康菲 (COP) 2005 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the ConocoPhilips first-quarter earnings teleconference call.

At this time, all participants are in a listen only mode, and will remain muted until the Q&A portion of today's call, at which time I will prompt the audience on how you may register your site for a question.

Joining us today, we have Mr. Jim Mulva, Chairman and CEO, as well as EVP and CFO, John Carrig.

And to get us started this morning, I am pleased to turn the floor over to General Manager of Investor Relations for ConocoPhilips, Mr. Clayton Reasor.

Go ahead, sir.

Thank you, Jim.

Good morning, and welcome to ConocoPhilips' first-quarter earnings conference call.

I am here today with Jim Mulva, our Chairman and CEO, and John Carrig, the EVP of Finance and CFO.

During today's call, we will be referring to presentation material which will help us more fully discuss first-quarter financial and operating performance.

This presentation is designed to give you a better understanding of the factors that have had a significant impact on this quarter's results.

You can find a presentation on our website, conocophilips.com.

On page two, you can see and read our Safe Harbor statement.

It says, among other things, that in response to your questions and in our prepared remarks, we will be making forward-looking statements.

Actual results may differ materially from those we expect today.

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

With that said, I would like to turn the call over to our Chairman and CEO, Jim Mulva.

Clayton, thank you.

And I would like to welcome all those who are participating in this conference call regarding our first-quarter earnings.

I am going to start my comments on page three or slide three, titled 'Highlights.'

The Company had a good quarter.

We generated 2.9 billion in net income, and 4.1 billion in cash.

This allowed us to improve our financial strength, balance sheet, reducing our debt level from 15 billion to 14 billion, and our debt to capitalization from 26% to 23%.

During the first quarter of '05, our Exploration and Production produced 1.6 million barrels of oil equivalent a day, which is essentially the same level as the last quarter of 2004.

These numbers exclude the impact of production from the LUKOIL strategic alliance and our ownership of shares in LUKOIL.

Our estimated share of LUKOIL's production in this quarter was 201,000 BOE a day during the first quarter.

As we have done in the last quarter, we report net production and earnings using the equity accounting method, and then we use LUKOIL and report it as a separate segment -- a separate segment of LUKOIL investment in our financial reports.

Now, we have realized higher worldwide E&P crude oil and natural gas prices in spite of lower crude oil and natural gas realizations in the United States.

Turning to Refining and Marketing, our refineries ran at 92% of crude processing capacity.

That is down 2% from the last quarter.

In the Midstream, we as you know, we have announced and initiated steps to increase our ownership from about 30% to 50%.

I will comment more about that here a little bit later.

And over the last past month or so, we announced that we increased our quarterly dividends by 24% to $0.62 a share, and we announced a stock split of two-for-one.

Our adjusted return on capital employed is very competitive, and I have got a slide a little bit later to talk about that.

I am moving to slide four, 'Contribution and Capital Employed.'

You can see we have got two pie charts on this page, and it shows how our major business segments performed in the first quarter relative to capital employed.

Now, we adjusted this slide for the gain associated with the TEPPCO sale, and the Midstream part of our business.

If you look at these pies, you can see that E&P generated 63% of our income from continuing operations, and represented 58% of capital employed.

Refining and Marketing generated 25% of the quarter income, and represented 30% of capital employed.

And when you combine Midstream and Chemicals, it generated 8% of income from continuing operations, and represented 4% of capital employed.

And for LUKOIL -- generated 4% of the income, and represented 5% of year-end capital employed.

Our return on capital employed in the first quarter for the total Company was 27.1%.

I will comment more about that a little bit later.

Now I am moving to the fifth slide.

This slide shows net income comparisons between the fourth quarter of '04 and the first quarter of '05.

You can see we had higher worldwide oil and gas realized prices, stronger U.S. refining margins.

And this helped us 140 million higher sequential earnings.

We have had more volumes, though primarily in Refining and Marketing.

And this had an impact of reducing income sequentially $86 million.

As part of our plan to increase our ownership in the Midstream Duke Energy Field Services to 50%, there are certain transactions were initiated which generated income to us of $300 million.

And the largest of this transaction was the sale by DEFS of the interest in TEPPCO, and we reflect our proportionate share of that sale.

So sequentially, we had lower DD&A and impairment charges, and that helped us in earnings this quarter by 52 million.

And our discontinuing operation generated a loss of 11 million during the quarter, reducing income -- or net income slightly.

Now I am moving on to page 6, which is the Company's cash flow.

The cash flow from operations, I said earlier was 4.1 billion in the quarter.

We started the quarter with the cash balance of 1.4 billion.

Our capital spending and investments amounted to 1.8 billion during the first quarter.

And this included an acquisition of another 1.3% of LUKOIL, and we spent about $324 million doing that.

