康菲 (COP) 2003 Q2 法說會逐字稿

Please stand by.

Good day, everyone, and welcome to the Conoco Phillips second 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 call to director of investor relations, Mr. Clayton Reasor.

Please go ahead, sir.

Thank you, and welcome to Conoco Phillips conference call and webcast on our second quarter 2003 financial and operating results.

Jim Mulva, Conoco Phillips and CEO and John John Carrig, EVP finance and CFO are here to review this quarter's operating and financial performance -- to support these remarks, we have put presentation material out on our web site, and hopefully you've had a chance to download and review this material.

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

I encourage you to use this material as Jim makes his comments.

After the prepared remarks, Jim and John are available for your questions.

In addition to talking about second quarter earnings, there may be remarks that include projections, plans, expectations and other forward-looking statements about future production, capital efficiency, expenses and future results.

Actual results may differ materially from those we currently forecast, and the factors that could cause those to differ are found in the company's filings with the SEC and are also available on our web site.

During the call, we will discuss some non-GAAP measures as we review the company's performance and you can signed the reconciliation of these measures on the web site as well.

With that said I'll turn it over to the president and CEO of Conoco Phillips, Mr. Jim Mulva.

Thank you.

I would like to thank all who are participating on our conference call who go through our prepared comments following the format that Clayton outlined, and after we do that, we, all three of us, are certainly willing to entertain and respond to your questions.

I'd like to draw your attention to page 3 of what's been put out on the web, and start with my comments on page 3.

That's (inaudible) labeled performance eye lights.

You can see that we feel quite pleased with our results in the second quarter.

For delivering in both operating and financial performance, as we expected in our 2003 operating plan and it does incorporate the synergies that we have in mind for all of our operating units, as well as our staff's.

And our units and staffs are right on plan with respect to what we expect to accomplish in not only the second quarter, but for the year.

Now, looking at the upstream part of the company, we actually have produced more in the second quarter of '03 as compared to the second quarter of this past year on a pro forma basis.

So, we think that's a good accomplishment.

Essentially what we have done is held our production flat after giving consideration that we sold during this time period about 1% of our base production.

We sold about 16,000 BOE a day during this time period.

Looking downstream, we ran our primary close to capacity at 96%.

Through result of our operating performance we're able to pay down debt again this quarter, so we've reduced debt by $2.2 billion so far this year, and that has resulted in a reduction in our debt ratio from 39% to 35%, and we're also making progress on our asset sales and I'll talk more about the asset sales here a little bit later in the presentation.

Assets we're selling are those that allow us to increase a higher proportion, increase proportional higher returning pro sets than the assets we're selling or those that don't fit in quite with our strategic plan or more mature nature.

Of course, all of these things are designed to deliver better and higher mid-cycle returns for our shareholders.

I'm going from page 3 down to page 4.

Looking at page 4, you can see we sequentially compare our second quarter earnings with the first quarter of this year, and our income from continuing operations was a 1.079b.

This quarter compared to 1.27 billion last quarter.

The earnings fell $423 million, due to lower commodity prices and downstream refinery margins.

Higher upstreams volumes and better downstream refining utilization contributed $152 million, compared to the first quarter.

Our merger costs were $88 million higher than last quarter.

This is attributed to a number of items, first, due to accounting that is associated with accelerated lump sum elections taken by our employees who are retiring early.

So this accounting has resulted in higher merger costs this quarter.

In addition, something that has also increased our merger costs this quarter, but will ultimately result in more ultimate synergy capture is we've increased our number of anticipated employee reductions as a result of the merger by another 700 employees in the total that we've accounted for in this quarter, and then we have the other relocation and related merger expenses.

Now, the repeal of the Norway Grant Act, this resulted in and was accounted for in a net after tax benefit of $87 million in the second quarter.

We had a tax benefit of $55 million, and it's not just tax, but it's in connection with the ratification of our Australia east Timor treaty and the restructure of the ownership interest on the project.

This continued operations were $59 million for the quarter.

So if you add those back in, it contributed to the total net income of $1.138 million.

So if you go to page 5, as you can see our underlying cash generation, was stronger in the second quarter, cash from operations after working capital changes was $2.260 billion.

In addition to cash operation we sold $373 million in assets.

Our capital expenditures and investments was $1.574 billion dollars, paid [272] million in dividends, so our generated cash available for debt repayment was $626 million.

And going to page 6 in looking at the same slide at page 5 but looking at for the first six months, first two quarters of '03 our cash generation was $[5.4 billion], $494 million from proceeds from assets sales.

We spent about $2.9 billion on capital expenditures, and so $2.2 billion of the cash was used to pay debt to 534 -- 543 million was used to pay dividends.

Moving from page 6 to page 7, page 7 is our debt ratio improvement, and we've placed a lot of emphasis on the importance of not only growing our company and capturing synergies, but also improving the financial flexibility of the company by reducing debt and building equity.

We reduced our debt balance to $17.6 billion, increased our equity ratio to $33.1 billion.

So our debt ratio at the end of the first quarter compared to the first quarter, we've gone down to 34.7%.

