康菲 (COP) 2005 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter ConocoPhillips earnings conference call.

My name is Jen, and I will be your coordinator for today.

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

We will be facilitating a question-and-answer session towards the end of today’s conference.

If at any time during the call you require assistance, please press star followed by zero, and a coordinator will be happy to assist you.

I would now like to turn the presentation over to your host for today’s conference, Mr. Gary Russell, general manager of Investor Relations.

Please proceed, sir.

Thanks, Jen.

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

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

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

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

Now, on 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 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 of ConocoPhillips, Jim Mulva.

Gary, thank you.

And I also want to thank everyone for joining us today on our third-quarter earnings conference call.

We always appreciate your interest in our company.

And I’m going to start my comments on slide number, Page 3.

As you can see from the highlights, the company had another strong quarter.

We generated $3.8 billion net income, $6.1 billion cash flow from operating activities.

And with the strong results, we were able to fund our capital program, improve our financial strength and flexibility.

We reduced our debt level by $516 million to $13.5 billion.

Therefore, our debt-to-capital ratio went down 1 percent, from 22 percent to 21 percent.

During the third quarter, our U.S.

Gulf Coast operations were significantly impacted by the Hurricanes Katrina, Rita and Dennis.

During the third quarter of 2005, our E&P production, this excludes the LUKOIL segment, was 1.52 million BOE a day.

And this 1.52 million BOE a day is consistent with what our interim update that we provided to you earlier this month.

Our estimated share of LUKOIL’s production in the third quarter was 266,000 BOE a day, that started in the third quarter, and it reflects our increased equity ownership position.

As done in past quarters, we report net production in earnings using the equity accounting method under a separate LUKOIL Investment segment for financial reporting.

Earlier in the quarter, we finalized our DEFS restructuring, so our ownership now is 50 percent; and refining and marketing, including hurricane impacts, our refineries ran at 95 percent of crude processing capacity.

That’s down 2 percentage points from the last quarter.

This, essentially, relates to the impact of the hurricanes.

Our average diluted shares outstanding compared to the last quarter were flat at 1.42 billion shares, and our adjusted return on capital employed continues to be very competitive with the largest companies in the industry.

We have a lot of slides now that we’ll go through that support all of these numbers with further comments.

So, I’m going to move now to Page 4, which is contribution and capital employed.

We put these in all of our past quarterly presentations.

And the pie chart on the left side of this slide illustrates the proportion of operating income that our business segments generated during the first three quarters of 2005.

And on the right inside of this page, it shows percentage of total capital employed for each segment as of the end of September 2005.

You can see that E&P generated 59 percent of the company’s first three-quarters income from continuing operations, while it represented 56 percent of capital employed.

You can see the LUKOIL segment on the pie chart.

More than half of that LUKOIL capital employed relates to E&P, so if you were to separate that out our E&P position or capital employed would be right at 60 to 61 percent.

Refining and marketing generated 32 percent of our income from continuing operations and had 29 percent of the company’s capital employed.

Midstream and Chemicals generated, on a combined basis generated 4 percent of income and represents 5 percent of capital employed.

And then for LUKOIL the first five-months earnings, 5 percent of our income and represents 7 percent of capital employed.

When we talk about capital employed in this slide, I’ll just give you a few numbers.

Our E&P segment, capital employed is about $35.7 billion.

Midstream 1.7 billion.

Refining and marketing, 18.6.

Chemical was 1.8 billion.

And the LUKOIL segment is 4.7 billion.

That’s ending capital employed.

Now, I’m going to move on to slide 5, which talks about total company net income and compares it to third quarter of 2005 to the previous quarter in 2005.

So, you can see the sequential quarterly comparison, income from continuing operations.

A higher worldwide realized oil and gas prices, along with stronger worldwide refinery margins partially offset by the impact of natural gas prices on inventory positions, were the major sources of improvement, which totaled 854 million in earnings compared to the previous quarter.

You can see our earnings were impaired by the impact of the hurricanes on our volumes.

You will see this in more detail as we go through the presentation.

During the third quarter, our DD&A was 48 million higher than the prior quarter.

In addition, the impact of asset sales were $32 million lower this quarter than the previous quarters because the gains from the sale of certain assets in the second quarter did the curve in this quarter.

Incurred our early debt retirement premium of $42 million in this quarter; other impacts to our earnings for the quarter include lower turnaround costs, which are more than offset by higher taxes and utility costs, as well as an impairment associated with the discontinuation of a marketing incentive program in the downstream.

Result, income from continuing operations was $3.804 billion.

The discontinued operations, quite small now, generated a loss of 4 million during the quarter, decreasing income very slightly.

I’m now moving on to slide 6, which shows the total company cash flow in the third quarter of this year.

As you can see, cash from operations was $6.1 billion.

Now, we’ve benefited from working capital changes of approximately $2.4 billion in the third quarter, mainly due to the timing of domestic and international tax payments.

We’ve made some pretty substantial domestic and international tax payments the early part of the fourth quarter.

