康菲 (COP) 2004 Q3 法說會逐字稿

Good day, ladies and gentleman, and welcome to ConocoPhillips Third Quarter Earnings Conference Call.

At this time, all participants are in a listen-only mode.

We will conduct a question-and-answer session and instructions will follow at that time.

If any one should require assistance during the conference, please press "*" then "0" on your touchtone telephone.

As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host Mr. Clayton Reasor, General Manager of Investor Relations.

Mr. Reasor, you may begin.

Good morning and welcome to the ConocoPhillips third quarter 2004 earnings conference call.

I am here today with Jim Mulva, our Chairman 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 third quarter financial performance and hopefully give you a better understanding of the factors that impacted our results.

This material is available on our internet site conocophilps.com and will be useful for you to have during Jim's prepared remarks.

On page 2, you can read our safe harbor statement. [We provide] that in response to questions and in our prepared remarks we will make forward-looking statements.

Actual results may materially be different from those we expect today.

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

With that said, I'd like to turn the call over to the Chairman and Chief Executive Officer of ConocoPhillips, Jim Mulva.

Clayton, thank you, and good morning and welcome all those participating in the Company's third quarter conference call.

I am going to move right to the third slide of our presentation and looking at the third slide titled "Highlights", overall we had a good third quarter, especially when you consider the amount of planned downtime and higher exploration costs that we had at E&P.

Also, we had scheduled an accelerated turnaround's contingency and impairment charges in refining and marking, and then we also had one-time retirement charges in the corporate side of the Company.

Our diluted income continuing operation per share was $2.87 cents a share, and that's up over 50% when you compare that with the third quarter a year ago and it's about flat with what we did on a sequential basis.

During the quarter we generated over $4.4 billion cash from operations and we were able to build our cash balance to about $3.3 billion.

We did this in anticipation of our previously announced capital investment in the LUKOIL strategic alliance.

Our debt-to-cap ratio has been reduced to 28%.

In E&P, we had significant planned downtime, which -- it was scheduled downtime, which reduced our production by about 5% compared to last quarter and we ended up producing about 1.48 million BOE a day.

Worldwide, our refineries have ran at 94% of capacity, somewhat higher than last quarter.

Realized crude prices were $38.77 cents a barrel in the third quarter and that compares to $34.11 cents a barrel last quarter.

So it's about 14% increase.

A final point I would make on this slide, our adjusted ROCE was 23% per quarter, which is comparative with the largest companies in the industry.

Now, I am moving to slide 4, now, which is contribution and -- titled "Contribution and Capital Employed".

You can see the 2 pie-charts in this page illustrate our major business segments performed relative to the capital employed.

You can see E&P generated 63% of our income from continuing operations and represents 61% of capital employed.

Refining and marketing generated 31% of our third quarter income and they represent 30% of capital employed.

Midstream and chemicals combined generated about 6% of income and represent 4% of capital employed.

Moving on now to slide number 5, which is the "Total Company Net Income."

The slide shows a sequential quarterly comparison of total company net income.

We had higher liquids prices offset more of the US refining margins and slightly lower oil and gas sales volumes.

The inventory gains offset the absence of benefits from a change in Canadian tax that we realized in the second quarter.

The discontinued operations generated a loss of $5 million during the quarter reducing net income to a little over $2 billion.

The remaining variances include changes in foreign currency result and equity earnings.

I am moving on now to the 6th slide which is titled "Total Company Cash Flow."

Our cash flow in the third quarter -- cash from operations was $4.4 billion.

You can see the capital expenditures and investments were at $1.6 billion during the quarter, and that's about the same level as last quarter and essentially most of that capital is going to fund our legacy asset developments.

We paid out $296 million in dividends, reduced debt by $133 million.

As I said earlier, our cash balance was increased by $2.5 billion during the quarter up to $3.3 billion, and again, this is in anticipation of funding the capital investment in the LUKOIL strategic alliance.

Moving on now to slide number 7, pie-chart shows total company cash flow.

What you could see here is the cash generation and then the utilization of our cash during the first three quarters of 2004.

On the left you could see that the total cash generated during these quarters are $10.2 billion, 86% of it came from operating activities, as you can see a reminder of our asset disposition program.

One the right, the pie-chart shows the capital expenditures of $4.6 billion, which is right on target through the quarters for our 2004 capital spending.