Now, in the third quarter of '03, we've announced, we expect due to the impact of new accounting rules, we'll add about $3 billion in debt, and that's moving it from off balance sheet to on balance sheet.

Simultaneously, we're going to see a similar amount of reduction and off balance sheet debt and minority interest.

So we have to resist moving from off balance sheet to on balance sheet.

However you look at it, whether it's on the balance sheet or the total on and off the balance sheet, our debt reduction in the past six months is about 5%.

So moving from page 7 to page 8, we're in the second quarter, our worldwide AEP production was a little bit more than a year ago.

And you can see that we're at 1.636 billion barrels oil equivalent.

And I've already commented on -- we feel this is pretty noteworthy given we've held production flat, considering we sold 1% of it over this time period.

Bonds were helped in this last quarter through a full quarter production in Venezuela and we see increase with respect to production in China.

Looking forward to third and fourth quarter, the second half of the year, we expect there will be declines in terms of our worldwide production, that which we experienced in the first half of the year.

It's a result of the impact of our anticipated or expected asset sales that we're working on. -Some seasonality and then we do have some natural fuel decline.

We do expect lower production in the third and fourth quarters than what we've experienced in the first half of the year.

I realize worldwide crude prices were down 18%.

We get $25.19 a barrel, come compared to $30.73 in the first quarter.

Worldwide natural gas price were down 12%, that's 56 cents per MCF to $3.93. $4.49 in MCF in the first quarter. (inaudible) Gas prices were partially offset by lower effective tax rates, due primarily to the changes in taxes that I already talked about for our upstream business and certain ownership changes in Australia/East Timor.

In addition, our earnings are (inaudible) -synergy capture upstream.

I'm moving now to page 9.

I mentioned earlier second quarter '03 production was 1,636,000 barrels of oil equivalent a day.

In Venezuela, we benefitted from a full quarter of production at (indiscernible) and we're pleased to see that our production is really a steady basis resumed to levels that we had seen prior to shutdown, in some cases a little bit higher.

Production in Norway, U.K., Alaska and U.S. was lower but this is due to normal seasonal reductions and we did quite a bit more maintenance in the second quarter.

Moving to page 10 now, recurring in the net upstream was continuing operation was $1.07 billion, $67 million lower than the first quarter.

Primary reason for the sequential decline was falling oil and gas prices or prices had an impact of reducing income of $339 million.

Offsetting lower price for a higher sales volume and lower taxes, sales volumes benefitted our earnings by $98 million.

More crude was sold and produced.

That offsets last quarters inventory build, essentially we're well balanced all around the world at the end of the second quarter.

I mentioned earlier, events in Norway and our (indiscernible) project in Australia/East Timor increased by 87 million and 55 million respectively, and this has had impact reducing our tax rates for our international operations GNP.

So accordingly, all of our tax rates in the U.S. were constant.

The international effective tax rate dropped from 64% to 42% for one quarter to the next.

Of the billion total income upstream income, our earnings were $516 million and international million were $554 million.

I'm moving to page 11, moving to the downstream.

We ran our refineries well in the second quarter operating at 96% of capacity.

Refining margins fell in every region of the U.S. with the exception of the mid-continent.

Our U.S. realized refining margin fell from $6.50 a barrel in the first quarter to $5.34 second quarter.

That's an 18% decline.

Our internationally our (inaudible) refinery margins, the margins fell 31% from $6.78 a barrel to $4.71 a barrel.

The realized marketing margins improved in the U.S. and internationally, and this increase in margins was seen both in the retail and wholesale parts of our trade.

U.S. marketing made $58 million during the quarter after including lease loss accruals of 25 million, and we're seeing synergy capture in the downstream.

It helped our downstream net income compared to our baseline in 2002.

Moving to page 12, our refining second quarter income from continued operations was $301 million compared to $371 million for the first quarter of '03.

Remember, the $301 million -- these numbers do not include the income from our discontinued operations in the downstream.

So the various between the first quarter and second quarter is due primarily to lower realized refining spreads.

That was $226 million, offsetting a portion of wholesale and retail marketing margins.

Our wholesale motor fuel margins were up 62%.

That's about from a little less than 5 cents a gallon to about 7.6 cents a gallon.

Retail margins were up both in the U.S. nearly 50% and internationally between 25 and 30%.

Higher volumes improved our sequential earnings by about 50 million.

Moving to page 13, midstream part of our business made $25 million second quarter, that's a thousand six million from last quarter.

The decrease was due to lower -NGL prices.

That had an impact of $15 Million adverse.

Our offsetting (inaudible) for higher volumes (ph) that helped us $4 million and higher equity helped us about $9 million.

In chemicals. , our net income of 12 million represents about a 35% improvement quarter to quarter, result of higher sales prices for ethylene and domestic polyethylene. -That helped us in the neighborhood of about $35 million improvement in the quarter.

And lower natural gas price helped earnings also.

Turning to emergent businesses, we lost $23 million the second quarter.

We lost $34 million in the first quarter.

The primary reason for the improvement is our decision several months ago to shut down the carbon fibers business and this has resulted in cost reductions.

