third quarter in terms of commodity margins was indeed in and around midcycle levels.

Well,

, we are doing really well in our capture of synergies and our cost reduction, but I don't think we see ourselves at midcycle normalized spreads in terms of our products.

We also have taken in our financial results some -- you might say some special items with respect to accruals or write-downs, or whatever -- of a minor nature, not significant, but they are included in the financial results.

We did see, as you said, stronger margins way through the first two months of the year -- the first two months of the quarter.

But then on the ethylene, polyethylene chain, it backed off in September.

And we didn't have a strong quarter at all in terms of the

and aromatics.

I'm sorry, and then one final one, if I could.

Could you be specific, or a little bit more specific, in terms of what the in process research write-offs were that represented the special item you took in the quarter?

Well, it's primarily the research expenditures related to heritage Conoco development of the gas and liquids technology and projects.

OK, so assume this is something that you are not going to pursue?

Oh, no, no.

We're going to continue to pursue, certianly pursue, we're excited about the opportunities for gas and liquids and the technology, but by purchase accounting, we are required to write that off.

OK, thank you.

Our next question will come from

of

.

Two questions.

Jim, I know that this is kind of early on in the quarter, but the

and Gulf Coast crack spreads are both up about 60 percent, October to date, versus the second quarter averages.

And I guess I'm wondering if that's flowing through or if it's to some extent being diluted by marketing.

And second question, have you -- again, this is somewhat premature, have you taken the opportunity to calculate financial impact of FAS-143?

Let me handle first with respect to the crack spreads.

We are certainly seeing a much better crack spread than we had expected.

This will be driven through in our financial and operating results.

There has been some decline in terms of the margin we see in the marketing side, but the strength of the crack spreads certainly way overshadows, overwhelms, the reductions that we see on the marketing side.

With respect to FAS-143, no, we're working hard on it.

we expect that we're going to adopt it, though, for January 1st, '03.

Thank you.

And our next question will come from

of Lehman Brothers.

Hi, Jim.

Two quick questions.

One, on the Timor Sea, can you give us a quick update and see your

being the

, straight aheads already being ratified.

And then, how long you think that you may take, and is that going to cause any delay to the value you then develop on the

timeframe.

Secondly, is there any plan -- I know it's a bit premature, but is there any plan to put the rest of the company midstream business to the

venture?

On your first question, Timor Sea, everything that's developing both for our recycle project and our LMD project, we watch this very closely.

Both the East Timorese and the Australian authorities have indicated they expect to see the treaty ratified by the end of this year, and of coruse, it's important to us and so our entire team, including myself, we follow this closely to make sure that that happens.

But both governments have indicated that the plans are to get this ratified by the end of this year.

Everything else about the projects continues to go well, and this is going to be in

for product fulfillments.

The midstream part of the business is not performing as well as we would have liked, both operationally, its cost structure -- and in terms of, we've had the impact as I've said,

prices as a percent of west Texas intermediate.

We have no plans to be looking at the disposing of our interest in DEFS, and of course we have midstream interest as a result of the merger of Conoco and Phillips.

So the issue ultimately, longer term, is how do we best create the value of what we have in the joint venture as well as the midsteam assets through heritage Conoco.

Thank you.

We'll move now to

of UBS Warburg.

Good afternoon, Jim.

Couple of quick questions.

On the E&P side, you obviously took a small hit on the outstanding Conoco hedge positions.

I just wondered first of all if that program is actually being closed down or are you just going to let it run through to the end of the year.

And then secondly, again it may be premature, obviously pensions is the topic du jour of the market at the moment.

If you have a position -- I know you mentioned previously that Phillips was making additional contributions to their pension fund, what the combined business looks like at this stage in terms of incremental contributions from the enlarged company?

OK, on the first question of the Canadian hedge, it is really running down.

We're just going to let it run out.

It relates only to the oil side, not to the gas side, and I think you could expect that this is not going to be a material item at all in the fourth quarter.

Funding the pensions, I can give you some broad oversight or overview, but if you look at our SEC filing for the balance sheet for our pension fund and our medical plan worldwide, on a PBO basis, we have a liability of about $2 billion.

Our basic approach and plan is we use conservative expectations on the return from the plan.

It will be, going forward, in the neighborhood of about seven percent assumption on return, which is conservative, and we certainly used the low interest rates and

the liabilities is why we have a number of $2 billion on the balance sheet.