So, we expect a significant portion of this benefit to be offset in the fourth quarter since these payments have been made.

The capital expenditures and investments amounted to $3.6 billion during the quarter.

Included in these numbers were the acquisition of approximately 2.2 percent of LUKOIL shares, and that represented $850 million.

And then there was $838 million which represents the increased ownership and restructuring of the midstream DEFS.

We paid $430 million in dividends.

That’s reduced $516 million, and we spent $588 million repurchasing 9.4 million shares of our common stock.

Year-to-date we have repurchased now 20.9 million shares of our stock for $1.2 billion.

Now, after, including other sources and use of cash flow, our cash balance increased approximately $1.3 billion during the quarter.

Now, I’m going to move to slide 7, total company cash flow, September year-to-date.

On the pie charts, shows you the use of cash flow for the three quarters.

The chart on the left, total cash available was very close to $13.6 billion.

Ninety-six percent was generated from operations.

On the right-hand side of the chart shows that 63 percent of our cash generated or about $8.6 billion was used to fund our capital investment programs.

It shows that we continue to reinvest a significant portion of our cash flow right back into the growth and development of all of our businesses.

Thirty-seven percent or about $5 billion of cash sources was spent to fund the dividends, pay down debt and repurchase stock.

So, now, I’m going to go to slide number 8, debt-ratio improvement.

With the strong earnings and cash flow, we continue to improve financial position, strength and flexibility.

Our debt-to-capital ratio throughout all these quarters for the last several years.

And the bar chart on the left shows equity grew to $51.1 billion at the end of the third quarter.

So, for the nine months of this year our equity is up $7.2 billion or about 16 percent.

The balance-sheet debt is down to $13.5 billion, so the debt-ratio is now 21 percent.

I’m going to slide 9, and we’re going to start talking, a few slides on exploration and production.

Our worldwide realized oil prices went up 21 percent from the previous quarter; the total was $56.64 a barrel in the third quarter.

Our realized global gas prices up 16 percent to $6.38 per MCF.

E&P production in the third quarter was slightly lower than the previous quarter, down about 1 percent, and that’s 16,000 BOE a day.

And I’ll talk more about that in a moment.

The Hurricanes Katrina, Rita and Dennis were the major contributors to the lower production in the third quarter.

I’ll go through this more in subsequent slides.

And our exploration expenses were somewhat higher but have been consistent with our plans.

I’m going to go now to slide 10, which just goes into the total company production and compares it to third quarter of 2005 to the previous quarter, the second quarter.

And you can see the sequential variance compared to this past quarter.

We saw reduced production in the Lower 48 as a result of the hurricanes, as well as lower production in Alaska and the United Kingdom due to planned and unplanned downtime.

For information purposes, in Alaska the plan and unplanned downtime was about 10,000 barrels oil equivalent a day.

About 7,000 of that was planned and about 3,000 was unplanned.

In the U.K., we had about 34,000 BOE a day that was down, primarily attributed to Britannia.

About 30,000 BOE a day of the 34,000 BOE a day was planned and 4,000 was unplanned.

Looking at the slide, the reductions were almost offset by higher production, though, from what we realized in the Timor Sea, Vietnam and our offshore Gulf Coast production, Magnolia.

And then you add the 266,000 BOE a day of LUKOIL production to the E&P segment reporting production, and you can see the total then for the company is 1.79 million BOE a day.

I’m going to the next slide, 11.

We compare sequentially the net income for E&P.

And you can see in the third quarter it increased by $359 million over the previous quarter, so we’re up to $2.3 billion.

And the benefit of higher realized commodity prices, partially offset by the high, by the impact of high natural gas prices.

And inventory positions and increased production tax as a result of high commodity prices, also improved this quarter’s income of $487 million.

Putting this in perspective, the improvement to higher crude oil prices accounted for nearly 80 percent of this improvement from one quarter to the next.

Our higher DD&A reduced our E&P income about $48 million, and our lower production as a result of the hurricanes further reduced our E&P income by $21 million.

Other factors that reduced our third-quarter E&P income as compared to the higher quarter were higher taxes and utilities, as well as the absence of favorable settlements and gains on asset sales that we had in the second quarter that did not occur in the third quarter.

I’m going to slide 12.

We’re now moving to refining and marketing.

We benefited this quarter from higher worldwide refining margins.

In the United States, our third quarter realized crack spread rose $3.38 a barrel to a $14.61 a barrel.

In our international crack spread rose $1.65 a barrel to $10.44 a barrel.

In the U.S. our, our refining system ran at 93 percent of state of capacity, that’s down from 98 percent in the previous quarter.

It’s essentially all the result of the impact of hurricanes in our three Gulf Coast refineries, Alliance, Lake Charles and Sweeny.

Our international refining system ran just a little bit over stated capacity.

The U.S. wholesale and international marketing margins were significantly lower than the previous quarter, and our turnaround expenses amounted to $53 million free tax during the third quarter.

