康菲 (COP) 2003 Q3 法說會逐字稿

Good day, everyone, and welcome to the ConocoPhillips third quarter Earnings Conference Call.

Today's call is being recorded.

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

Please go ahead, sir.

Good afternoon and welcome to ConocoPhillips third quarter Earnings Conference Call.

I'm joined by our President and CEO, Jim Mulva and our CFO, John Carrig.

Following Jim's comments, both he and John will be available for questions.

During today's call we'll be referring to slides describing third quarter and year to date performance.

These slides are available on our Internet site and would be useful to have in front of you during today's conference call.

I also need to remind you that during the prepared remarks and in response to your questions we will be making forward-looking statements that may be materially different from actual results.

A list of items that can cause these changes from our current expectations can be found on our recent filings with the S.E.C.

So, with that said, I'd like to turn the call over now to ConocoPhillips' CEO, Mr. Jim Mulva.

Clayt, thank you.

And I want to also extends my thanks and appreciation to all those who called in on this conference call for your interest in our company, ConocoPhillips.

As Clayton outlined, we have 20 slides, and what I'd like to do is, so you follow along with the comments that I have, I'll go through these 20 slides and then we'll go to the questions and answers.

So I'd like to start with the highlights slide on page 3.

And what we're trying to put across there is you could see that we're delivering on both our financial and operating performance measures.

Upstream we produced about 1.56 million BOE a day, a little bit more than the third quarter of last year on a pro forma basis.

And then you have to consider, on a pro form basis, third quarter this year we have sold a number of producing assets during this period of time.

Downstream our refineries ran very close to capacity, allowed us to take the benefit of strong [INAUDIBLE] spreads in refining margins.

During the quarter we reduced debt by 1.4 billion.

So, we reduced debt by 3.7 billion through the first nine months of this year and 4.1 billion since we completed the merger last year.

You're going to see a little bit later in our slides we have achieved our year end target synergy run rate of $1.25 billion a year.

And we've done that a couple months earlier than we would have expected.

That's the year end run rate and we're already doing it at the end of the third quarter.

And you're also going to see that we're going to be delivering, either have announced or under process of completing, $3.5 billion in asset sales by year end.

We've already completed 2.2 billion since the merger closed, and we expect 1.3 billion by the end of the year.

We'll talk more about that in subsequent slides.

One other point I'd like to make before we leave this page, and that's 2.9 billion of our debt previously was in unconsolidated entities and minority interests and it's been added to our balance sheet.

This was retroactively consolidated to January 1st of 2003 due to FIN 46.

So, as a result of prior periods in 2003 reflect the application of this accounting change.

I'd like to now move to page 4, which is the company's income from continuing operations and we compare our third quarter of '03 to the second quarter of '03.

Income from continued operations was 1.249 billion this quarter, and in the prior quarter we did 1.095 billion.

The benefit of higher oil, gas prices and refining margins were offset to some extent by somewhat lower upstream sales volumes.

In the second quarter E&P, you can see there in the slide, had the benefit of the Norway Grant Repeal and the Bayu-Undanau ownership realignment where we sold some of our interests.

Of course that didn't reoccur in the third quarter so that had a negative variance from the second quarter to third quarter of 138 million.

We had lower merger costs and gains from E&P asset sales, and so, that had a favorable impact of 153 million on earnings.

Our discontinued operations were $57 million in the quarter.

That adds up to a total net income of 1.306 billion.

I'm moving on now to page 5, total company's cash flow.

Cash flow was strong in the third quarter.

Cash flow from operations, and that includes working capital, came to nearly $2 billion, a little over 2 billion.

And so, working capital added a little over $300 million to our cash flow.

And in addition to the cash from operations we had asset sales a little over $900 million in proceeds.

This all represents the net proceeds from our retail marketing assets in the Northeast and then our Federal Trade Commission mandated sales that were completed and some other smaller upstream asset sales.

Our capital expenditures for the quarter were $1.5 billion.

We paid 272 million in dividends, and we had some other items that partially offset the payment of dividends.

That's where you see the net $59 million.

So, we had strong cash flow.

And with our disciplined capital spending and asset sales proceeds, allowed us to reduce our debt by 1.4 billion.

Moving on now to page 6, which is the cash flow of the company for the first nine months of the year, you can see our cash from operations for these nine months was 7.4 billion, 6.4 billion came from operations and just a little less than a billion from working capital reductions.

And we had our asset sales proceeds of 1.5 billion, and we spent 4.4 billion, a little over $800 million, in fact 815 million was used to pay dividends.

So, 3.7 billion was used for the repayment of debt.

Before I leave this slide, if you just look at the total sources of cash, which is from operations, working capital and asset sales, it comes up to almost $8.9 billion.

And so, where did it go of the 8.9 billion? 50% went to the growth of the company in capital expenditures, 9% went to dividends, and 41% went to debt reduction.

So, if you look at dividends and debts reduction, half of our cash sources for the first nine months effectively went to shareholders and/or to debt reduction.

We think this helps in creation of shareholder value.

Let's move onto page 7.

What does this all mean to our debt ratio?

