康菲 (COP) 2003 Q1 法說會逐字稿

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

Today's call is being recorded.

At this time, for opening remarks and introductions I would like to turn the conference over to the Director of Investor Relations, Mr. Clayton Reasor.

Please go ahead, sir.

Good afternoon, and welcome to our first quarter conference call.

We appreciate your interest in ConocoPhillips.

Jim Mulva, ConocoPhillips President and CEO will highlight this quarter's operating and financial performance.

We'll also take some additional time to go over the process we are using to measure our synergy capture performance relative to our operating plan.

Hopefully you've had a chance to review and download the presentation material we put on our website this morning.

These bar charts and other graphs show the drivers of our earnings change and synergy capture and should make our results more transparent.

I encourage you to view the material as Jim makes his comments.

In the detailed supplemental information material, you can see that we reported net income from continuing operations.

This excludes the impact from discontinued operations and FAS 143.

There are no other adjustments for special items.

As -- after the prepared remarks Mr. Mulva and John Carrig, Executive Vice President and CFO, will be available for your questions.

In addition to talking about first quarter earnings, there may be forward-looking statements made in response to some of your questions that deal with our projections and expectations of future results.

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

So with that said, I will turn it over to the President and CEO of ConocoPhillips, Mr. Jim Mulva.

Thank you.

I very much appreciate everyone taking the time to join us on our conference call.

We appreciate your interest in our company.

I'm quite pleased with our first quarter 2003 results, both from a financial and operating perspective.

As you know, it is the first quarter that really demonstrates and shows benefit from the use of our operating plans, which incorporates the business improvements and synergy targets in each of our business units.

And we're seeing the improvements in all parts of our organization.

Our business units and our staffs have met or exceeded the first quarter '03 operating plan targets.

Now, to help you follow along with the comments, I will let you know when I'm moving from one page to another, as we go through this conference call, so that we can make sure we're on it with respect to my comments and what page I'm looking at so let's move on to page 3.

The top titled "elevate expectations".

You can see we generated net income of over $1.4 billion in our income operations almost $1.3 billion, and cash operations more than $3 billion.

A lot of paydown $1.5 billion of debt and you can see that strengthens our balance sheet.

We ran really very well.

Of course we had the strike in Venezuela.

But take it into consideration for the strike in Venezuela, the E&P production volume, we really did very well.

We have the benefit of good oil, gas prices and experience.

You see later in the presentation, we are able to document significant incremental after-tax earnings that can be directly attributed to our getting the business improvements and the synergies and driving them through into the financial results as it demonstrates the strength of our merger and I'll discuss all of these synergies and business improvements in quite a bit more detail a little bit later in the presentation.

So now, what I would like to do is move on to page 4, and we'll look at our company cost structure, and compare this quarter's cost structure with the last quarter which is the fourth quarter of '02.

We reduced our production operating exploration, SG&A by about $382 million from the first of last quarter of last year.

And the operating costs were taken out of all segments of our business, including merger-related costs, dry holes, other exploration costs.

I will talk more about these things and the subsequent slides of the presentation.

And now if you will turn to page 5.

We talk about the total net income of the company.

You can see an income of continuing operations improved from $558 million last quarter to $1.27 billion this quarter.

So the total net operation income increased by $425 million.

A great deal is contributed to strong prices and markets but our production operating costs improved by $236 million compared this quarter to last.

You can see on the slide FAS 143 accounting standard which addresses the decommissioned assets and results in a positive impact of about $145 million.

The discontinued operations provided about $22 million in net income.

I'm going to move now on to page 6, with just the company's cash balance.

Our cash from operations, this is before working capital, amounted to $2.5 billion and this amount of cash was supplemented by $712 million reduction in working capital.

Now, a significant part of that is attributed to the increase tollway taxes payable and result in our prices with higher taxes payable with respect to our Norwegian operations.

Capital expenditures was $1.3 billion and you can see dividends are $270 million and then you have discontinued operations and other items were up $344 million.

And so this blends with our $1.5 billion provided.

You can see there's no significant buy here for sale of assets.

This is $25 billion, it's really coming from our cash from operations and how we manage working capital.

We moved on to our next page 7, our balance sheet as you will see here, how we improved the balance sheet, specifically the debt ratio.

You can see free cash flows gave us the opportunity to strengthen the balance sheet.

Our balance sheet net was $18.2 million and our forecast went up to $31.9 million, and there was nearly a 3% reduction and in our balance sheet debt ratio.

At this point in time, we're ahead of our plan, primarily as a result of the business improvement synergies and certainly the strong pricing and downstream track spread environment as a result of the strong pricing environment.

But we want to point out that we used essentially all of our free cash flow to reduce debt and we did not change our capital expense.

Let's move on to page 8, which is the exploration and production.

The first quarter our business we produced more oil and gas and oil equivalent than we outlined in our fourth quarter conference call.

So all in all, our lines are pretty close to what we does in the fourth quarter last year.

We have production as a result of the strike in Venezuela but it was offset by higher production than we might have expected in Alaska, China and Indonesia Worldwide enterprises for this quarter were $30.72, last quarter, $25.31 a barrel.

We realize worldwide natural gas prices were up to $4.49 compared to $3.27, down from last quarter.

Capital expenditures and E&P were a little over a million.

And the upstream captured about 40 million in pretax cost reductions synergies and 30 million reduction in capital.

Cap Ex expense , the most significant source of our cost synergies are head count reductions primarily in the upstream.

Nearly 8% are premerger work force and this is employee as well as open positions we had at the time of the merger.

One of the examples of our business synergies is capitalizing on the ability to combine and renegotiate contracts for many of our service providers.

Moving now to page 9.

Our production.

