康菲 (COP) 2004 Q1 法說會逐字稿

Good morning everyone, and welcome to the ConocoPhillips First-Quarter 2004 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 over to the Director of Investor Relations, Mr. Clayton Reasor.

Please go ahead, sir.

Good afternoon and welcome to ConocoPhillips First-Quarter 2004 Earnings Conference Call.

I’m here today with Jim Mulva our President and CEO, and John Carrig, Executive Vice President Finance and CFO.

During today’s conference call, we will be referring to presentation material which will help us describe first- quarter activities and increase the amount of disclosure and financial transparency.

This should allow you to understand better our performance during this period.

These slides are available at our Web site, conocophillips.com, and it will be useful for you to have access to them.

Those of you on our e mail list should have received a link earlier this morning, and if you haven’t received the slides and would like to be put on our distribution list, please let us know.

On page 2 of the material you can see “Safe Harbor” language which states that in response to questions and in our prepared remarks, we will make forward looking statements.

Actual results may be materially different from the statements we make today.

And a list of items that could cause these potential changes to occur can be found in our filings with the SEC.

So with that said, I’d like to introduce the President and CEO of ConocoPhillips, Jim Mulva.

Clayton, thank you, and I welcome everyone calling in and participating in our first-quarter conference call.

I’m on page 3 of the slides.

And as you look on page 3, as you can see, we’re off to a good start, 2004, with net income of $1.6 billion; cash flow of $2.1 billion; and debt reduction of $700 million.

With respect to the upstream, we ran quite well, producing at the same level as last quarter in spite of the effect of some asset sales during the first quarter.

In terms of the downstream, the refining business performed very well, running at 95 percent of capacity, and we benefited from strong crack spreads worldwide.

During the first quarter of the year, about $120 billion of synergies were captured, and this is in addition and over that which we captured or accomplished it in the first quarter a year ago.

That brings our incremental strategies and – strategies up to an amount of our target of $1.75 billion.

I’m going to talk a little bit more about this later in the slides that I’ll go through with you.

At the end of 2003, our asset sales were at $3.4 billion.

And with asset sales of $449 million in the first quarter, we’re up to about $3.8 to $3.9 million of asset dispositions, and we expect by the end of this year to be up near about 4.7 billion.

The result of all of the operations and asset dispositions, our debt ratio is now down to 32 percent.

I’d like to move on to the fourth slide.

And this slide shows sequential comparison of the company’s earnings.

As we said, we’ve had a good, strong first quarter.

Income from operations increased to $1.6 billion from the $985 million the last quarter of last year.

And we were the beneficiary of higher commodity prices, margins, gains from asset sales, lower exploration cost.

These are all the reasons that led to the improvement in the financial results.

The impact of synergy capture was certainly realized, and it’s included the benefits of lower costs as well as higher realized prices and margins.

So we’ve had a – we have achieved a 25 percent year over year, included earnings per share improvement.

Now the discontinued operations contributed $13 million to net income, and the discontinued operations are from asset sales for sale.

So our total net income for the quarter is $1.616 billion.

Moving now to slide five.

For the first quarter, our cash flow was nearly $2.1 billion.

We had asset sales of $449 million.

The asset sales proceeds primarily came from the disposition of our Canadian Petrovera sale and then the sale of retail marketing assets.

Our capital expenditures investments were $1.5 billion.

Most of that was going towards the funding of our legacy assets.

We paid nearly $300 million in dividends, and the balance-sheet debt was reduced by $675 million.

I’m moving now to page 6.

We like this chart, pie chart, because it shows where the sources of funds, where did they come from, did, and then how did we apply and utilize the sources of funds and cash.

So the pie chart to the left shows that the total cash available was about $2.5 billion, and about 18 percent of that came from asset sales.

Now what did we do with the funds?

The first quarter our capital spending was $1.48 billion, just pretty much right on planned.

So in the first quarter, 38 percent of available funds were applied to pay down debt and to fund the dividend.

If you look over the past five quarters – which is the four quarters of 2003 and the first quarter of 2004 – we have applied 47 percent, or nearly half, of available funds towards debt reduction and dividends.

Now I’m moving on to page 7.

The result – and this is the debt-ratio improvement.

The result of our strong earnings, cash flow, asset dispositions, and our disciplined approach to spending, capital spending, we’ve made good progress in reducing debt and strengthening our balance sheet.

You can see on the left hand side of the chart our book equity has gone up by $3 billion over the last three quarters; balance-sheet debt is now down to $17.1 billion.

And the way we measure and report our debt to capital, the ratio has now fallen down to 32 percent.

You can see on – you know, it’s 2 percent in the quarter.

Now we adjust this ratio for the impact of purchase versus pooling accounting, but we do not – we do not adjust this ratio for purchase versus pooling, but we do adjust for return on capital employed measurements.

Moving on to page 8, exploration and production.

We said earlier our first-quarter production was about the same level as the last quarter, and this is in spite of asset sales.

The higher production on a daily BOE basis occurred, and we were the beneficiaries in Norway and Vietnam, and that was offset by declines in the UK, our Petrovera sale in Canada.

I’m going to show more about our production numbers here in a moment.

In terms of prices, worldwide average realized crude prices up 11 percent, from $3.11 a barrel.

That’s up from the $27.24 in the fourth quarter to $30.35 a barrel in the first quarter.

Now our realized natural gas prices went up 10 percent, at 41 cents an MCF.

It sent from $4.07 an MCF to $4.48 an MCF.

Our U.S. gas prices sequentially increased 66 cents, compared to an increase of about 25 cents internationally.

Our pretax exploration expenses fell from $211 million last quarter to $143 million the first quarter.

And with respect to our asset dispositions, our sales of upstream assets, we essentially are done, and we finished this program.

Moving now to page 9, a little more detail on our E&P production.

As I said, our production was flat this quarter, compared to last.

Now for our U.S. production, it was 659,000 BOE a day in the first quarter.

Last quarter, it was 664,000 BOE a day, and on a year over year basis, our U.S. production has fallen 5.9 percent, from 700,000 BOE a day.