The capital expenditures represent 46% of the funds we generated, so then the other 54% is directed towards debt reduction, dividends, and building the cash balance.

By moving on now to slide 8, which is the "Debt Ratio Improvement", you can see that it's improved every quarter since the beginning of 2003 -- strength of our earnings cash flows and how we use our disciplined approach in capital spending allowed us to make good progress reducing debt, improving our financial flexbili8y.

If you look on the left, the bar-chart shows that equity grew to $41 billion at the end of quarter, year-to-date that's up $6 billion.

The balance sheet debt at the end of the third quarter is $15.5 billion with a debt-to-cap ratio of 28%.

So far this year, that's been reduced $2.3 billion.

Again, remember that we've grown our cash balance during this quarter.

Now I am moving on to slide 9 titled "Exploration and Production" where we compare the third quarter of ’04 with the second quarter of ’04.

The realized oil prices were up 14% or $4.66 a barrel compared with second quarter.

Our average third quarter realized price was $38.77 a barrel.

Our realized gas prices in the U.S. were down $0.16 an Mcf, while they were higher $0.17 an Mcf internationally.

Our worldwide production was down 5% or 79,000 BOE a day from $1.563 million BOE a day in the second quarter.

So, we've had 1.484 million BOE a day in the third quarter.

This reduction is largely due to planned scheduled downtime in Alaska, offshore UK, and the North Sea.

I don't have the file here that show that a little more clearly.

These shutdowns more than offset increased production from Bayu-Undan.

In the second quarter, we produced more than we sold resulting in an effective under-lifted position.

These under-lifted volumes were sold in the third quarter, so as result compared to the last quarter, total sales volumes fell only 1% or about 15,000 BOE a day.

At the end of the third quarter, we essentially well balance with respect to our production underlift or overlift.

Now, turning to Hurricane Ivan and other related disruptions, really don’t have that much of a material impact on our third quarter results, we estimates about 2,000 BOE a day.

Our income from continuing operation for E&P was up 5% sequentially, up 47% compared to the third quarter a year ago.

I’m moving now to slide 10, our E&P production.

This slide illustrates the sequential variance in our production.

As I mentioned earlier, third quarter was down 5% compared to last quarter.

This is largely due to the seasonality and planned maintenance which lowered production in Alaska, Norway and UK, partially offset by higher production in Bayu-Undan.

To give you some more specific numbers, Alaska was down second quarter of ‘04 to third quarter of '04;

Alaska was down 56,000 BOE a day, primarily Alpine and [Crudale] downtimes and scheduled maintenance.

In the UK Britannia, reduction worked out to sequentially 19,000 BOE a day.

And Ekofisk, Norway's scheduled downtime resulted in 29,000 BOE a day reduction in the third quarter and that was offset somewhat by Bayu-Undan and Timor Sea, it was up by 25,000 BOE a day.

On a year-to-date basis compared with 2003, the volumes were about 55,000 BOE a day lower and that's due primarily to the asset sales program that we've done over the last 18 months or so.

We said in our media release consistent with our plans, our average production for the year is expected to be 1.56 million a day, now that implies based on the first three quarter our fourth quarter production will be about 1.584 million BOE a day.

I am moving now to -- slide 10 now to slide 11.

If you look at our E&P net income, that amounted to $1.42 billion in the third quarter, that's up $66 million over the last quarter; net impact of higher commodity prices, that was a positive $188 million, of which -- 170 of the 188 million came from oil prices and then other $18 million came from higher prices for natural gas, Syncrude, NGL, LNG.

Our total sales volumes were down 1% from 1.518 million BOE a day to 1.503 million BOE a day and that's a slight degree of variance in production that I mentioned earlier.

We had the benefits from the change in Canadian tax in the second quarter, which did occur this quarter.

If you look at the other category, lower operating costs were more than offset by foreign exchange losses, lower equity earnings, and other factors which resulted in $42 million reduction from last quarter.

Moving now on to slide 12, "Refining and Marketing".

Our realized refining margin did fall as much as the U.S. weighted 321 crack spread.

The market indicator fell $3.50 a barrel while our realized U.S. crack spread fell only $1.04 cents a barrel.

As we said last quarter, we were not as negatively impacted because the decreased in the 321 crack spread came from gasoline cracks and we typically produce about 50% gasoline versus 66% implied by the 321crack spreads.