Moving to page 14, our corporate cost excluding the $59 million earnings from discontinued operations were $306 million in the second quarter.

Costs were benefited from a lower net interest expense went down about $30 million from $167 million to $137.

But then we had the merger-related expenses increased $88 million over the prior quarter to $115 million, and as I said, the merger related costs, there was about 39 million of that $88 relates to accounting charges associated with lump sum retirement elections for employees who elected to retire early.

Then $35 million, a portion of that came from 700 additional employees that we see in our total reductions as a result of the merger of the companies.

And $41 million of other charges such as relocations and other associated merger costs.

Our discontinued operations were $37 million higher than the previous quarter.

I'm moving to page 15 now the corporate segment net income from continuing operations received a loss of $306 million in the second quarter.

If you look at the component net interest expense went down $30 million to $137 million.

Administrative costs were up 3 million to 38 million.

The merger related costs are up $88 million to $115 million, and we have other miscellaneous things.

And the discontinued operations were positive $37 million, the reported numbers, $247 million.

Now, if we look into the future, the net interest expense and administrative staff costs is expected to increase to about $190 million in the third quarter of '03.

And the reason for the additional interest expense is by moving off balance sheet debt to on the balance sheet.

So if you look at the run rate that we see going forward for a total third quarter corporate costs, it's going to be in the neighborhood of 200 to 210 million.

It's made up of $152 million of net interest expense.

It's around $38-$40 million of administrative costs, and our merger costs going forward, we see in the neighborhood of about $15 million a quarter.

So you add those three numbers up, and you get the $205 million.

One other thing I'd like to say is included in the $205 million, is we expense our stock options and that amounts to about $7 million a quarter.

So if we go to page 16, I don't think the page is numbered, but it's page 16, it says "synergy capture" we're on track to achieve our 1.25 billion in synergy run rate at the end of 2003.

Our cost synergies include also what we call cost synergies, tax synergies, and they also include other non-operating cost items.

We think these cost synergies will relate to 70% of the reported synergies of the 1.25 billion run rate.

Improvements in margins, income side about 20%, and capital reductions about 10%.

We see good progress in spite of the capturing synergy in spite of salary and benefit increase when is we compare this year to last year.

As we described last quarter, we're reducing methodology to reported first half of 2002 income and costs, make adjustments, which you'll see in the attached tables, on prices, margins, operating conditions, accounting policy changes, tax changes So we can get a comparison to demonstrate a recapturing of our synergies looking both at a cost point of view and income point of view.

We see that -- we have our baseline adjustments are credible reasonable and consistent and as said, we have looked at these adjustments in the tables that I won't go through but they are attached to the presentation.

Let's look at our synergy capture from two perspectives.

First, costs and incomes, so I go to page 17.

In terms of cost, you see the waterfall graph helps show how free tax cost reduction of $285 million was captured.

We made adjustments for the first half of '03 for unusual cost items, as set dispositions were $115 million.

We have higher refinery utilization costs.

Fuel costs $96 million. (inaudible) $235 million, we had currency impacts of $121 million, other costs, $127 million.

But the use of 2002 baseline of cost of $4.528 billion in the first half of '03, costs $4.937 billion and go through thighs adjustments $694 million, the pretax cost reduction is $285 million in cost synergies.

I'll use a tax rate of 50%, you can see that just the pure costs, this is not tax savings, just pure costs we're at a run rate of about $570 million.

Let's go to page 18, which looks at income for the first half of the year compared to the prior year.

If we compare the $854 million in 2002 income baseline against the $2.349 billion that we earned in the first half of '03, then we make the appropriate adjustments, and you can see that $1.48 billion has been added to the $854 million baseline to address the higher oil, gas prices and better refinery crack (ph) margins.

We made adjustments for asset dispositions, higher refinery energy costs, merger costs, and other items that are impacted the first half of '03.

You can see these in the attached tables to the presentation.

And this means our after-tax income improvement of $228 million, of which about $150 million comes from more costs,

So let's go to page 19.

First half synergy capture, you see we took the $228 million in earnings benefits.

We used a 50% tax rate.

That grosses up to $456 million in before tax business improvements for first six months.

When you and analyze, you get to $912 million.

So we see ourselves well on our way towards moving and achieving our targeted $1.25 billion a year synergy run rate at the end of this year.

Now, remember.

When we looked at the $912 million, this does not include capital synergies and as we said, the capital synergies we're always going to be about 10% of the 1.25 billion run rate.

We're going to update every quarter as we said for '03 and '04 performance, but we're also going to update you at our fall analyst meeting with respect to what we see our annual run rate will be, and putting together our 2004 operating plan.

So the inference is it's certainly going to be higher than 1.25 billion at the end of this year.

I moved to page 20.

We believe we've made good progress in taking steps to improve our returns on capital employees and consistent with what we said before, we're really focused on closing the gap between our ROCE and those are the largest companies in the industry.

Increase in ROCE, we know is certainly going to result in better shareholder return, multiple expansion, share price, it helps with our capital investment decisions.

Our baseline mid-cycle return on capital employed when adjusted for purchase accounting, first two bars of the left side of the slide is 7.6%.

