康菲 (COP) 2005 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Conoco-Phillips second-quarter earnings teleconference call.

At this time, all sites 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 sites for a question.

To get us started this morning, I'm pleased to turn the floor over to General Manager of Investor Relations for Conoco-Phillips, Mr. Clayton Reasor.

Go ahead, please.

Thank you.

Good morning and welcome to Conoco-Phillips' second-quarter earnings conference call.

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

Also here is Gary Russell (ph), the new GM of IR.

It's been a pleasure to have had the opportunity to work with the analyst community over the last four years, and I'm sure Gary will enjoy it as much as I have.

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

This presentation is designed to give you better understanding of the factors that have had a significant impact on this quarter's results and can be found on our Web site, Conoco-Phillips.com.

Looking at Page 2, 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.

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'd like to turn the call over to our Chairman and CEO, Jim Mulva.

Clayton, thank you very much for the introduction.

I appreciate very much all of those who are participating in our conference call this morning and your interest in Conoco-Phillips.

I'm going to start my comments on Page 3.

The Company had a strong quarter.

What I want to do is, on this first slide, give you some of the overview highlights of what took place in the first quarter.

You can see we generated $3.1 billion in net income, 2.8 million of cash flow from our operations.

This allowed us to continue to improve our financial strength, flexibility.

Our debt levels mainly came in at 14 billion and we are funding a strong capital growth program.

We further reduced our debt-to-capital ratio percentage from 23 to 22%; this is done primarily through the growth of our equity and you will see this in the subsequent slide.

For the second quarter of '05, E&P -- and this includes the LUKOIL segment -- production was 1.54 million DOE a day.

This is just as we outlined to you in our conference call this last quarter.

Our estimated share of LUKOIL's production this quarter was 223,000 BOE per day.

As we've done in past quarters, we report net production and earnings of LUKOIL using the equity accounting method.

Again, the LUKOIL investment is a separate segment for reporting purposes.

During the second quarter, we also closed our Timan-Pechora joint venture with LUKOIL.

At Refining & Marketing, our refineries ran at 97% of capacity; that's up 5% from last quarter.

With respect to our U.S. refineries, we ran very close to mainframe capacity in the second quarter.

In the second quarter, we increased our quarterly dividend 24% to $0.62 per share, and we completed the announced two-for-one stock split.

Our average diluted shares outstanding, compared to last quarter, were flat at 1.42 billion shares outstanding.

We have another slide later that shows our invested return on capital employed continues to be very competitive with the largest companies in the industry.

I'm moving from Page 3 or Slide 3 to Slide 4, which shows our contribution in capital employed.

If you look at the pie chart on the left side of the page, it should illustrate the proportion of operating income that our business segment generated in the first half of '05.

Then on the right side, it shows the percentage of total company capital employed for each segment as of the end of June.

You can see that E&P generated 61% of the Company's first-half income from continuing operations, while it represented 58% of capital employed.

Refining & Marketing -- (technical difficulty) -- 29% of our income and had 29% of the Company's capital employed. (technical difficulty) -- generated 6% of income and represented 5% of capital employed.

Our estimate of LUKOIL's first-half earnings was 4% of income and represented 6% of capital employed.

This is a very strong relationship in terms of what we are seeing in terms of income and where we have our capital employed.

Moving now from Slide 4 or Page 4 to Slide 5, which shows the total Company's income in comparison to second quarter of '05 to the first quarter of '05 sequentially -- (technical difficulty) -- higher worldwide realized oil and gas prices in the second quarter, we saw stronger U.S. refinery margins and higher worldwide marketing margins.

This was the source of most of the quarter's improvements, which totaled about 526 million in earnings compared to the first quarter of this year.

The improvement in our volumes -- and when I say improvement in our volumes, I'm really then saying and the related impact on our net income -- primarily came due to our U.S. refining system.

As you'll see in subsequent slides, that more than offset the lower volumes that we had and the impact on net income from the upstream business for the second quarter.

During the first quarter of this year, we had a 300 million gain from transactions related to the restructuring of our ownership in midstream Duke Energy Field services, and that of course did occur in the second quarter.

So sequentially, more income from that -- there was more income from asset dispositions and that sequentially increased earnings by 65 million in the second quarter.

The results of our income from continuing operations, it was 3.13 billion.

Discontinued operations -- a pretty small part now with 7 million during the quarter and that improved net income slightly.

So as I conclude, looking at Page 5, all in all, we had a very clean quarter with very little unusual or special items.

Now, I'm moving to Page 6, which is the total Company cash flow in the second quarter of '05. (indiscernible) from operations of 2.4 billion in the second quarter and we started the quarter with a cash balance of 2.4 billion.

Our working capital requirements in the second quarter increased (indiscernible) 2.1 billion, mainly due to domestic and international tax payments.

Capital expenditures in investments amounted to 3.1 billion in the quarter.

We also acquired an additional 1.3% of LUKOIL shares; that cost us about 384 million.

We also completed the funding -- we closed and completed the initial funding of our Timan-Pechora joint venture in Russia, and that cost about 512 million.

During the quarter, we paid 432 million in dividends; we spent 382 million repurchasing 6.5 million shares of our company stock.