We can see from the bars on the left our equity has gone up to 3.5 billion.

And then after adjusting for the effect of the accounting changes outlined in the prior slides our debt now is down by 3.7 billion to 18.9 billion.

If you look at the balance sheet debt before these new accounting pronouncements and implementations, it went from 19.8 to 16 billion on the red bars.

So, the improvement in our debt to capital ratio, however you look at it, on an apples to apples basis, has gone from about 43% down to about 36%.

And essentially the point we really want to make on this slide is that all that the market has given us in terms of higher oil and gas prices and crack spreads essentially has been used for debt reduction because we haven't changed our capital spend program.

So, that results in more financial flexibility, stronger balance sheet.

We think it's helpful to our shareholders.

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

This slide we compare the third quarter to the second quarter.

Our realized oil prices were up 7%.

The numbers are $25.19 a barrel to $27 a barrel.

Natural gas prices, though, went down worldwide.

Realized gas price from $3.93 an MCF to $3.80 an MCF.

We've been actively working on disposing of the more very mature low returning assets in the upstream.

We sold about 1.4 billion since the completion of the merger, and we certainly see no problems in meeting our goal of upstream dispositions of one and a half to two billion dollars, and we're getting the value of cash additional synergies both upstream and downstream in the total company.

We'll talk more about that a little later.

Let's move on to page 9, talking about EMP production volumes.

As I said earlier, our third quarter production was about 1.56 million BOE a day.

You can see on the slide it's 80,000 barrels a day equivalent, more than the second quarter.

Now, about 60,000 of that comes from planned maintenance and seasonal declines primarily in the North Sea and Alaska.

More specifically, seasonal declines in maintenance in the U.K. reduced our production in the third quarter 27,000 barrels equivalent a day, Norway was minus 12 and Alaska minus 17, and everything else around the world was minus 4,000.

So, 60,000 of the 80,000 from second to third quarter is really maintenance and some seasonal declines.

Compared to the pro forma third quarter '02, you can see on the slide our actual production is up a little bit by about 10,000 barrels of oil equivalent a day.

Now, we're not going to get all 60,000 barrels of that back as we look into the fourth quarter.

But if we look at the fourth quarter, we expect our production is going to be moving up towards about 1.6 million BOE a day, and then for the full year we expect that our production will average for the full year of '03 somewhere very close to 1.59 to 1.6 million BOE a day.

So, now I'm going to move on to page 10, which is the income from continuing operations, comparison of the third quarter to the second quarter.

As you can see, the upstream was 967 million.

This was 110 million lower than the second quarter of '03.

And let's go through the bars on this slide.

The higher liquids prices increased earnings 82 million over the second quarter while realized gas price had a negative earnings impact of $27 million, so, the net there was $55 million.

This benefit was offset by lower volumes as I talked about in the past slide.

That had a 93 million impact.

In the second quarter we received the benefit from the Norway Grant Act repeal and the Bayu-Undan ownership realignment, which benefited the second quarter earnings.

And of course, these are not recurring situations.

So, that is one of the adjustments or variances from the second to the third quarter.

And in this quarter we benefit from gains on asset sales, 98 million compared to 13 million last quarter generating 85 million sequential improvement.

The sales are essentially coming from the lower 48, Indonesia, Canada and the U.K.

In addition to these changes there was a negative impact of 19 million, that's the last under other, and that ultimately then led to the 967 million dollars in the third quarter.

Now I'm going to move from exploration and production now to page 11, refining and marketing.

We had a strong quarter in refining and marketing.

Overall our refineries have ran well in the third quarter.

And of course, we benefited from the strong crack spreads.

Our U.S. realized refining margins increased $1.05 a barrel over last quarter.

Internationally they were unchanged.

Our realized marketing margins fell on both the United States and internationally.

If you look at our earnings and where they're coming from, domestically 81% is coming from the refining side of the business and 19% from marketing.

We're getting a lot of good synergy capture in the downstream that helps reduce our operating expenses, enhancing our earnings over the 2002 baseline.

And we're making good progress in our disposition program of our retail marketing assets.

We'll talk a little bit more about that later.

But if you look at our worldwide downstream, in the third quarter our earnings, 485 million, 75% is coming from refining and 25% is coming from marketing.

And if you look year to date, all nine months, about 77% of everything in the downstream is coming from refining and 23% is coming from marketing.

I'd like to now go on to the next page, 12, and we take a look at our downstream income from continuing operations, looking how it's moved from the second quarter to the third quarter.

It had a strong quarter, 485 million.

That's 164 million over the last quarter.

We were the beneficiaries of strong crack spreads.

You see that on the slide, 120 million.

The overall improvement in prices margin included lower marketing margins and less favorable light-heavy crude differentials.

On the other hand, we ran very, very well.

Downstream sales volumes improved sequentially.

The earnings from those volumes, $7 million.

Utility costs were down a little bit, about 19 million, because of somewhat lower natural gas prices.

And our turn around expenses were light in the third quarter.

They were $14 million.

Now, our downstream earnings could have been even higher than the 485 million.

We had the impact of the Paca City operating incident in the third quarter and that impacted us adversely.