And this is in line with our expectations and are $53 million lower than we realized for turnaround expenses in the previous quarter.

I’m now going to slide 13, which is a comparison of refining income, net income third quarter, and over the second quarter.

And you can see we generated $1.4 billion net income during the third quarter.

That’s up 25 percent from the prior quarter.

The higher worldwide crack spreads partially offset by lower worldwide marketing margins, that I spoke about earlier, resulted or contributed $339 million of increased net income from the second quarter to the third quarter.

The volume impact of the hurricanes on our U.S.

Gulf Coast refineries decreased our net income by $103 million.

The rest of our refining system ran quite well, running higher volumes than in the previous quarter.

And this led to an increased net income sequentially of about $81 million.

Now, there are a number of other affects to the sequential earnings.

They include lower turnaround costs, which are more than offset by higher taxes and utilities.

The impairment resulting from a discontinuation of our marketing incentive program, and the absence of gains on the sale of assets in the second quarter that did not reoccur in the third quarter.

Now, I’m going to slide 14, which shows a little bit more information on the refining and marketing earnings sequentially.

You can see the relative contributions of the refining and marketing’s business segments during the first three quarters of this year.

You can see essentially all of our earning are coming from refining.

As I mentioned earlier, our refineries around the world were not impacted by the hurricanes.

Ran very, very well and it’s reflected here.

In the third quarter of 2005, our U.S. marketing margins were significantly impaired, and international marketing margins were lower than the previous quarter.

I’m going to give you some numbers that give you an indication of just where the earnings come from that are associated with this slide.

If you look at just refining in the United States, our income was $1.296 billion.

International, refining income is $270 million.

So, that adds up to $1.566 billion.

Marketing, the United States we lost $209 million, a positive income in marketing and international of $20 million.

So, for marketing the net worldwide is a loss of $189 million.

If you add refining and marketing, then the total refining and marketing in the U.S., net income was a positive $1.96 billion, and international was $294 million.

So, that total of U.S. and international was $1.390 billion.

These numbers do not add up perfectly because included in our refining and marketing business we have some other businesses, of smaller impact.

Our specialty business is included in our downstream results, as well as we have some costs associated with the headquarters, associated with the operation of our downstream business.

So, I’m going to slide 15, which is the LUKOIL investment.

As I said earlier, we increased our equity ownership by 2.2 percent.

We’re now up to 14.8 percent ownership.

As a result, our average ownership for the quarter, the third quarter, is 14.2 percent.

Our equity earnings for the third quarter from this segment were $267 million.

That’s up from $148 million in the second quarter.

Now, I’m going to slide 16, which is kind of a consolidated slide of our midstream chemicals and emerging business segment.

As you can see, the earnings for the Midstream business, $88 million in the third quarter, that’s up from $68 million in the second quarter.

The sequential increase in earnings is primarily due to higher natural gas liquids prices and increased ownership in DEFS.

This is partially offset, though, by the volumes that related to, more volumes that related to the disposition of a Canada Empress system.

In our chemicals, JV with Chevron our earnings fell to $13 million in the third quarter, from $63 million in the second quarter.

The decreased chemical earnings compared to second quarter are largely due to lower margins from olefins and polyolefins and the affects of hurricane-related shutdowns and higher utility costs.

If you look at the decline in income from the second to the third quarter, nearly 80 percent of this decline is attributed or associated with the impact of the hurricanes in the Gulf Coast.

The Emerging Businesses results were slightly positive compared to second quarter, and this is primarily due to stronger financial performance from our domestic and international power operations.

Now, I’m going to slide 17, which reviews the corporate segment; and you can see its impact on continuing operations was a loss. $242 million in the third quarter compared to a loss of $179 million in the second quarter.

Now, we did have slightly lower interest expense in the third quarter as compared to the previous quarter, but we incurred an early debt retirement premium of $42 million in the third quarter.

We had some higher benefit- related charges and unfavorable foreign exchange impacts to the third quarter.

The losses from discontinued operations were $4 million.

It’s mainly related to the marketing assets held for sale.

Now, I’m going to slide 18, and we always include this in our conference calls, return on capital employed.

You can see that the numbers are not available for the third quarter for the peer group.

When we talk about the peer group, we’re talking about the publicly traded companies that are larger than ConocoPhillips.

As you can see, our return on capital employed continues to be very competitive with the largest companies in our industry.

In the third quarter of 2005, our ROCE adjusted for purchase accounting was 35 percent.

Improvements in price and commodity price and margin environment, while it’s good operating performance, continued to have a positive impact on return of capital employed.

If you look at the third quarter and you analyze return on capital employed in the third quarter by segment, associated with combined 35 percent, then the numbers for E&P are 42 percent; refining and marketing 43 percent; the combined Midstream amd Chemicals is 14 percent;

LUKOIL 25 percent; and when you look at the total as you see on this slide, it’s 35 percent.

So, now I’m going to the last slide that we have in our opening comments and our presentation, slide 19, which is the outlook.