We paid out 348 million in dividends, and we reduced our balance sheet debt by nearly $1 billion, $990 million.

We spent 194 million repurchasing shares of ConocoPhilips' stock.

So after considering all the sources of cash flow and uses, we ended the quarter with $2.4 billion of cash.

And I am moving to the seventh slide, the debt ratio improvements.

With strong earnings, cash flow, and debt reduction we continue to make quarterly improvements in our debt ratio and our financial balance sheet.

The strong earnings cash flow allowed us to further accelerate our plans for debt reduction, improving our financial strength.

The bar chart shows that equity grew to 46.2 billion at the end of the first quarter.

And over the last six months, our book equity grew by 5.4 billion.

The balance sheet at the end of the first quarter, $14 billion in debt.

That is down 1 billion in the quarter.

And our debt ratio is 23%.

Our net debt ratio when you take into account our 2.4 billion in cash, our net debt ratio would be 20%.

I am moving now on page eight -- slide eight, which shows what has happened in exploration and production.

In the first quarter our production was essentially flat.

Actually, it was up 4,000 BOE a day, but essentially flat with the last quarter.

Our production would have been even stronger, but we had some unplanned down time.

And I will talk about that here in a moment.

Our realized oil prices for the first quarter were $43.15 a barrel.

That compares to $40.96 a barrel last quarter.

So they are up about 5%.

Our U.S. realized oil prices did not increase sequentially, as the domestic market -- marker crudes did, and this is primarily due to the -- it is on a 1 month lag effect in how and what we realized for our North -- Alaska's North flow production.

Our global realized gas prices were up 1% from the fourth quarter to $5.19 an Mcf.

And our international oil and gas prices moved in line with the international markers.

Our exploration expenses were lower, but they were certainly in line with the guidance we gave earlier in the month.

I am moving now to page 9, the total Company production -- comparison one quarter to the next.

As you can see, we saw slightly higher BOE output in this quarter.

It came largely due to the ramp-up production in three of our large projects, the Hamaca heavy oil project in Venezuela; the lower 48 Gulf of Mexico production from Magnolia, and the Belanak project in Indonesian.

Now these gains were offset by about 15,000 BOE a day of unscheduled maintenance, which was primarily directed into offshore UK, Canada, and Alaska.

And we also had 10,000 BOE a day of planned down time in Norway and Alaska.

I will just go through, because of the fourth quarter to the first quarter of this year, some of the larger items had netted out to essentially about the same production from one quarter to the next.

In Canada, we lost about 12,000 BOE a day -- the Syncrude unplanned shutdowns.

In the UK, there was a reduction of 10,000 BOE a day -- the southern North Sea, the Abba (ph) field in J Block.

In Vietnam, we are negative, or down some 7,000 BOE a day because we have some constrained production limits on us at this point in time.

The impact of the Ekofisk shutdown in Norway was minus 5,000 BOE a day in the quarter.

But then on the positive side was Venezuela, Hamaca, 19,000 barrels a day positive increase.

Lower 48, Magnolia was up 6,000 barrels a day, and Belanak in Indonesia, about 5,000.

And then everything else was a plus 8.

So those are the -- that is the background that gives you the -- what was taking place around the world by specific project for our production in the first quarter.

Now, if you add the 201,000 BOE a day from LUKOIL, then our production for the total Company is 1.8 million BOE a day.

Now I am moving to slide 10, E&P net income.

In the first quarter it was 1.8 billion.

That is 116 million over the last quarter.

You see the impact of higher realized commodity prices was 86 million, of which 77 million came from higher oil prices.

The average realized price for Alaska crude fell $0.22 a barrel, compared to ANS (ph) spot price increase of $2.25.

Again, this is due to -- this result is due to the one month lag effect in our crude oil pricing.

Overall, our sales volumes had a very minor effect in relation to sequential earnings as it relates to our production during the quarter.

In the first quarter, we had some asset sales that generated $77 million more of income than in the fourth quarter that primarily relates to the gains on the Powder River asset swap that we did.

And also, certain E&P tax benefits in the last quarter, fourth quarter '04, did not reoccur in the first quarter of '05.

I am moving now on to slide 11, Refining and Marketing.

In Refining and Marketing, we benefited from higher U.S. refining margins.

However, the lower margins in the worldwide marketing and international refining more than offset this gain, resulted in somewhat lower sequential earnings.

Now in the U.S. the first quarter margin indicator crack rose $2 sequentially to (technical difficulty) $9.24 a barrel from 7.24 a barrel, while our realized U.S. crack spread rose $1.73 a barrel to $10.11 a barrel from $8.38 a barrel last quarter.

In addition, we benefited from a widening of the light/heavy crude differential.