Now, if you look at what we've achieved in the first half of this year and apply normalized assumptions, $20 oil price, WTI that's $1850 (indiscernible) 325 Henry hub and 325 gulf coast crack spreads then using that, our annualized ROCE would be 9%.

So we've gone from 7.6% to 9%.

And we see that's a nice improvement of about 18% of where our baseline has been.

If you look at what we've done, just adjusting for purchase and accounting, and comparing how we've done in the first half of the year, compared to the largest companies in the peer group, our ROCE is about 17.1% and I believe Shell and BP are in the 17% range.

We looked at where we are on a normalized basis, if we're at 9% and you can see on this slide, we're looking to see ourselves be going up to 13 or 14% on normalized basis, we have a 3-4% gap of improvement.

And each 1% of return on capital employed will improve earnings by $300 million.

So we have a big challenge ahead of us, but we have long-term plans in place.

What this means is, to close the gap, we'll should result in about an increase of about a billion dollars a year in income.

If we look at the last slide, page 21, which is really a wrap-up of sum sup rising where we see ourselves, we're quite pleased with our performance.

With respect to asset dispositions, in 2002, at the close of the merger, from the time of the close of the merger to the end of 2002, we have sold 800 million in assets.

And the first and the second quarter of this year, we've sold 600 million in assets.

So we've done 1.4 million.

In the third quarter, we expect our asset dispositions will be about $500 million, and in the fourth quarter, $800 million, and that adds up to $1.3 billion.

If you take what's been done, $1.4 billion to date, and $1.3 billion over the remainder of this year, you get to $2.7 billion.

Remember, we said between the upstream and downstream, we were looking at selling in the neighborhood of $3 to 4 billion.

So through the end of '03, and by the way, selling $3 to 4 billion was tied not just to '03 but to '04 as well.

We finish '03 with a total of $2.7 billion of asset disposition, we feel we're well on our way to what we said we would do to '03/'04 to ultimately three billion of dispositions.

We have talked through on synergies.

Our annual run rate at this point in time is 900 million a year.

I talked about asset dispositions.

We're looking towards selling the lower return assets, the nonstrategic assets, those with our most mature in the upstream do not have much upside potential.

We feel we're making good progress with respect to closing the gap on where our return on the capital employed is compared to the largest companies.

We're working hard on improving our upstream portfolio to our legacy asset projects as well as capitalizing and the business improvements that we have well underway with respect to improving our downstream performance as well.

So that really concludes the prepared remarks in going through the slides that we put out on our web.

So I'll stop now and let's entertain whatever questions or comments that those who are participating in our conference call have.

Thank you, sir.

The question-and-answer session will be conducted electronically.

Any participant wishing to ask a question, please press star 1 on your touchtone telephone.

We'll take your questions [caller instructions]

q-and-a

We'll first hear from Steven Pfeifer of Merrill Lynch.

Hi Jim.

You mentioned that you have increased the number of employees that you are targeting to leave the organization.

Can you walk us through what this takes you to in terms of targeted employees and how much of those have actually left the organization and what might be left to come.

On the second question I had was on the, you know, at least on our numbers when we look at your DD & A rates in the U.S. an international are dropping.

Could you maybe comment a little bit what - is that synergy capture or is -it mixed as different projects come on.

If you could provide a little color, that would be great.

Okay, Steve, if I've got this right, first, we are talking about 2000 in reduction of employees.

We're headed closer up towards the 4,000 level.

And so, the increase of 700 is from about the low 3,000s up towards 3800 to 4,000 employees,.

That's why we took more merger related expenses, accruals in the second quarter.

So we're a little over 2000 going towards 4,000.

And, of course, our businesses and staffs continue to look at putting their plans together, you know, how can we make the company even more efficient.

With respect to the second question, maybe John or --

Could you help us with the second question that had to do with synergy capture?

What I did is I went through your release.

You show the depreciation and volumes.

I just took unit DD & A from that release it looks like it went from 451 in the fourth quarter to $4.21 for BOE in the second.

So I'm just trying to get some flavor for what might be driving the lower unit DDA.

Is it did I investments, is it some of the office closures, layoffs?

Just a little more color on what's driving the --

That may be part of it.

We had the big adjustment in the first quarter in Alaska.

Was it reduction in DD &A charges I believe in Alaska due to decommissioning and removal of assets up there.

I can't remember what the standard is.

Steve, I think the best thing for us is just to come back to you on that question.

But we could -- I could follow up on DD & A with you and MEP.

Okay, thanks.

Next we'll hear from Arjun Murti of Goldman Sachs.

Thank you.

It looks like the first half of capex is trending below expectations.

I don't know if you're expecting a bigger ramp-up in the second half, or if you are looking underspend your previous budget.

And then E&P volumes seem to be tracking above expectations.

Any thoughts on where the second half in '04 may hold on that front?

Okay, Arjun, good hear from you.

First on capex.

We said we are going to spend essentially $6 billion, maybe a little bit more than $6 billion as a result of our election to buy a little bit more of carcogen (ph).

We'll stay close to 6 billion.