In the UK, crude production fell by 5,000 barrels a day, and that’s from 72,000, 67,000, largely due to the planned shutdown of the McCullough field.

We also, with respect to natural gas production, we dropped from 954 million cubic feet a day to 879 million cubic feet a day.

Britannia production was very strong last quarter, and our production for Britannia returned to the more normal levels.

We had planned maintenance at the Viking field, as well as we had at the Murdock field.

In terms of production, we had strong production in Norway and Vietnam.

It was up in the neighborhood, those two areas, about 24,000 barrels a day.

We had the first full quarter of new production in Vietnam, about 15.1.

As I said, strong Ekofisk production performance, and we had the ramp up of our share of the Agrona production in Norway.

As I said about the sale of Petrovera in Canada, that asset sale occurred on March 1, but it had an impact of 8,000 barrels a day less production in the first quarter.

And it will reduce our production disposition of about 18,000 barrels a day for the rest of the year.

On the other hand, as you’re going to hear from us, even though we’ve made the disposition of this asset, we expect our production to remain just as we said for the entire year, 1.56 million barrels a day.

Compared to the first quarter of 2003, our production for the company in total is down less than 1 percent.

So we’ve gone from, a year ago, 1.626 to 1.611 million barrels a day.

So we’re pretty pleased with the results given the fact we’ve sold, if you look year over year, we’ve sold a little over 4 percent, or 68,000 BOE a day of existing production during the time period 2003 to 2004.

Moving now to slide 10, E&P net income – it was 1.257 billion in the first quarter.

That’s up 266 million over the prior quarter.

And most of this change is higher oil and gas prices.

The lower sales volumes and the absence of benefits from tax changes in Canada partially offset some of the earnings improvement.

And we had better earnings also as a result of more exploration expense, change from asset sales, and some other items which include foreign exchange and controllable expenses.

I’m going to move now to slide 11, which is the downstream refining and marketing.

Higher refining margins and running at 95 percent of capacity were the primary reasons for the improvement in our downstream in the refining performance.

The realized U.S. refining margin increased almost 31 percent, from $5.58 a barrel to $7.30 a barrel.

And this also, these numbers include lower coke product margins which are driven by higher crude oil prices.

Marketing margins were down in the U.S., U.S. wholesale margins were sequentially lower by 43 percent.

And U.S. natural gas prices increased causing utility costs to rise.

But if you look at the first-quarter performance in refining and marketing, all of our earnings came essentially from the refining side of the business.

And when you look at the refining side of the business worldwide, 87 percent of that came from domestic refining and 13 percent from international refining.

On a worldwide basis, we actually lost a little more than $20 million in marketing, but essentially the income from our downstream specialty business line offset essentially – more than offset or about offset – the worldwide loss in marketing such that our total income in the downstream business essentially came from the refining side of the business.

Now moving to slide 12, net income for refining and marketing.

The first quarter the income was $646 million, and this is more than double of the last quarter.

The increase is primarily due to significantly higher realized crack spreads in the U.S. and internationally.

As I said, this includes the effect of the lower coke product margins, which reduced our realized refining margins, we estimate, by about $35 million in the quarter.

Also helping us and a good performance were wider heavy-to-light and sweet-to-sour crude oil differentials.

Operating costs were lower due in part to the benefit of synergy captures.

Our turnaround costs were lower than expected, as we deferred the initiation of a significant turnaround at our Alliance refinery on the Gulf Coast from – we really started in very late first quarter, so most of that turnaround will be in the second quarter.

We really have no unusual items in refining and marketing.

The financial performance is all based on margin performance, cost and synergy capture.

I’m moving now to page 13, talking about midstream chemicals and emerging business.

In the midstream part of our business, income was $55 million in the first quarter.

This was up $43 million sequentially, and $31 million over year over year.

I’d like to point out though, included in our first-quarter numbers of the $55 million, there is included in that number a provision, $12 million loss recognition for assets held for sale.

Talking about the midstream performance, strong performance is due to better natural gas liquid prices and lower costs.

In chemicals, our net income was $39 million.

That’s up $28 million from the previous quarter.

And in chemicals, we had higher margins; primarily ethylenes but also from the aromatics and specialties help the improved performance.

The emerging business is where we have the new technologies and the new things that hopefully over time will be brought to commercialization.

We lost $22 million in the first quarter.

Compared to a year ago, the loss was $24 million – I should say $24 million last quarter, $34 million a year ago.

I’m moving from slide 13 to 14, which talks or addresses the corporate expense aspect of the company.

Our corporate cost, excluding net income from discontinued operations, was $180 billion in the first quarter; the net income loss was $177 million.

So what this does is represents a 20 percent improvement in corporate compared to the prior period, and nearly – less than about $50 million.

A 20 percent improvement, $50 million over the last quarter.

And these cost reductions were partially offset by lower currency translation benefits and minority interest adjustments, and those two things added together were about $10 million.

Now moving to slide 15, a little more information on corporate net income.

In this chart, you can see our first quarter performance relative to our corporate segment target, which is $180 million.

If you exclude the impact of the $14 million of merger related costs, shown in the second bar, corporate costs would have been $176 million.

Essentially that’s the net of the first and third bar.

This quarter results are a significant improvement over the fourth quarter of last year.

The improvements over the last quarter come primarily from $59 million and lower net interest expense, $8 million in lower corporate overhead, and $26 million in lower merger related expenses.

Now with respect to merger related expenses and costs.

We are essentially complete with these type expenses, and any future costs are expected to be essentially insignificant.

So we don’t expect to see or have any future reporting on merger related costs.

I’m moving now to slide 16 on synergy capture.

We have a full year of operating the financial data to compare to, and now we use the year 2003 as our base year to compare this year’s results, first quarter results, for determination of synergy capture.

As you remember, we indicated last quarter we captured $1.31 billion in pretax cost reduction and business improvement synergies, and then you have to add to that $150 million of capital expense or capex reductions in 2003.