Lost opportunities of about $30 million.

I'm going to move on now to page 13 and briefly cover the Midstream chemicals and emerging businesses.

Mid-stream business income was 33 million in the third quarter, that's up 6 million from the second quarter, which we attributed to higher NGL prices or natural gas prices.

Chemicals, our income of $7 million, that's down 5 million from the prior quarter.

We saw lower margins in ethylene and polyethylene, and they more than offset higher sales volumes.

Margins in aromatics and styrenics were a little better than the second quarter.

With respect to our merging businesses, they lost $18 million in the third quarter, and we had a $23 million loss in the second quarter.

Primary reasons for the improvement in the emerging businesses were related to lower costs with respect to our gas to liquids business, our technology initiative there.

Moving on to page 14, we're going to talk about corporate, third quarter versus second quarter.

Corporate costs, excluding earnings from discontinued operations were 223 million in the third quarter, 94 million better than the second quarter.

Merger related expenses, $74 million lower than the second quarter.

Net interest expense fell due to calling of the notes, the costs associated with calling of notes in the second quarter.

Higher capitalized interest.

Then we had lower debt balances in this quarter.

Discontinued operations fell from 91 million in the second quarter to 57 million this quarter as a result of lower marketing margins.

And then the completion of certain of the asset dispositions in our marketing business.

Now, the impact of FIN 46 on income from continued operations through the first half of '03 has a benefit of $9 million.

This is due primarily to lower rent expense, partially offset by higher interest expense and financial reserves.

I'm moving on now to page 15.

We talk about the corporate side.

We call it corporate income.

It's really the corporate expense.

Let's go through this slide.

Corporate segment income from continuing operations amounted to a loss of $223 million.

You can see the net interest expense was 134 million, so we're down 11 million from the last quarter.

Staff costs were 33 million, down 10 million from the second quarter, this is lower compensation expenses.

And merger-related costs were 31 million.

And this was caused by increases in accruals with respect and settlement accounting accruals for severance and the cost of primary personnel with respect to the merger.

I think the important thing, though, that we want to stress here is if you looked at corporate costs, if you exclude merger-related costs, are near about $180 million.

That's pretty close to what we previously indicated to yourselves when we last talked.

Fourth quarter guidance, we still will continue to have some merger-related costs, less than what we've been seeing here most likely this quarter and past quarter's.

Guidance probably is close to about $200 million a quarter, maybe a little bit more than 200 million.

We'll update these numbers and what we see going forward for '04 when we meet with the financial community in November.

I'm moving on now to page 16 and synergy capture.

As I said, we achieved a run rate of 1.25 billion at the end of this quarter.

And one thing I wanted to point out, this synergy capture includes all the recognition of any types of increased costs for compensation, increased costs for benefit costs.

Synergy capture is a net number.

As we indicated earlier, our methodology is to use externally reported numbers and make adjustments for prices, margins and operations to demonstrate are we incrementally capturing synergies and demonstrating our performance.

The baseline adjustments are necessary to make period to period comparisons, and we've really not changed in how we do this and we've included in the attached table to this slide just how that's done.

To date so far this year we estimate that we've achieved 478 million in after tax net income, improvement throughout the company resulting from synergy capture.

And let's talk a little bit more about the analysis of synergy capture on our next page, 17.

In order to determine the business improvements that we see from synergy capture, we compare the 1.28 billion in our 2002 income baseline against the 3.61 billion in income from continuing operations after making these various adjustments that you can see in more detail on table 1.

Now, you can see in that first green bar that there's 2.16 billion is added to the 1.28 billion baseline.

And this really addresses and recognizes the higher oil and gas prices and downstream refining margins that we've seen in 2003.

Again, this is all done comparing the normalized baseline.

And you can see what the normalized baseline assumptions are in the footnote to this slide on page 17.

And we make adjustments for asset dispositions, energy costs, merger costs and other items that impacted income from continuing operations, and we see that the results in this analysis and after tax benefits of $478 million to income.

Now, if you go to page 18, how we take the $478 million to get to our 1.275 billion annual pretax run rate.

We use a 50% tax rate assumption.

Then that grosses up to 956 million pretax.

And then put that on an annualized basis and you get the 1.275 billion.

Remember, we said that we were going to be at this rate or 1.25 billion run rate at the end of this year.

So, we're several months ahead with respect to the run rate that we're realizing.

Now, moving on to ROCE on page 19.

Everything that we've done in the company, in our operating plans and actions that we take, both investment and operations and managing our working capital is to improve our returns.

So, consistent with what we've said, we're focused on mid cycle return on capital employed.

The gap between us and what we view as the competition is the largest companies in our industry.

Now, when the merger was completed, our baseline mid cycle ROCE when you adjust for purchase accounting was 7.2%.

And during the first nine months of the year, we have increased our adjusted mid cycle ROCE by 1.9% to 9.1%.

So, we have a pretty significant improvement.

Percentage wise it's about 26%.

Now, using the 2003 actual earnings and adjusting for purchase to [INAUDIBLE] accounting, our annualized ROCE for the first nine months, that's the yellow bar on the right side of the slide, is 16.5%.