Our overall strategy, objectives, financial goals we’ve laid out our operating plans; consistent, remain unchanged.

The hurricanes did have an impact on what we achieved in the third quarter and what we expect to achieve then for the entire year of 2005.

We expect our fourth-quarter E&P production in barrels oil equivalent to be higher than the third quarter, and anticipate our entire year of 2005 production to be flat with 2004.

And it would have been up if we did not have the impact of the hurricanes.

This is not different from what we’ve indicated to you earlier, several weeks ago in our interim update.

Our increased production in the fourth quarter versus third quarter will come primarily from the U.K., Norway, Vietnam and Alaska.

And then if you include LUKOIL, we expect our total BOE production to be approximately 1.80 million BOE a day for the year.

Turning to the refining side of the business, our efforts to restore our Gulf Coast we are planning the operations to continue.

The Sweeny refinery returned to normal operations very quickly after Hurricane Rita, and we expect our Lake Charles refinery to be at normal operations by next week; we’re in the process of starting up part of our operations.

The company’s Alliance refinery is expected to begin partial operation December and return to normal operations in early 2006.

As business conditions permit, we plan to continue to repurchase company stock and to retire debt.

The company continues to pursue opportunities to increase our domestic energy supply through our LNG gas projects, the Canadian oil sands projects, and projects aimed at developing Alaska, Mackenzie Delta gas resources.

Specifically late last week, the company and the state of Alaska recently announced an agreement in principle on base fiscal terms for a natural gas pipeline contract that will progress the development of Alaska North Slope gas.

And, additionally, we are advancing our plan to expand our overall refining capacity and clean fuels capabilities.

And all of these things, all these projects, strategies and operating plans will be really reviewed with you at our November analysts meeting in New York City.

So, this concludes my prepared remarks.

And so we’re willing to entertain questions that you might have.

Gary, I’ll turn it over to you then to start the questions.

Jen, why don’t you bring up the first question, if you would, please?

[OPERATOR INSTRUCTIONS.]

Gentlemen, your first question comes from Arjun Murti with Goldman Sachs.

Thank you.

Jim, you just alluded to the natural gas agreement in Alaska.

Are there any additional details you can provide on that and what it is about that agreement that gives you more confidence in, I guess, potentially moving forward with the project?

Maybe what additional steps need to be taken?

I assume Exxon and BP have to come to agreements, as well.

And then is there any better guesstimate of the timing of when that might, you know, I guess start moving forward or even startup?

Arjun, thank you.

As you know, the producing companies have been negotiating and discussing with the state of Alaska for a very, very long time period, a way in which we can move forward with the development of the arctic gas resources on the North Slope.

And we’ve made a lot of progress, which led to the announcement by our company.

Obviously, we look forward to Exxon Mobil and BP reaching an agreement with the state of Alaska here shortly.

And we certainly would like to look forward to that.

The state of Alaska, the governor, we have to keep the information somewhat confidential at this point in time because I believe the governor intends to layout all the details of this to the legislature which ultimately then will be considered by the legislature.

So, I can’t really give out any more details than what we’ve announced, because this is an agreement with the governor and the state, but all of this will be made known over the next several weeks with a full review and discussion by the legislature and everyone within the state of Alaska.

So, that’s really what I can pass on to you.

Jim, would it only be the Alaska Legislative body that needs to sign-off on this, or are there any federal approvals, at least in terms of the primary agreement, that are needed?

Well, the agreements that we are talking about, agreement in principle, is between our company and eventually the other producers and the state of Alaska.

So, it’s really the state of Alaska, not other states or the federal government.

And then just, finally, does moving forward possibly with Alaska gas in any way impact moving forward with Mackenzie Gas, which I know you did mention in your prepared remarks?

Do you still, would you still like to also move forward with Mackenzie Gas?

Absolutely.

We certainly want to move forward with the Mackenzie Delta Gas.

We would expect that the Mackenzie Delta Project would come before the Alaska North Slope project because it is further developed.

It’s a large project but certainly somewhat smaller than the Alaska North Slope gas.

So, we would expect – we’re very interested.

We expect the Mackenzie Delta to come first.

This makes sense for all reasons, and we certainly want to not be trying to do both pipelines at the same time.

So, the Canadian Mackenzie Delta comes first and then the Alaska North Slope.

That’s great.

Thank you very much, Jim.

Your next question is from Doug Terreson with Morgan Stanley.

Good morning, Jim.

And congratulations on another record result.

Thanks.

You’re welcome.

In refiningand marketing, U.S. petroleum product sales were well above that of the year ago period in 2004.

But within the quarter, I wanted to see if there were meaningful differences in consumption growth between the different months.

Meaning were demand trends considerably different in relation to the year ago period?

For instance, in July, August and September on kind of a comparable outlet basis, whether you have it in retail or wholesale?

And, also, if you guys have any updated consumption trends for October, that would be appreciated, as well?

Well, Doug, it’s somewhat difficult for us to really respond to that.