Also remember that we do not adjust for wage or pension cost increases when we go through these synergy captures.

Last November, when we met with the financial community, we raised our 2004 synergy target to $1.75 billion by the end of this year.

During the first quarter, we generated an additional $119 million in recurring synergies as compared to the first quarter of 2003.

Now let me go through that a little bit further by going to slide 17.

To measure first quarter synergy capture, we began with the first quarter of 2003 income from continuing operations, then we identified changes that we had to adjust for due to variations in prices, margins, the Venezuelan situation last year, lower interest expense, and certain other items that are further outlined in Table 1 of the attachments.

You can see that the synergies contribute about $119 million after tax to the first- quarter earnings.

Remember again, this is in addition to the synergy capture in the first quarter of 2003.

Now I go to page 18, to some of the incremental synergies for the first quarter of 2004 and those captured in the first quarter of 2003 are $218 million.

And this represents the current, after tax synergy capture run rate.

So let’s go now to page 19.

This slide provides a summary of the information we used to conclude that we have met or exceeded our expectations of $1.75 billion pretax synergy objective.

Now how do we do this?

We begin by taking the upper left hand side of the slide, taking the $218 million of after tax run rate of the previous slide, then the synergies are converted to pretax, and we use a 50 percent tax rate, and we annualize the pretax number and add capital synergies, and we get ourselves up to near a $1.9 billion run rate at the end of the first quarter.

So from all of our analysis and our operating plans that we track in many different ways, we have achieved our $1.75 billion synergy objective earlier than we planned, which we had indicated would be at the end of this year.

So as a result, we don’t plan to continue to provide further analysis of synergy capture and quarterly reports in our calls that we take, but we certainly do include in all of our operating plans, the focus will certainly be it’s imperative on continuous improvement in all our operating plans to cost reduction and income enhancement initiatives.

So what I’d like to do now is to move to slide 20 and talk some about return on capital employed.

Regarding return on capital employed improvement, which is the real cornerstone of our operating capital plans and the most important initiative for the company over a multiyear period of time, we look both at the actual and the normalized returns on capital employed.

As you know, for the normalized return on capital employed calculations, we use mid cycle prices of $20 WTI, $18.50 Brent, $3.25 natural gas at Henry Hub, and $3.25 U.S.

Gulf Coast refining margins.

But we keep those the same, and the reason we keep those the same is we want to calculate and demonstrate and show improvement from one period to the next versus any adjustment or change to our normalized assumption.

So under these normalized assumptions at year-end 2003, we indicated that we had a gap of about 2 or 300 basis points in return on capital employed to be competitive with the largest companies in the industry using these normalized assumptions.

So we’ve made progress, and you can see that on the yellow bar on the right hand side of the tie.

We’ve made progress certainly over the last several quarters, but we still have more work to do.

Now I’d like to turn to the bars on the left, which is really the return on capital employed, which takes what we are actually doing – and this is not using normalized assumptions, this is using the actual prices and margins that we realize for our business lines.

And as you can see is, by looking at these green bars in periods of stronger commodity prices that we’ve experienced for the last number of quarters and certainly the first quarter, we have a very competitive return on capital employed.

Our return on capital employed, for the first quarter of this year, is 20.2 percent.

And let me just share with you E&P is doing about 27.3 percent; refining and marketing, 17.1 percent; our midstream and chemical joint ventures combined together is about 17.1 percent.

Of course, midstream is much stronger with returns and less capital employed than the chemical side.

And then everything else in corporate is a 17.8 percent.

So we’re doing 20.2 percent.

We believe we’re very competitive with the largest companies in the industry.

Of course, we don’t have the numbers for the first quarter for the largest companies in the industry.

So what I’d like to do now is go to the last slide 21, which is a summary or a wrap up.

We’re off to a strong start in 2004.

As I indicated, we expect that our production for this year to be 1.56 million barrels of oil equivalent a day.

So for seasonal and maintenance requirements, less production in the second and third quarters, stronger in the fourth quarter.

But the average continues to be the same.

What we’re actually doing is raising our forecast of production somewhat because the sale of the Canadian Petrovera asset, we had in our 1.56 million number for the year as an asset that we had in production for the full year.

So you can see that we’re offsetting that asset disposition with production increases elsewhere to maintain that 1.56 million BOE a day.

Now with respect to the downstream, we expect our capacity utilization range to remain in the mid 90 percent range, as we saw in the first quarter.

Our pretax turnaround expense will be about $240 million for the year.

The second quarter will be somewhat close to the first quarter, less in the third, and then more in the fourth.

So it’s going to add up to about $240 million.

Corporate expense, $720 million for the year, and our planned capital expenditures, which if you’ll exclude capitalized interest and minority interests, our cash capital expenditures are going to remain as we indicated to you last November, about $6 billion for the year.

So off to a good start.

That really concludes the prepared remarks.

And Clayton, I think we’re now open to take questions from those who are participating in our call.

Okay, great.

Thanks Jim.

Greg, do we have some questions lined up?

Yes, thank you.

And as a remainder for our audience, if you do have a question or a comment today, please press the star key followed by the digit “1” on your touch tone telephone.

As a reminder, if you are on speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment.

Once again, it is star “1.”

We’ll hear first from Steven Pfeifer with Merrill Lynch.

Hi, guys.

I had a few questions.

Just if you could, again, just discuss that share repurchases.

I know you’ve had a real desire to get debt to cap down to lower 30 percent range.

You’re now there.

Assuming that relatively robust conditions continue and you still have the kind of cash flow that you’ve enjoyed for the last couple of years in terms of precash, could you discuss, you know, the prospects for share repurchases now that debt seems to be getting to a much more manageable level.

Steve, thank you.

I think we’d like to watch continued performance, strong performance of the company that we expect with these market conditions and our operating plans as we go through the next several quarters of the year.

What we want to do is get our – continue to bring our debt down.

We’d like to see it moving toward $15 million on the balance sheet.

We know that with strong earnings performance, that our debt ratio will be at or less than 30 percent as we go through the year.