The WTI Myer (ph) differential widened from about $16 a barrel in the fourth quarter to $17.08 for the first three months of 2005.

The weaker dollar premarket also benefited our refining business.

Turnaround expenses were $108 million in the quarter.

That is pretax.

Pretty close to expectations.

The planned refinery turnarounds were in Borger, Lake Charles, San Francisco, Sweeny, Wood River.

The unplanned down time was essentially at our Alliance and Borger refineries.

And the result of this unplanned down time reduced feedstock process by about 60,000 barrels a day in the quarter.

Moving to slide number 12, net income for Refining and Marketing.

We made $700 million.

This includes a gain of 31 million from asset sales.

We had higher U.S. -- though were more than offset by sharply lower U.S. marketing margins and lower international refining marketing margins.

Our volumes were lower due to what I said earlier, the planned and unplanned down time.

We had lower DD&A and reduced impairment charges, and this resulted in a 35 million benefit in the first quarter compared to the fourth quarter of last year.

Now moving to slide 13.

This chart -- this slide shows the relative contributions to our Refining and Marketing worldwide business during the first quarter of this year as compared also to the fourth quarter of last year.

As you can see in both of these periods, essentially all of our Refining and Marketing earnings is coming from refining.

For the first quarter we experienced losses in U.S. marketing.

I will just run through some numbers for you for the first quarter.

In the first quarter of '05, U.S. refining made $640 million, international refining made $150 million, so refining worldwide made $790 million.

In marketing, we lost 115 million in the U.S. and 10 international.

So in marketing, we lost in the quarter $125 million.

So that gives you a net $665 million.

And to get to the 700 million reported net income in Refining and Marketing, we had the income that we get from our specialty business, and then we had some other offsets -- that is the total of 700 million from this business -- total Refining and Marketing downstream in the first quarter of '05.

Now, I am moving to slide 14, which is the LUKOIL strategic alliance.

Regarding this LUKOIL strategic alliance and ownership in the company, we started our ownership at the end of last year at 10%, and we increased our ownership during the quarter to 11.3% at the end of the quarter.

So our average for the first quarter was 10.6.

Now using the 10.6, our equity earnings for the quarter for LUKOIL was 110 million.

That is up 74 million from the fourth quarter of last your.

So we expect LUKOIL is going to report their fourth-quarter '04 and their first-quarter '05 results in the second quarter of 2005.

So when the actual results come out, then the estimates that we have been using for '04 and '05 will be reconciled to the reported earnings.

With respect to the other things that are ongoing with our strategic alliance, all of our activities and plans continue right on track, just as we announced when we put forward with this in the fall of last year.

The Sacatta (ph) and LUKOIL and ConocoPhilips employees are now working at each others' headquarters.

And this helps us exchange best practices, processes, creating value for both companies.

Also our joint venture in the very North Timan-Pechora area we expect to close during the second quarter.

Now I'm going to slide 15, which is the Midstream.

The Midstream business earnings were 385 million in the first quarter.

Now as we have previously announced, our plan is restructuring and increasing our ownership in DEFS from 30 to 50%.

We expect to get this done in the second quarter.

And as part of the restructuring, as I said earlier, we had a gain -- it was 306 million.

It is really our share of the disposition by DEFS of the interest in the TEPPCO Limited partnership.

If you exclude this $306 million, our Midstream earnings were actually a little bit lower, 15% from one quarter to the next.

And this is due to lower NGL prices and margins.

I am moving to slide 16, which is chemicals.

Our chemicals joint venture with ChevronTexaco, we saw significantly better financial results during the first quarter.

The earnings were $133 million.

This represents a 50 million increase from the fourth quarter, an 60% improvement.

The ethylene cash margins improved more than 48%, while high-density polyethylene margins were also slightly higher.

We saw modest improvements in Aromatics, Styrenics, and our specialty business lines, and so the improvement in the market fundamentals, along with the efforts made over the last several years to reduce costs, improve capacity utilization, resulted in a strong quarter for PP Chem (ph).

I will just say in the first quarter of '05, capacity utilization for olefins and polyolefins was 93%, for Aromatics and Styrenics, it was 85%.

Now I am moving to slide 17, which is -- takes a look sequentially at the corporate results.

And you can see the corporate costs from continuing operations were $7 million higher in the first quarter compared to last quarter.

We saw an improvement of 8 million in net interest expense, and this is due to higher interest income, because of higher cash balances and lower debt levels.

The corporate overhead was lower, due primarily to a decrease in benefit plan expenses.

We had $17 million fewer FX gains in the first quarter as compared to the fourth quarter.

And discontinued operations lost $11 million.

And this is generally attributed to the remaining marketing assets that are held for sale.

I am going to move on to slide 18, which is our return on capital employed.