I mentioned the first quarter, the plan with the fourth quarter of last year, 1.623 million BOE a day.

Our performance was better than the fourth quarter conference call.

I went through that already.

Although we lost 30,000 barrels a day in Venezuela production, we were pleased that we saw production fully resume to the month that we had prior to the shutdown.

We lost about 6,000 barrels a day equipment production from Canada and that is due to asset sales up to 7,000 BOE a day due to field declines.

Experiencing freeze production from Alaska, 16,000 BOE a day, China 12,000 BOE a day that's where we're bringing down the first phase of production.

Indonesia was up 9,000 BOE a day, and all of this has helped us to keep our production.

It's over 1.6 million BOE a day.

Moving to page 10, we talk about E&P net income.

And this is compared from last quarter to this quarter.

And our income from continuing operations, it was about $329 million higher than the AOA last quarter.

Primary reasons for sequential improvements are increases in oil and gas prices.

It accounts for about $307 million in the increase in earnings.

We had more production, operating costs, exploration expense, SG&A costs, all of those things had an impact of helping us on our income in continued operations by $120 million.

First quarter E&P income, operation 1.137 million and you could see the FAS143.

This is an accounting standard and we increase the E&P income by $146 million.

So the entire first quarter we were $1.283 million.

Of this total, the U.S.

E&P earnings were $837 million, while international were $446 million.

I'm going to turn now my comments to the downstream on page 11.

I mean, if you look at the downstream in the first quarter, your consideration to where we had scheduled turnarounds and marked project, we were really well at 92% of our approval capacity at stations.

And we also in the first quarter had the benefit of UK refinery being on screen for the entire quarter.

Refining margins improved in the U.S., with realized primes up $6.50 a barrel.

Last quarter it was $5.07 a barrel.

With these improved in our cracks, primarily in the Gulf Coast, the West Coast and the East Coast, it didn't provide as much benefit as geographically.

Internationally our refining margins increased quarter by quarter from $2.98 a barrel to $5.03.

Now looking at our marketing, margins were -- were essentially flat.

U.S. up somewhat internationally.

In the United States we lost a little bit of money in Martin, but you have to take into consideration that that includes the least cost accruals.

About $25 million and our lower operating costs were down about -- after tax $23 million.

I'd like to go and talk a little bit more about the performance of refining and marketing on page 12.

We'll talk about on page 12 the downstream net income.

Income from our downstream operations was $371 million this quarter and last quarter it was $105 million.

So the various is $266 million, $243 is due to improve crack spreads.

It's the benefit of wider differentials and also the improvement from last quarter is due to operating costs reductions and $23 million.

That $23 million may not look that substantial, but it is a substantial reduction in after-tax operating expense, especially when you give consideration in that turn around expense was $23 million higher than last quarter and our utility costs were $3 million higher than last quarter.

Now, I haven't looked at refining, currently.

Let's go to page 13, which is the midstream chemicals and the merging businesses in the company.

In the midstream part of ou r business, we made $31 million in the first quarter, up a little bit over last quarter.

Increase was due to better pricing or operating expenses offset by lower volume and some other write downs and other assets.

Chemicals product prices were not able to keep up with the increase.

This business lost $23 million a quarter.

So that's worse than last quarter.

Now aromatics, any specialties performed at the same level as last quarter, but olefins or the greater source of the loss and pass the utilization for olefins and polyolefins and the higher restock cost was the reason in the chemical business side in the first quarter.

In terms of emergent businesses, we lost $34 million in the first quarter, it is the development of new technologies and hopefully strong new business lines for ourselves.

The last quarter we lost $40 million.

So, the improvement primarily is as a result of the decision this past quarter to discontinue our business.

That -- past quarter to discontinue our business in March.

Now turning to page 14.

Under corporate, the corporate side of the business benefited from one-time maturity of mutualization gains, lower staffing costs, synergy cap shares and $22 million in earnings for discontinued operations.

I want to talk more about corporate as we go to the next page, 15.

We have the chart.

You see the corporate segment income from containment operations a loss of $212 million.

If you look at components on this chart, you see that our net interest expense of $167 billion, administrative costs of $35 million, further related costs of $27 million.

The other item is insurance item, $70 million for a total corporate was $212 million.

Discontinued operations $22 million.

So reported impact corporate of net income is $190 million.

If you look at this on an ongoing basis, you really have to look at the first two bars on the left.

If you add net interest expense, administrative cost, staff cost you get in the neighborhood of around $200 million.

And that's close to the guidance that we indicated last quarter which was $190 to $200 million.

One note I would like to say, we do expense options, and in the first quarter, the expense line of options to $4 million.

Now, I would like to move on to a whole new part of our presentation, which is how we look at and how we are demonstrating and monitoring that we are capturing synergies and business improvement as a result of merger and corporate restructuring in our operating plans for this year and next.

So go to page 16.

And I'm quite pleased with the progress we are making.

I would like to point out that we are using our operating plans.

We're also using internal databases, and external financial statements to look at it from every different perspective we can to ensure that we are capturing the business improvements and the synergy capture.

In 2003, we routinely review our operating plans with our business units and our staffs to ensure that these business improvements and synergies flow through to the bottom line.

Although not precise, we estimate that about 70 to 80% of the improvements from all the business improvement and synergies is recurring in nature.

And we will continue to work on reporting, making sure that we are capturing all of this, and in a very accurate way and demonstrate this to you, our shareholders.

As you can see in the following slide, reporting business improvements using both our cost perspective and an income perspective and we match and compare our performance in this quarter against the baseline which is the first half of 2002.

So let's go to page 17.

In order to really review this and look at this for comparison purposes externally, we report 2002 net income and cost and then make adjustments with only four items.

On prices we used the cycle of prices and margins.