We want to make sure that we have a competitive dividend.

Given the higher share price, we recognize the importance of maintaining competitive yield.

We like the idea of the discipline of having annual increases in our dividends, good discipline, good payout, and so with respect to share repurchase, as we accomplish and bring our debt down towards $15 million debt ratio at and below 30 percent competitive dividend, we’d like to consider some modest to – (Inaudible.) – share repurchase.

I think that would be considered more in the latter part of this year – the third and fourth quarter – and we’d like, as a target, to start thinking about not having more shares outstanding than 700 million.

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

Great.

And just on refining, the run rate was 95 percent in the first quarter.

Could you just give us a sense for the run rate that you’d expect?

And I believe you’ve got most of your downtime behind you, but could you talk about that a bit?

Well, in terms of run rate, I think we indicated, I did earlier, it’s somewhere in the neighborhood of the mid 90 percent.

In the second quarter, we have the same amount of money being spent on turnaround.

So we have a pretty good turnaround program taking place in the second quarter, and part of that also is not just turnaround, but implementation of things we need to do for meeting all the clean fuels requirements.

And then there will be less turnarounds in the third quarter.

And then it’s back to a pretty good program in the fourth quarter.

So I’d say for the second quarter, about the mid 90s.

Great.

Thank you.

And we’ll hear now from Paul Ting with UBS.

Good afternoon.

Several quick questions, please.

First of all, I remember in your November strategic presentation, you did indicate that to the extent that you have free cash flow, one of your higher priorities is to try to grow organically.

Is there any expectation that your capex may exceed the $6 billion?

I know you said you’re comfortable with that, but – especially with respect to upstream, is there any chance you may exceed the $4 or $4.5 billion range of upstream capex?

Well first, with respect to organic growth, you’re correct.

That’s what we have in mind, is to grow our reserves and production, do it, you know, at acceptable competitive finding and development costs.

We look at all the opportunities, but we’re also very careful that we want to make sure that our investments make good sense, not just at these prices, but at prices in the low 20s and the high teens.

So we feel that we’re finding all the legacy projects and the things that we really need to and want to.

I don’t think you’re going to see too much creep though or increasing our capital spending in the upstream side.

We do look at opportunities for – new opportunities for investment, the Middle East, potentially Russia, those are areas that we’d like to participate in more and form organic growth.

That could lead to some increases in spending.

But at this point in time, I think for your premise and the rest of the financial community, we’re sticking pretty close to just the $6 billion capital spending program that we’ve outlined for the company.

Okay.

And just a bookkeeping kind of a question.

Alliance refinery downtime in the second quarter, can you give us some flavor as far as to how much that may cost you in term of opportunity cost and total cost?

Oh, I don’t think we’ve – it’s a little early to know.

You know, I might be able to help you with that later, but I don’t think we’ve got that yet.

Okay.

But is it going to last through the bulk of a month or two?

Anything –

Oh, no, no, no, no, no.

No, this is just a standard turnaround.

It’s just that the turnaround, instead of starting in the middle of – or the first quarter, just was moved to the end of the first quarter.

So it’s nothing unusual.

It’s not, you know –

Nothing significant.

Right.

Okay, great.

Thanks a lot, guys.

And we’ll hear now from Fred Leuffer with Bear Stearns.

Hi, guys.

How you doing?

Good.

Just a couple of things.

One, can you give us some production guidance for the second quarter?

Maybe talk about what the maintenance schedule is at Ekofisk.

And Jim, you had mentioned that you feel confident you can offset the loss of production from the Canadian disposition.

Where is production running higher than you thought, or likely to run higher, you know, as we go through the year?

Well, first, I’ll take the last question, where we think production could be higher than when we first thought.

We’re having good performance in Vietnam, we are seeing pretty strong performance in certain of our fields in the North Sea, we think we’re going to see strong performance in total of our projects in Venezuela.

So those are some of the things that immediately come to mind.

I think the lower 48 has gone somewhat better than we expected when we put our plans together for this year.

So it’s a combination of not just one or two things, but just about across the board, we’re meeting our plans.

It’s a little bit better than we thought, and that’s offsetting the sale of 18,000 barrels a day of production in Canada.

Now in terms of the guidance on production for the second quarter, gee, I –

It’s somewhat less – it’s going to be somewhat less than you saw in the first quarter, but it’s not a real dramatic number and change difference from the first to the second quarter.

But it’s certainly going to be less.

And maintenance at Ekofisk?

Maintenance at Ekofisk, I’d have to come back to you on that.

I think that’s the third quarter.

Usually when we do the maintenance at Ekofisk, it’s the July/August time period.

That’s usually the best weather window.

And I don’t know.

John Carrig is with me.

There was another question you might want to add.

I think there’s some planned maintenance in the UK in the second quarter, and I believe there might be a little planned maintenance in the commencement of some activities in Alaska, either in the second quarter or the third quarter, maybe straddling both.

Around Alpine.

Around Alpine, yeah.

And that’s what is the reason for the reduction in the production profile in the second quarter.

All right.

Thanks.

And moving on to Arjun Murti with Goldman Sachs.

Thank you.

Jim, you noted the, you know, some really positive production variance for 2004 when you adjust out the Canadian asset sale.

I just want to get any update on maybe the 2005 and 2006 guidance relative to the November analysts’ meeting.

I know the forecast is for kind of a decent uptake in those years when some of the big, new projects come on.

Are you still looking for that?

It would seem that the good – (Inaudible.) – in 2004, you’ve got to be feeling pretty good about the 2005, 2006 numbers.

Arjun, thanks.

We stay by our numbers for 2005 and 2006; there’s no change.

It’s up about 5 percent in 2005 and in 2006.

But one thing I would say, if 2004 is 1 percent better than we expected, I’m just going to say somewhat better than 1.56, then if not, it will be 5 percent on top of – something better than 1.56.

So you know, it might be something less.

But that’s because we’ve got stronger performance in 2004.

But we stay by our numbers.