So, we see ourselves very competitive with the largest companies in the industry.

And by the way, all of our analysis including the impact of FIN 46, and the impact of FIN 46, it does add some increases in the capital employed.

So, it's all done in a total basis that you see, just the improvement that we're making and how we stack up on a normalized basis as well as what we're actually doing given higher oil and gas prices and crack spreads against our peer group on the right side of the slide.

Now I'm moving to page 20, which is the last slide of the presentation.

We see ourselves as really building momentum and executing our operating plans that we shared with yourselves about a year ago.

And of course we're going to update you with respect to all this, '04 and '05 and subsequent years, a little later in November.

So far this year we sold 1.5 billion in assets and we're right on track to meet our asset sales targets of 3 to 4 billion dollars.

We've been able to accelerate our debt repayment efforts.

We've reduced debt 4.3 billion since the merger was closed.

So, $4.3 billion in about a year's time.

Integration of the merged company has gone well.

In terms of our synergy target run rate, a couple months ahead of schedule.

And then by applying the discipline to our operating costs, capital spent, capital allocation, we are pushing hard to continue the momentum to close the return on capital employed GAAP on a normalized basis with the largest companies in the industry, and we're quite convinced, firmly convinced that the disciplined approach allows us to strengthen our balance sheet, gives us more financial flexibility, but we think all these actions also tie in and very commensurate with building and bringing value creation for shareholders.

I said a few times going through these presentations and these slides, we look forward to reviewing all of this and our strategic initiatives in a much more detailed level when we meet with yourselves on the 19th of November.

So, that really concludes the presentation we had and so maybe we ought to just stop now and open up for questions and our responses to all those who are participating on our conference call.

Great, Jim.

That was great.

Steve, are we ready for some questions?

Thank you.

Our question and answer session will be conducted electronically today.

If you would like to ask a question, please do so by pressing the star key followed by the digit 1 on your touch-tone telephone.

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

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

Once again, please press star 1 on your touch-tone telephone.

If you find that your question has been answered, you may remove yourself from the question queue by pressing the pound key.

We'll pause for just a moment to allow everyone to signal for a question.

We'll take our first question from Doug Terreson with Morgan Stanley.

Jim, my question's on the synergy chart that you gave us today because you point out that you met your synergy objective ahead of schedule, which I think you did, but it also appears as if the quarterly rate of capture rose pretty significantly in Q3 in relation to the first few quarters.

And so, there's a couple of points here.

Either the program's gaining more momentum or there's pretty significant seasonal effects in the quarter.

So, my question regards the rate of change that you guys are seeing with the synergy program, whether there are any seasonal or timing effects that affected the gains that you posted in the third quarter.

And also, could you provide any breakdown from the operating segments related to the synergies that you may have and how they varied with the original plan?

Well, Doug, thanks.

With respect to synergy capture, what we are finding is that we are learning and understanding much better the assets that we have in our combined company much better over this past year.

We see more opportunities not just on the cost side, but we're seeing opportunities on the income side, income enhancement, by which we could capture in the chain of value creation from the upstream and then particularly through the downstream part of the business.

I don't think it's so much seasonal in nature.

I think it's just that we've pushed this through a little bit faster than we might have thought.

I don't think you can necessarily will see -- that one quarter to the next see the same rate of increase.

We're going to update yourselves on what we expect the run rate will be at the end of '04, and we'll update you with respect to how much of this is coming from upstream, downstream and the corporate side of the business.

But I don't see it so much seasonal.

What it's really coming from is more income enhancements.

We're certainly capturing everything we thought and maybe a little bit more on the cost side.

But I think accelerating here is understanding our assets better and we're also enhancing our income as a result of running these assets much better and knowing what they can do for us on an integrated basis.

Great, thanks a lot, Jim.

We'll take our next question from UBS's Paul Ting.

Good afternoon.

I have two questions, please.

First of all, given your fairly rapid debt pay-down schedule and given the fact that your capex at the upstream is about $3.3 billion, do you believe that you might be able to exceed, I think the current guidance is a little over 4 billion, 4.4 for the year, any revised targets for capex for this year?

And secondarily, Kashagan, can you bring us up to date as far as the status of the negotiation or renegotiation with the government and any revision to your production target dates?

Okay.

With respect to capex, we don't see any changes from what we said we were going to spend.

We might be several hundred million dollars behind in terms of what we think we will spend this year.

If you look at the first nine months and what we announced for the year, some of our large projects are wrapping up.

So, there's really no change in what we think we will spend in '03.

With respect to Kashagan, we're right in discussions and negotiations amongst our group and with the government, and I think it's probably appropriate for me not to really comment.

I mean, we're certainly hopeful.

We want to get these things resolved and sorted out so we can get on with the development plan for Kashagan.

So, I don't think I really have anything more to say in that regard.

I don't know if there was another question?

No, those were the two.

Anything else, Paul?

No, that was it.

Thank you very much.

Next we'll move to Tyler Dann with Banc of America.

Hi.

Thank you for your time today.

A question on your Venezuelan plans.