After including other sources' uses of cash flow, we ended the quarter with about 1.5 billion in cash.

Now, I'm moving to Page 7, which is the total Company cash flow, available sources of funds and how we used those funds in the first half of '05.

We have two pie charts.

Go to the first six months of the year, on the left.

Cash available was about 7.2 billion.

The increase in second-quarter working capital that I just mentioned in the prior slide was largely offset by the working capital reduction in the first quarter.

We look at the available cash on the left-hand side of the slide. 96% we generated from operations.

I think you'll continue to see that percentage essentially be very little from asset sales in future periods; it's all operating cash flow.

The chart to the right shows that nearly (indiscernible) 69% but nearly 70% of our cash generated, or 4.9 billion, was used to fund our capital investment programs.

So the other 31% or around 30% or 2.2 billion of cash for expense (ph) pay down debt in the first half, fund the dividend and repurchase stock.

Now, I'm going to Page 8, which shows the improvement in the financial flexibility of our balance sheet.

The second quarter of '05, we continued to improve and strengthen our company -- very strong, and I think, in subsequent periods, you're going to see this trend continuing, given the business environment we operate in.

The bar chart on the left shows how our equity grew to 48.5 billion, and over the past six months, our equity has grown at 4.7 billion.

That remains the 14 billion, so the debt ratio now is 22%.

We expect, as I said just a moment ago, this trend to continue.

Going to Page 9, I'm going to start talking now about exploration, production and sequentially what took place in the second quarter of '05 compared to the first quarter of '05.

As we advised, compared to the first quarter, our E&P production was down 4% or 63,000 barrels of oil equivalent a day.

We will talk more about this in a subsequent slide.

Our realized oil price for the second quarter was $46.93 a barrel.

In the first quarter, it was $43.15 a barrel, so we realized about a 9% increase.

Cash prices in the second quarter were up about 5% to $5.52 per Mcf.

Exploration expenses were lower, consistent with our operating plans.

As I mentioned earlier, we closed our joint venture, Timan-Pechora joint venture with LUKOIL in the northern part of Russia.

Again, this venture though I will say will be reported as part of our R&P segment, will not be reported as part of the LUKOIL segment for future periods.

Now I'm going to Page 10 and talk about our E&P production in the second quarter compared to the first quarter.

This shows sequentially what took place from quarter to quarter.

We saw slightly higher production coming from the Lower 48 U.S. states, Canada and Venezuela.

These gains were more than offset by about 45,000 barrels oil equivalent (indiscernible) high-end downtime.

This is primarily associated with the fully extended planned downtime that we had with the Bayou one-band (ph) project in Timor Sea, operations in Alaska and Norway.

But we also had about 25,000 BOE a day of unplanned downtime in Norway, Alaska and United Kingdom.

All I can do here on the slide is just give you a little bit more information as to what the planned downtime would have (indiscernible) essentially four major areas in the Company in E&P and associate it with the 45,000 barrels oil equivalent that was planned downtime.

We had -- I'm going to give you 22,000 where it came from of the unplanned downtime; the total Company is 25,000.

First in the Timor Sea, that's the Bayou one-band (ph) scheduled turnaround in the second quarter.

That accounted for 24,000 barrels of oil equivalent of planned reduced production.

In Norway, we had a planned lower production of 6000 barrels a day.

That comes from part of our operating assets.

But we had an unplanned impact of 9000 barrels of oil equivalent in Norway, and that was because it was unplanned oil production from the Hatering (ph) field in Norway.

The third area was in Alaska.

Planned impact or shutdowns (indiscernible) our LNG Plant turnaround (indiscernible) pipeline; that accounted for 11,000 BOE a day in Alaska.

But we had 7000 BOE a day of unplanned shutdowns, and that was primarily the heat exchanger and its impact at our Prudhoe Bay operations.

The fourth area of planned shutdowns was in the UK, 4000 BOE a day in the second quarter (indiscernible); the unplanned was 6000 barrels of oil equivalent, and that was Britannia, (indiscernible) North Sea and (indiscernible) operated assets.

When you look of the total reduction from first to second quarter, these four areas, planned shutdowns of these four areas were 45,000 BOE a day; unplanned was 22,000 BOE a day.

Now, if you step back from what the total Company did and you add 223,000 BOE a day of LUKOIL production to our E&P segment, then in total our production was 1.7 million BOE a day in the second quarter.

I'm going now from Page 10 to Page 11, which shows sequentially what took place with our E&P net income, second quarter compared to first quarter.

In the second quarter, we earned 1.9 billion; this was an increase of 142 million over the first quarter.

On the impact of the higher commodity prices E&P was 251 million in the quarter, of which 192 million came from higher oil prices.

Now, of the lower sales volume reduced our E&P income we estimate about $97 million.

For the year so far, our sales are just modestly, just slightly higher than our production.

So there's not a lot of impact of difference between our sales and our production.

Now, the net gains on asset sales in the second quarter were 69 million lower than the first quarter.

Drago (ph) costs were 38 million more than the first quarter.

I'm going to Slide 12 now, moving from E&P to Refining & Marketing.