And just so we’re clear, I think, in combination with an earlier question, that within the, I guess, $6 billion cash overall budget and whatever of that amount that’s allocated to E&P, it’s not predicated on a rise in the budget, you think you can do it at your current spending level to gross in 2005 and 2006?

Well, I can’t recall the exact numbers, but I think we’re close to, you know, 6 to 6 1/2 billion for 2005 and 2006; somewhere in that area.

That’s great.

Thank you.

And we’ll hear now from Doug Terreson with Morgan Stanley.

Hi, Jim and team, and congratulations on a solid result.

Thank you.

In E&P in Venezuela, there’s been some commentary regarding exploration success at the Delphin prospect, and I think that drilling and development activities are moving forward at Tiberon and Corocoro as well.

And on this topic, I just wondered if we can get an update on your business related to these three items and also on Petrozuata and Hamaca, if there’s anything new to report there.

Well first of all, with respect to our exploration program, I think that was –

In Venezuela and Deltona and around Corocoro, those new developments.

Well, in terms of Hamaca, you know, we continue to develop our project and the upgrader, still on schedule to start the upgrader in the fourth quarter of this year.

So we’re expecting more production.

So that still continues to be on schedule.

In terms of – I thought you asked about the general exploration program.

Yeah, in general, in effect, yeah, in Venezuela.

Oh, in Venezuela?

Right.

Yeah, we’ve got an interesting well or two that’s in front of us.

I think it’s a Tiberian well that we’re pretty interested in, and that’s in front of us to do.

And hopefully that’s promising.

Corocoro, we’re taking a good, hard look at from the standpoint of we certainly intend to do the project, but we want to make sure we get our capital cost right and all the premises so as we make sure that we derive the value from Corocoro that we expect.

So we’re making sure that when we spend our money, we get the results that we like.

Venezuela is a real important country for us.

Obviously, there’s always the question with respect to the political risk.

But all of our operations at Petrozuata and Hamaca, we’re quite pleased with the performance on production, we’re pleased with the financial performance, and all the projects that you know of, we’ve discussed in the past, continue to be in our plans and we’re pretty promising about that.

I don’t know, is there something else that you had in mind, Doug?

No.

That kind of covers it.

I mean, I wanted to talk a little bit about exploration, which I think you covered it, and Corocoro is on track.

And so that really covers it, Jim.

Thanks a lot.

Okay.

Thanks, Doug.

You’re welcome.

And moving on to Mark Gilman with Benchmark Company.

Jim, John, Clayton, good afternoon.

A couple of things.

Jim, I wondered if you could perhaps update us on the Freeport LNG project, where things stand, and maybe provide just a bit of clarity with respect to the financial structure and terms.

Well, first, it’s my understanding that on the Freeport LNG project, we have contracted for a billion cubic feet a day of capacity.

That fits very nicely with respect to our Qatar LNG project.

The Freeport project expects startup – or for getting the permits here within the next month or two, to construct with a finish date somewhere in the late 2007 or early 2008.

Everything seems to be going right on schedule with respect to Freeport.

In terms of how it’s structured, John Carrig is with me, and I think, John, you might want to go into that.

But in terms of the basic schedule approach and how it fits into our plans, there’s no change in that.

It’s right on schedule.

So John, you want to cover the structure of it?

Sure.

We’ve signed an agreement with Freeport LNG that reflects our decision to fund the regas capacity for Viaday, and that’s effectively it.

I mean, we have a long term arrangement to fund the Viaday and then we have certain rights with respect to the facilities, including operations and construction.

But we have a contract with a limited partnership of some silent partners.

Will you own an equity interest in this, John?

We will not – we won’t – that’s still to be determined.

We have not made that decision.

But you’re financing the entire project.

We’re financing our portion of the entire project for Viaday, and that’s really – that’s really all that I’d like to say about that now.

Okay.

Guys, could you give me an update of where Bayu stands in terms of production?

It looks like contribution in the first quarter was pretty negligible.

Well, it’s negligible not so much because of the production.

It was negligible because when it started up, we produced and first lifting took place in the latter part of the quarter.

So although for sales it was rather negligible, the production and the wells are doing just what we expected, Mark.

We expect run rate to be up around 50 a day by the end of the year for liquids.

What was it as of the end of the quarter and now, guys?

I don’t know.

Twenty three.

Twenty three.

Twenty three gross?

23,000 – (Inaudible.) – a day, yeah.

I don’t have the March data yet.

Okay.

Just one more.

There was a huge working capital negative in the first quarter in the cash flow, John.

Is that timing and temporary, or is that something that’s likely to be in place over the course of the full year?

You may have noticed the commercial paper outstanding at the end of the quarter was zero.

We took a little cash, around $170 to $200 million in cash, and then we had significantly lower sales of receivables so that, you know, we would not expect that to be, you know, a continuing phenomenon.

John, I’m sorry, I don’t quite understand.

When the year is said and done, would you expect working capital to be up $766 million, or to be basically zeroed out?

Well, if it was a static – if it was a static world from now to the end of the year, we could see further sales of receivables that would offset the reduction of working capital that we experienced in the first quarter.

The increase in working capital.

The increase in working capital.

That’s right.

Okay.

Thanks.

And our next question comes from Jennifer Roland with J.P. Morgan.

Hi.

I had a quick question on the asset sales.

I think you mentioned you had about a billion more in asset sales to go.

I was just wondering if you could break out where that’s coming from.

I know you had mentioned that you’re pretty much done with upstream asset sales.

And also if you could update us on your view on your European and Asian downstream business and whether that’s still core.

Okay.

First on asset sales, we’re essentially – we’re done on the upstream part of the business, exploration and production.

So what remains is several hundred million dollars of midstream assets that we would sell.

And second, it would be the completion of the sale of the retail marketing assets, essentially well under way – or well near completion.

Finish that up probably in the second and the third quarters.

So the bulk of it is really midstream and retail marketing.

In terms of downstream presence at our business in Europe for the downstream, that is a core legacy asset for the company.

And Asia as well?

Asia?

Yeah.

Asia, of course, we have a much smaller presence.