What I will say is, obviously, as you know, and know even before the hurricanes, the supply, demand situation was very, very tight.

And then with the impact of the hurricanes, that’s quite an impact with respect to supply, and, therefore, had an impact obviously on the pricing environment.

What we have done throughout all the time period of prior years, and certainly through 2005, and now after the hurricanes, all of our efforts are directed and dedicated to getting our facilities up and running and maximizing the availability of supply so as to meet the needs of consumers and to moderate the price impact on the environment.

Sure.

So, what we see is not really any impact in terms of how we run our operations.

Everything that we can make, the market certainly wants to see the supply.

So, it does have an impact on pricing, but in terms of we don’t see anything unusual or strange in terms of demand for what we produce and the different channels by which we sell our refined product.

Okay, great.

And while on the topic of arctic gas, I mean the Shtokman Project in Russia is a project where partners haven’t been announced, but there’s been some favorable commentary towards your company and a few others as it relates to that outcome.

Is – can you just kind of give us an update there, as well?

Is the working expectation that partners will be announced by the end of this year or is that a 2006 item or is it just too soon to know?

Well, our company has been named one of five on the short list, you know.

And the review and the study and the development of the Shtokman Project with Gazprom.

Gazprom is a very specific, good program, and timeline by which they want to go-forward with the project.

And the expectation is that the partners in this project, and there will be more than just one company in this project, there’ll be several companies participating because it’s very large, technically challenging and all.

That will be done more in the March time period, as I recall, Gazprom mentioned that.

So, it won’t be the end of the year, but the study work continues such that it leads to the selection of the participants in the March 2006 time period.

And then there’s a quite aggressive program by which to technically and commercially move forward with Shtokman so as to accelerate the time period where production can be started and delivery to North American markets, specifically, the U.S. can occur.

Okay.

Congratulations, again, on great results.

Thank you.

Your next question is from Bruce Lanni with A.G. Edwards.

Yes, the same thing, Jim and Gary, congratulations on a great quarter.

I have two questions.

But you know, basically, they’re similar.

The first one, Jim, is on your debt reduction in respect to the share buybacks.

First, do you have any targeted debt level on which you will go down to, number one?

And how are you going to balance that out against share repurchases?

And then the second part of the question, some of your competitors are now starting to talk about high inflationary pressures.

Could you go into any discussion on that and what you’re seeing?

If you can quantify it, it would be great.

And will it impact your capital spending going into 2007?

In 2006 and 2007, I’m sorry.

Okay.

First, with respect to debt reduction, share repurchase, we are looking at some modest debt reduction as we go through the rest of this year and into 2006 and 2007.

We don’t have to – it’s not a priority objective for us to accelerate that reduction.

But we said over time, over the next several years to slowly let the debt come down to, I would say, maybe a minimum of about $10 billion.

It makes a lot of sense for us, but we don’t have to – the cost of our debt is very reasonable; and so what we will do is fully, like we are this year maybe over the next several years, a billion or so a year is what we have in mind.

And then we want to be quite aggressive and very competitive on dividends, so with good strong earnings and cash flow, well, we think that’s good discipline of having annual increases and dividends.

And so the remainder then of cash availability really goes towards share repurchase.

Now, what I would say, though, is our capital spend for this year, capital spend on organic growth and investment in oil purchasing shares in LUKOIL, we’re going to be spending in the neighborhood, of 2005,, $10 to $11 billion in this program.

If you look at 2006, when we have our November analysts meeting, you’re going to see a similar amount of capital and investment spending going forward into the next year.

So, what I’m telling you is we have a rather unique situation in our company, that if we are strong and this environment a strong cash flow, but we redeploy a good share of most of our cash flow right back into the growth and development of our businesses.

And we talk about our businesses as both E&P and refining and marketing.

With respect to the impact of inflation, inflation is having an impact on our cost structure and our capital spend.

And we intend to pretty fairly go through that in each of our businesses when we have our November presentation in New York City with the analysts.

It certainly is having, inflation is having an impact on operating costs and capital spend.

But these are incorporated in our operating plans.

We’ll talk about them.

And they’re incorporated into the numbers when I talk about capital spending of $10 to $11 billion a year.

Okay, Jim.

But just going back to the debt question.

I mean is there – you quantified a minimum of $10 billion, but on a net-debt basis what is the level that you’re willing to go down to, I guess, as far as from a capital efficiency standpoint?

Well, I think what we’ve really said is the company has done very, very well over the last several years.

It’s a beneficiary of a very strong pricing environment upstream and downstream.

But, also, we’ve operated well, and we’ve had the synergies and all of how we do our operations.

We initially said we want to get the debt-ratio down to 25 percent, then the 20 percent.

I don’t think we want to see our debt-ratio going below 15 to 20 percent.

It’s already now almost 21 percent, and headed towards 20 percent.

But I think the guidance, I would say, is we don’t want to maintain or hold a lot of cash.