And regarding return on capital employed, you can see what we did in '03 and '04, the peer group are the largest -- the larger international oil publicly traded companies and ourselves.

You can see how we compare.

And then for the first quarter, you can see that we are quite competitive.

Our return on capital employed, adjusted for purchase accounting, was 27%.

We don't have the numbers, obviously, for the other peer companies, but when available, why, we can certainly update our slide.

You can see, we are pretty sure we are quite competitive.

Now, the higher oil and gas prices, better U.S. refining crack spreads, improvements in chemical performance, this all had a positive impact on return on capital employed.

If you look at this 27.1% annualized number for the first quarter of '05, I am going to give you the ROC numbers for the various segments.

For E&P in the first quarter, it was 35.2%;

Refining and Marketing, 22.5%.

When you combine Midstream and Chemicals, it was 38.9;

LUKOIL is 14.9.

And then you take the corporate and emerging business, it is a negative, 16.4.

And as a total Company, it is 27.1.

I am going to the last slide, which is 19.

We continue to follow the established strategy, operating plans, financial plans that we have outlined over the last several years.

We continue to follow them, just as we have outlined.

With respect to second quarter production and -- Exploration and Production, we expect it to the lower than the first quarter.

This is a result of seasonal declines.

In fact, we expect our second quarter compared to the first quarter to be down something about 4% compared to the first quarter.

About half of it is seasonal declines in production.

And the other has to do with -- we had some very major turnarounds taking place with the Baya-Undan field.

We have turnarounds at Ekofisk, Brittania.

And then we also have a continued loss of -- unplanned loss of production up in Alaska at Prudhoe.

On the other hand, we expect that the total production for the year is unchanged at 1.61 million BOE at day.

So obviously, we see stronger production we pull in the second half of the year.

Now if you include our share of LUKOIL production, then we expect our annual production for ConocoPhilips to be, for the entire year, over -- a little bit over 1.8 million BOE for the year.

That is 1.8 million a day the year average.

Our 2005 cash capital spending program is 7.4 billion.

We expect to more than replace our production this year.

It comes from all the projects that we are doing around the world.

In addition to our announced capital program, we put out in our media release this morning that we are planning to add an additional $3 billion over and above what we had planned for Refining and Marketing for the 2006, 2010 time periods to increase our U.S. refining systems capability to process heavy-sour crude oil and other low quality feedstocks.

These investments are expected to incrementally provide an increased refining capacity, certainly increase our capability, and our clean products yield at our facilities.

And we can do this at very attractive returns.

We will be telling you quite a bit more about this as we go through the year, but particularly when we update you in the fall with our operating capital plans over the next several years.

But we wanted to tell you about this additional $3 billion program on top of what we have already announced for Refining and Marketing.

And then last, we continue to repurchase Company stock.

This is consistent with our goal.

We would like to get our shares outstanding on a presplit basis down towards about 700 million shares.

So that really concludes what I had as prepared remarks, so I think on the half of Clayton and John Carrig and myself, I think let's go forward and try to respond to questions as callers might have of us.

Jim, do you have some questions lined up?

(OPERATOR INSTRUCTIONS) Doug Terreson, Morgan Stanley.

Congratulations, guys, on your record quarter.

In international Refining and Marketing, your sales volumes appear healthy in relation to the last couple of quarters, which I suspect is more related to Asia and gains in Europe.

But it is not completely clear.

And so I wanted to see if we could get some color on the demand trends that you guys are seeing in your international marketing business, specifically in Europe, but also in Malaysia and Thailand, where changes to government fuel policy have materialized, and where prices have increased recently at retail?

And so if you could provide an update on the most recent demand intelligence that you guys have in those markets, I would appreciate it.

I guess I would have to say with respect to Asia, we are quite small in terms of our marketing, and primarily in Malaysia and Thailand.

As we have said strategically, we are looking to growing our capacity, primarily on the refining side of Asia.

So that is something that we are working on, and in due time, we can share with you.

In terms of the marketing side in Europe, we continue, we think we have a very unique and interesting model, by which even though the economies may be slow and not expanding that much, we continue to press hard with our model of being efficient, low cost in terms of pushing through the volumes on marketing.

And I think everything we are doing there, despite what may be a slow economy, we continue to maintain our volumes.

And hopefully over time, we are increasing our volumes because of the model that we use.

In terms of our refining capacity, we have been essentially, based on what our capacity is both in Asia and as well as Europe, we continue to run close to about 100% of capacity.

But I think over and above those comments, I don't know if Clayton has anything more, I think we could come back to you off line with a little bit more from our downstream people.

Yes, I am sure, Doug, page 9 of that settlement you can see that our distillate sales are up for the quarter internationally.

But we can talk more about that later.

Mark Flannery, Credit Suisse First Boston.

I have got two questions.