In terms of Asia, I think we look at the marketplace.

And first, it’s probably a stronger marketplace than we saw six or twelve months ago.

We also have to give consideration to some of our new exploration and production projects to see how best to maximize the value of that production in terms of pricing it, getting the best price.

So in terms of Asia, the question of what we do with our downstream presence in Asia is something for us to strategically determine over the next several quarters.

Okay.

Great.

And one other quick one.

On the Alliance refinery being pushed off, the maintenance work, what’s the rationale behind that decision to push off that turnaround?

Why was that done?

Yeah.

Oh, I think it was probably done – I don’t know for sure – but it could be for market reasons, and it also could be for making sure that the preparations were in place to put all the contractors and all to do the turnaround in a real efficient way.

Okay, great.

Thank you.

And we’ll hear now from Doug Legget, with Smith Barney.

Hi.

Good afternoon, guys.

I wonder if I could ask you about DD&A in the quarter.

Your international DD&A fell quite sharply from Q1 last year and the volumes are obviously down.

I just wonder if you can give us some color as to what’s changing there.

Is it just portfolio mix?

I believe it’s the portfolio mix.

We expect the DD&A for the quarter – for the year to be in the $3.6 billion range, which was consistent with what we outlined last fall at the analysts’ meeting.

But I believe you’re right.

The DD&A, I believe, was about the 950 overall for the quarter.

But we expect that to come back in line.

Okay, great.

Maybe just one quick follow up or point of clarification on capex, if I may.

You’ve got quite a number of longer term projects, like the Qatar and so on, to report 2008.

I would imagine that the capex for those is going to start in the next couple of years.

Is that included in your $6 billion run rate, or is there some outside risk there?

Yeah.

Some of the very large projects, like an LNG project in Qatar, it’s essentially in the next several years there’s no production, so it’s not in our production numbers.

But the real ramp up in capital spending is not in the next year or two.

It’s in the later time period.

So the projects are going forward, but most of it’s study work and engineering and all, in preparation for the expenditures, you know, several years from now.

So basically is the capex included in the $6 billion number, or is it –

Yeah, it’s all included in the numbers.

But what we’re actually seeing is, as you look out over longer periods of time, I try to give you specific numbers because I said earlier for 2005 and 2006, it would probably be in the neighborhood of 6 to 6.5 billion.

But some of the large projects that we’re doing right now, like Bayu Undan, LNG, Hamaca, some of those large projects are finished and completed, and so we start coming in with the new projects like LNG from Qatar and others.

So we tend to, to some extent, level the capital spending as we grow the legacy projects and to add to reserves and production.

Okay, great.

Thanks a lot.

And moving on to Paul Cheng with Lehman Brothers.

Hi, good afternoon, gentlemen.

Several quick questions.

Jim, you mentioned about the expansion program in Venezuela.

Can you give us some – maybe elaborate a little bit more boldly on your global program over the next two or three years and where the focus area is and what will be the key word that we should be watching now.

Also that in the deep-water Gulf of Mexico, it seems like your activity has slowed down quite a lot.

Is that an area that you’re going to increase your – (Inaudible) – activity also?

Okay.

If you look at our, essentially frontier and new exploration program, in other words what I’m saying is, you take out appraisal drilling, you take out treadmill exploration and global trend, and the conventional spending and exploration in Western Canada, if you look at a program that’s in the neighborhood of about $600 or $650 million.

It’s our core program.

We look at those who are most successful in exploration, have a planning cost of near a dollar or $1.25 a barrel.

So we have production in the neighborhood of 600 million barrels a year.

So we allocate about $600 billion for the pure exploration of the company.

What we have in mind is drilling in the neighborhood of 50 wells in that program.

And some of the areas that are really important to us is to follow-up on the discovery in Malaysia, we have some interesting things that potentially we can do in Vietnam, the Caspian and Kazakhstan, a find around Kashagan, and others finds, that’s also going to be very interesting to us.

As I said, we have some interesting prospects in Indonesia, potentially some additions in China, and Nigeria is going to be an interesting country for us.

We’ve got some big wells coming up in Nigeria.

Always, we don’t have as much opportunity as we’d like, not only in our company, but our industry, but we have some wells in Norway that certainly can be interesting to us, and as well as in the Gulf of Mexico.

Most of our very large, key exploration wells are scheduled for the later quarters of this year.

And so we’ll just have to see how that goes.

But that’s basically our approach.

We have some interesting, encouraging results on some of our appraisal wells.

So hopefully I’ve come across and given you a flavor of our approach to exploration and where we see ourselves going.

In terms of Gulf of Mexico, I think you asked a question on that.

I don’t have specific numbers, but I think you’ll see a Gulf of Mexico program that probably is not increasing, but maybe of a scope and of a magnitude close to what we’ve done in the past.

And Jim, all of the 50 wells you’ve mentioned, how many of them would be considered as the – (inaudible) – wildcat in the frontier areas?

There are about 30, a little more than 30 are pure wildcat, and maybe 15 to 20 are appraisal.

Okay.

Excellent.

Second, if we can go back to Venezuela.

There’s a certain, I think, news out there talking about the Venezuelan government want to encourage a heavy oil upgrader that increase their or expand their production, but with a base on their 2001 hydrocarbon mold.

And so from your standpoint for Hamaca and Petrozuata, is that an (Inaudible.) – on the hydrocarbon – 2001 hydrocarbon mold with the expansion on those projects, were they attractive to you economically?

Well, it’s hard for me to really speculate or to comment on that.

We’re always interested in the opportunities to expand our heavy-oil projects in Petrozuata and Hamaca, and I think it’s premature for us to be commenting just on what the terms and conditions would be on that, because I think that’s something that we have to talk with our partners as well as the government.

I mean, all that I really want to pass along to you, we certainly have an interest, but in so doing, we’ve got to make sure that we do it in a way that creates value and we’re aligned with Venezuela and our partners in creating value for our shareholders.

So it’s premature to really comment on that, but we have an interest.

Okay.

If I could, the final question.