So, what we really see is bringing the debt down slowly towards $10 billion in absolute terms, not holding too much cash.

And so we’re going to be quite aggressive in terms of a capital program, a lot of competitive dividends and then accelerate share repurchase.

Perfect.

Thank you very much.

And congratulations, again.

Thank you.

Your next question is from John Herrlin with Merrill Lynch.

Yes, hi.

Just a quick one on U.S. gas.

You did have sequential production up even with the hurricanes, predominantly onshore, is my question?

Was it, the gains?

Well, we had – we certainly were impacted by the hurricanes, but we do not have a great deal of offshore Gulf of Mexico production.

So, the impact to us, probably relative to the industry in our profile of gas production in Lower 48 offshore in the Gulf, is less than other companies.

So, that’s really why we probably look a little better in terms of our production in third quarter.

Great.

One other one.

You had spoken downstream of spending an incremental $3 billion downstream and over the next five years or so.

Given all that’s happened in the Gulf of Mexico post-hurricanes, do you think the industry will have the capacity to service your needs?

Or will this be more protracted?

Well, I didn’t know exactly where you were going with your question.

But we’ll, again, share with the financial community and the analysts in November.

We are going to spend at least an additional $3 billion in terms of enhancing our capacity and capability in our refining system around the world.

But definitely in the Lower 48 states, because we have good opportunities.

But, furthermore, we also recognize the supply, demand situation.

So, we’re going to be adding capacity.

We had this in mind before the hurricanes.

We came out and announced that we are going to significantly do everything we could to add capacity because we do have the opportunities.

And we’re going to add capacity in many of our refineries.

We have 12 of them in the United States.

And we’ll share that with you at the November analyst meeting.

But we’re also increasing our capability by which we can handle the lower-quality crude feedstocks.

That’s a good investment return for us, but more importantly, also, we’ll make a greater proportion of transportation fuels.

So, it’s a win, win for our company in terms of investment opportunities in the downstream, but it’s also a win for the country and the consumers because we recognized several years ago the need for adding capacity and capability in our downstream part of our business.

I think your next question, are we going to be able to do all of these things?

Obviously, the availability of contractors in service industries to perform and help us?

That is a question for us, but a lot of our projects have already been on the drawing board.

We’ve lined up a lot of the capability to help do these things.

But no doubt, you make a good point, as we go into these subsequent years, this is going to – this is a question for us, and that is the availability of the construction and service industry to serve what we’re doing not only upstream, but certainly downstream.

And because we’ve got to make sure that we deliver our projects on schedule and within the cost constraints.

But, again, we’re going to share all of this with you when we go through, and our views on it very thoroughly, upstream and downstream in November.

Okay, thanks.

Look forward to hearing it.

Your next question is from Nikki Decker with Bear Stearns.

Well, good morning, Jim.

Just a couple of questions.

First, I haven’t seen any repair costs or costs associated with the hurricanes.

Can you quantify what that might have been in the third quarter?

In the third quarter, it would be very modest because we were in the assessment phase at Alliance, Nikki.

And we took, we shut down our refineries at Sweeny and Lake Charles in advance of the hurricanes, so they would be more in the nature of just operating costs.

So, we’ll have the substantial costs that we have will start appearing in the fourth quarter, and I think it’s better that we update you Nov. 16 at the analysts presentation.

Okay.

Secondly, as the project in Yambo, maybe you could talk on what you anticipate in terms of timing of construction there and potential configuration of the plant?

Okay.

I think your question relates to the new grassroots refinery to be built on the West Coast of Saudi Arabia?

That’s right.

Well, we are actively working with Saudi Aramco.

We’re very interested in the project.

We have our commercial technical teams working.

We know that there are other companies who are quite interested in doing the same.

We’re encouraged, and we’re also very interested in this investment opportunity because it fits very nicely with what we’re trying to do in the downstream part of the business around the world globally.

And it fits in quite nicely not only on the refining side but it fits nicely with our commercial attributes of what we’re trying to do in terms of moving refined product both to the North American markets, Europe and Asia.

But there’s strong competition, and I think the plans for Saudi Aramco is to finalize determination of who the companies are that are going to participate in this as we go through late this year and early into next year.

But this is an opportunity that we take very, very seriously.

And we’re very interested in doing and working with Saudi Aramco.

Is this intended to be an complex refinery?

Well, it’s not really for me to get out and talk about this at this point in time.

But I think what I really wanted to say is our company is obviously working, reviewing and working with Saudi Aramco.

We’re very, very interested in it, but it’s not yet been determined by Saudi Aramco which companies they are going to select to participate in this project.

And we expect that to be, you know, late this year, early next year.

John, do you have something more on this?

Well, I was only going to just add that the precise configuration of the refinery is not yet determined.

That’s something that the technical teams are discussing and will be determined when they make the selection of the party that’s going to help them.

I see.

Okay, thank you.

The other thing that I would say is it’s very important given the current environment that we operate, not only in the United States but around the world, when we’re looking at adding refining capacity, certainly we need to and want to do that in the United States.