I remember, John Nokes used to say that in the downstream, capitalism isn't really your friend.

And so I wonder if you could explain what has led you to this extra $3 billion of planned capital expenditures in the United States system?

I assume it is mostly in the U.S. system.

And can you give us any rough parameters there about how that will be split between overall expansion and products yields?

And then I have a further question after that.

Well, first what I would say is that "capital is not necessarily your friend" continues to be something that we follow with respect to maintenance capital and making sure that when we spend our money that we get good returns for it.

On the other hand, what we do see is a changing world in terms of additional demand and a different slate of feedstock that is being made available over time, which is going to be heavier and more sour.

No -- additional capacity is not coming online.

And so we see ourselves in a differential favored position, given an asset base that we feel the demand continues to go up.

The need for clean products is certainly there.

And we have the assets and the capability and the financial resources, given what has taken place over the last several years.

And what we expect in terms of oil prices, gas prices and crack spreads, we had to have more resources.

So we have more attractive opportunities by which we can be spending our money.

And we think most important is that we will be able to have the supply and the products to meet -- to hopefully meet the demand.

So the world is certainly somewhat different.

We have unique opportunities, and we see really very strong returns that are coming from this additional investment.

We also think that this is something that not only is good for our Company, but it is certainly consistent with what the energy policy of the United States would like to see with respect to additional capability and capacity.

On a separate topic -- thank you for that.

On a separate topic, would you just update us on what is going on in Alaska, and how long those problems might last?

I realize that there is an operator issue here.

But what have you got for us for second and third quarters perhaps?

Well, we do know this, that this loss of production, unplanned production essentially coming in the form of -- I guess there is an exchanger impacting our production of liquids from crude oil that then go over to Caparie (ph) help us with production is not something that is one or two months.

It is going to take us longer to correct.

Whether that is six months or less, it is just too early for us to tell.

But it is not something that is going to come back immediately in the second quarter.

You can expect that that loss of, I guess, 10 to 15,000 barrels will continue in the second quarter.

And that is one of the reasons why, not only seasonally, but we expect that we are going to be down compared to the first quarter of about 4%.

Was there a second part of that question?

No, that is all.

Thank you very much.

Paul Chang, Lehman Brothers.

Jim, can you give us an update about Venezuela related to the latest change in their operating contract?

It seems like you suggest that their heavy oil upgrading project will not be subject to -- if that changes.

One thing, have you guys been officially contacted by the oil industry to confirm that?

First, before I answer the question, there was an earlier one regarding have we changed essentially our criteria by which we invest in the downstream?

There is another thing that I wanted to pass along, and that is as we move through this year and next year, in conclusion of '06 we pretty well have most of our investment completed to meet requirements for clean fuel.

So it fits in nicely by looking at the investment opportunities by which we can increase our capability, at some capacity, by which we can handle the heavier sour feedstocks coming from Canada, Mexico, Venezuela or other places in the world -- from the middle East.

So it fits nicely.

We complete clean fuels, but we can be looking at the opportunities to further enhance our downstream position.

With respect to Venezuela, we work very closely with the Ministry, with Sinavasa (ph) and the authorities in Venezuela.

As you know, we announced that we have reached an agreement with the Corocoro project.

With respect to our other projects, Corocoro plus this exploration, all of that continues to work and progress as planned.

Now, with respect to the heavy oil projects, we do -- and we have a sense that we do pay higher royalties.

I think it's 16-2/3%.

But in terms of the latest announcements of increased taxes going to 50% on the operating agreement, Hamaca and Texalota (ph) are not under the operating agreement concept.

So we don't see -- the tax situation that relates to Hamaca and Texalota is as we have reported.

And that has been confirmed by the Venezuelan authorities.

So the increase in taxes prior to the operating agreement, not to Hamaca and not Texalota.

Jim, if I could, I have two more questions.

First, I wanted to see if you have any update about Nepia (ph) on the oasis (ph) negotiation.

It seems like it might take longer than everyone thought.

Is there anything particularly that is holding up here?

Secondly, I think this is for John.

John, do you have a unique knitting (ph) cost and DD&A for 1Q '05, as well as 4Q '04, for your upstream operation?

It looked like that the cost -- maybe I am wrong, but it would like the unit costs is going -- is higher sequentially.

Okay, on the first with respect to Libya, we continue to work closely with our partners, Amerada and Hess and Marathon for reentry.

We continue to work very closely with the Libyan authorities.

We essentially negotiated our agreements and all, but it just takes time to work through the process for approval -- probably longer than we all might have expected.

But there is no reason to believe that we will not in time reenter under the old concessions of Libya that we have had.

And I think we just have to be patient and work through this.

It does take some time, but there is nothing different or strange to indicate that anything different from what I just said.