Here we're looking at sequentially what took place in the second quarter compared to the first.

In the second quarter, we benefited from higher U.S. refining margins.

The improved our U.S. capacity utilization and we saw improved and higher worldwide marketing margins.

In the U.S., our second-quarter realized U.S. crack spread went a $1.12 a barrel.

In other words, it went up to $11.23 a barrel; first quarter, it was $10.11 a barrel.

On the second quarter, the light-heavy crude differentials remained relatively wide, but they narrowed during the quarter.

The WTI/Maya price spread was about $4 a barrel less in the second quarter than in the first.

In other words, it fell from about $17 a barrel down to about $13 a barrel.

I said earlier our U.S. refinery system -- it ran near stated capacity.

That number is 98%.

We did have unplanned downtime at our Alliance and Walter refineries and this reduced feedstock processed during the quarter by about 60,000 barrels a day or about 2 or 3% of our U.S. capacity.

In terms of marketing, U.S. wholesale and international marketing margins improved over the previous quarter.

Now, looking at our turnaround expenses, they were $106 million pretax for the quarter, pretty much in line with what we expected in our operating plan.

We did have -- our Humber refinery in the United Kingdom and Lake Charles refinery had major planned turnaround activity in the second quarter.

Obviously, that impacted the financial results in the second quarter.

On the other hand, you can look at it and say had those refineries been up and running and not had their planned turnaround, the performance would have been even stronger.

Now moving to Slide 13 or Page 13, Refining & Marketing net income in the second quarter sequentially compared to the first quarter, Refining & Marketing generated 1.1 billion in net income second quarter; that is up 59% from the first quarter where we earned 700 million.

The higher U.S. crack spreads to marketing margin improvement I spoke about earlier added about 290 million of increased net income.

This improvement is net of the narrowing by heavy differentials that I just talked about on prior slides.

We had higher volumes, mainly as a result of the increased capacity utilization at our U.S. refineries, and that has a positive impact (indiscernible) $141 million.

If we go to Slide 14, take a look at what are the earnings Refining & Marketing are coming from, you see the contributions to the first quarters of the year.

As you can see in both the periods, essentially all of our Refining & Marketing earnings, when you look at it this time period, is coming from refining.

In the second quarter of '05, U.S. marketing was slightly positive.

This is the result of improved margins from that which we experienced in the first quarter.

I'd like to just say, in the second quarter of '05, we earned billion, $1.110 billion.

Of that $1.110 billion, $1.032 billion came from refining.

In the U.S., of the 1.032 billion in the U.S. contributed 918 million of earnings; internationally, it was 114.

In terms of our marketing contribution, it was $59 million.

The U.S. was 11, international was 48, and that adds to 59.

So you can get a relative feel for where the income is coming from.

The numbers don't exactly add up to $1.110 billion because we also have our specialty businesses that are also part of Refining & Marketing and earnings.

Now I'm going to move to Page 15, which is the segment of our LUKOIL investment.

You can see our strategic alliance with LUKOIL.

We increased our equity ownership by 1.3%.

We are up to 12.6% for the average for the second quarter of ownership LUKOIL is 11.9%.

Our equity earnings for the quarter were 448 million; that's up from 110 million in the first quarter.

LUKOIL continues to do quite well, and we also see (indiscernible) increased ownership of our participation in earnings.

LUKOIL announced a dividend.

Our share of that would be approximately $100 million pretax to our company, and we expect to receive it in the second half of the year.

All aspects of our LUKOIL strategic relationship continues as we planned and according to our expectations.

I am moving now to Slide 16.

We're going to talk about midstream chemicals in our emerging businesses.

The earnings from the midstream business in the second quarter was $68 million; that's down from 85 million in the first quarter.

This comparison excludes the 300 million gain that was associated when we restructured DEFS in the first quarter.

The sequential reduction from quarter to quarter in earnings is primarily due to lower realized margins.

Now, turning to chemicals, our joint venture in chemicals, our earnings fell to 63 million in the second quarter from 113 million in the first quarter.

The decrease primarily is a result of lower margins coming from lower sales prices of olefins, polyolefins, and aromatics and (indiscernible) part of the business wee had lower margins that resulted from lower sale prices, higher utility costs and lower volume.

Our emerging businesses lost 8 million in the second quarter.

That's pretty much flat with what we experienced in the first quarter.

I am moving to Slide 17 in which we talk about the corporate part of our financial results, again that's sequential second quarter compared to the first quarter.

You can see that the impact of corporate was a loss of $179 million in the second quarter; it is an improvement of 17 million, quarter-to-quarter.

This results in -- this improved 17 is net interest expense.

We have lower average debt levels, and the early debt-retirement premium that we paid in the first quarter we didn't have in the second quarter.

So this was, to some extent, offset by the impact of currency movements.

Our discontinued operations contributed $7 million.

That's generated by the marketing assets not -- very few of them left that are still held-for-sale.

Now we are moving to Slide 18, which is our return on capital employed.

You can see on that the green part of the bar is what we have done in terms of our return on capital deployed by quarter.