And essentially, we benefited by some winding of the light heavy and sweet sour crude differentials.

Internationally, our refining utilizations were up dramatically to 99% compared to 69% last quarter and increased our refining by 35%.

Also benefiting international earnings was a 24% improvement in realized marketing.

Now, in the U.S. we ran at 93% of rated capacity.

Third quarter utilization rates in the U.S were impacted by our decision to accelerated turnarounds of fourth quarter and the third quarter Bayway and Sweeny swinging refineries and we also have the planned unit turnaround at Lake Charles, our US Gulf Coast volumes were down 8% compared to last quarter and we were not materially impacted by Hurricane Ivan, in part because of the turnaround schedules at Sweeny and Lake Charles.

And we also had in the quarter certain contingency accruals and impairments and they together reduced our earnings by about 40 millions during the quarter.

Moving to slide 13, the refinery and marking net income, in the third quarter we made $708 million in net income, that's down 13% from last quarter.

This change in earnings was due primarily to lower refinery crack spreads which we experienced in all regions with the exception of the US Golf Coast and our international refineries.

Worldwide we produced greater volumes in the third quarter, although in the US we saw lower volumes due to the heavy turnaround quarter and international volumes more than offset this reduction.

Now, the gain in inventory included sales out of inventory in the third quarter from the seasonally higher levels that we had in the second quarter.

The gains from our commercial activities and lower international turnaround expenses offset somewhat higher DD&A charges and foreign exchanges losses.

I am moving now as slide 14, our worldwide refinery and marketing earnings for the third quarter and for the 2004 year-to-date.

And you can see what the chart shows, relative contributions of refinery and marketing's major business segments during the third quarter and year-to-date.

You can see that US refining continues to be the largest contributor followed by international refining.

If you look to the third quarter, our refining division produced $682 million of net income, our marketing produced worldwide $30 million, just a little bit about breakeven in US marketing and had about $26 million in income from international marketing.

If you look on a year-to-date basis, we earned from refining worldwide $1,982 million.

If you look at our marketing, we lost about $85 million in marketing in the US and made $64 million internationally.

So, if you net of all of our marketing, we lost so far this year about $22 million.

So, which really driving our earnings is the nearly $2 billion in net income coming from the refining side of the business.

Moving now to slide 15, midstream, chemicals, and emerging businesses, just a few comments on each of these areas -- our midstream business made $4 million of earnings in the third quarter compared to second.

We have a recognition of impairments and the absence of gains on assets sold in the second quarter more than offset the higher NGL prices and volumes we benefited this quarter.

In chemicals, a much better performance in chemicals, we saw net income improve, better results in all the major product lines, lower maintenance cost combined with higher volumes and margins helped our olefins, polyolefins, and styrenics business.

So, styrenics and aromatics also helped us as well as our international results for chemicals.

Our emerging businesses showed a slight $2 million improvement quarter to quarter.

Improvement came primarily from United Kingdom, we have power plant -- Immingham plant, which has been commissioned and is now operating.

I am moving on now to slide 16, which talks about the corporate charges, our corporate costs excluding the impact from discontinued operations were $209 million, down a little bit from the $218 million of the previous quarter.

The early retirement of $1.185 billion of debt in August resulted in a $43 million after-tax non-recurring debt retirement cost.

This cost offset reductions in interest expense which resulted from lower average debt levels and higher capitalized interest during the quarter.

Now, it's interesting, compared to the last quarter, we had $15 million lower orphan site accruals.

Looking at this a little bit more closely, go to slide 17, on the chart we compared the $209 million loss in the corporate segment to the target of $180 million.

You can see that excluding the 43 million charge from the early retirement of debt from the 209 million in actual third quarter, corporate charges would have resulted in something closer to about $170 million.

Discontinued operations had a 5million negative impact to net income.

I’m moving on to slide 18, which is our "Return on Capital Employed", you can see at the right, 2003 so far this year, you can see that during '03 and then so far as year.

Our returns are comparative with the largest companies in the industry.

Obviously, the higher commodity prices, strong refining crack spreads and improvement in chemicals had a positive impact on return on capital.

I would like to just give you some numbers.

In the third quarter, our adjusted ROCE for E&P was 29.3%, refining and marketing was 25.1%, combination of the midstream and chemicals was 23.4, and all the other was minus 19.8 and blended together it's 23.2%.