And one of the best ways of doing that is to add capacity and capability where we already have refineries.

We’re encouraged by the legislation that’s passed the new energy bill, or the legislation passed, because that’s going to encourage not only adding capacity in refineries, but hopefully new refineries in the United States.

But when you look at the opportunity of adding capacity and new refineries in Saudi Arabia, while it may not be in the United States it does provide over time more supply to a worldwide market of refined product, whether that facility is built in the United States or elsewhere.

We need to do everything we can to add capacity and supply, not only in our country but Europe, Asia and certainly in the Middle East.

I think we can go to the next question.

Your next question comes from Neil McMahon with Bernstein.

Hi.

I’ve got two questions for you.

The first one is really just looking at the jump in natural gas prices in the start of the fourth quarter.Ccould you give us a sense of, you mentioned higher utility bills in terms of the refining profitability, what about the increased costs of hydrogen?

So, what pressures are you seeing in terms of refining profitability in the fourth quarter due to the higher commodity costs?

Well, obviously, Neil, what you’re saying is important.

We do recognize, you know, the cost of utilities, the cost of natural gas and all, that we have for all of our operations, not only downstream but upstream.

The cost of hydrogen;

I think that’s – I’m not really the right one to respond to that.

Maybe we could do that offline.

And I know when we’re in New York, Jim Nokes and our downstream people can certainly answer that question a lot better than I can.

Yes, Neil, we can circle back with you.

Okay, just the second question, then.

It’s basically when you see the increase in terms of your LUKOIL Investment on your production profile, what seems to be happening from our numbers, at least, is that you’re losing a bit of your leverage to the higher oil prices, a component of Russian production has got a higher tax rate.

Have you thought about going forward in terms of your upstream business where the role of M&A or major asset acquisitions might fit into your strategy, as it doesn’t seem that you’re replacing reserves from an exploration point of view in areas of lower tax regimes at a fast enough pace to keep your leverage high with the higher oil prices?

Well, you make a good point.

One of the things we do know is access to new areas for exploration is something that’s become more and more difficult for our company and our industry.

And this access is not only around the world, but it’s also in the United States.

And one of the things that, obviously, we’re working on is what can we do to increase our production.

As an industry we need more access.

So, it is true what you’re saying.

More and more of the reserves here recently has been replaced by companies based on old exploration that they’re working on in pricing and developing.

But we need new exploration increase, not only our company but others.

So, we look at business development opportunities, where we go in and we know there’s stranded gas for LNG projects, or there’s heavy-oil projects potentially in other places in the world, that we take our technology and our financial resources and people to help get it out.

But you make a good point, and we look at all things.

Exploration, business development, stranded gas, where we can go in with our capabilities to ad reserves and production.

We also look at the M&A market, what assets may be available for acquisition.

And that’s very, very competitive.

As you know, it’s pretty much a seller’s market, not a buyer’s market.

We look at everything.

We look for the opportunities, but we also have to make sure that when we look at these things as a way of growing and developing the company it’s done in a way that’s supportive of what valuation and creation for the shareholder.

Just on the back of that, any update on Libya?

Well, on Libya, we routinely, I routinely go through Libya working on the negotiation for re-entry.

Our partners in the Oasis Group, Amerada Hess and Marathon, we continue to have very good dialogue and discussions with the authorities in Libya.

And it’s taken us quite a bit more time, but we’re very interested in the opportunities.

And, you know, hopefully over the next several months we’ll have something positive to report going back in, re-entry of the Oasis Group and the old concessions.

Great.

Thanks a lot.

Your next question comes from Doug Leggate with Citigroup.

Thank you, and good morning, everybody.

Jim, apologies if you’ve touched on this already.

I think you did.

I was a couple of minutes late getting on the call.

Your domestic gas realizations versus the indicators, weighed in quite a bit.

Could you just remind us or go over again perhaps why that was?

Okay.

Maybe John or Gary, can you answer that one?

There’s nothing unusual about that, that I’m aware of.

I think it’s the mix.

We have, of course, a lot of San Juan gas production.

We’ll have to come back to you.

That’s not something that really popped out to a large degree.

Okay.

And I guess the only other question I have is probably a follow-up to one of Neil’s really.

It kind of relates to your exploration and the outlook for 2005 as things have progressed so far this year.

Our understanding is that you’ve had some changes in the exploration team internally, and obviously, there’s not been a great deal of news flow this year.

Could you just give us a kind of a feel for how comfortable you are with the exploration portfolio you have right now?

Whether or not you think you need to take some kind of more significant actions to readdress, you know, I guess the fairly slow pace of exploration success?

And, you know, perhaps just give us a feel for how you feel the exploration outlook might look this year in the absence of any major project sanctions?

Well, let me come back, because I think we’ve addressed some of this in earlier comments.

Our company is no different than others.

Our exploration success could always be better, and we are looking to certainly do everything we can to improve it.

But one of the things that’s very, very important is access.