It's equivalent of $18.50 a barrel. $35 natural gas and then $3.25 Conoco price spread and that's prices.

We also made adjustments on operating conditions.

It addresses anomalies in operations and historical average.

For example, of an operating adjustment, and charges and downtime from operations.

This has the impact of reducing the 2002 net income base line for operating condition adjustments of $11 million.

And we had to adjust also our baseline for accounting policy changes.

The changes to accounting policy are measured and the baseline adjusted accordingly.

Examples of the changes include where we had 2002 cost and our processing fees are made and we made adjustments there and on the tax side, the 2002 synergy results from modifications made to tax rates, our tax rates and regimes around the world, plus significant changes came from the expiration of 729 tax credits and the increase in the UK tax rates.

So we feel the adjustments are very fair and reasonable and a list of these adjustments and amounts are shown on the three tables attached to the presentation.

So, I'm what I'm going to do now is we're going to take a look at the synergy capture from the two perspectives on the company, both as far as the cost structure and the impact on the income and compare the two and get a good indication of what the business improvement synergy and the run rate we have seen as we go through the latter part of the first quarter of this year.

So let's go to page 18.

Which is the first half 2002 cost base line.

The 2002 first quarter base line of 2.264 billion dollars was established by taking the first six months of all these adjustments that I outlined and you can see in the attached tables to the actual reported ConocoPhillips costs.

Exploration expense, SG&A costs, reducing this cost by discontinuing operations like in Denver refinery, the Utah refinery and our asset sales in the Netherlands.

And maybe these other adjustments are on page 24.

So after these modifications are made, we adjust six month cost line is calculated that's a 4.53 billion.

So 50% of this amount, and to determine that our quarterly cost baseline of the first half 2002, of that baseline is $2.64 billion.

Take that and go to the next page, 19.

Page 19 we're going to compare that to what we actually did in 2000.

Look at the waterfall chart.

The waterfall graph helps to show the business improvement of $188 million calculated.

Adjustments were made in 2003 on usual cost items such as retail marketing distributions for $55 million.

Higher refinery utility costs which is $64 -- 65 million our losses of $52 million and other increase loss of $28.5 million.

So based on the 2002 base line, and our costs in 2003 of $2.273 billion, plus announcements, there's $197 million, there's a pretax cost reduction of $188 million is obtained.

As we take the $188 million, and annualize it, you could say that the annualized run rate on the cost side is $762 million.

But we know that we didn't capture all of our synergies at the beginning of the first quarter as we went through the quarter, but also know that on all of these synergies it might be recurring in nature.

So the $762 million is not really appropriate, but if you look at this number from the cost side and we believe that the run rate at the end of the first quarter on the cost side is $700 million.

Now, I want to look at the upside, with the intention of seeing if we can core real estate late back the cost side and see on the income side so we'll go to page 20.

If you're looking at the first half of 2002 income baseline, so similarly, to how we establish the cost base line, we calculated quarterly earnings base line, $427 million, and so we began by taking the combined net income and then removed the impact of prices discontinued operations, and other adjustments.

These adjustments include things like impact of increase UK taxes, accounting policy changes, other items, pending impacts.

They are all shown on the chart on pages 25 and 26.

The result is a six-month baseline figure of $854 million.

That's the first six months of 2002 and we reduced it in half.

That's how we came up with $427 million.

We compare that out of what we actually did in 200 3.

So we go to page 21, and so what we did is we compared $427 baseline against $1.37 million in earnings we announced today.

Our adjustments -- we had to adjust higher than normal.

We had the impact of the Venezuela strike on [INAUDIBLE] We did have higher refinery and utility costs.

So those adjustments need to be made.

You can see that $878 million is at a $427 million basis.

It addresses the higher gas prices and crack spreads that we realized over and above the assumption in the fourth quarter.

We had the impact of the strike in Venezuela.

That was $35 million.

That's the impact on [Peda Vesada].

We have the higher impact and losses of $24 million and other adjustments of $35 million were taken out of the first quarter reported results.

For this results in a business improvement of $99 million.

Of which around $65 million comes from lower costs.

So you assume that if you annualize it and convert it to pretax, and use a tax of 50%, it's $800 million.

Again, we don't feel that we -- the full value of all of our business improvements throughout the entire quarter and not all was recurring until we step back and say, this is a good look at a disappointed view that matches pretty good with what we think is our base line run rate of business improvement and synergy tax with about $700 million at this point in time.

Now, what we intend and will do is each quarter, as we go through the second and third and fourth quarter of this year and the fourth quarters of 2004, we'll keep this baseline and cumulative to keep looking at it not only each quarter but cumulative look at our business improvements and synergies.

Now what I would like to do is go to page 22, which is my last slide, and we'll ask for he questions and comments that you might have.

To summarize, I'm really quite pleased with the operating financial performance of the company.

There's no doubt that higher prices helped our earnings but you can also see that the benefits of our actions that decide to curb reducing cost and integrating our synergy plans and our operating plans.

And it really has created a process that will help us to keep score and demonstrate to the shareholders that we're on track with meeting all of our targets.

Turning to the second quart of this year, our outlook, I expect our production to be somewhat lower than the fourth quarter.

This is just due to normal seasonal declines and the spring time and some asset sales.

We also expect exploration expense to be higher in the second quarter than in the first quarter.

Refining utilization mark should be up 95%.

Other expenses are expected to be maybe more than half of what we did in the first quarter and corporate costs are expected to be maybe just a little more than $200 million, but if we put in what our assumption that relates to expenses for $25 million, then corporate costs will be in the neighborhood of $210 to $230, but that's with $25 million of merger-related costs.

So we believe that the synergy gathering in the first quarter was $73 million, we're making good progress and we're taking steps to improve our operating and financial results.