Straight on to slide 19, the LUKOIL transaction, just an overview, as you know, we announced the strategic alliance with LUKOIL in late September.

We have acquired 7.6% of LUKOIL company stock through the government privatization process, would like to also say that we are right on track to have our -- increase that ownership to 10% by the end of this year.

Now, this transaction is consistent with our corporate E&P strategy to increase our accessed reserves and generate production growth from new legacy assets.

Joint development of the world-class reserves in Timan-Pechora is the first step in our joint development activities.

And we are going to give you a full update on the LUKOIL strategic alliance and transaction at our November 17th analysts meeting in New York.

Now, I am going to move to the last slide that I have titled "Wrap-Up".

I want to make sure that you know that we are consistently filing our growth, operating and financial plans.

We focus on continuous improvements in all of our operations.

I think you will see that in some of the metrics in the plans when we go through with you at the November 17th meeting in New York.

As I previously indicated, we expect to average production 1.56 million BOE a day for 2004, so that means we will do 1.584 million BOE a day in the fourth quarter.

Our total exploration expense, which makes up O&O, dry hole, lease impairments, in 2004 is expected to be in the $650-700 million range.

This is somewhat higher than previous guidance and it's due primarily to the higher dry hole expense, particularly for the well in Azerbaijan, Zafar Mashal well.

Important also that our legacy asset developments including fuel programs are executed well in order for them to bring the income and greater returns that we expect in the refining marketing part of the business.

And at downstream refining, we expect turnaround expense to be about $75 million in the fourth quarter as several accrued units will be taken down for scheduled turnarounds.

Our corporate expense in the fourth quarter is expected to be near $200 million.

And as I have already mentioned, we certainly invite you to participate and listen to our update on annual analyst meeting in New York which is going to be on November 17.

So it really concludes the comments that I wanted to make on the third quarter and I think Clayton and John -- three of us are ready to take whatever questions participants have of us on our conference call.

Thank you, sir.

Ladies and gentlemen, if you have a question at this time pleases press the "1" key on your touchtone telephone.

If your question has been answered or you wish to remove yourself from the queue, please press the "#" key.

Again, if you have a question at this time, pleases press the "1" key.

One moment while we queue for question.

Our first question comes from Doug Terreson from Morgan Stanley.

Your question please

Congratulations on a great quarter, guys.

First of all, Jim, in Venezuela, the government seems interested in adjusting the royalty regime on the Petrozuata and their markup project and so I just wondered if you could provide a little bit of an update on that situation, that is the current status and any intermediate term expectations that you have for operations in that country if they've changed?

Thank you for a nice comment regarding the results.

Turning to Venezuela, as you know, as just been announced by the President a week or two past, we have not been officially notified of this and we are studying this pretty thoroughly, but assuming the understanding of what has been announced, the impact to us would be about 7.5 million barrels oil equivalent of production of production in a year and that works out to about 20,000 BOE a day to ourselves.

So, this is important to us.

We want to make sure we fully understand and study it.

And I expect that I most likely will be going down to Venezuela to talk and discuss this more prior to the holiday season.

Okay, great.

And second, in Alaska, there seems to be movement on the permitting process and on loan guarantees as it relates to the big gas project out there which would be a longer term item, but would also be positive for ConocoPhillips, probably more so than any other company and so, if have an update on the overall status of that situation and any other expectations there, I would appreciate it as well.

Doug, thanks, yes we had some real progress took place and we thank the Alaska delegation for what they have done in Washington in terms of what was ultimately passed in the house and the senate signed by the President.

This is very helpful for advancing and moving the project to the next phase of development.

We are working also very closely with Governor Murkowski and his staff in Alaska and I would expect over the next several months some very good negotiations to see that we can sort out what the fiscal on commercial arrangements are between the producers in the state of Alaska.

This is very important with respect to the attractiveness of the project, the fiscal situation and uncertainty.

We are working together when our partners Exxon Mobil and BP.

We also continue to do a lot of study work in terms of how we can look at hopefully reducing the capital cost of this project, but a lot of progress has been made for working well on this together, but certainly we thank the Alaska delegation for what was accomplished in Washington over the last several weeks.

Thanks a lot, congratulations again.

Thank you.

Our next question comes from Paul Ting from UBS.