Coalbed methane, several years ago that, that’s an area, I think, Phillips had looked at more closely in, I guess, one of the coker area.

Given the company is much bigger and also the industry seems to have some disappointment in those areas, should we still consider that as an important focus area for the company at this point?

I’m sorry, Paul, you said what area was –

Coalbed methane.

Coalbed methane.

Oh, coalbed methane.

Yeah, I think coalbed methane for us is going to be most important in the San Juan Basin, and we don’t have quite the – necessarily the interest or the presence up in the Rockies.

And it’s not that we – we just have to allocate our priorities and where we think we have the best opportunities.

So we’re probably not – we’re not going to be aggressive in coalbed methane up in the Rockies, but certainly like to do all that we can at San Juan Basin and I think also up in panhandles of Texas.

Jim, what is your current production from coalbed methane?

Well, we –

Yeah, I can come back to you on that.

I think it’s less than a hundred a day.

Less than a hundred.

And so we should assume that is – (inaudible.)

Yeah.

Let me do some work on that, Paul, and come back to you.

Okay.

Thanks.

And we’ll hear now from George Gaspar with Robert W. Baird.

Good afternoon.

Great quarter, Jim.

Merger looks better than ever.

George, thank you.

First question, on Alaska production, can you update on your capex schedule?

How many wells are you looking at drilling this year, exploratory versus development?

And do you see anything particular that you might want to try to accomplish that hasn’t been on the schedule?

Well, we’re spending about $650 million up in Alaska for 2004, and some of that is for Alpine expansion and some other things that we’re doing there.

It can be for satellite fields, it’s completion of our double hull tanker program, and we also spend – I don’t know the exact number – we spend money on exploration up in Alaska.

It’s kind of early to say just how the exploration program has gone.

You’ll hear more about that.

At my side, I just don’t have it available.

In terms of Alaska, our production, you know, several years ago, with the acquisition of Arco Alaska, we said we would produce 350 to 400,000 barrels a day for five or six years out in the future.

We’re already into our third or fourth year, and we still hold to those 350 to 400,000 barrels a day.

Yes, we have the natural decline at Kuparuk and Prudhoe, but we do spend money to drill new wells so as to arrest that natural decline to single digit numbers, and then we offset that decline by the satellite fields, the strength of the very strong Alpine field and the expansion of Alpine.

And then also we feel very good about West Sak, where we’re able, with innovative drilling and technology, we think that we can add future reserves in production.

So these are all the reasons that are important and are an integral part of maintaining that production, 300 to 400,000.

Now we can go up a little one year and down a little, but that’s the timing by which we bring on these satellites and this new production.

The other thing I think we’re pretty pleased about in Alaska is it’s the high cost environment.

But we know that our long term, economic long term value creation is to have a low cost structure.

And so even though it’s a mature area and it’s a high cost structure, we’re doing really well, I think, with our partners to really work hard on the cost side of Alaska.

Continuing to do real well with this.

I don’t have the exact numbers in front of us, but you know, we make more than $300 million a quarter in these prices up there and a relatively modest tax rate.

So it’s been a really good business unit for the company, exploration and production total company.

Okay.

Thank you for that.

I’ve got a question now.

Looking at your chemical operations income for the quarter, it was impressive.

I can’t recall – correct me if I’m wrong – if there ever has been a quarter since the chemical operations have been combined.

How do you view going forward here on a profitability basis?

Are there some particular circumstances one way or the other on maintenance or whatever, that might cause the number to slide from 39?

Do you have any thoughts at all on this?

Well, we certainly want it to be – 39 is, by comparison, the prior quarters, prior years is good, strong performance, but it’s nowhere near what we know we can do in the long term and have through the cycles.

We’ve done a real nice job, a good job in getting the costs out of the business.

We’re taking a lot of synergies out through the joint venture that we’ve done with Chevron Texaco.

Right.

Our utilization rates of our capacity are starting to move up, and that’s tied to the strength of supply and demand and strength of the economy.

So if the economy gets somewhat stronger and utilization rates go up, we can seek dramatically much better performance from chemicals.

The other is, is we’re bringing onstream and getting the benefit of our project in Qatar.

It’s really onstream, the volumes are up, and so we’ve got access to low cost feedstock, and then we can source that product and export to Asia and into Europe.

So we’re expecting to see stronger performance out of our investments in Qatar as well as our aromatics investments in Saudi Arabia.

That’s doing real well for us.

So, you know, things are – look a lot more positive than they have over the last two or three years.

So we’re expecting hopefully stronger performance as we go through, but it’s dependent upon a strengthening of the economy and higher utilization rates.

Okay.

And one question on the LNG site from an exploratory point of view.

The kind of drilling that may become necessary to produce the goodies to bring in here – and I realize this is a long term situation, obviously, before the facilities are ready.

But how do you approach that in terms of building production volume?

Well, when we build regasification facilities or we have commitments to use regasification facilities or build them here in the Gulf Coast onshore or offshore, we don’t do that unless we’re tied into an integrated project back to the reserves.

In the case of Qatar, we will have an allocated block working with Qatar Petroleum by which we have an allocated block in the North field to the reserves, we book the reserves, we get our share of production, and then the gas is piped ashore, we liquefy it, put it on the LNG tankers, crane it for the States.

So what we have is an integrated project.

As I said, we wouldn’t build or contract regasification unless we have access to known reserves that we know that can be – are there and technically produce at a very efficient cost, and the total integrated project has to be able to deliver gas into the U.S. market, Henry Hub, at a very attractive price, and have a realized return for us, an acceptable rate of return, with prices, you know, in the 350, 325 range.

Okay.

And then ongoing with that, in terms of your exploratory development in Canada, what do you put down as a timetable to get this job done in the North field?

In the North field, well, the plans are to have first gas in here somewhere in the neighborhood of late 2008, 2008, early 2009.

Okay.

So start drilling a couple of years ahead?

Oh, we’re working very hard on this.