The gray part illustrates what the larger companies would call -- that we compete against, the peer group; these are the five or six companies that are larger publicly traded companies than Conoco-Phillips.

You can see that, since the merger, our return on capital employed is quite competitive with these largest companies in the industry.

The second quarter of this year, our ROCE, when you adjust for purchase accounting for a comparison purpose, was 31%.

So we see a nice improvement as we go through this time period and certainly quarter-to-quarter.

The improving in pricing environment, margins, good operations has quite an impact on our return on capital employed.

What makes up that 31% in the second quarter of 05?

Well, here are the segments.

In the second quarter of '05, E&P return on capital employed adjusted for purchase accounting was 37%.

Refining & Marketing was 35%.

Midstream and chemicals combined was 19%;

LUKOIL, 17%.

Of course, we have the offset on the corporate side, so the combined all rounded up is 31%.

While we don't have the info yet available on the competitive peer group, our ROCE -- because it is not available to the other companies -- we expect that our 31% will be very competitive with the peer group and as we had demonstrated over the last number of years (indiscernible) several quarters.

I'm going to go to the last slide now, which is our outlook.

This is on Page 19.

While we originally always say this to make sure that you know that everything that we're doing in the Company, our strategy, objectives, financial goals that we laid out, and our operating plans and our capital programs, remain unchanged.

We expect that third quarter a barrel of oil - the equivalent production be higher than the second quarter.

We expect that our 2005 E&P production to increase about 3% over 2004 levels, so that is about near 1.61 million BOE a day.

Now, I think I would say it's important that the unplanned downtime, we'd minimized unplanned downtime in the third and fourth quarters so as to meet the 3000 -- or meet the 3% increase in production average for the year and the 1.61 million BOE a day.

Again, these numbers exclude the LUKOIL segment.

Our E&P production growth will come through the ramp-up of production from Magnolia, Hamaca, (indiscernible) and satellites and waterflood and malonic, (indiscernible) as well as expansion projects in Alaska, the UK, specifically from the Southern North Sea and the Clara (ph) field in the UK side of the North Sea.

Now, if you include LUKOIL, our BOE production is expected to be over 1.8 million BOE a day average for the year.

We are on track with our 7.9 million capital budget for 2005.

Then when you add our existing (indiscernible) to our existing capital program, our purchases of LUKOIL shares, our initial investment in the joint venture with LUKOIL (inaudible) the Timan-Pechora joint venture, you can see that we're spending a large proportion of our cash flow on the upstream legacy projects, our downstream clean fuels programs, and other developments that we see that are going to improve the financial performance volumes and returns for upstream and downstream to our Company.

As we said in the first quarter, we're planning to spend an incremental $3 billion -- that's from 2006 through 2010 -- to increase our refining system's capability and capacity over and above what we have outlined in the past what we would be spending in Refining & Marketing (indiscernible) refining capability capacity.

These projects primarily are at (indiscernible) refineries.

They're going to be discussed in a lot more depth at our ANF (ph) analyst meeting that is scheduled in November, but I will say planning, engineering and all for these (indiscernible) incremental program is well underway and we're going to be pleased to share that with you in November.

Finally, we continue to repurchase Company stock.

This is consistent with our goal of bringing our diluted shares outstanding to 1.4 billion shares.

So, that really concludes the prepared remarks.

I think Clayton and John Carrig and myself are prepared to respond to whatever questions you may have as a result of what we've gone through in our presentation.

Thanks a lot.

Jim, if you'd like to line up a few questions for us, we'd be ready to take care of those right now.

(OPERATOR INSTRUCTIONS).

Arjun Murti with Goldman Sachs.

Thank you.

I guess first to Clayton, thanks for your help.

We're going to miss you, but congratulations on your new assignment.

There's been a lot of I guess press reports about what's going on in Venezuela.

Jim, do you have any color in terms of how you see the situation?

There's obviously talk about owing back taxes and changes to future tax rates.

Can you provide any clarification on what you think is actually going on down there and how this impacts how you think about the country?

Thank you.

Obviously, we have a very substantial investment in Venezuela through our (indiscernible) project - the oil project, Hamaca, the development of Coral-Coral (ph).

We continue to work very closely with all levels of the authorities and operating side of PTVSA and (indiscernible).

I think we have very good relationships.

We continue to work on all of these issues that you read about.

We think we have conducted all of our operations in the right way, handled all of our financial affairs, returns in an appropriate way.

We continue to meet very regularly with them.

In fact, I'm headed to Venezuela later this week.

So, I think, in many regards, we feel good about our position in Venezuela.

We understand the situation; we continue to work very closely in a transparent way with the Venezuelan authorities, so I think I really don't have too much more to say than that.

I got you.

It's not, at this point, changing your sort of future investment plans or is it too early to say on that?

Well, we're not changing our investment plans with respect to heavy oil project at Coral-Coral (ph).

There's also some other opportunities that we see that we can potentially do in Venezuela, but that's something that we need to do and are in discussion with the minister and PTVSA and the authorities in Venezuela.

That's great.

Just one other, if I may, Jim?

I think stock buyback, as you just mentioned, has typically gone towards offsetting dilution.