Your question please.

Good morning.

A couple of the major oil companies have indicated that due to inflationary and foreign exchange effect, capital expenditure has been nudged upward.

I noted that if you look at the [up trim] CapEx year-to-date about 3.7, mixture target may be a little low, do you have any plans of upping your CapEx guidance for this year or perhaps any colorful years to come?

Well, it is true that we do see the effects of inflations on capital spending, particularly the future projects as it relates to the cost of steel.

We also have seeing that increased cost potentially on drilling.

But on the other hand, the guidance represents, I think, everything we said in terms of our capital spending for 2004 is going to stay right within the guidelines that we have indicated.

Because of a lot more growth projects that we see over the next several years, I think you are going to see us up our capital spending a little bit for 2005 and 2006 from what we have experienced in 2004.

But we are going to assure that in detail with you at the November 17th analyst meeting, but guidelines for 2004 is going to be right what we said, again, about this time a year ago.

Okay.

If I can just ask one more question on the downstream, just looking at your distillate yield in the fourth quarter, it is about 26% which is comparable to what we saw last year distillate sales in terms of your total product portfolio actually declined slightly to 20%, given the shortfall of distillate inventory, are you maxed out at 26%, are you currently producing much higher than 26%, can you give us some description on that front?

Paul, I will have to circle back on that.

I don’t think we've got that level detail I would imagine with distillate spreads right now.

We are producing everything we can.

But I will have to come back to you on that one.

Okay, great.

Thanks a lot guys.

Thank you.

Our next question comes from Gene Gillespie of Howard, Weil.

Your question please.

Good morning.

I would like to add my congratulations on an excellent quarter.

One question, the LUKOIL investment seems to me as the first major primarily growth initiative that you have undertaken since the closing of merger and not to suggest that your are covering your back on returns, I don’t mean to imply that at all.

But I guess the question is, does this represent a change of shift or more -- towards more of a balance between growth and return based initiatives?

Well, Gene, thank you for comment on third quarter.

I’m going to beg to differ [little bit] in terms of the growth projects.

Yes, LUKOIL is a great growth opportunity for us, but as you know, a great deal of our production reserves and production comes from North America and the North Sea.

So as we go on to more different places in the world, the risk profile changes a little bit, but it's going to continue to be very predominantly North America as well as North Sea in terms of reserves and production.

The other thing is we don’t feel in any way that looking at the LUKOIL transaction that we're compromising returns in any way.

We expect that it has to compete with the returns that we see in other parts of the world.

The other thing is when we say from the time of the merger, growth opportunities, one of the most significant ones from the time of a merger, I would look back and -- look out and say there are some others that I think are very important.

At the end of this year -- prior to end of this year, I expect we are going to improve the full field development on Peng Lai and Bohai fields.

We also have approved the number of oil and gas projects or reported production in Indonesia, the Bayu-Undan LNG projects significant, making good progress in Kashagan and we see LNG out of gutter as well as gas to liquids out of gutter are really important projects for ourselves.

And then we've done well in terms of -- we are bringing the upgrader for Hamaca is on stream, that is by [inaudible] and that's a new growth project for us out of Venezuela And we're looking well on heavy oil projects up in Canada.

And so a good opportunity for me to rebut and come back to you, Gene, but it is also I want to get the word out growth in the company -- new growth in the company is not just LUKOIL strategic alliance.

Thank you Jim.

Thank you.

Our next question comes from Mark Flannery of Credit Suisse First Boston.

Your question please.

Yeah, Thank you.

I am interested in the international refining and marketing area, which is a bigger number than we'd have expected.

Given the fact that indicated margins in Europe were down in the quarter, could you perhaps give us some color on the contribution of the Humber refinery?

In other words, did you make a lot more money given the widening heavy light spreads out there or is that something else that we are not quite seeing?

Well, I can answer one part of it is we just ran much better because utilization and capacity was quite bit done with full realization of capacity in third quarter compared to the second.

In terms of the realizations, I am sure pretty they are higher, business detail of that I don't -- do you have, Clayton?

Mark, the realized margins internationally were up 24%. $9 in the third quarter versus $7.24 cents in the second and Jim also mentioned the volume, volumes were up 35% internationally.

So I think it's always 2 things combined, plus you had lower turnaround costs, your costs were lower in the third quarter because we didn't have a turnaround schedule that we had in the second quarter.