And we are also continuing our effort -- our progress towards increasing had the upstream portion of our portfolio, compared to the total portfolio of the company.

We continue to spin off and spend our capital money.

We keep our capital expenses at the same load we announced last year, early this year.

And we expect to see better returns as a result of this business improvement synergies, assuming normalized prices and crack spreads.

If you notice in our slides, we have not included any information or comments on returning capital.

It certainly has improved, no doubt about it, as a result of the better business environment, but also as a result of synergies.

So, we would think it will take another quarter of operations and results under our belt and then the next time that we -- the second quarter conference call, we'll talk about all the things that we have here.

So how are we closing the GAAP and how are we translating closing the GAAP of our business lines in the updates compares with the other companies in the industry.

So it's a long time going through all of these slides but we thought this is the full real full quarter of our new company.

We're very pleased and excited with what we have accomplished and what's to come in the future and we wanted to demonstrate with you how analyzed and how our synergies both from a cost point of view and income point of view.

So Clayton, I'm going to stop and open it up now for questions that we'll do our best to try to respond to.

That's great, Jim.

Thanks a lot.

Lori, if you could line the questions up for us.

Thank you, today's question and answer question will be conducted electronically.

If you would like to ask a question, simply press the star key followed by the digit one on your touch-tone phone.

Again, if you would like to ask a question, please press star one.

Additionally, if you are on a phone that has a view function, please make sure to disengage your mute before attempting to signal.

Once again, that's star one to ask our question and we will take our first question from Arjun Murti with Goldman Sachs.

Thank you.

My question relates to asset sales.

You noted that you all are using the 325 Henley Hub normalized gas price that seems sensible, though some may wonder if over the next few years it may not be a bit higher than that.

Is that making you rethink at all the types of properties you may be willing to sell?

Might you look to hang on to more of your North American gas properties, for example, and then somewhat similarly, you've been very focused on the integration and it looks like some of that is starting to come through.

Is there any sense in terms of how, at least philosophically, you are thinking about acquisitions to add to the upstream portfolio?

Do you feel the integration, is well enough along that maybe the acquisition side of things is coming back into vogue here?

Well, Arjun, you make a real good point and obviously what we have tried to do is the benefit of a strong business environment, we've taken all of that upside and applied it towards debt reduction and improving the financial returns to the company.

There's no change with respect to our sale of assets that we expect with the downstream part of the company.

As we indicated, a great deal of that was accomplished during the latter part of this year.

Turning to E&P, we're already north of 7 or 800 million in asset sales.

That's looking the latter part of last year and what we've done small amounts already this year.

We said that we would sell basketball be $3 and 4 billion of asset combined upstream and downstream so if you look at the downstream and what we've done in the upstream, I would say that you would probably know that we're closer to three than $4 billion and the reason is, yes, we're going to sell E&P assets that are very marginal to ourselves.

They might have a higher cost structure, don't have a great deal of upside, but when we sell them, we don't use 325, we use the forward strip price or even a higher than in that regard.

So we are not going to part with anything that we really would like to keep and hold in the portfolio.

So you make a good point.

I think we're maybe a little bit less aggressive with respect to selling E&P assets and anything that we really six months ago would have liked to have really kept in the portfolio, we are going to keep in the portfolio, and so maybe a little bit less aggressive just with what you said.

We're only going to sell those things that have high costs, very mature, and things that we would rather not part with that we are not going to part with.

That is terrific, Jim and think thoughts philosophically on how acquisitions might fit in?

Again you've been focus on debt reduction.

I know you want that to continue.

Any comments?

Well, we have said, Arjun, is our focus is on the integration, capturing the value of the merger and the past transactions and our focus is also we've got a pretty aggressive and very large legacy process in organic growth that we're bringing on in the next several years.

We always look at the opportunities for acquisitions but we wanted to tell the marketplace that was not high priority to us, that we had the scope and size of a company and a growth that we didn't feel we had to be making any acquisitions.

Now, looking at acquiring properties that may become available in the market place, they would have to be very complimentary to where we already have strengths and we would have to look at a low-cost structure with an upside.

If we were looking at acquisitions that we could see without any doubt that we're really very appreciative to our shareholders on a per share basis.

We're not interested in just adding reserves for volume purposes or anything.

We don't feel the need to do that but we'll look at it, but we'll make sure that if we acquire some assets, that it fits very complimentary, as upside, low cost, and we can clearly demonstrate to the shareholder that it's very accretive to our shareholder.

That's very helpful.

Thank you.

And we will take our next question from Doug Terreson from Morgan Stanley.

Good afternoon, guys.

Jim, on the synergy program, I wanted to see if we could get clarification on the definition of synergies and how we could classify some of the various cost items for the rest of the year, and specifically, I think you suggested that the number that should be compared against the $1.25 billion annual objective was just the gains from business improvement.

But with your emphasis on midcycle conditions, it seems like maybe you should count what the business improvements would have been after adding back some of the costs in this quarter which seems to be unusual, such as higher refiner costs, 4x et cetera, which seem to be transitory.

So could you help us with that, the retail impacts may be permanent, some appear to be transitioning, but it seemed like some of those should be netted out.

Can you help us with that a little bit?

Yeah, Doug, this is John Carrig.

We did make some of those adjustments that you suggested, if I could call your attention again to page 19.

Right.

We -- we did take out 4x.

We did take out the impact of the utility cost to the to the extent they exceeded normalized conditions.

Okay.

And so we are, in fact, doing that.

Okay so the adjustment has been made.

So basically what you are saying you've own obtained about 15% of the savings that you expect to obtain for the year but it another way 85% of the savings are still ahead?

You have to annualize those either savings on cost, or the improvement income.

You have to annualize that.