With your balance sheet getting very, very healthy, any desire at some point to start actually reducing the share count or still is there the preference to raise the common (indiscernible) dividend over buying incremental stock?

Well, first of all, Arjun, it's a good opportunity for me to say that we have, for our sized company, tremendous opportunities both upstream and downstream.

You know, our first priority is to spend our available cash to grow and develop the Company.

In this kind of pricing environment, we have to be very careful, though, that we continue our discipline, that we expect and realize returns when we invest 70% or more of our available resources right back into the business.

So having done that, I think you'll see some modest amount of debt reduction, but -- (technical difficulty) -- have a very strong balance sheet and the cost of our debt is certainly very low.

We have to cross (indiscernible) comment here in a moment but I think it's between 4 or 5% or closer to 4%.

Now, we want to be aggressive on dividends.

We liked the discipline of sharing with our shareholders routine increases in our dividends.

But, after doing that, I think you'll see, if we have available cash, we're not going to stop at 1.4 billion shares outstanding.

If we have available cash, we're not going to carry the cash; we will be more aggressive in the marketplace buying our shares.

We announced a $1 billion share repurchase program and at the pace we're going, we are pretty well going to conclude that or finish that here in the next month or so.

So you can probably expect that we will probably comment more on this in the next month or so.

That's great.

Thank you, Jim.

Mark Flannery with Credit Suisse First Boston.

I'd just missed something on the call about the joint venture in Timan-Pechora.

Did you say you would be reporting that as part of LUKOIL or would not?

We would not, because that's part of the normal operations of E&P, so it's just included that E&P volumes, costs, operations, everything.

The ownership of equity in LUKOIL is what is included in the LUKOIL segment, only that.

Okay, great.

Still on that topic then, could you just walk us through the general outline of what we can expect to see in here from that Timan-Pechora joint venture in the next, let's say, two to four quarters?

Well, I think -- I don't have all of the metrics in front of me, but there's a pretty substantial investment that's going to be made now as we go through this year, '06, '07, '08 that we have in mind that they're going to have initial production in the latter part of '07.

Then it ramps up as we go into to '08 and '09, It's an integrated project, so a lot of the money that we're spending on development in the YK (ph) field -- we are going to have to not only develop a YK (ph) field but the infrastructure and the pipeline and the (indiscernible) which we are a part of and support of -- (indiscernible) once that's in place, then we have the opportunity in quite a few other satellite fields in the area that we have in our joint venture, that we can hopefully add and expect to add to the YK field that's being developed.

I don't know.

John Carrig is here.

You might have something else you'll to add to that.

Only, Mark, that we expect, later this year, to have a formal project sanction for the investment in the YK (ph) field.

That's later this year?

Yes.

That would lead to presumably reserved bookings this year then?

Consistent with our processes, yes.

Thanks very much.

Also, I would like to add my thanks and best wishes to Clayton as well.

Paul Sankey with Deutsche Bank.

Jim, just to press you a little on the cash balance again, I guess from what you're saying that LUKOIL remains the focus of, if you like, let's call it acquisition-type activity.

Beyond that, you would be prioritizing it seems to me now more buyback and perhaps not such aggressive increases in your dividend.

Am I reading that correctly?

No.

If I've got this right, let me just come back, Paul.

We will be pretty aggressive on our capital program when we share with the analysts in November.

I think you probably can be looking at capital spending this next year of 8, $9 billion.

We will be some modest amount of debt reduction as we go through the period of time -- not real substantial, but just say $1 billion or so a year.

We will be looking at some increases in dividends annually.

We think that is a good thing to do.

Whatever is leftover, we will be pretty aggressive in buying our shares.

In terms of the LUKOIL investment, I think, for planning purposes, you can probably expect that we're going to get up towards the 20% by the end of '06.

Great. (indiscernible) 702 under the pre-split or I guess 1404 million shares still an idea -- would you like to get back to that kind of level in terms of -- (multiple speakers)?

Yes, we want to be at the 1.4 billion probably as fast as we have available cash, but then the question is going below 1.4 billion is going to be the last allocation of cash after the capital program, getting to 20% of LUKOIL, the aggressiveness in terms of periodic increases, annual dividend increases, assuming the pricing environment/earnings continues to support that and will be in the share repurchase.

Great, thanks.

Would you say that Venezuela is the biggest risk you face to the Company?

Well, we have all -- obviously, in this business, we have different risks.

We have technical risks.

In different parts of the world are pretty challenging in deep waters or Arctic environment.

We have political risk.

No, I wouldn't say that.

I would just say it's a different kind of risk than we experienced in different parts of the world.

I wouldn't characterize it as such.

Okay, fine.

One final for me -- your midstream structure, I get the sense that that's shifting in terms of what's going to happen with your assets there going forward.

Could you comment on that?

Well, we've always -- (indiscernible) the midstream part of the business, and we now have gone from 30.3% in the joint venture with Duke to 50%.

Both Duke and ourselves, we think this is the premier midstream company in the business -- joint venture.

We want to continue to grow and develop it, so I think you'll see we've been very supportive of its aggressiveness in terms of growth and volumes, investments, but we're also going to make sure to have discipline on investment that improve operation, safety performance and all that.