This is a liability that's long term in nature, and our approach is that we will allocate several hundred million dollars a year, each year over a number of years, to make sure that that is properly funded and it's not an issue for us with respect to financial results, income and expense.

We will share a lot more detail with you on this when we have our meeting on November 22nd, but it gives you kind of -- this is not a problem, really, for the combined company.

It's certainly not an issue as compared to quite a lot of other companies in other industries, but these are the numbers, and our approach is to put several hundred million dollars of our available cash resource this year and any year out so that we have a good, funded retirement plan and medical plan.

But we want to make sure it's really well funded.

Right.

But not at the expense of debt reduction or our capital program or our dividend.

Just one more question if I may.

I read in a recent industry article about

production tests, I mean, limited volume from the northern territories project in terms of trying to keep your involvement alive in that scheme.

Could you perhaps expand on that in terms of your view towards Russia in general and that project specifically?

I didn't really get the -- I guess, you're asking me about the composition in Russia and how we look at Russia relative to some of the other investment opportunities.

Yes.

I think coming back on that one, the heritage Conoco has already had more of a position, and you might say interest, in Russia than has heritage Phillips.

And it wasn't that heritage Phillips didn't have an interest in Russia, they just had more things to do in other parts of the world.

Speaking, now, in the new company, and the position in the new company, I think Russia will be very important to the new ConocoPhillips.

And so we have a number of opportunities and issues that we would like to proceed.

And what I'm really trying to say is, I'd like to see Russia become a real important part of the new company.

Exactly how it plays out and how we participate is something that's in front of us immediately at this point in time in our long term strategy.

OK, thanks very much.

Our next question will come from

of

.

Hi, Jim.

I'd like to follow up on

question there on are you feeling the higher crack spreads.

Particularly given Conoco's refining base composition, are you feeling any improvements in the light-heavy spread?

Another way of putting that is to say if the whole quarter was break even for refining, what did September look like on a combined basis?

Well, September was weaker than the first two months of the quarter.

We haven't seen much improvement in the light-heavy spread.

And in terms of the improved crack spread, we've seen pretty significant improved crack spreads in just about all geographic areas with the exception of the West Coast.

But overall, this improvement in crack spread can really drive as long as they prevail at the levels that they are, which is essentially on a combined basis.

Near or above midcycle crack spreads certainly are going to have quite an impact on our financial results.

I didn't point this out when I went through my initial comments, but 25 cents a barrel improvement in the average crack spread for the entire company, over a year, 25 cents a barrel crack spread improvement for the year, is a net income impact of positive $130 million for us.

So this is important to us.

Right, OK.

Just follow up with one question.

The write-down of the appraised value of the heritage Conoco assets of $1.1 billion, you described that as a Canadian issue.

Can we assume that that is really the final write-off of the Gulf-Canada assets?

Well, we have spent many, many months with independent outside appraisals.

They have looked at everything in the company, and we do not expect to be looking at write-downs or changes.

This is it.

This is not a bite at the apple every quarter or every year.

This has to be done at one time through purchase accounting and accounting conventions, so we have spent the better part of the year 2002 from the time we announced the merger looking at all of our assets, applying the right discount rates and factors for the operations and geographic locations, and this is a result of that effort.

Great.

OK, thanks, Jim.

And the next question will come from

of Goldman Sachs.

Thanks.

Jim, in your comments you alluded to maintaining a strong balance sheet, and I know you probably want to talk more about this in November, but I seem to recall in the past sort of a $5 billion type debt reduction target.

Is that order of magnitude still what we're looking at?

And to achieve that, should we assume that there'll be fairly significant asset sales in 2003?

Well, you have a clever question, because I really want to cover it seriously with you on November 22nd, but the direction is correct, yes.

We want to see some pretty significant reduction in our debt.

We said all along that we don't like debt ratio that's high 30s or 40 percent.

We want to be moving this down toward 30 percent.

And yes, when we meet, we'll be talking about how we're going to do that, including some asset disposition.

So the specific metrics and exactly how that's done, that's November 22nd.

But your question as to the direction is exactly right.

And just a follow up there.

You know, given how important bringing on the legacy projects for both the legacy Phillips and Conoco is, I guess I'm assuming that more of the debt pay down would therefore have to come from an asset sales program as opposed to a slashing of cap ex.

Well, I think it's going to be a combination of everything.