That's where we came looking at it for the first quarter an annualized it.

We think that we're at a run rate at $700 million pretax.

Okay that answers my question.

Thanks a lot, guys.

And with Howard Weil, we will now here from Gene Gillespie:

Good afternoon, Jim.

Jim , you mentioned return on capital employed towards the end of your comments and obviously you are committed to capital employed and getting it up.

Could you tell us what adjusted ROCE was for the quarter?

Well, I think we can answer it this way.

They are using generally accepted -- GAAP.

ROCE for the first quarter was $11.3%, but if you adjust because we have -- a lot of our past transactions were using purchases, if you adjust for that the adjusted ROCE was 18.7%.

Thank you very much.

Thank you.

We will now move to David Wheeler with JP Morgan.

Hi, gentlemen.

I've got a question, I guess on the income baseline that was used in November, when you did your presentation.

You didn't give us an income baseline, but you give us a 2002 midcycle earnings number or at least you gave us a return number that had a 5% next to it.

And the goal was to go from 5% up to 11% through synergies and adjustment for purchase accounting, et cetera.

As I look at this base line of $850 million for a half, that's more like a 3% return on capital.

Has the baseline for earnings, the estimated baseline for earnings come down here?

The estimated baseline, my recollection was that there's some noise around the number we used last November and now, but the number is about 4.7 as opposed to 5, if I recall correctly.

I don't have all the detail on that in front of me, but we can certainly get back to you on that.

Okay.

Okay.

Because I'm just looking at that first half, 2002 baseline 850 million so you're $1.7 billion annually.

This is -- I guess the second question for you then, around this is on kind of a midcycle basis, it looks like your cash flow, if you give credit -- give credit for the expected cost synergies, is going to be around $6 billion.

And your cap ex is around $6 billion and you have a billion dollars in dividends doesn't give you a whole lot of cash sales to pay down debt.

Is there any intention to try to further pareback on the cap ex so you are able to pay down debt with free cash?

No, we don't plan at all to be cutting back our capital program but on the other hand we're not enhancing it either.

From our perspective, we ran well, and so we took what the mark gave us, and accelerated our debt reduction to give us more freedom with respect to continuing our capital spend at $6 billion on the dividend and see the improvement in the balance sheet.

So when conditions are better than midcycle that will be the opportunity to pay down debt?

That's right.

Okay.

Thank you.

Thank you.

And we will now hear from Matthew Warburton with UBS Warburg.

Good afternoon, gentlemen.

A couple of questions unrelated if I may.

Could you give us some details behind the very strong working capital that helped cash flow in the first quarter?

I have a follow on accounting one for John after that.

Matthew, that was a variety of factors but an important factor was the deferred taxes in Norway, in -- you know, we pay those taxes, actually in April, and the first quarter then you're able to accrue -- keep the cash and use it to pay down debt instead of taxes.

So essentially it's a timing difference rather than a permanent reduction?

Well, there's some -- good point there.

There is some reductions that we believe is permanent related to dispositions of inventory that we're going to be he seeing going forward.

That's several hundred million dollars.

And it's a real important point, because we're working very hard in our operating plans and that is to reduce the inventory and the working capital required primarily with respect to our downstream operations and this is real important with respect to business improvement, it gives us a real source of cash to help us improve our balance sheet, and it's also very important with respect to improving the return on capital employ on our downstream so we're aggressively working on working capital in the company.

Thank you.

The next question really relates to FIN 46.

Obviously you highlighted in your 10-K, you said that you could be reconciled $2.6 billion in debt, assuming you still have ownership of the retail assets held for sale.

How would you look to readjust your 11 cent return target or your 30% debt-to-capital target in light of that, you know, if you are ultimately proved unsuccessful to get rid of those ass?

Well, the way we would evaluate this is the -- you know, the numbers we would show the FIN 46 numbers together as with the balance sheet debt that we have now so you can measure our progress going forward.

We haven't really -- we haven't really decided that we would alter the ultimate goal.

We've already, as ail result of the market conditions accomplished in a rather short period of time some improvement in the balance sheet in debt reduction.

I think as you add this additional $5 billion to the balance sheet debt wise, we are still on target and our opportunities are still headed for 30 cents over time.

One very quick one.

Looking at your different refinery runs in the U.S., you highlighted the improvement in the West Coast refine margin.

It seems odd that the runs didn't respond to that.

Was there anything underlying operations that you weren't able to fully maximize runs and take advantage of the margin up there?

Up in the North, that had some impact with respect to the utilization and capacity up in Prunedale.

Okay, thanks very much.

And our next question from Merrill Lynch, Steven Pfeifer.

Hi, guys.

I wanted to ask a question, I guess on your slide -- page 11 on the E&P income where you go through the fourth quarter and you show the higher taxes and the other items negatively impacted income quarter to quarter by $144 million and just looking at your release looked like effective tax rate went up by 5 percentage tax points.

Presumably that was $60 million.

Could you comment on what type of tax rate you expect going forward is it 51, 50% a good number to use in this $25 oil environment?

And what are some of those items and are they recurring?

Much depends upon the price environment that we're experiencing, and the -- particularly what the refining crack margins relative to the oil prices where we generally have a better buy than in the U.S.

We saw that this quarter, relative to last quarter improvement benefits that we got from the mix of income which would lower our tax rate were offset by the loss of section 29 credits and increases in taxes in the UK.

We think between 50 and 55% is a good -- is a good rate -- run rate for us going forward.

In broad to similar market conditions.

Okay.

Good.

Can you just comment on the magnitude of some of these other items outside of taxes and if those were recurring in nature?

I mean, just doing my math, it looked like the tax item was about $60 million on page 11 and that the other item may have been roughly $80 million, plus or minus.