Could you please talk about, basically we've had the Energy Minister sort of sound off that new heavy oil contracts will be falling under the 2001 hydrocarbons law.

Could you talk about that and the impact for your future plans in Venezuela?

I think with respect to -- we don't see any change with respect to our plans on Petrozuata, Hamaca, [inaudible] or exploration or the opportunities for hopefully developing gas.

In terms of our ability to in certain cases expand our heavy oil projects, it's something that we're certainly going to have to take into consideration.

This, by the way, is one of the issues, I mean, we recognize the political situation down in Venezuela and like yourselves were quite -- we read and understand, but we're very close to the situation.

I think it might be a little bit better for us because we intend to cover this pretty thoroughly in November at the analysts meeting, if you wouldn't mind, just put this off for a few weeks and I think we'll pretty well answer your questions then.

Okay.

Thank you.

Our next question or comment will come from Fred Leuffer with Bear Stearns.

I have two questions.

Jim, the first is can you update us on oil and gas production for the outlook for '04 and '05 first?

Fred, I don't think we're going to go into '04 production targets at this point.

I would just use what we've given you so far.

But we'll update that in a few weeks.

All right.

And the second issue is on the cost savings.

I can't find a single penny of the cost savings in your results.

You've come out in each of the last three quarters by segment very close to our forecast, and we factored in no cost savings.

Even as you go through your own reconciliation quarter to quarter by segment, you've gone through the price and volume changes and got us exactly to the results without any cost savings.

Now, I have no doubt that you're cutting costs, but my suspicion is that the savings are being computed away or there are other cost increases, like pensions and other things, that are offsetting this.

Am I reading this right or not?

Well, Fred, this is John.

What we've seen is we certainly believe we are getting cost reductions as a result of head counts and other activities that we engage in.

We have experienced some cost impacts associated with currency purchasing power as a result of the weakness of the dollar.

And well, those two things are really what have been driving our costs.

We have, as we indicated in the past, had other cost increases that are more than offset by the cost savings we've experienced.

Well, we do have increased costs just by the merit treatment and the cost of benefits, medical and pension.

But that's all factored into our plans.

What I would say is we watch very carefully every month the cost structure of every business unit upstream and downstream and then the cost structure.

If you adjust for the utility costs of gas and power, essentially all of our operations are meeting their cost targets with respect to cost.

And then we see some very significant reductions on the corporate side.

So I hear what you're saying, Fred, but everything that we see -- we check this, both what we present to you in these slides, but then we have very detailed operating plans that we really monitor and hold our people accountable for.

I'd like for ourselves to sit down, some of our people like Clayton sit down with yourself and go through this because I think we can certainly demonstrate that what you're seeing and what conclusion you're coming to is not quite right.

It seems to be a very big leakage, Jim.

I can see even off the first call estimate.

We saw this happen to Chevron, and they fear it's happening to you.

But let me ask you this.

In the first quarter you tried to provide us with segment cost savings.

Are you going to do that at some point in the future?

The reason we've gotten off this cost -- we will go through costs when we meet with yourselves in a few weeks, cost structure for per barrel downstream, upstream and all of that.

But the reason we've gotten off just costs is because we're finding our synergies are more than just cost.

It's income enhancement in the company.

That's coming from really two primary aspects, costs and income enhancement, which is another form of synergy of the merger of the two companies .

Maybe we should go to the next question?

Sure.

Our next question will come from Steven Pfeifer with Merrill Lynch.

Hi, guys,I have three different questions.

If you could just update us on the number of employees that have left to date, and I suppose maybe compared to the second quarter just to get a sense for, just following up on Doug's question, what's the rate of change here as far as people leaving?

The second would be, we're 10 months into the year.

Can you talk at least qualitatively on how the reserve replacement looks for this year when you exclude divestments, of course?

But can you book Kashagan and maybe some other things that you might be able to book, and maybe a preliminary look at reserve replacement.

And then last, I just wanted to follow up on the corporate and other where, I guess, as you talked about, you have $180 million a quarter base and then about 40 million of merger-related costs in the third quarter.

If I remember right, the merger-related costs are expected to sort of end in the fourth quarter, and then next year we don't have those.

Could you just sort of confirm that?

And the $80 million underlying base, would that continue to decline next year as you close on some of these divestments and bring in the cash and really pay down debt?

Okay, Steve.

I'll go in the order of your questions backwards.

First, the corporate costs, we said somewhere around 200 million, maybe a little bit more than 200 million in the fourth quarter.

You'll see when we meet with you in November it's, going forward in '04, it's going to be less than 200 million a quarter.

And we'll tell you what that number is in a few weeks.

Reserve replacement, we're going to give you more in a few weeks on that, but I think what you're going to see from us is we're going to more than replace our reserves this year.

And in terms of employment, Clayton's got the numbers.

You may want to go through those.

These are net numbers.

We adjust out for asset sales, and then we had some outsource activities that we now in source in the company.

And the reason we insource is because we think we can do the job more efficiently and better than outsource.

So, when you get the number, it's the net of all those things.

It doesn't have asset sales in it, and it has the net of taking outsource to insource.