We see -- we'll update on November 22nd our synergy number, and the synergy number will be more than $750 million, so that will drive financial results and cash flow.

I think you'll see that we're going to be very disciplined in how we look at our capital program, and we'll be looking at asset dispositions as well.

So it's going to be a combination of everything.

That's terrific.

And one final one on the Canadian write-down.

Just given where commodity prices are, should we assume that there has been reservoir disappointment on those Gulf-Canada properties, or is there a price effect just given

gas prices?

Well, I guess if I understand the question, yes, I think you're right.

I think that's what I got.

Yes, well, I think there were a couple of things, and one was the timing at which the production was going to take place, and the cost associated with developing those reserves.

Well that, we've also stretched the profile.

Yes, OK.

That makes sense.

Thank you very much.

And our next question will come from

of Bear Stearns.

My question was answered.

Thank you.

Moving on to

of Bank of America.

Hi, good afternoon.

Question on the cash flow, I realize that you published only preliminary numbers, but I wanted to see if you all had an approximate number from cash flow from operations, excluding the changes in working capital.

And I guess a corollary question to that would be, of the after-tax special items that you mentioned in the press release, to what extent are those cash versus non-cash?

Tyler, this is Clayton.

You know, we haven't broken out the working capital impact for the quarter at this point.

I can probably get back to you on that one.

OK, and in terms of -- Jim, I wanted to attack the question on chemicals perhaps another way.

The margin environment for the fourth quarter, have you seen some of the good sequential improvement that you saw in the third quarter sticking into the fourth?

No, I think what we would say is for our composite, business signs at chemicals in the joint venture, I think we see the fourth quarter looking a lot like the third quarter.

We see real improvement, probably, maybe some as we go through 2003, depending on the economy, but the real improvement is 2004.

And there have been

signs that we talked on quarterly conference call.

We said the real improvement is 2003, 2004, and I think what we're really saying is it clearly looks more like 2004.

OK, and then my final question would be -- perhaps this is a little aggressive, but did you realize any cost savings or synergies in the fourth quarter?

Not really.

It's all in front of us.

Got you.

Thank you.

Our next question will come from

of Morgan Stanley.

Jim and Clayton, how are you all doing?

.

Jim, you may have just answered this, but you may not have.

Going back to the question about portfolio management, both companies have been -- have used portfolio in the past, but more so in E&P than refining and marketing.

And yourself and

have talked about the cost reduction opportunities in the downstream, but based on your initial assessment, do you guys feel pretty comfortable that there are going to be portfolio management opportunity as well, and does this include refining, terminals, retail, or not so much as may be the case in E&P.

Well, we see opportunities the entire portfolio.

First of all in the upstream part, there are going to be some assets that just make more sense to someone else.

It's going to be small, it's not anything major or wholesale as we look at a

to see assets.

But there's -- given the portfolio and the size, there are some things we can do on the upstream.

In the downstream, yes, we see that there's opportunities for rationalizing the portfolio, but as we've said in the heritage company before, it's going to be directed primarily towards the regional side of the business of marketing.

OK, and let me just ask one other question.

You clarified the drivers behind the 50,000 barrels per day decline in output pretty well, and I think you mentioned at 18,000 barrels per day, Britannia represented the largest component of the non-recurring production items.

And within this context, could you elaborate on the situation at Britannia, meaning, what were some of the specific issues?

And that's a pretty high return project for you guys?

Well, it is high return.

It's a legacy asset.

It's really important, and that's why I wish we could have said that our earnings were better than 94 cents a share, because that really has a lot to do with E&P variance.

The specific reasons and points on that, I think we'll have to come back to you offline.

OK, thanks a lot, guys.

And as a reminder, to ask a question, please press star, one.

We'll go now to

of First Albany.

Guys, I was wondering, do you have a balance sheet available for September 30th, or is that going to wait the 10-Q filing?

10-Q filing.

I note that some of the numbers, Jim, I believe that you quoted in your comments appear to be different from those on the October 1st 8-K, so can I assume that there have been some revisions?

I can come back and reconcile those two things with you.

OK, if you could, please.

I will.

Thank you.

And that concludes today's question and answer session.

We'll turn the conference back over to you, Mr. Reasor, for any additional or closing remarks.

OK, great.

Well, we do appreciate your interest at ConocoPhillips, and a copy of our release you'll find at our Web -- you can find that at Conocophillips.com and we do appreciate your participation.

And that concludes today's conference.