I don't have that at hand.

We will have to come back to you on that, Steve.

Yeah, I can give you a call, Steve.

We can walk through it.

Okay.

Thanks.

Mm-hmm.

Now we will hear from Michael Mayer with Prudential.

Good afternoon, guys.

I have two questions.

First, on page 3 of 14 of the investor relations supplement you have you a nice table of the items that affected net income, which I guess are no longer going to be considered special items but in the footnote it refers to certain non-recurring items that would affect comparability between periods that would be special items.

Can you provide us all with a schedule of those items so we could clean up our respective earnings models?

That's just a request.

And secondly, my question is that I see that proceeds from asset sales were about 125 million in the first quarter.

Could you tell us what you expect to realize over the course of this year and next?

Hey, Mike.

I can tell you on the special items on the items that we would have called special if we were looking at -- still looking at things that way.

In E&P, you had $1 million in asset sales and $11 million in property impairments.

In R&M, you had about $25 million in the provision In corporate, you had $27 million in merger-related items and debt retirement and then a benefit of $34 million on insurance mutualization.

So a total of about $37 million of debt that you would have removed from net income as a result of these items.

Okay.

And how about the expected asset sales proceeds.

I think the asset sales you will see E&P continue on in amounts maybe somewhat similar to what you saw in the first quarter as we go through the quarters, maybe a little bit more in certain quarters.

The balance sheet part of the business, the retail marketing disposition is going to be in the latter part of the year.

And when I say the latter part of the year, it takes time to do this but you're really talking about third and fourth quarter.

Can you give us a net realized number for the full year?

No, I would rather not do that.

And the reason is because it starts getting into, from my perspective, competitively some of the numbers that we are looking at to achieving with respect to the downstream marketing side.

So that's the reason I'm hesitant to come out with the numbers because from my perspective that gives expectations as to what type of value we would expect from retail marketing disposition.

Okay.

That's fair enough.

Could you -- perhaps do you say that you feel that given current market conditions you've already written down all assets for sale to something approximating their market value so there would not be any additional hits to shareholders equity which these sales are completed.

What we indicated in the fourth quarter, we continue to stand by and that is we don't any fits or sizable hits or anything as a result of disposition program, any sizable write-downs.

We did indicate that from quarter to quarter, you will see something like 25, 50 million dollars, 30 million dollars worth of related expenses but all of our values we feel we fully recognized and we have a pretty clear year going forward as we go through 2003.

All right, thank you very much.

And we now move to Paul Ting with Salomon Smith Barney.

Good afternoon.

I have two unrelated questions.

One, let me just follow up on Michael Mayer's question, while I understand the sensitivity of trying to quantify the cash and the dollar impact on the downstream asset sales can you give us some idea the kind of level of interest, whether it's coming from foreign, domestic, one big buyer, multiple buyers?

Can you give us any type of flavor on that it would be appreciated.

And second, can you bring us up to date, what are you doing in Venezuela?

How much are you producing today?

Well, with respect to dispositions of retail marketing, once again, not to not respond to the answer, but we do have interest.

There's no doubt about.

That we have interest there is no doubt about that but with respect to how we are doing it and all, I think it impacts the process in terms of the competitive nature of it.

I would rather not comment on that, other than the earlier question when you ultimately disposed of this in packages or one entire package, do we feel that we fully recognize its impact when we look at the sales and we feel we certainly have fully recognized its impact, so you should not see a surprise in that respect.

We really would rather for competitive reasons will not go into it, other than the process is very rigid.

We're working aggressively on it.

And we will get this done.

Now, with respect to Venezuela, it's quite remarkable.

We essentially came right back on to full production in [INAUDIBLE] and Hamaca in the early part of March.

You don't see a whole lot of benefit to income because we had the cost associated with no production.

The costing will go away in January and February that we didn't have, you know, pretty good income in the month of March.

But if you look at the full quarter there wasn't a lot of contribution coming from Venezuela.

The important thing is we're up and running fully.

No surprises at all in that regard so we're looking for a strong performance from Venezuela in the second quarter.

Are you back to about 50 MBD, but what level are you running at?

We are running about 60 a day from [Petro Siswada] and 15 to 20 in Hamaca.

Very impressive.

Thank you very much.

Thank you.

And we will now hear from Tyler Dann.

Hi, gentleman.

I have one observation to bounce off of you and one -- one question.

On the observation, I'm referring to in my slide book, page 55, it may be what Jim was referring to as page 21, in terms of the Q1 of 2003 income comparison to baseline, and I'm adjusting -- I'm taking out the price adjustment and adjusting for the remainder of the kind of [Petro Siswada] impact, and then adding back the business improvement, and if I recall that John said that the -- the base level ROCE was around 4.7%, I want to say, does that not translate into about a 7.3 ROCE at referenced conditions?

Is that -- does that square with what you would have been saying or seeing?

We had $7.5. -- we had 7.5?

I believe that to be the case.

We will confirm that.

Okay.

So that's a substantial improvement.

And then the second point would be on page -- my page 5, perhaps your page 4.

On the total company costs, you -- you did a -- you did operate separate out the merger-related costs from lifting, dry hole and other exploration costs.

So I guess a two-part question.

To what extent how did you make that determination because I'm sure that some of the lifting costs were related to the merger, as were some of the dry hole cost improvements, and so, I guess the interpretation question is: Should I be not including those lifting costs improvements, dry hole costs other exploration cost improvements as sustainable cost savings?

I think what we were trying to do there, Tyler, was just explain where the difference is between the fourth and the first quarters came from.

Whether or not those reductions in lifting costs or merger-related expenses are the same going forward, I don't think we know at this point in time.

And, really, the direction of the slides is really more of an explanation on who was driving earnings change.