We also advantage the Humber because distillates -- the products are bit more heavily oriented towards distillates, and that didn't help us.

Okay, great, thank you.

Thank you.

Our next question come from Jennifer Rowland of J.P Morgan. your question please.

Thanks two questions, one, if you update us on your thoughts about share repurchases, actually saw a little bit share creep this quarter, I was just wondering if you are still considering initiating a share buyback program potentially this year or next?

Okay, I think the first question was on share repurchase and on that we have not announced any program on share repurchases.

As we said in the past, higher priorities have been to fund our growth program in the Company, debt reduction and ensuring that we -- at this point of annual increase in our dividends and the competitive dividend and then last with share repurchase.

What we intend to do is to update the finance community on all of those things including share repurchase at our November 17th meeting.

So of you could hold-off a little, we will update you on that in about 2 weeks' time

Okay, and just one other quick question.

On the LUKOIL tender offer, I believe you had launched the tender offer for an additional 2.4% right after the transaction was first announced, just wondering if you are able update us on where that stands, if you have been able to buy in the 2.4?

Yes, as such you know, the facts are that we did tender for that additional 2.4% at the same price that we bought the 7.6% so that was done almost the same day or the day after.

Our response, as I said in my opening comments, we expect to increase our ownership from 7.6% to 10% by the end of this year and our progress to-date not indicating exactly just how it's all done, but our progress to-date were right on track moving to 7.6 to 10% at this point in time.

Okay, thank you

Thank you.

Our next question comes from Neil McMahon, Sanford Bernstein, your question please

Thanks, just a question -- few questions, firstly on refining and marketing numbers, could you let us know what the chemical and trading impact on refining and marketing numbers or margins were in the US if both chemical products and trading helped out there?

Second question was looking at operational uptime, especially in places like the North Sea, could you give us an update on where you are there, what your current uptime is and if you got any planned maintenance in the North Sea, especially around the Britannia field?

And then just lastly, may be an update from the Kashagan field in the Caspian, have you got any prepared export pipeline routes for the main volumes coming out from Kashagan?

Yeah, first on the R&M side on chemicals, you know, the material chemical activity that we have in refining and marketing would be some polypropylene and saline asset that didn't have a measurable impact on the results for the quarter.

Commercially, yes, we continue to trade around our assets and there are some positive benefits that tracing activities, but I don't have a separate break out of those.

And then on the operational uptime, with respect to Britannia we don't have any planned -- I don't believe we have any planned shutdowns for the fourth quarter.

And on Kashagan, Jim, may be you want to update on Kashagan?

On Kashagan, we continue to do well exploration wise and appraisal; in terms of evacuation, they are studying a numerous number of routes which is for certain partners could be CPC, it could also be the Baku-Tbilisi-Ceyhan pipeline by which you have to barge over some of the crude, but all this is being worked on, I don’t think there is anything new or different to pass along to you in terms of Kashagan.

Of course, you have got the issue on the preemption of British Gas and the government has announced some potential changes by which possibly they could be participating in that preemption, but that's all being worked on between the government and the partners in Kashagan

May be just a follow-up, just firstly on the Opindear (phonetic), do you have any indication of actually being in the material basins such as the North Sea, if you have seen some improved your uptime over the last year?

And then just a follow-up on Kashagan as well, at the minute the Bosphorus seems to be pretty chock-a-block with tanker, have you looked into the fact that a bypass on the Bosphorus may be the only way of getting crude out of that area?

First, I think you will find and we are going to update most of these things at the November 17th meeting.

We are certainly cognizant of the Bosphorus, that is why I mentioned evacuation routes such as the CPC pipeline, BTC pipeline and potentially others that could go in different directions.

So, and your point is well taken, but I think we can just update you more in about 2 weeks' time.

Okay, thanks.

Thank You.

Our next question comes from Michael Mayer with Prudential.

Your question please.

Thank you.

Your production forecast for the fourth quarter, does that include counting any production from LUKOIL?

No, there is no counting of production from LUKOIL in those numbers.

Okay, yeah, that’s what I assume.

But I wanted to confirm that and why not if you are going to use equity accounting, won't you be including production from LUKOIL?

Well, what we are going to do in our November 17th meeting is to tell you what the production is and our plans as you have known us before the LUKOIL transaction and then we are going to put the LUKOIL transaction right on top of it so that you can see it very clean.