Some of our large projects have more spend in the second half than the first half.

So we're right on target in that regard.

A little less than half in the first half of the year but, it'll be a little bit more by 6 by the time we finish the year.

E and P volumes, some of the assets, I know you asked a similar kind of question last conference call, last quarter, and we have looked -- given what the market has done for us, we've looked at some of our assets and we're doing better for us than we thought, so we've been slow on disposing of some of the assets, because we've looked at them so maybe they are more valuable to us by holding them, but we are still committed to meeting the dispositions that we set.

So that's one of the reasons.

Another thing is, some of our fields have done a little bit better than we might have expected but going forward to the latter part of this year, it's going to be less than the first half.

In terms of a number for '04, I think it's really best, we're going to come out with that in the fall when we have our operating plans all together.

We have numbers of what we would expect, but it's really kind of premature.

I would rather give you what we really think for '04, a couple months from now.

That's great.

And Jim the 1.3 billion in second half asset sales, I assume that primarily focuses on marketing assets.

Is it the time (inaudible) the second half of this year?

We've announced already that we're selling one of our packages, we've reached agreement on the Northeast, we're working on other packages.

A lot of that in the latter part of the year relates to marketing assets, but I will say in the third and fourth quarter, there are some E & P assets in there as well.

It's more downstream than upstream in the second half of the year.

That's great, thank you very much.

Moving on we'll next hear from David Wheeler of JP Morgan.

Hi, Jim.

So just to clarify, $1.62 million a day for '03 is still a good volume number to use.

We're not necessarily going to beat that, or are you saying with lower as set sales we'll be ahead of that?

No, I think the '03 number, the first half of the year is the 1.63, but I don't -- you are going to see a lower number for the second half of the year.

I would say somewhere between 1.57 and 1.6 for the entire year.

Okay.

And Jim, this is a question I guess a bit about debt paydown after the cycle of asset sales.

Where do you see the free cash flow situation being?

Do you need to cut capex further in order to generate free cash flow out in '05 and '06 to further pare debt?

How do you see that falling out?

A lot depends on with respect to what the market does in terms of prices and crack spreads.

What we have said we would do is we're going gear to making sure that we live within our means, So we want to fund certainly our largest projects that are legacy type assets and we have some pretty significant clean fuels requirements in the downstream which will require us to have a capital spend of the downstream of something more than a billion dollars.

I think the capital expenditure levels that you see that we're doing right now around 6 billion, maybe a bit more is for planning purposes, something that we're looking at pretty closely.

If you look in future years, you expect to see volume growth that's going to come with respect to bringing on some of these legacy assets.

That's going to bring us more cashflow.

We also expect to see continued improvement that we're recognizing and seeing in just how we run in the downstream part of our business.

That's going bring value, and we haven't captured all of our synergies yet.

As I said, we expect to see even a more aggressive synergy target going into '04.

For these reasons, we think we're going to have stronger cash flow to help us fund the capital program, but not be going backwards.

We still want to see our debt coming down some, just in the absolute terms, and by having retained earnings, we're going to see the debt ratio over time be moving towards 30%.

So we think we can fund -- so, we think we can fund it all, but we're going to make sure we have the capital discipline but we want to make sure that we do the projects that will bring long-term value for the shareholder.

Very good.

Thank you, Jim.

Next we'll here from Mark Flannery of Credit Suisse First Boston.

I'm interested in your change of thought on some of the assets disposition, and your intention to still meet that target, particularly, I think, regarding the upstream.

Can you walk us through what your thinking has been on that?

Is it solely the fact that prices are higher, generating more near-term cash flow which can be used to pay down debt or have you swapped around the assets that you intend to use to meet the disposition target.

We haven't swapped the assets around of what we intend to ultimately dispose of.

What we were merely doing is we were -- two things.

The assets that we've identified as having less strategic value to the company, we looked at what was happening in terms of the marketplace and what they were doing for us from the income and cash flow point of view, and we raised our expectation to what we needed to part with those assets.

It's not that we won't ultimately probably part with those assets, it's a timing question.

We felt that we could make more money for the company by watching and deferring or delaying some of the timing of the sale of the assets, it would bring more value to us, in fact, that's exactly has happened to us.

And we look at a number of the assets, and we say we could have sold them six months ago, but we can get the same price we could have got six months ago, but we've enjoyed the volume and the revenue.

That's really what we're doing.

We're not swapping, we're not changing, we are a trying to make sure we maximize what these assets will do for us.

That's what we're really trying to do.

Was there another aspect of the question?

Well, no, not really.

It's -- so you think basically there is going to be a delay in the disposition, take the income as it's coming now, and then, say, review it, you know, in early '04, something like that?

That's right.

Okay, thank you.

The next -- and next we'll here from Paul Ting of UBS.

Good afternoon, I've got two questions, please.

One is on your synergy.

Is that still according to the kind of proportion that you described when we saw you last basically out of the $1.25 billion, half a billion dollar and up a little bit less than half a billion dollars in downstream?

Is that the proportion that you are seeing right now?

Yeah, that's still the same, and by the way, I wish I could come back to the last question.