But we like the business, and we think -- on the other hand, though, I don't think you're going to see it kind of (indiscernible) and midstream increase to more than 5% of our portfolio.

In terms of disposition or IPO-ing that or anything, we don't have any plans to do that.

We like our relationship with Duke, and we like it -- we want the DEF (ph) joint venture to be just like the chemicals joint venture we have with Chevron.

No IPO, no publicly traded company -- we like the structure and the ownership (indiscernible) which we have.

Thanks a lot.

Of course, it remains for me to thank Clayton on behalf of Deutsche Bank.

Thank you very much, Clayton, for what you've done and I'm very tempted to ask you what you think of marketing, given what you said about it in the past, but I think I'll let you into the job before I do that.

Lehman Brothers, Paul Cheng.

Good morning.

Clayton, I just wanted to say also to add my thank you and congratulations, so best wishes.

Jim or John, you talk about, say, next year, that the CapEx may be about 8 to 9 billion.

Is there any revised number that you would share with us on the '05, or do you think '05, despite the cost measures that we've seen in the industries, still on the (indiscernible) what you have in the project after we adjust for the (indiscernible)?

Well, Paul, John can comment here in a moment, but all I was trying to say is responding to, in this environment, pricing and given the growth programs, initiative capital programs that we have, I'm just (indiscernible) that we don't see a reduction in our capital program from what you see this year, we think, just (indiscernible) your models until we meet with you in November, you'd be thinking 8 or $9 billion.

I wouldn't read anything more in that other than we are just signaling to you that we don't see a reduction in the money that we're going to be spending through capturing the opportunities we see, both upstream and downstream.

With respect to our '05 budget, we remain on track for the 7.9 billion capital spending that we announced plus you add to that, for planning purposes, what we said was $1 billion of LUKOIL purchases and the $500 million (indiscernible) close the Timan-Pechora joint venture and we (indiscernible) at about 9 million spending for '05.

So you (indiscernible) but how about the Timan-Pechora -- the actual capital spending relate to the joint venture, but not if we exclude the upfront costs (multiple speakers)?

That is in the 7.9 million that I quoted earlier.

7.9, right?

(multiple speakers) -- 307 to close (inaudible)?

John, also there, you guys have announced a $3 billion additional premium (ph) investment in the refining sites.

When is that spending is going to kick in or is going to accelerate?

Well, we've assumed -- obviously, over it's a five-year period and on a level basis, it would be a $600 million a year, but given the nature of the investments and the required planning and engineering, you would expect that to be somewhat towards -- ramping up towards higher numbers in the out years.

So there's probably more likely in the 2008 that you start to be more aggressively spending?

Well, there will be (indiscernible) items so it's premature for us to tell you how that will be.

But it will really ramp up as we go through the latter part of '06, certainly '07 and '08.

We are already spending money on engineering and on the people side to make sure that we have the project management people and commercial people along to make sure that we execute these projects exactly how we like.

So we are already spending money on doing that but that ramp-up of capital spending is really going to be as we go through maybe the mid and the latter part of '06, but certainly having it in '07 and '08.

We will share that with you in November.

Sure.

Jim and John, if I can ask one last question on you comment about if you have excess cash, you probably would become more aggressive, after funding for all the other purposes (ph) in the share buyback.

What is the required minimum cash balance that you need in the book?

Is it 500, 600, or 700 million?

What kind of number that we may be talking about?

Well, obviously, we like to run with as low a cash balance as possible, but in the 500 range is not a bad balance (ph) -- (multiple speakers).

So 5 to 600 is a reasonable estimate, say, the minimum requirement on the cash balance?

It's a reasonable estimate.

I see, very good.

Thank you.

Neil McMahon with Bernstein.

I've just got a few questions.

Thanks, Clayton, from us at Bernstein, too.

Just first on LUKOIL, just looking, when you correct for your equity stake, it looks like LUKOIL's oil production slowed in the second quarter in terms of the growth rate.

Has that something to do with the seasonality in Russia, or are you seeing something else happening that it's not growing production as fast as it did from the fourth quarter to the first quarter '05 and then from the first to the second quarter of '05?

So that's the first question on Russia.

The second question is, in terms of your downstream position globally, are you seeing any indications of demand slowdown in any regions?

We've heard from other companies that potentially there is actually a bit of renewed strength, especially in the U.S., around some oil-product areas.

Well, first, with respect to LUKOIL production, it's really not appropriate for us to comment on LUKOIL production because I really don't have the capability of doing that, other than I would say I know that they've recently came out with their operating and future plans, which showed some pretty dramatic increases in production as you go forward over the next couple of years.

In terms of seasonality, whether they have an impact from one quarter to the next, I think mabye Clayton or Gary could come back you on that, but I would say, when we come back, we're really going to go to LUKOIL.

It might be best for them to respond to that.

But I know, talking with (indiscernible) and what they've put out publicly, it's a pretty aggressive and good growth programs in terms of increasing their production for the total company, both in and outside of Russia.

So with respect to the domestic demand that we see for refined products I think and the volumes that we see in our refineries, I will just comment generally and then I don't know if Clayton or John could speak up.