Now, in terms of the question that you have asked, I guess, of John Carrig -- I don't know, John, do you have that?

The DD&A is up modestly, as you have observed.

And it is slightly attributable to the Magnolia project that we outlined for you in the analyst meeting last fall.

Yes, I mean, John, do you have a number that you can share with us?

Is it $7 on the Companywide for BOE.

That is the top number I am looking at for both DD&A and cash lifting costs?

We generally don't break those down, Paul.

We do it once a year in the K., but we don't provide it quarterly. (multiple speakers).

Clayton, do you have at least some number then maybe you can share in terms of sequentially that the difference on those two items from the 4Q into 1Q?

I believe we said that for the year, we were going to be experiencing an increase in DD&A by around $100 million in our upstream business.

And we still believe that to be the case.

Why don't we -- if we could talk about it after we issued a Q?

Okay, will do.

Fred Leuffer, Bear Stearns.

Just to follow-up on the R&M spending announcement.

Jim, can you give us an idea of what the plan might result in in terms of increased capacity?

And then also maybe increased upgrading capacity?

Well, a lot has to do with additions of cokers.

And it is primarily not so much capacity as it is improving and increasing our capability to handle heavy sour crude, particularly at our facilities in Mid Continent.

So I think -- we just wanted to tell our investors, shareholders and the financial community that we are embarking upon a plan.

We are going to give you far more detail when we come forth in the fall time period at the analyst presentation.

But I think that is all we would really like to say at this point in time.

Okay.

So this is primarily heavy sour capability increases more than it is increased throughput?

Its both, but it's primarily capability of handling the heavy sour feedstocks.

There will be some capacity, but you shouldn't read into that that's primarily capacity.

It is primarily the capability of handling the change in feedstocks that we see made available from Canada, Venezuela, Mexico and the Mid East.

Let me just ask you what your appetite is for any further investment in refining capacity -- that is to say, acquisitions of refineries, if one came up?

I don't know if Citgo has approached you about these refineries that are supposed to be for sale, whether they have or not.

And if they did, are you interested in any further increases in your refining capacity?

Well, Fred, not only on the refining side, but also on the E&P side, we look at everything to see that we don't miss an opportunity.

As you know that compared to when the Tosco (ph) transition took place, the refineries have significantly more value today if you were to require one than you did years ago.

So we continue to look at everything.

But on the other hand, there are not too many sellers.

And the requirements for a sale of a refinery is pretty expensive, which is one of the reasons why we looked at -- and we asked, why can't we organically do things with our own facilities that we think is a better way to enhance our capabilities and value for our shareholders in our basic business -- our organic growth, than to try to do it through the acquisition side.

Now we will look at everything.

I'm not saying we wouldn't do it, but it gets more difficult.

And we have to be very careful on what kind of returns that we can see that we say that we want.

Every investment we make has to fit and support improving and being really a leader of return on capital employed, both in Refining and Marketing, as well as the upstream and the total Company.

Neil McMahon, Bernstein.

I just have two questions.

First of all, could you comment on what appears to be an increase in LUKOIL's production over the first quarter versus the fourth quarter?

As it looks like Russia as a whole, TNKBT and Yucrosses (ph) production failed, yet LUKOIL's production appears to have grown.

And could you postulate on why there is a different there between the companies, maybe acid mix or something like that?

And secondly, have you thought about adjusting your strategy going forward due to the change in the mix of your upstream portfolio?

I ask this because the production growth is going to come from fast-growing countries like Russia or high tax areas -- what is the new project in Venezuela?

And also with the Qatar's postponing or holding off on the detail LNG project, it looks like there is an overall project mix change going on.

Maybe some comment on that?

Thanks.

Okay, first with respect to LUKOIL, two general comments.

First, LUKOIL has a clearly stated strategic objective and plan to pretty substantially grow their production and their reserves.

So what they are doing is quite consistent with that.

In terms of specifically, why is production up compared to the fourth quarter and all, they are going to release their results here.

And they really are the ones that should be commenting in terms of exactly how that increase is taking place and where and whatever.

If we go to the change in mix of our production at our reserves, this is very clear to our strategy as we have outlined over the last couple of years.

Our basic strategy is we continue to add and hold our production in North America -- the North Sea.

Many people thought we couldn't do that.

But we, with satellite fields, technology, improved recoveries, we have held our production intentionally flat when you look at Alaska, Canada, the lower 48, Norway, and the UK.

That is 1.2 million BOE a day.

Now, based on that we go to the other parts of the world, because we have the highest concentration of reserves and production for our sized company, larger or smaller, to have an integrated company to always see D (ph) reserves in production.

Now, we go to where the oil and gas reserves are.

We are thinking 5 years, 10, 20 years out.

So we feel very strongly, we need to be in Russia.