So when we come up and say our production is increasing x% a year in ’05 and ’06, we're still on a our plans like we said over the past year for everything excluding LUKOIL, LUKOIL is on top of that, so that’s what we are really going to be doing on November 17th.

All right, but there is no change in your plans to the accounting for LUKOIL as an equity investment in booking share of earnings in the fourth quarter etc.?

No change.

Okay.

Thanks very much.

Thank you.

Our next question comes from Paul Sankey of Deutsche Bank.

Your question please.

Hello, good morning, gentlemen.

A very specific one on overlift.

I heard you mention that you are balanced on overlift, but number looks quite large for this quarter, could you talk a little bit about that and dynamics?

No, we were underlifted at the end of second quarter.

We essentially caught up overlifted in the third quarter so that at the end of the third quarter we were essentially balanced.

We are not in underlift or overlift.

If we are around in different parts of the world, it's very small.

Okay.

We caught up in a third quarter, but we underlifted in the second.

Okay, great.

And on the -- just further to LUKOIL on the shareholder resolution, is there any more update that we can get on that, the likelihood of that going ahead?

Well, I think the plans are that this is going to be handled in the first quarter of next year and we will update you on November 17th on that.

Great, thanks, and the international R&M results, I think it was a record for you guys, could you talk a little bit about the sustainability there?

I think you just mentioned that you were running at 100% capacity internationally, is that correct.?

I can't say for sure where it was a record performance, it's very strong, but given our plans in terms of turnarounds and how we run the system, assuming that the margins continue to hold, we keep our reliability up, these are the critical factors of continuing the sustainable earnings and performance at or somewhat near to kind of level.

And in terms of the environment, could you talk a little bit more about, again, this has partially been addressed, could you talk a little bit more about the distillates, what you are seeing in the distillate market, there's clearly a lot of concern about winter coming up.

Well, the markets are certainly driven by supply, demand and inventories and we see that are tight, continue to be tight.

Our company like all the other companies in the industry, we're doing everything we can in terms of producing and providing product, not just to the total market, but by regions; we watch it very costly by regions.

So the tight market hasn't changed.

Obviously, this does well for future performance of the company, but we are all everyone in the industry doing everything we can to make sure that customers are provided with product.

Very specifically, are you exporting diesel to Europe or what's the dynamic there?

We really don't talk about where [multiple speakers]

Okay

I think our commercial guys would like it too much if I told you will.

I understand.

On the international R&M side as well, you have talked about ambitions in Central and Eastern Europe, could you say a little more about your shape in terms of the international R&M?

I think that strategic outlook for what we might do in Central and Eastern Europe would be something that we would address on November 17th.

Jim will be addressing that.

Okay, great, I will leave at that, thank you.

Thank you.

Our next question comes from Doug Leggate from Smith Barney.

Your question please.

Hi, good afternoon, gentlemen -- good morning, I should say.

Three quick ones, first of all on the cash flow, pretty strong cash flow, but a fairly heavy contribution from working capital.

Can you just talk about what that move was and whether or not you would expect that reverse out in future quarters?

Secondly, on the -- just briefly on the LUKOIL acquisition or the equity acquisition, have you had discussions with anybody regarding whether or not you are -- you had it confirmed that you will be able to equity account.

I think, you made the assumption you can, but obviously I think there is -- I don't think you have actually had that confirmed categorically.

And finally on costs, follow-up from one of the earlier questions.

You mentioned that there are some inflationary pressures, obviously, and I think again coming back to the equity issue of LUKOIL, you have some pretty aggressive targets still I guess from your last start of the presentation for funding and development costs, which I guess underpin the improvement in closing the gap in your return on capital employed.

Can you just talk a little bit -- may be you don’t want to have it till 17th, but talk a little bit whether those targets you are still comfortable with them with or with LUKOIL -- the 475 equity target you're talking about?

John, you take the cash flow and working capital question.

Yes, firstly, with respect to cash flow, we built inventory in the first half of the year and we were the beneficiary of sales of some of the inventory in the third quarter.

So our inventory levels were coming down.

In addition, we had the benefits of taxes payable went up and those generally get paid in October and then we had good performance from collection of accounts receivable that were largely just spilled over from the second quarter into the third quarter.