There is one other aspect that I wanted to bring up in terms of volume, and some asset disposition.

We're also looking at what we call more of a treadmill thing up in western Canada.

And we looked at the prices and all that we could realize, and we have put a little bit more of our money into that, because we know in short-term production falls off quickly, but we looked at what we could get for it price wise, so a little bit of change than where we were when we started.

We've created value by running higher volume unless, but we looked at cost structures higher and costs for incremental is higher.

It's a different business, but given what the marketplace is doing in oil and gas price, we create a lot of value for us.

That's another aspect of a slight change, not in long-term strategic direction, but we looked at as a different part of E & P, what we call treadmill in (inaudible) western Canada, we wanted to maximize value on.

In terms of synergies, no, we're not changing in terms of what we expect to do this split breakdown.

The thing that I'd like to pass along to you, though, is that we're working hard with respect to how we can enhance and bring the run rate up higher than 1.25 billion in putting the plan together for '04, and I suspect it's not coming from upstream and downstream, it's going to come from all parts of the company, upstream, downstream and the corporate staffs.

Okay.

The second question is really on your accounting changes.

I think it was mentioned that the $3 billion of debt increase as we saw in the accounting change.

If I understand it correctly, once you dispose of some of the assets, particularly in the retail area, a portion of the debt may come off the books.

Is that still true and can you give us the guidance?

Is that still in the --

John Carrig can best answer that one.

Well, we mentioned that there is $3 billion of debt coming on the balance sheet in the third quarter, and Jim mentioned that there's asset dispositions in the second half.

When you adjust for that debt coming on balance sheet, then the asset disposition proceeds go straight to debt reduction.

That's the way we look at it.

Okay, and this whole thing does have an impact on your debt ratio?

Yes, it will have an impact on our debt ratio, yes.

It'll help improve it.

Very good.

Thank you very much.

Next we'll hear from Fred Leuffer of Bear Stearns.

Good afternoon, Jim.

Have two questions.

And forgive me if you answered this.

I dialed in a little late.

But the first is just the drop in foreign tax rates in E & P. Is this a one-time effect or do you expect the rates to stay low?

On that one, Fred, as it a one-time effect.

It is a one-time effect?

Well, Fred, there is two pieces to that.

One is the one-time effect associated with the Norway -- repeal of the Norwegian grant tax, plus the impact of the change of ownership structure in Australia, East Timor.

But then on an ongoing basis, as you know, when we report equity earnings, from places like Venezuela, those numbers are after tax, and that as intended to mitigate and lower the overall impact of our foreign tax rate.

So what would you -- what sort of tax rate would you look for in foreign E & P in the second half?

I think between 50 to 60, maybe closer to 60%.

For the international overall between 45 and 50.

Okay.

Second question is can you quantify for us the impact of the synergies by segment in the second quarter?

And can you tell us if you saw any offsets -- the numbers that you are giving us actual bottom line numbers?

Yeah, Fred, we have not broken out those synergies captured by segment.

And really, I don't think we want to get in -- by rolling it up on a cost basis and income basis, we're providing enough detail.

So don't expect to do that or expect us to do that going forward.

I think, though, you will see, though, in the financial analyst meeting in New York later this year, we will update where the total synergies, total for the company, and we'll say where they are coming from by segment in the company, and we'll describe within the segment what types of synergies they are.

One other thing, though, it's an opportunity for me to comment, I'd like to point out, there is a fair degree of question in the media, not about our company, but I think just industry in general, about pension costs, and one of the things we did when -- as a result of the merger and putting the companies together in our financial plans, we looked at our pension and we just built into our plans and our funding, $350 million a year for the next five years.

So, whatever we feel he we need to do with respect to the pension that's already built into all of our plans, income, cash flow, so there is nothing out there coming that we need to address.

It's already built into the plans.

So I want to make sure everyone heard that.

Okay.

But just back to the cost savings, are these net of any offsets or competitive factors?

In other words, are these actually --

Yeah, these are net of any dis-synergy or these are net of any -- I guess you called it erosion or -- yeah, this is what we've done.

I'll give you a for instance.

We're spending money to put in new systems throughout the entire company.

So whatever the cost of those systems, that's all in the cost structure.

It's all netted into whatever we have to do to capture the synergies.

Okay.

Thank you.

Our next question will come from Nick Griffin of Deutsche Bank.

Just a quick question on the upstream volumes.

You seem to be running at 1.63 for the first year first half with 1% of disposals.

I was wondering if you could give us some indication of how much on your new assessment (inaudible) upstream disposals for the year, how much will be loss of these from disposals in the year 2003?

I think we'll be getting into the specific assets that we have in mind that we might be parting with.

I think both from a competitive point of view and I really don't have the numbers right in front of me.

It's difficult for me to answer.

I think what we really are trying to say is production, all of these different reasons it's not going to be as high in the third and fourth quarter as in the first half of the year.

But for the year, we're going be doing better than what we expected or told everyone we would do for this year.

Back in November when you said 1566 --

That's right.

Thanks very much, guys.

Uh-huh.

Next we'll go to Mark Gilman of First Albany.