That's right.

I guess the end of the third quarter we were at 58,000, and including the increases that we've seen, as Jim mentioned, we're at 55,800 right now.

So, it's a reduction of 2,200.

And of course, we've announced that there would be 3,800 leaving the company.

So, we still have some ways to go on employee head count reduction.

I've said in prior conference calls that if you net everything out, take the assets out and don't count that, the reductions are probably closer to around 4,000.

But they're more than 4,000 because of taking outsource activities and insourcing them.

But now, when we meet in November we're going to go through the upstream, what happened to the head count and the downstream and the corporate staff.

You're going to get a lot of numbers on this in a few weeks, okay?

Great.

Thank you.

Mark Gilman with First Albany.

Please go ahead.

Jim, Clayton, good afternoon.

Jim, you specifically made the comment that the maintenance and seasonal factors in the third quarter production won't rebound in their entirety in the fourth.

Why not?

Mark, that's largely because of the full impact of asset dispositions that we experienced in the third quarter.

It's not really because of any underlying fundamentals with the field.

It's the full effect of the asset dispositions as well as the incremental asset dispositions that we plan to make in the fourth quarter.

Okay.

I see.

John, do you have any sense as to what you'd project for fourth quarter working capital changes.

No, I don't have a forecast for you right now, Mark.

We can see if we can develop something for you off-line, but typically in the fourth quarter we've made a Norwegian tax payment.

We make a payment of European excise taxes.

Those are negatives.

And then we have usually some positive factors related to Norway and other operations.

But generally the fourth quarter is flat utilization of working capital.

John, there is a 631 million dollar negative number in the cash flow statement in your supplementary figures for the quarter.

Could you explain what that is?

Mark, that has to do largely with the impact of three things: 1, asset sales.

As you know, when you gain on asset sales that's included in the income statement and you must back that out in the cash flow statement in order to put it down further in the cash flow statement for proceeds from asset disposition.

There's also the effect of undistributed equity earnings, which are fairly significant this quarter.

In addition, there's some translation effects as well as foreign currency effects.

And then that number, 631, has some classification issues that we expect by the time we file the Q we'll get cleared up, but there are some classification issues associated with the working capital in the 631 that will get cleared up when we file the Q.

Just one more, if I could.

John, could you talk about the tax payment outlook with respect to both Hamaca and Petrozuata?

Are they paying taxes currently?

Are they expected to pay taxes sometime in the foreseeable future?

Petrozuata, of course, has taxes being accrued quarterly.

And that's reflected in their results.

They do have some deferred taxes or some tax allowances that help on the cash side, but that's impacted significantly by the exchange rate in Venezuela.

Hamaca is in early production, and I would expect in early production that the taxes would not be all that significant in the early periods until they reach, until they get to full production.

Thanks a lot, guys.

Deutsche Bank's Nick Griffin.

This is Nick Griffin here from Deutsche Bank.

A quick question just on asset disposals.

You highlighted that you think you've got another 1.3 billion of asset sales to do before the end of the year, and that adds on top of the 2.2 billion that you've done, which equals 3.5 billion for the year.

Am I correct in reading that's an upgrade from the 2.7 billion you mentioned in the Q2 statement or in your Q2 comments?

And if it is, could you give us some idea of what new you're looking to sell before the end of the year?

Well, I don't know that it's all that new, but yes, it's an upgrade with respect to what we said in the second quarter.

Remember, in the second quarter there were a lot of questions with respect to our asset dispositions on retail marketing and marketing assets in the downstream.

And we said it was going to occur in the latter part of the year.

Well, our announced sale of Circle K was announced in the third quarter.

And so, this is -- and we're selling it for what we see as a pretty favorable price.

So, I think that coupled with what we still have left to sell on the retail side of the downstream coupled with some smaller asset dispositions in the upstream has resulted in our probably raising our expectations what total asset dispositions will be by year end '03 versus what some might have been moving into '04.

So, a little bit ahead in terms of the timing of it.

And the second thing is as we'll be announcing that we'll be doing a little bit more than total asset dispositions than we announced a year ago.

And we'll update you on that when we meet with you in November.

I'm sorry.

If I could just have one more question, just in regards to the synthetic leases that you've brought on to the balance sheet this quarter.

If I'm correct a lot of those synthetic leases were attached to the retail side, in Circle K, et cetera.

Could you give us some idea of how that number might be reduced once you close your downstream assets sales.

I suppose the ones you've already done and the ones you're hoping to do?

Well, we have -- you're correct that there was a significant amount of synthetic leases associated with the retail assets.

And those synthetic leases have largely already been refinanced.

And they are reflected in the debt numbers that Jim showed you earlier on the charts.

So, when we sell assets, that will go straight to those revised debt balances and reduce debt 1 for 1.

Okay.

I understand.

Okay.

Thanks very much.

Moving on we'll hear next from Gene Gillespie with Howard Weil.

Congratulation on a good quarter.

With the asset sale program being well along and with the debt levels down to much more attractive, manageable debt to cap, Jim, have you changed the way you think about capital allocation going forward?

No.