And we do not have the access, the new acreage and new prospects that we’ve had historically over the past decades.

And the other is that we do have some nice exploration success that has recently been announced and come forth in Asia, specifically in the Timor Sea of Asia.

So, I think really the changes that we make are just routine changes of personnel from time to time and to different parts of the organization and the company.

Exploration success is never good enough, we always can do better; and we’re emphasizing that we do need access.

And we will share with you the successes and where we’re going in exploration when we meet in November.

Okay.

Just one clarification.

Major project actionthis year, am I missing anything, or is…

No, I don’t think you’re missing anything.

You mean what’s to come in terms of adding reserves that get booked this year versus this year versus next year?

Yes, I’m really just trying to get a feel for how the reserve replacement outlook might be for the current year.

Well, I think we’ll share that with you in November, but that’s something that’s premature for us to be talking about at this point in time, what the reserve replacement will be for this year.

All right, Jim.Thanks very much, indeed.

Yes, we normally do that early next year, late this year, early next year.

Thanks.

Your next question comes from Gene Gillespie with Howard Weil.

Jim, Gary, again, congratulations on a great quarter.

Jim, the trade press continues to, or I continue to see a lot of negative comments and inflammatory political comments regarding Venezuela.

And I guess my question is basically does this give you pause?

Given the fact that you do have a large commitment there and a number of future developments are on the board that in the past you’ve expressed a desire to pursue?

Well, Gene, thank you.

Yes, we are a significant investor in Venezuela.

And it comes by our heavy-oil projects that we have with Petrozuata, Hamaca, as well as the new offshore oil development Corocoro.

And we’ve had with partners exploration success.

Our relationship with the – we understand fully the questions that come with terms of political relationships and all, Venezuela, the United States, and as we have - we’re faced with wherever we operate around the world.

I would say this, that irrespective of the political situation between countries, our relationship with Venezuela, PDVSA, the minister and the authorities is very, very good.

And we continue to do what we really do best, which is to operate and commercially maximize with our partners the other international oil companies, as well as PDVSA and the Venezuelan government, good relationships by which we do what we do best, and that is to operate well and maximize the value of the oil.

We also are in discussion and look for the opportunities by which we can further enhance the capability and capacity of Petrozuata and Hamaca, with PDVSA, the minister and with the other partners.

So, wherever we go we have these issues and political risks, but our investments and our returns have been a good experience in Venezuela.

We work it very, very hard.

As I said, relationships are good, and we don’t see too much different than what we said in the past quarters about continuing to work that hard and look for the new opportunities.

So, basically, more of the same.

And is the, on the surface, the political stuff in the press is, would you characterize that as being worse than reality?

No, Gene, I would – it’s not really appropriate for me to make a comment on what the political situation may be between countries because that’s really not our area.

What I would say it’s not just more of the same in terms of what we do operationally and investment-wise in Venezuela.

We have very good operations, acceptable returns, we have additional opportunities, as I said a moment ago, by which we can expand and enhance our capabilities and investments there.

And we continue to work closely and have good relationships with the minister and the authorities there to try to make this happen.

Good enough.

Thank you.

Gentlemen, your last question comes from Mark Flannery with CSFB.

Hi.

Yes, I just wanted to get a little bit of clarity on the Indonesian price impacts on volumes.

And, also, what you expect from – that was in the third quarter and the fourth quarter?

And what we expect from hurricane into the fourth quarter?

I’m sorry if I missed that earlier in the call.

Well, obviously, with respect to the hurricanes, the sooner we get our refineries up and running the less impact that has in terms of financial net income to the company, and obviously, we want to get them up and running for that purpose.

But, also, the increased supply that’s made available to our consumers in the Southeast and throughout the country.

So, that we’ll share with you because we do have costs in terms of repair, but we also have costs in business interruption in refineries.

With respect to production levels, as I said earlier, production in the fourth quarter is going to be higher than the third quarter.

You can then average this all in, because we say we’re effectively going to then, for all these different reasons, be flat in 2005 compared to 2004.

In terms of the impact of the higher price structure for crude oil and its impact on production in Indonesia, as we said, it does have an impact because of production-sharing contracts.

I don’t know, maybe Gary may have, or John may have the numbers associated with that.

But if we don’t have it today on the call we’ll just circle back and give it to you later.

Yes, I think, Mark, if you look at the supplemental information, the majority of the change in Indonesia is related to the PSC impact on high prices.

And because we continue to grow and add new projects by which we can increase production, we do get the impact then of the higher prices.

In November, Mark, we plan to give a full year outlook of price affects in Indonesia, for Indonesia for 2005, and also we’ll try to develop a rule of thumb for variation in those six.

Okay.

Thank you.

Okay.

I guess this wraps up our discussion on the third-quarter results for ConocoPhillips.

Once, again, I thank everybody for your interest in the company.

You can find the slides that we went through, as well as a transcript of the presentation that was made this morning, on our Web site, conocophillips.com.

Hope you all have a good day.