Guys, good afternoon.

I had a couple of things.

Jim, could you just go back to this whole upstream asset sale issue from a strategic perspective.

I guess I don't quite understand why it is staring at $30 oil and at least up until fairly recently 5 dollar plus Diamondbacks why you wouldn't accelerate an upstream disposition program in that environment, rather than slow it down?

Well, I mean, you make a good point, Mark but some of the things that we are selling are certainly not the legacy assets of the company, we're selling mature assets.

People look at it as a defined production curve and many most cases it's a maturity declining production curve.

People look at the same price (inaudible) that you're enumerating and we say we can get that ourselves, do we hold it or do we sell it, and so that's one of the things we're faced with.

No, obviously we want to Sell mature assets in a high price environment, but you know, our purchases are pretty sophisticated, too, So we don't want to part with something unless we can see it's more valuable to someone else than it is to us.

I mean, I understand and take your point.

That's exactly what we're trying to do.

Okay, let me ask something about headcount.

I'm having an arithmetic problem.

When the companies merged and you added the headcount of the two together, you got a little bit over 56,000.

The release today says June 30th is 55-8.

Where is the 2000 reduction that you indicated has been achieved up to this point?

Well, I mean, the specific throughout the company, but as I said, the reductions are going to also be moving up towards 4,000.

But then that does not include the sale necessary assets that we have and in the case of the retail size, I recall the retail employees of what we have in mind in exposing this to 16 or 17,000 employees, so if you start seeing down the road that you have an employee base that looks more like something closer into the mid-30s than what you see today at 55,000, but specifically, where each of those employees are, at what percent in the upstream and downstream, I don't have the numbers in front of me.

I have the total numbers.

I'm trying to reconcile the arithmetic.

If you started in 56 and the June 30th number is 55-8, I can't find two thousand in reduction.

What you said has been achieved.

We understand the math mark.

I understand your point.

I don't have a reconciliation between the 2200 positions that we mentioned earlier.

We do believe and our content that we have eliminated 2200 positions, and I will have to help you with the reconciliation.

I don't have that in front of me.

John, if you would, please, could you just clarify something I think you said in response to a prior question regarding this off balance sheet and the fin 46 issues.

I think the question was to the point of if you divest the retail units, the debt that you are bringing on the balance sheet disappears, not with standing any cash consequences, doesn't it?

No.

I mean, I think -- no, I don't think that's additive, Mark.

The debt comes on.

When you dispose of the assets, the cash proceeds from the assets will be used to satisfy debt.

Okay, maybe I'll have to take it up off line.

One other one.

Bull hide production, dell me how it's doing.

It looks like the China liquids is lower than what I thought it was going to be.

I think it's doing fine.

It's ramping up according to schedule.

We'll expect to see further improvement of that as the year goes on, but I don't believe that's -- that's not out of line dramatically.

As I recall, though, mark, we had down time in this past quarter, but there is no change in terms of what we expect that we're going to get out of the first phase of production.

It's the third and the fourth quarter.

Okay, guys, thanks very much.

Our next question will come from Fadel Gheit of Fahnestock and Company.

Good afternoon.

Some of my question has already been answered.

I have a question on the Saudi gas project.

Are they over or are you going to revisit some of the watered down projects or scaled back?

Well, with respect to the core venture number one and core venture number 3, as you know core venture number 1 has been terminate preponderance of the evidence core venture number 3 was also terminated, but there was a fair degree of discussion amongst the three companies in core venture number 3, Shell, Patel and our company, Conoco Phillips possible interest in purely an expiration and it was primarily, I think, the acrage of the old core venture number 3.

And we looked at it and from our point of view and prospectivity and what we're trying to do in expiration and it didn't meet our objectives is why we didn't go forward in regards to that.

We participated in London a week or two ago, and the oil minister made the presentation to 40 or 50 different companies.

We're interested in opportunities in Saudi Arabia, and we have excellent relationships with them, and with Aramco and we'll be looking at opportunity, other opportunities of what we can do, but that's essentially where we are at this point in time.

Thank you.

And next we'll go to Paul Cheng of Lehman Brothers.

Jim, you said earlier that you will look at what will be the estimate capital spending for 2004, or that you are going to give us some --

No, the 2004 -- what I would do is just look at the old presentations, but that that's what we're putting out and using at this point in time.

That's all going to be updated when we come into New York in the fall and you'll get all of the full break down of that.

We're in the process right now, as you know, doing this ourselves.

Operating plans around the world not just capital, you know, operating costs and the personnel requirements, and technology and all so.

It's a bit premature.

We just go with what we have out there.

Okay.

That's fair.

Maybe this is going to be for John.

John, I was looking at the international EMP.

I understand the effective tax rate is lower because of -(inaudible) gain and also the Norway tax appeal, but even after take out those two into consideration, the tax rates still look low by maybe about 50 million additional benefit compared to a more normalized tax rate of60%, is there anything going on in the quarter other than a change in the assets perhaps the earning from the mix, from the equity income that we take into consideration, why the tax may be somewhat lower?

Well, not that I'm aware of.

Make John Carrig might know something more.