The discipline on the cost structure and the discipline on the capex and the discipline on debt reduction is going to stay the same when we see each other in a couple weeks for '04 and '05, you'll see -- so, these going to be discipline on capital.

If you noticed, we've hopefully trying to demonstrate that whatever the market gives us in oil and gas prices and crack spread, we don't change the capital program.

We just use it for debt reduction.

If we see a good opportunity to do something in EMPs, drill another well or a hundred million of expenses or capex, we can always look at that.

But you'll see the discipline on the capital side.

You'll see that 75% or so of the capex will continue to go to the upstream.

The downstream is primarily -- their capital is for maintenance.

Clean fuels expenditures over the next several years.

And then certain payoff projects.

But most of the downstream is directed towards maintenance and clean fuels.

So, the bulk of our capital spending, 75% or maybe a little bit more is directed towards the upstream side of growing our reserve base and our production.

And most of that is towards, out of that's toward committed projects, Legacy projects and the new ones we're going to bring along.

So, I think you're going to see, I know you're going to see a very consistent story of what you've heard from us, what we've been trying to say.

You'll continue to hear that in a few weeks' time up in New York.

Looking forward to it.

Thank you.

Next Mark Flannery with CS First Boston.

Hi.

Two questions here.

One is referring back to the presentation.

I guess it's probably an extension of Fred Leuffer's question.

Page 12, the variance for refining and marketing income from continuing operation, inside there the second piece of that chart where it says prices and margins $120 million, is that where we might see some of the cost savings imbedded?

In other words, I presume our referring to your own margins, or is that industry margins?

What exactly is in that green piece?

And I have a follow-up question.

Those are realized margins.

And you're correct, Mark, that any number of costs get into the margin, basically on the cost of goods sold side, and there's many things that get reflected in that.

But those are realized margins.

Thank you.

My follow-up question is are you doing anything differently at the operating level in the downstream to produce what was a relatively strong number?

In other words, is anything changed in the day-to-day activities apart from some of the structural management issues?

Well, yes.

Really, quite a bit of change.

With respect to the real focus is on operating reliabilities.

It's also on our cost structure.

We have a commercial organization that's separate from upstream and downstream, and the commercial organization is responsible for selling all of our production around the world for the best price and they're responsible for getting the feed stock for the downstream, and then using the infrastructure.

We're much more aggressive in terms of the crude types that we will run in our refineries.

This has a lot of value creation.

We move our products around in this infrastructure that we have much more efficiently to create value.

So, our commercial organization we think whatever they can do in trading around and moving what we produced and what we need in feed stock and what we ultimately manufacture very aggressively is creating a lot of value both for the upstream and downstream.

And any value creation that the commercial organization creates goes right back to the upstream and the downstream.

So, there's no change in terms of our values and wanting to certainly run safe and run operationally at full capacity and very efficiently, and we're working on the cost structure.

And every asset that we have, we've got a plan that we get it up to its maximum achievable quartile of operation.

But then I think we're also running the business much more aggressively with respect to working capital.

We're taking a lot of working capital out.

But the commercial organization is driving a lot of value creation for the integrated company.

So, I think that's what we're starting to see that's of real interest to ourselves.

It's a great upside for the company.

And that's one of the reasons why we're not talking about just costs.

Synergy capture is coming both on the cost side, but it's also coming in less working capital and income enhancements.

Pretty exciting to watch what we can do.

And I think hopefully we can kind of demonstrate some of this, what's going on in our company here in the next several weeks when we meet with you.

So, that's what's different.

Great.

Thank you very much, Jim.

We'll hear from Lehman Brothers' Paul Cheng.

Hi.

Several quick questions.

I think the first one is for John.

John, when I'm looking at your international EMP business, is the unit cost sequentially higher comparing to the second quarter?

It looked like it was higher by maybe about 25, 30 million on an after tax basis.

To the contrary, on the U.S.

R&M, the cost structure, the localized sequential is actually down quite a lot, maybe to the tune of about $100 million on a pretax basis.

So, I'm wondering if you can clarify whether that observation is correct or if they are, what is the key reason behind the changes there?

Secondly, I want to know on the full year basis, if we don't have your controllable cost structure, what is the average inflationary pressure a year?

Is it $100 million that the cost will rise up every year or 200 million?

What's that number maybe?

And thirdly, to see if there's any foreign exchange gain or loss in the latest third quarter?

And then a final question is probably for Jim.

In Russia you have joint venture Polar Light, what is your expectation about that operation?

Are you just wanting to do it as a status quo, or do you plan to expand it or do you want to get rid of it?

Okay.

Let's go to international EMP first, Paul.

Sequentially there has been some cost creep experience from the planned maintenance activity which was in the third quarter as well as from the purchasing power effects of the reduced value of the dollar.

And those are the things that we see as the main drivers in the third quarter sequentially.

In the R&M sector, I believe you've seen the impact of reduced utilities quarter over quarter because the gas costs were lower as inputs into the refinery and due to the capture of synergies which I think we're starting to see better fruits of.

With respect to the average inflationary pressure, yes, we experience inflationary pressure just like everyone else.