We need to be in the Middle East.

We have a very strong position in Venezuela.

So we go where the oil and gas reserves and resources are.

That ties into our basic strategy of a portfolio balance.

We said that we continue to want 60 to 65% -- somewhat less, but 60 to 65% of what we do around the world reserves the production of the OECD.

So there t is not a change in strategy at all.

Effectively, we are just implementing what we said we were going to do.

Maybe just a follow-up comment on Qatar -- with the LNG and GTL project.

Is that -- that is more of the longer-term strategy, just what you commented on.

Are you sort of thinking twice about what is going on there?

Or maybe if you could just give us an update based on their recent statements.

Oh, we our absolutely not thinking twice of Qatar.

This is clearly world-class, one of the largest gas resources (indiscernible) oil.

And so we have a very large and strong position in petrochemicals.

We have our first LNG projects that we are working on.

First gas that is going to be delivered to the U.S., I believe it is in 2009.

And we are looking for more LNG.

We are looking for more petrochemicals and gas to liquid.

A lot is -- a lot of projects have been announced in Qatar.

It has a lot of contractor work.

Thousands of people working many, many project, as well as how to start best managing projects, but that is managed over the long term -- the North Field reservoir.

And so essentially, the recent comments by the Minister Al-Attiyah is primarily related to not so much -- it is more when and the timing of the project versus whether they are coming or they are not going to come.

So gas to liquid to us has s always been a longer-term project -- post 2010.

We effectively know in working with the Qataris, it is probably going to be several years longer before it goes forward.

But in terms of our interests in Qatar, no different whatsoever.

We have a very sizable position.

We want it to be even larger.

(OPERATOR INSTRUCTIONS) Doug Leggate, Smith Barney.

A couple of questions, if I may.

There may be a catch all in the balance sheet.

Clearly, if the environment stays where it has been for the last several quarters, we are going to see you continue to deleverage quite quickly.

I am just wondering how you are thinking about managing that situation -- perhaps bringing in some discussion on your buyback program.

And just a taste of how quickly you increase your stake in LUKOIL?

If I may just follow-up on LUKOIL.

You have mentioned the venture is scheduled to close in the second quarter.

How is that -- or maybe just an update on the progress in terms of the strategic access to the resource in Russia beyond Timan-Pechora, do you see any imminent kind of news flow that might start to eat up some of that spare cash?

(multiple speakers) Okay, first, you asked a broad question about the business environment, assuming oil, gas price, the crack spreads continues like it does, obviously, there is a fair degree of cash flow, and how do we apply and use that cash flow?

Well first, we think differentially we have a lot of investment opportunities ahead of us.

So it is going to take a lot of cash to fund those investment opportunities.

And then we have essentially just outlined to you in our media announcement this morning that we are going to get a little more aggressive on our capital spending in our refineries.

That is going to take cash for sure.

We would like to see, as we say over time, but not in an aggressive way, we would like to see our debt get down to an absolute, maybe about $10 billion.

It gives us more financial flexibility with the earnings that we have.

We are quite aggressive on dividends.

We just announced a 24% increase in dividends.

So we think it is good discipline.

You are going to see us be quite aggressive on dividends.

The flywheel obviously is to buy more shares in.

And I don't think that you are going to see us be too aggressive on buying the shares in, because we have -- priority-wise we have been in today's business environment -- we have redeployed more of our cash flow back into what we call our pipeline projects, both in E&P and Refining and Marketing more than any company, I think -- integrated company of our size, larger or smaller.

So we have the investment opportunities.

We are going to be pretty aggressive on dividends and some debt reduction.

But when we get our debt debt ratio down to 20% -- maybe even as low as 15, we would like to stay closer to around 20%.

So obviously, the marketplace continues to be good to us, then we have to be more aggressive with respect to shareholders distribution.

We have the investment opportunities and, as you say, the ability to make acquisitions and increase our ownership in LUKOIL.

And we said over the next several years, maybe we would do that a little more aggressively.

But that is how we feel about it.

Now, in terms of spending more money in Russia, we have a joint venture in the Timan-Pechora area, but we are also looking for other opportunities in Russia and outside Russia that we can be working through our strategic alliance with LUKOIL.

But we are also working with other opportunities with other Russian companies like Gazprom with respect to what we can be doing with them in the case of LNG from the Bering (ph) like Stocklin (ph) and bringing gas to Europe and to the United States.

So I think that is really our response to that question.

Paul Sankey, Deutsche Bank.

I wondered if you could comment on President Bush's comments today regarding the building of new refineries in the U.S.?

Well, it is difficult for me to comment on something I haven't really read too much about.

But on the other hand, I think the basic strategy and approach that we need more refining capacity in the United States certainly make sense.