You would have expected the merger-related costs were in fact higher in the fourth quarter because we had more accruals in the fourth quarter than we had in the first quarter.

And so, yeah, that's a rather narrow definition of merger-related.

So, I would expect that this relative to the fourth quarter, we would expect that those are sustainable.

Okay.

Thank you.

Thank you.

We will now hear from Credit Suisse First Boston, Mark Flannery.

Yes, I have a kind of philosophical question related to synergies.

We've seen a repeat, particularly in the downstream of mergers such as yours beginning with fairly big numbers for synergy targets in the downstream area.

And ending up with nothing much visible, particularly on the bottom line.

I think that's fair to say that's been seen in two or three cases.

When you're considering, you know, the level of synergies, do you have some kind of half life in there, some kind of consideration of what the rate of giveback is on those synergies and if not, is that something you should be thinking about?

Well, we think about, it but the way we've put together our plans for 2003, and 2004, we know some of these synergies that we said, 70, 80% of them are recurring in nature.

So we don't -- I don't view them as half lives.

I view them as we go from 2003, 2004, and 2005, it's our nobody to make sure that we don't, it's our be job to make sure that we don't give them away, we keep them captured and we have to learn how to always in each of our business lines, become more productive as we go from one period of time to the next and heed inflation.

We know we're a commodity businesses, a very mature businesses and so in my perspective, I don't see three or four years from now that we're giving away what we lost in synergies.

I will make another point.

We already factored into all of our plans the increase cost for pension and medical benefits.

That's all been -- it's all put into our operating plans.

So we're not in any way giving them back some way or another, or losing them in some other way.

I mean, it's just -- our total cost structure and all is set up and our operating plans to capture these and to hold them. 70 to 80% of them are recurring, 20% may not be recurring.

Right.

Can you say at the end of the year or maybe early next year, maybe we could take another look at those and see if that's still the case?

Well, we certainly will.

Okay.

And the way we'll look at them is we're going to demonstrate each quarter, you know, we said our run rate was going to be at the end of the this year, $1.25 billion, and we'll update the numbers for operating plans in the fall when we meet with everyone, for 2004.

So we feel we're right on target.

You know our job be is to make sure that we don't lose these synergies we do capture them and do better than that.

It's not our plan.

It's not our plan to see these synergies and business improvements be lost as we go through 2004, '5 and '6.

Okay.

Thank you very much, Jim.

And Nick Griffin with Deutsche Bank has our next question.

Yeah, hi, guys.

How are you doing?

Quick question, -- I don't mean to bang on about this, but it is on the asset sales.

Have you a total of $3 to 4 billion, and I think that's close to 3 at the moment.

Can you give us how much of this you've actual done.

How much you currently have for sale and how much is left to still be announced in total over that whole program?

I think in the fourth quarter, we had announced somewhere between 6 and 700 million of upstream sales primarily.

I think it was the Netherlands.

There really has been no material amounts of downstream sales up until this point.

And I would say asset sales in the upstream were probably light this quarter.

Something under a billion dollars, Nick.

And the other thing is we have not necessarily closed but we do have -- reached agreement with everyone with respect to federal trade commission mandated dispositions.

We have pretty well have that all not closed but we reached agreements with whatever we had to do in that regard and I think you will see those proceeds coming up in the next quarter or two.

So is that on top of the billion that clay just mentioned or is that an extra --

No, no, that's part of it.

That's part of it.

And just a second question, the retail disposable impacts for Q1 cost comparisons to baseline.

These retail disposable impacts have to do with the U.S. downstream sales, will they be ongoing until you dispose of those assets.

I suppose if you could add a little bit color as to what they actually are, how long they are going for and how big they will eventually be?

Well forecast are significant asset distributions like the retail asset, we took the retail results out of the baseline.

Yeah.

And then -- they are now being reflected in discontinued operations.

And there's about $200 million of cost that will be impacting the continuing operations this year that are -- that won't be recurring.

So you -- as we go forward, you will see them in the discontinued ops and we don't expect to have further retail impacts beyond the 200 I mentioned in the continuum

Okay.

Great.

Thanks very much.

With Lehman Brothers, Paul Cheng.

Hi.

Good afternoon, guys.

For the head count reduction, Jim, are we at this point that all the people supposed to be gone?

Are they gone yet?

We have a number of significant -- a significant number of transition employees.

We continue to keep looking at our organizations and all of our business lines and our staffs.

So, no, we're not finished yet.

As I said, we have transition employees.

You will see, we're right on our target, though with respect to what we're doing on the manpower side, but you're going to see some very significant reductions in total personnel as we complete some of the asset dispositions, particularly on the retail side, instead of having 56,000 employees, one retail disposition is completed and all, and the other dispositions and the improvements and synergies, you know, we're looking at a company that has, you know, somewhere in the neighborhood of 30 to 35,000 employees.

If we, excluding the sales impact, just on the transitional and the employee, I mean, how many head count that we may be still talking about?

Well, I believe we're in the neighborhood of -- we're north of a couple thousand at this point in time, but then we also had quite a number of open positions that from the time we announced the merger back in the fall of 2001, we're not filled.

So it's not just the number of employees that were on the payroll that have a different reason to left, it's also quite a few of open additions.

So we're up north of several thousand in that regard, and a number of our business lines are starting to approach 10% or so in terms of reduction.

On the staff side, it's significantly lower, but, no, we're not finished.

Continuously looking, say, you have an operating in terms of synergies $1.25 billion that you have outlined back in March, November.

If you look beyond that pain, is there any particular area that you have in mind and see the most potential upside in terms of servicing the benefit?

Well, I -- I guess I would say we see tremendous opportunity throughout the company and I would say we're seeing really great progress in the downstream part of the business.