They are rather small eye tells, we told you what the large items are.

There are always small things that might amount to a half percent or a percent, but maybe it might be best for John or for Clayton just to talk to you after the telephone conversation.

Okay.

That will be great.

Last question, can you tell us what is the second quarter -after overlifting? and also at the end of the second quarter the company as a whole, is it underlifting/overlifting or is it balanced?

We've got -- I've got it right here.

Looking at sales versus production for 2003, we've produced 951,000 barrels a day, and we sold 954,000 barrels a day.

So, we slightly overlifted 3,000 barrels a day.

And Clayton, that is for the year to date.

How about second quarter?

Second quarter was 967 in crude oil produced and 996 in crude oil sold.

Okay, thank you.

Next we'll hear from Tyler Dann of Banc of America Securities.

Thanks, most of my questions have been answered, so appreciate it.

Stand by just a moment.

Our next question will come from Doug Terreson of Morgan Stanley.

On the chart that you have on page 20, I notice that the adjustment for purchase accounting increased from two and a half to three, but the mid-cycle baseline declined for the similar amount.

The total is close to the previous one.

Does this relate to the mid-cycle adjustments that you made earlier in the year, and if not, could you provide insight as to where it came from?

Doug, think that was just a reconciliation to get the baseline right, we've seen that we had some categories that weren't quite right and we just adjusted them.

That's something fundamental there.

That's fine.

And secondarily, there has been a decent amount of production variability in the equity affiliates for a lot of obvious reasons.

And so could you kind of provide some clarification as the recent production levels in some of those countries and any segmentation within those countries that you may have, too?

Well, the primary drivers of that, the equity earnings are the Polar Life venture, the Petravera (ph) venture in Canada, and Venezuela.

The largest variance has been in Venezuela.

And that's attributable to the fact that we were down in January and February and only up for part of March.

So, I think what you see in the second quarter is more indicative of what we would expect going forward.

I believe Canada it's like 17, 18,000 barrels a day.

If we -- that may or may not be something that we would consider for disposition in Canada, but assuming that we hold on to it, it would be in the range of what you saw in the second quarter.

Okay.

That's fine.

Thanks a lot.

Next we'll go to Michael Mayer of Prudential.

Can you give us insight into the refinery accidents you've suffered over the last four weeks or so in terms of do they point to any underlying deficiency that needs to be addressed and secondarily, what production and cost and loss profit impact will be on the third quarters' results?

Thank you.

Okay, Mike, good question.

It's always unfortunate when we have operating interruptions.

Let me go through a few of them with you.

We had our boiler incident at Carson office (ph) in Los Angeles late last week.

That facility is back up and running at capacity.

We don't see that it's impact with respect to lost profit opportunities for two or three days.

It's not that significant in the context of the third quarter.

We go to -- very unfortunate, the fire or the incident there.

We expect that we're going to operate at 120,000 barrels a day average for the third quarter.

We usually can do about 190,000 barrels a day, so you can see where we're running at.

We think that the lost profit opportunity impact on net income in the third quarter, which is most of it is going to be in the third quarter, because we expect to be substantially back in full operation toward the end of the third quarter, is about $30 million of net income.

And then we were also impacted adversely with -- in the past several months with some complete power failures at Lake Charles.

This is power that's supplied to us.

It's -- we'd like to think it's always reliable, but it's it would certainly be impacted.

So we have a number of situations, some of those that obviously that we're results of our own operations and some that have -- due to some external factors.

Unfortunately, you have a rash of these things at the same time.

We don't see that there is anything fundamentally wrong with respect to how we operate our systems, our safety, environmental process that we have, but obviously, we need to do better.

We know that.

And our employees know that.

So, hopefully I responded to the questions.

Different types of situations and also try to demonstrate to you what the impact has been and will be in the third quarter.

Good, thank you.

Eric, we're about out of time here.

Maybe we have time for one last question.

Yes sir, that will come from George Gaspar of Robert Baird.

Just a follow-up on the downstream on the cost side.

What's your scheduled maintenance turnaround situations for the second half or don't you have anything scheduled?

Obviously, a little bit more in the first quarter.

We're lighter in the second quarter.

And the third and the fourth quarter, I'd have to

George, we had planned on spending about $150 million turnaround expense for the entire year.

Okay.

We've got about 66 taken year to date, you know

Fourth quarter will be the heavy.

Obviously it could impact those costs as well.

Okay.

About -- about even with what we spend in the first half of the year.

All right.

And then lastly, the up and coming lease sale and the joint development zone off of Nigeria, are you planning on being part of the bidding process?

Oh, I would -- I don't know for sure myself.

We would have to talk to our own people, but even if I knew, I think I would be quiet on it for competitive reasons.

So George, I'm going to have to pass on that one.

Okay.

All right, thank you.

With that, gentlemen, I'll turn it back over to you for closing comments or remarks.

Right.

We would like to thank everybody and appreciate the opportunity to review our performance and plans.

A replay of this teleconference and copies of the slides can be found on our web site and once again, we appreciate your interest in the company.

That concludes today's conference.

We thank everyone for your participation.