And our policy last year and I would expect on an ongoing basis is that we need to do whatever we can to make sure that that inflationary pressure gets absorbed through cost-saving ideas and through our operational efficiencies.

John, is there a number that you can cite?

Every year you say $100 million of inflationary pressure or --

I'd have to come back to you to give you a precise number in the U.S.

R&M downstream.

It's going to be impacted by, say, an average wage increase of 2 to 3% plus what our outlook would be on oil and gas prices as well as the impact of turn around.

If it's all right, I prefer to ask Clayton to come to you and see if we can't work that out for you.

Okay.

The foreign exchange gains and losses were $34 million for the quarter.

34 million gain or loss?

$34 million gain in the third quarter for the corporation as a whole.

Do you have a breakdown by division?

I don't have it in front of me.

My recollections is that they were not overly material to the results as a whole in any particular segment.

Thank you.

How about in terms of Russia?

In terms of Russia, of course the ruble --

No, I'm talking about the Polar Light.

Well, in terms of Polar light, of course technically it's been very successful.

In fact, I just gave a speech over in St. Petersburg at the U.S.-Russian summit and we said that we'd done really well technically and its been a success and we've learned how to do business up in the northern part of Russia, and that's really important and good.

On the other hand, over the last 10 years or so we've had 40 or 50 tax increases.

So, from an economic perspective it hasn't been all that great.

Relatively speaking, it's a small part of our total international portfolio, both in terms of capital employed and certainly in terms of production and income.

So, we are trying to work what can we do in, you might say, a marginal way to enhance and improve the returns from Polar Light.

On the other hand, we are looking as a company how can we participate in Russian oil and gas development and development of assets, oil and gas assets that may be in a further part of north working with Russian companies.

So, it's kind of building on the experience that we've learned over the years of polar lights and using our technical experience and all that we've learned, say, up in the north of Alaska, how we can be helpful in developing assets and opportunities in the north of Russia.

So, that's what we're going to focus in on and what we're interested in.

Jim, if you have to rank Russia in terms of priority in your portfolio, are they in the upper quartile, or middle or lower quartile?

I wouldn't skew something as upper quartile, middle quartile, because around the world we have, total company, more than $6 billion capital program.

When we decide that we're going to do something, everything is in the upper quartile.

I'm not going to say that one project or the other, think of our people that are working around the world.

This project is more important than another project.

So, to our investors and the countries and to our partners and our employees, when we approve a project, they're all important.

Thank you.

Steve, I think we have time for one more question.

We'll take our final questions from George Gaspar with Robert W. Baird.

Good afternoon.

Jim, just to pursue this Alaskan situation a little bit more.

Just noticing overall a bit of complacency or a lack of initiative on the part of the whole EMP sector looking at the Alaskan situation and just wondering how COP fits into the situation going forward from here.

Is there some particular strategy on this downshift?

I mean, I'm not really impressed with what's going on overall.

Well, George, we're going to need to spend some time together when we see you in New York because we don't think there's anything complacent about what we're doing up in Alaska.

Okay.

You're talking about Alaska, aren't you?

Yes, I am.

Okay.

We feel that we, along with others, are pushing as hard as we possibly can to get in the energy field.

The incentives and the enabling legislation so that we can start moving out development of the gas resources and get the gas down to the lower 48.

The other thing is we're the largest, and continue to be the largest, explorer up in Alaska, and we have a pretty substantial exploration program on a consistent basis.

We also continue to bring satellite fields out all the time.

We have the national pines and production from Kuparuk and from Prudhoe.

But on the other hand, we're developing satellite fields around using the infrastructure, and Alpine continues to do really well.

And we're looking at how we can enhance our capacities to even handle more at Alpine for Alpine and some satellite fields.

So, we still are not coming off.

Our production is going to be up in the neighborhood of 375 to 360 to 400,000 BOE a day.

We've spent quite a bit of money up there, and we see it both exploration, gas, satellite fields, everything about it, this is an integral part of our company and our corporate strategic plan.

Now, other companies may not feel the same way, but that's how we feel about it and we're working for more opportunities up in Alaska, and we're also looking, as I say, for the gas pipeline initiative.

We continue to spend.

We'er in our last several years of converting our total tanker fleet to state of the art double-haul tankers that we move on our own tankers all of evacuation, everything that comes out of Alaska we put in our tankers and we run it down to the West Coast.

So, George, we're good friends and I like you, but I really disagree with you when it comes down to how aggressive we are in Alaska.

You ought to talk to the Alaska delegation, both in Alaska as well as the House and Senate here in Washington, and they would say we're pretty aggressive.

Well, all I want to say is you've got a lot of spirit, and it's probably the best answer to a question I've had in this whole third quarter conference situation.

Thank you.

Okay.

Great.

I guess we'll conclude the conference call with that final question on that high note and remind you that you can find a replay of this conference call and the slides as well as a transcript of this conference call on our website, www.conocophillips.com.

Thanks again for your time.

We'll talk again.

That does conclude today's ConocoPhillips conference call.

We thank you very much for your participation and have a good day.

At this time you may disconnect.