And it’s not just at Qatar, we’re also looking very seriously at LNG projects that potentially come out of Nigeria, perhaps a project Venezuela, and I think longer term opportunities for gas LNG coming out of Russia.

Okay.

But Qatar is the focus point for LNG for us right now.

Okay.

Good.

And one quick question on corporate.

What’s the trend from the 190 of the first quarter –

Well, we said 190.

We expect 720 million for the year –

Okay.

– so going forward, you take 720 and divide it by four.

Thank you.

And we’ll hear now from Paul Sankey with Deutsche Bank.

Hi.

Good afternoon, gentlemen.

I just had a question about synergies and returns going forward.

You’ve declared victory, let’s say, on your synergy target.

How do you propose we track you now going forward?

Are you going to stick with the underlying road sheet (ph) targets that you talked about and could you just repeat those if indeed they are the way we should track you.

Well, I think what you should track is all the metrics of the total company as well as each of the business lines.

So what we’re looking at overall is continuous improvement on our return on capital employed utilizing those normalized assumptions.

But, I think you also should look very closely at what are we doing in terms of our production volumes, efficiency utilization of our capacity, as well as a cost structure per unit.

There’s a lot of emphasis on continuous improvements on the cost structure of what it takes to produce, to transport, per barrel through our refining, the cost structure of how we market through our marketing organizations around the world, what is the cost of the corporate side of the company.

That was just a previous question, 720 million divided by four.

Overall, our strategic objectives are on the normalized assumptions that I went through earlier in the call, is to get ourselves up from the low 9 percent up to 11 percent to 14 percent.

And those are some of the targets we’re looking for.

Okay.

I was just going to say, so we can carry on looking at that underlying road sheet (ph) target as still being out there, as something you’re going to work towards and going to keep presenting to us.

That’s right.

We think that’s a really good metric.

We’re going to stay with it.

And we also know that the metric is, we have to compare ourselves against peer groups, and we look at the peer groups being the companies larger than ourselves in terms of relative improvement on return on capital employed with the normalized assumptions, as well as the peer group, shareholder return, which is made up of share price appreciation and dividends, not only for the current year, but a rolling three year period of time.

Thank you.

And a very specific question on share issuance.

Could you talk about, for instance, how many shares expected to be issued this year, and that the share count’s rising.

Well – (inaudible) – and part of that is because of options that have been given in the past essentially with the higher share price pretty much on the money.

But on the other hand, we’ve done two things, you might say one structurally, and one as a result of the higher share price.

First, there will be less options given out in the future as a result of we’re using more restrictive stock versus options as part of the compensation program for all the levels of the company.

And the second thing is, with higher share price, there will be less options granted in future years.

So I think you’re going to see that that growth is going to moderate some, but then I also made the comment that one of the things, assuming the environment continues in the strong like it is and we get our debt down further in competitive dividend, is the opportunity for share repurchase.

So as to not see a dilution as a result of exercise of options.

Outstanding shares get much above or above 700 million shares outstanding.

Yeah, I guess that strong environment referred to the first question actually, which is to say I was wondering really how relevant it is, given that we seem to have completely left the so called mid cycle behind.

But that’s just a general observation, I guess.

Anyway, I’ll leave it there.

Thanks.

Thanks very much, guys.

Sure.

Okay.

And our next question comes from Mark Flannery with Credit Suisse First Boston.

Hi.

Yes, I’ve got two unrelated questions.

First is on refining and marketing.

Many participants in the market are being – it’s being very bullish outlooks on U.S. refining specifically.

At what point do you look at that $3.25 Gulf Coast crack and decide that it’s drifting away from likely future outcomes.

That’s my first question.

And I’ll come back to the second one on Libya.

Well first of all, in terms of – you say others have a pretty robust outlook in terms of crack spreads for the downstream part of the business.

Well, we have always felt, compared to years ago and the average sale over the last five years or so ago that the downstream part of the business was a business that we thought would be somewhat stronger, you know, has been historically, and that’s one of the reasons why we increased our exposure through the acquisition of Tosco.

We also felt that it fit the size company that we see today as the value of integration.

In terms of the use of the $3.25 per barrel Gulf Coast crack spread, we use that so that we can measure, both internally and externally, continuous improvement in the company in synergy capture in our operating plans.

It may be that, that’s too low of an average historic crack spread.

It very well may be.

From our point of view, yes, we remain – we think over the next several quarters, the next year or two, it looks pretty bullish with respect to the downstream.

But on the other hand, we don’t make investments, add investments.

Our clean fuels implementation programs, we’ve probably seen significantly higher crack spreads.

We just know that as the market provides that, we just do that much better.

But I would agree, I think the environment is stronger.

But on the other hand, that’s no reason for us to be changing our assumptions.

We would rather have more conservative assumptions and if they turn out to be the more conservative assumptions, we can live with that and do very well with respect to our capital spending and creation of shareholder value.

Great.

Thanks.

And on Libya, as I understand it, the negotiations going on at the moment are restricted purely to the Oasis return.

My question is: If we get to a position which people expect where most if not all sanctions are lifted in the relatively near future, assuming a reasonable fiscal second term, is Libya somewhere you might like to expand your interests or at least look to go back in addition to returning to the Oasis concession?

Well, you’re correct.

We are concentrating a need to, per terms of State Department U.S.

Government, directing all of our attention towards negotiations, discussions of re-entry into our old concessions in the Oasis group, and we believe that that’s progressing quite well and we’re putting a lot of attention to it to make sure that we do it well because it’s a pretty significant opportunity for our company.

To the extent that the industry, our company and the industry, are able to look at future opportunities, we certainly will do so, because we think it would be a good province and a good area of the world to do that.

So we would have an interest.

Great.

Thank you, Jim.

Greg, I think we probably need to shut it down here.

We’ve gone over a little bit.

And I’d like to take the opportunity to thank everybody on the call for their interest in the company, and as a reminder, this conference call has been recorded, along with all the slides, and will remain on our Web site for the next several weeks, and you can access this information at conocophillips.com.

Thank you very much.

And that does conclude today’s conference.

Thank you and have a great day.