We haven't seen any real reduction in terms of our demand.

In fact, it's the other way around; we see increases on demand, so it's very important for our company and for the industry to run very efficiently, so as to make sure that we have the supply to meet the requirements in terms of going from one season to the next.

So I know our company and the industry is doing everything we can to make sure that we have the supply, both regionally and by product, to meet what the demand is not just in the United States but throughout the world.

Neil, I think some of the data that we've given you show an increase in sales volumes in the second quarter over the first quarter and year-on-year growth.

So I would just support what Jim said.

Sure.

I was just looking as well into the third quarter as well, if that was continuing to be the case.

So far.

I don't think there's any reasons why it wouldn't.

Mark Gilman with Benchmark Company.

Good morning, gents, and congratulations, Clayton.

A couple of specific things, if I could?

What tax rate, John, are you using to burden your Venezuelan earnings in the second quarter?

The earnings are equity earnings, Mark, and they don't come into the consolidated earnings balance sheet on carrying taxes.

Yes, but (indiscernible) have an embedded tax rate in there, John.

The tax rate is 34%.

34?

Yes.

Okay.

I wonder if I could ask you to comment on a couple of specific projects and current production levels and performance, specifically Magnolia and Belonic (ph), where we are currently.

Well, Magnolia continues to be in the ramp-up stage and you know, we have wells coming on.

We would say that performance is satisfactory.

Belonic (ph) I expect to ramp up.

As Jim indicated in his comments, we expect the Belonic ramp up to occur over the course of this year.

I don't have at-hand what the feed production is, when the feed production is but we do expect improvement in the production from Belonic as the year progresses.

Has the ramp up so far been in line with expectations on both?

Yes.

Just one final, if I could, on gas -- can you give us any guidance at all, given the rather significant restructuring, what the implications of that might be in the second-half contribution in an equivalent business environment?

We would expect it to be accretive.

Quantification?

I'm not prepared to quantify that right now, Mark.

Okay.

Did you make the cash payment associated with that restructuring in the second quarter, or is that a third-quarter item?

The transaction closed on July 1, so that would be in the third quarter.

Refresh my memory on the amount of that, please.

I don't have a -- there's a lot of moving parts to that, Mark.

Clayton or Gary will have to get back to you.

JP Morgan, Jennifer Rowland.

Just another question on LUKOIL -- now that the Timan-Pechora JV is closed, are you looking at other potential JVs with LUKOIL?

If you could comment on whether or not you're looking at solely upstream opportunities or would you consider potentially partnering with LUKOIL for refining investments?

Well, I myself meet with (indiscernible) from just about every other month or every six or seven weeks, we meet somewhere and make sure that everything that we are doing with respect to Sicandis (ph) with respect to the joint venture that we just closed, our ownership in the company -- all of these things we continue to do and watch.

We also look for the opportunities by which we could be working on other projects, both within Russia and outside Russia.

We are also working together to go forth with the license that LUKOIL has for the development of West Qurna field in Iraq.

So I think what I would say, it's upstream, it's downstream; we look at all of those various opportunities by which we could jointly work together.

On the other hand, there's nothing exclusive.

Both LUKOIL and ourselves can to do business in and outside of Russia and anywhere in the world and certainly with other companies.

But, it's a growing and developing relationship and we always look to where opportunities we can potentially work (indiscernible) another joint venture and other areas in or outside Russia.

Great, thank you.

Just an operational question -- is any of the unplanned downtime that you had in the second quarter -- will any of that impact third-quarter volume?

Well, it's a little too early to tell but we do know that we will experience some impact in Alaska as a result of the heat exchanger (ph) and a facility (indiscernible) impact on crude oil production.

But I think hopefully it will be a little bit less in the third quarter than we experienced in the second quarter, but it's too early to tell.

Okay, great.

Thanks, and thanks to Clayton as well.

Doug Leggate with Smith Barney.

Good morning, gentlemen.

As your production rounds slump (ph) over the next couple of years, it is fairly pretty aggressive growth.

How should we think about portfolio management in terms of maybe taking advantage of the current oil price environment high-grade in the portfolio (ph) if you like?

High-grading the portfolio?

Well, we've pretty well done all of the high-grading that we intended to do right after the merger in 2000 -- late 2002, and 2003 and 2004.

We like our asset base, so I think, for planning purposes, very little or modest because we like our portfolio, we like our assets, so we're not interested really in selling anything.

Okay, good, thanks.

A question for John -- your debt-to-cap ratio is approaching the lower end of the range that you gave us a few months back.

Is that range likely to come down?

I know there's a lot of options for use of cash, but how are you thinking about that 20, 25% range you gave us previously?

Well, I think, as Jim indicated earlier, you know, we can see relatively more modest dedication of cash flows to debt reduction, maybe 1 billion a year but probably trending down towards 10, an amount lower than 10 over a number of period of years.

Then the debt-to-cap can trend lower with equity growth offset by any share buyback programs that we have -- or do (indiscernible) increase.

Clayton, very best wished from all of us at Smith Barney as well.

John Herrlin with Merrill Lynch.