And then from the year-to-date perspective, we are -- our working capital change is negative 600 and that’s largely attributable to the fact that we have not modified the full amount of receivables program.

So, that’s where we are on cash flow.

With respect to the discussions on equity accounting for LUKOIL, that’s something that we will update everybody on in November.

Then on, Jim, the inflationary pressure with respect to the cost structure and the F&D targets of 475, I believe that we will again update the targets with and without LUKOIL in our November meeting.

I don’t know whether you wanted to add anything to or not.

No, so that’s really the responses for those three items.

Just is this real quick on the cash flow, I assume you already paid the cash out to LUKOIL equity stake?

The certainly the 7.6% that we purchased, certainly we've paid that, yes.

Thanks very much.

Thank you.

Our next question comes from John Herrlin, Merrill Lynch.

Your question please.

Yes, hi, two ones on longer-term type projects.

One, you and your partners announced that Plataforma Deltana was good in Venezuela, do you have any comments and the other on reentering Libya?

On the first question, Plataforma Deltana, I thank it's premature for us to be commenting on that.

I think it depends on not only evaluation of exploration results, but then commercial aspects of it, the markets and also it's premature for us to be speaking about it, even individually, but certainly we want to be working with our partners and what they about it.

So, it's premature.

In Libya, we continue to work closely with partners and are going to have some Marathon negotiating with the Libyan authorities to reenter our old concessions on Waha.

I think it is a process that does take a while to do to make sure that we are meeting the objectives of all parties.

I think we are making good progress; hopefully, it's something that we can conclude it over the next several months.

Thank You.

Thank you, our next question comes from Mark Gilman from Benchmark Company.

Your question, please.

Hi, guys, good morning.

I had a couple of things, some specific, some bit more general.

On the specific side, the inventory gain in the downstream, is that US or foreign and is it included in the margin numbers you reported?

It's primarily US and it is not included in the margin calculation.

Okay, Jim made reference to and I think you he used the word if I got it correctly, "continued impairments" in the refining and marketing, what is that all about and what is giving rise to these --

Continued improvement --

Are you talking about the impairments Mark?

Yeah, I was talking about the reference Jim made in his introductory remarks to continued refining and marketing impairments.

I think he said contingent impairment.

Yeah, just to clarify we had some accruals related to contingencies and impairments.

It is not -- I don’t believe you meant to say that we have had -- we are going to experience continuous impairment.

We did indicate subsequent to the call -- in the call that we are focused on continuous improvement.

Okay, perhaps I misheard, but I don’t think so.

On the strategic front, is it the position of yourselves and to your knowledge your partners that in order to proceed with the Alaskan gas projects, you still want a guarantee with respect to floor price?

Well, that’s something that's always been important to us.

As I said, we made a lot of progress, great progress, by the Alaska delegation in Washington.

At this point in time, our efforts are directed towards negotiations with the state.

We're also continuing to evaluate the cost of the project and economics of it.

I think this is an issue for us that we need to evaluate -- continue to evaluate overtime.

Okay, one final one, if I could.

On the LUKOIL situation, is a board seat contingent upon your reaching the 10% threshold which in turn I would assume is contingent upon your gaining approval for the charter amendments, which you see?

The rights that we have were actionable upon the acquisition of the 7.6% and there is no precondition that we must be at 10% in order to achieve a board seat.

John, could you just clarify what you mean the rights that you have -- the rights that you have with respect to what?

The rights in the shareholder agreement, Mark, there are a number of them, so that --

You have to have a board seat to seek that charter amendment which you need for blocking rights?

No there are two independent things and I

No, those -- there are two independent things that are reflected in the shareholder agreement, one is not dependent on the other.

So you really don't need to reach the 10% for that purpose at all?

Correct.

Okay, thank you very much.

Thank you, our next question comes from John Moten of American Express.

Your question please.

I have no question at this time.

Thank you.

I am showing no further questions at this time.

Gentlemen, you may proceed with your conference.

Okay, well, thank you very much.

We appreciate everybody’s participation.

You can find copies of the material -- presentation material and a copy of the transcript on our website conocophillips.com.

We appreciate everybody’s interest in the Company and enrollment.

Thank you very much.

Ladies and gentlemen, thank you for participating in today’s conference.

This does conclude the program, you may now disconnect.

Everyone have a great day.