So whatever it takes to accelerate the process by which the permitting and approvals to do that is certainly welcome.

And it is welcomed by our Company.

So essentially, what President Bush is outlining in terms of trying to increase our refining capacity in the U.S. makes a lot of sense, and it certainly should be supported.

As far as to our level of interest and other companies and all with use of oil (ph) over the military bases or whatever is something that I would have to have off line information before we comment on it.

Sure.

But I guess the perspective is at the moment there is a shortage of potential sites that this may well address.

It is going to -- it takes time though.

However refining capacity is added, we are not talking about one or two years; we are talking multiple years before you get this settled.

And further to the energy bill, are there particular elements to that bill that are important to you as a Company, or that you would highlight as being potentially significant for ConocoPhilips?

Well, it is not only to ConocoPhilips, but the entire industry, what's really important is MTBE.

In other words, the industry has said all along that we will be responsible for our handling, but we don't handle MTBE properly.

That is not a defective product.

And so we are looking for liability protection for other than if we don't handle it the right way.

So MTBE, for the provisions of the old bill -- the House bill -- is something that is very important to the industry.

And it will be aggressively pursued by the industry and the API.

And just if I could ask to further questions on Qatar, what would be your current expectations for first LNG delivery now from that country from your project?

(multiple speakers) -- Qatar for our Company?

Yes.

2009.

So you are still on track, do you think, for the 2009 first energy delivery?

Yes.

Jennifer Rowland, JPMorgan.

You gave some guidance as far as what you are expecting to see on the upstream side for Q2.

I was wondering if you could do the same on the downstream?

Are there any particular turnarounds scheduled in 2Q?

And then also, what are you seeing for marketing margins, and you expect the contributions from that area to start to pick up?

Well first, I think your question was on the refining side.

We expect to continue to have some pretty significant turnarounds in the second quarter.

On the other hand, it won't be anywhere near as much as we had in the first quarter.

But I guess how much is a little over $100 million pre-tax in turnaround expense first quarter.

And I think we are closer to about 80 or $90 million turnaround expense in the second quarter.

Remember, turnaround is not just turnaround, but we are also implementing the facilities and the change in technology we need to meet the clean fuels requirement.

So that is why, not only for our Company, but for the industry, the turnaround activity is more expensive and more long in duration as than you would normally expect.

In terms of utilization of our capacity, I guess that is another question on the refining side.

We expect to be in the mid to upper '90s as we go through the remainder of the year.

And I don't know, was there another question on that?

No, that was it. (multiple speakers)

Just on the marketing side, where you are seeing some margins, do you expect that contribution to start to pick up?

Well, we certainly would -- I would think so.

But on the other hand, it has been difficult to pass through the true cost of crude oil and the cost of taking crude oil and manufacturing and making refined product and distribution.

So margins in this kind of environment and marketing side has been certainly under pressure.

Now one of the things we feel is we are a differential in terms of a great deal of our marketing is done through the wholesale side versus retail.

And we think that actually that is unique for us.

It has been the history of the company, that we have always done our marketing that way -- branded wholesale marketing.

Now, we are looking to further improve our performance or our cost.

But on the other hand, we think we have the right model in this business environment in terms of improving our overall return on capital employed, because the real value in this business environment is coming through the refining side and the distribution side.

Jeff Dietert, Simmons and Company.

My questions have been answered.

Thank you.

John Herrlin, Merrill Lynch.

Light/heavy differentials, light procurement (ph) differentials has been pretty wide.

You are making a large commitment obviously to refining to take advantage of that.

What are your expectations on kind of a going forward basis for the light/heavy spreads, or have you thought --?

I won't give you a specific number, but when we talk about $3 billion of additional investment to increase our capability of handling heavy sour feedstock, we are not using the spreads that you see today.

We are using spreads that are more closer, but higher and historic, but we are not using to justify investment the differentials that you see today.

So that is the important point I think I would like to pass along.

Okay, that's fine.

You are interested, obviously, in Midstream.

Would you function as more of a consolidator with respect to that, or are you comfortable with the assets you now have?

We see a lot of value that comes from being in this part of the total integrated chain.

We have always been good at it.

So we see the opportunity to -- good value for our shareholders by going to 50%.

We see it accretive to earnings.

The other thing is, is we want to use a lot of capital discipline, but obviously DEFS will look at anything that becomes available.

But again, it is going to have to meet our investment criteria.

Gentlemen, that is the last question in the queue at this time.

I will turn it back over to you for any closing remarks you may have.

That's great.

Well, we certainly appreciate everybody's time and interest in the Company this morning.

And if you have follow-up questions, you can find me back in New York, or you can look on our website.

Thanks again.

Ladies and gentlemen, this does conclude our teleconference for today.

We thank you all for your participation.

And you may now disconnect your lines.