Yes, thanks.

Some quick ones, one for Mr. Mulva.

You've been spending more aggressively than your peers.

Have you been surprised that your peers haven't been as aggressive with their CapEx?

Well, first of all, it's inappropriate for me to comment on other companies because I'm not familiar with it and not only familiarity;

I shouldn't be commenting and don't want to comment on other companies.

But commenting about our company, we have, for our sized company, significant investment opportunities to grow and develop our E&P business and our refining and marketing business.

So we think it's in the shareholders' interest that, if we have the opportunities, we should fund them.

But as I said earlier, with the strong pricing environment that we are operating in, we should be very disciplined about our capital spending.

We do (indiscernible) we premise and we look at how we are spending our money.

We don't look at a 50 or $60 oil price or crack spreads where they are.

We use (indiscernible) modest expectations.

In some cases -- in all cases, we look at some very low prices and crack spreads to make sure that even though probability-wise we don't think it's going to happen, if it were to happen, we could live with the investments.

So we just -- we have the capability and the resources.

The Company has developed very, very well over the last several years, and we will invest in the opportunities that we have in front of us and it just happens that it appears that, proportionately, we have more opportunities maybe than some other companies that we compete against.

Okay, two other quick ones -- thank you -- two other quick ones.

U.S. gas production was up sequentially.

Is this something that is the start of a trend or was it just activity-related or tie-in (ph) related -- natural gas?

We will have to come back to you on that because normally, as we go through the summertime, we see some seasonality of that, particularly its impact on the North Sea.

But I wouldn't read too much into that.

Let us just come back to you on that -- Clayton or Gary.

The last one for me is on R&M.

Your clean fuel yields were down in the UK.

Any particular reason?

Well, I can't really respond to that but Humber was going through a pretty significant planned turnaround in the third quarter -- or second quarter -- so I'm sure this has an impact in terms of yields.

John, on the gas increase, we saw increases at Magnolia and Lobo.

So you're more active again in Lobo?

Well, I don't know about that; we just saw an increase in gas production at Lobo and at Magnolia.

What I would say, though, in terms of Lobo, in terms of aggressiveness, one of the things that we do in western Canada as well as the Logo trend -- we continue, irrespective of (indiscernible) development costs maybe higher than you would expect, this is pretty quick, very high probable production.

If you look at the finding and development costs, they are quite high, so they (indiscernible) the prices and it comes down very quickly, this is something that we should do.

So if it looks like, from your perspective, a little more aggressive than you would think, that's why.

Okay, thank you.

At this time, gentlemen, the last question comes from William Frerer (ph) with W.H. Reeves.

Good afternoon, gentlemen.

I can't believe that I'm the last question and I too would wish Clayton good success, I guess with the stock up and more importantly the dividend rising, then the assignment to oilfield working and Timan-Pechora is perhaps not shifted to Houston (sic), so I wish you good success.

I appreciate that.

Two kind of disparate questions, if I may?

Number one, as the now joint venture with Duke is a 50-50 relationship, given the fact that others in the industry are either buying or selling with some aggressiveness, does this open up new opportunities to add or perhaps subtract from your position, or are you comfortable where you stand?

Secondly, you had mentioned that most of the CapEx I believe in '06 and beyond timeframe for Refining & Marketing was directed to the U.S.

Could you give us a little flavor of the attention that might go to foreign R&M please?

Okay, first with respect to (indiscernible) midstream, we would be aggressively looking for opportunities to grow our volumes and our position in midstream.

On the other hand, in today's environment, things are pretty expensive, so we have to make sure we want to grow it (indiscernible) but we have to make sure that we have discipline in what we're doing, and I know Duke feels the same way.

In terms of the refining side of the business, as you say, a lot of our growth -- clean fuels -- is in the U.S.

Expenditure is pretty well getting near the end of this year and next year, but so we are looking at increasing our capability in handling heavy sour crude.

A lot of that is in the U.S., but I would not come to the conclusion that a lot of our expenditures in the future and opportunities are only exclusively directed towards the U.S.

Because we see quite a few opportunities to enhance our integrated position in Europe, Eastern Europe as well as Asia.

We are pretty interested in looking at what are those opportunities wherein we can enhance our position not only for the business of the downstream part of the business outside of the United States but also help us with respect to our integrated part the Company upstream.

So don't read into what we're saying that everything is exclusively directed towards the U.S.

No, we think it's a global business and we feel pretty strong about developing our downstream as a global business.

But, Mr. Mulva, that would be more in the areas in which you are currently positioned rather than new areas, I assume?

No, it could be existing.

Certainly, as we can to we complement where we are but also the new areas.

What I'm thinking about is not only Western Europe but Eastern Europe, as well as the Mideast, as well as Asia.

But I think what you would see is a lot of that opportunity's growth is directed more primarily towards the refining side of the business than it is the marketing side of the business.

Okay.

Well, once again, thank you for your interest in the Company.

You can find our slides and a transcript of this presentation on Conoco-Phillips.com and we wish you all a good day.

Ladies and gentlemen, this does conclude today's teleconference.

We thank you all for your participation and you may now disconnect your lines.

Have a great day.