Hmm.

Okay.

And --

There's nothing, way the way that we've seen in either staffs, upstream or downstream that's a negative surprise to us.

Mm-hmm.

Last question.

On the exploration front you said in the past, neither Conoco or Phillips -- perhaps the perception is bad, their exploration program could be better or could be improved.

Now that you have into eight months into the integration, is the exploration program has been changed in any way, including the methodology or the way that -- how you going to pursuing different prospects or ways to analyze?

Oh, yes he we're looking to improve our exploration program in terms of increasing the amount of reserve replacement through exploration and doing it in more competitive costs than we have in the past so we're really assessing very thoroughly our processes by which we do that, making sure that we have all the use of technology.

That's one of the things that two companies really compliment each other on with respect to technology, but I will also go in a more broad way and say that with the opportunity, we're not standing still to improve every aspect of our company and business, but we have to do that if we are going to do and accomplish what we said, which is to close the gap on the return of capital where we have been, and being right up with the largest companies in the industry but, you know there's no systemic change where we're going left and then going right in exploration.

We're just keep building on the best of the companies and creating a much more robust exploration program, which we are quite convinced that we have the people and the technology.

We are not going to spend a lot more money, we are going to spend less money.

We'll see better results.

So, Jim, is it fair to say that means for the explanation program, you haven't really had a bad quarter compared to the past.

You are just trying to improve from what you had from the past?

No, I'm -- you know, I'm pretty impatient individual.

I'm not satisfied with the past.

We're looking for dramatic improvement.

So it's not just trying to make what we have a little bit better.

We're looking for, you know, step change function in terms of, you know, every aspect of the company.

Not just exploration but you make a good point.

You know, we are looking for dramatically better results from exploration than we've experienced in the past.

All right, thank you.

And Fred Leuffer with Bear Stearns has our next question.

Good afternoon.

Can you take -- can you break down for us the 115 million in lifting cost improvement, what are the components of that?

Well, Fred, I think we'll have to come back to you, because I don't have that in front of me, but we'll come back to you.

I just don't have it in front of me.

Okay.

Sure.

Let me ask this, I -- earlier in the call, Jim, I think you said there was an 8% reduction in head count.

I don't know if that was company wide, or E&P.

How many initial people left in the first quarter?

Oh, let's come back to you on that.

That the reduction in head count was 8% around ultimately, I guess near 10% if you look at transition employees, maybe a little bit more but that number was really directed towards the upstream part of the company that statistic.

Numbers left in the first quarter, I think we'll have to come back to you on that.

Yeah.

That's right.

What was the biggest component of that lifting cost reduction, because that's a big number.

I don't know if that -- was that people or --

Lifting component -- lifting cost component you have you operating costs, have you transportation expense.

It can't just be the people.

No, no, we're just running better and we also -- our procurement, how we prepare our contracts and all, we're making really a lot of synergies in that regard.

So I would say it's somewhat people related.

Okay.

One last unrelated question.

What was the change in pension expense Q4 to Q1?

Okay.

All of it of the pension, and these type of expenses.

The quarter 4 was $73 million, and the first quarter of this year $81 million.

How about versus the fourth quarter?

That was.

73 to 81?

Yes.

And where does that show?

Is that corporate and other or -- into that gets allocated across all the business lines.

That's just the number that we figured and we we've watched and we try to manage, but that's not -- that ace disbursed throughout the segment.

Very little is health and corporate.

It's tied into all the cost structures of all the business units.

Very good.

Thank you.

Lori, think we have time for one more question if we can do that.

Certainly, and that question will come from Mark Gilman with First Albany.

Guys, good afternoon.

I just wanted to clarify this recurring versus non-recurring of the synergy capture.

The 700 run rate, am I to believe that that includes the nonrecurring portion as you termed it Jim?

No.

That does not.

That's the recurring portion?

Right.

So you're running at a 700 recurring rate towards your 1250 recurring rate target?

That's correct.

Okay.

Yeah, secondly, just a couple of tax things.

Tax rate on foreign R&M, tax rate on interest expense, both very, very, low, John, do you expect you can sustain or will sustain those tax rates going forward?

There's nothing unusual about that, other than the related to the mix of income.

So I don't expect material degradation of that.

It does depend on the mix of income.

It will change --

I'm talking specifically about two segment items, John.

Foreign R&M and interest expense, income mix is not an issue.

Well, as you know, Mark, there are a number of countries outside that we would be looking at.

Humber is one and in the UK, the results are impacted by Humber and there are the results in Germany, and then to the extent that you have better profitability in the Far East, and not losses, that has an impact on your overall effective tax rate.

With respect to the interest, I would pretty much expect that to be relatively comparable.

Okay.

Could you possibly give me a shot at on FAS 143, if you were to look at your provision for abandonment the old way, versus the way it is with the accretion component the new way, how does that compare, plus or minus?

I -- I had -- I just don't have that number in my hand.

I had that number.

I don't -- I just don't recall it at the moment.

We'll have to come back to you.

Okay.

One final one, how is [BO-Hi] doing?

[BO-Hi] in terms of oil performance, we're very pleased with the production from [BO-Hi].

At what rate, Jim, currently?

We're up at what -- 10,000 barrels a day.

What I'm really trying to say Mark, is the wells are performing as good or better than expected.

Great.

Thanks a lot.

And thank you, gentlemen.

That is the last question for today's question and answer session.

I will turn it back to you for any closing or additional comments.

Great.

Well, we'd like to thank everybody for participating in the call, and let you know that there's a replay available conference call, and these slides can be found on our web site at www.conocophillips.com.

Thank you very much.

Thank you, everyone.

That does conclude today's conference.

We do thank you for your participation.

You may now disconnect your line.