康菲 (COP) 2005 Q4 法說會逐字稿

Welcome to the ConocoPhillips fourth-quarter earnings conference call.

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. (OPERATOR INSTRUCTIONS).

I would now like to turn the presentation over to Mr. Gary Russell, General Manager of Investor Relations.

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

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

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

This presentation is designed to give you a better understanding of the factors that had a significant impact on the quarter's results and can be found on our website, ConocoPhillips.com.

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

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

The actual results may differ materially from those that we expect today.

You can find a list of items that could cause these changes to occur in our filings with the SEC.

At this time, I would like to turn the call over to our Chairman and CEO of ConocoPhillips, Jim Mulva.

Gary, thank you and good morning.

I appreciate all those who are participating in our conference call and taking an interest in our company.

I am going to start on slide number three, titled "Highlights."

You can see from the highlights the Company had another strong quarter.

It generated 3.8 billion in income from continuing operations.

This is about 100 million higher than our net income, because of a small loss in discontinued operations and an accounting change which we will discuss a little bit later in the presentation.

Our cash flow from operations was $4.7 million, so with these strong results, we're able to fund the capital program and continue to strengthen our balance sheet and our financial flexibility.

During the quarter, we reduced our debt by $1 billion to $12.5 billion.

As a result, our debt ratio went down 2% from 21% to 19%.

For the whole year of 2005, our debt reduction was about $2.5 billion.

Also during the quarter, we bought back $759 million worth of common shares, bringing the total repurchases for 2005 to $1.9 billion.

During the fourth quarter, we produced 1.88 million BOE a day.

This includes 1.59 million BOE per day from our E&P segment, and an estimated 0.29 million BOE a day from our LUKOIL investment segment.

With respect to Refining & Marketing, our refineries ran at 88% crude processing capability.

That's down 7 percentage points from last quarter.

This essentially relates to the impact of the Gulf Coast hurricanes.

Our average diluted shares outstanding compared to last quarter were down a little bit, down to 1.407 billion shares.

If we look at our adjusted return on capital employed, you'll see on the subsequent slide it's quite competitive with the largest companies in the industry.

So I am now moving from slide number three to the fourth slide, Contribution & Capital employed.

On the left-hands side of the slide, you see the pie chart.

It illustrates the proportion of income from continuing operations that our business segments generated during the whole year of 2005.

If you look on the right, it shows a percentage of average capital employed for each segment of the year 2005.

So what you can see is that E&P generated 60% of the Company's full-year 2005 income, but represented 57% of average capital employed.

With respect to Refining & Marketing, we generated 30% of our income, and R&M at 29% of average company's capital employed.

Then we put together Midstream & Chemicals joint ventures on a combined basis generated 5% of income, represents 4% of capital employed.

And then LUKOIL generated 5% of our income and represents 7% of average capital employed.

I'm going to go to slide number five, Total Company Net Income, when we compare the fourth quarter to the third quarter of '05.

And what you can see is that the total company income from continued operations in the fourth quarter of '05 was about $3.8 billion, pretty close to the previous quarter.

We realized higher worldwide natural gas prices, stronger downstream marketing margin and somewhat better chemical margins and better midstream results.

Now, these favorable items were somewhat offset by lower realized crude prices and lower refining margins.

The net effect of all of this improved our earnings by $270 million compared to the previous quarter, as shown in the first green part on the left-hands side of the slide.

Now, the fourth-quarter earnings also benefit as a result of higher volume, particularly or mainly from our E&P part of the company.

And that's had a positive impact to earnings of $200 million.

You can see our earnings continue to be impaired by the impact of the hurricanes, and we're going to give you more information on this as we go through our presentation.

In addition, our operating expense in the fourth quarter were $176 million higher than the third quarter.

This is driven primarily by higher utility costs.

We did have higher refining turnaround costs, and then we had the impact of higher production and the cost of higher production in E&P.

Again, we will talk about this more on subsequent slides.

Other factors impacting the fourth quarter included higher DD&A, higher exploration costs, somewhat or partially offset by improved corporate results.

Now, not included in the income from continuing operations in the fourth quarter was an $88 million charge that's largely attributed to Refining & Marketing.

And this is related to the cumulative effect from the adoption of a new accounting rule, FIN 47.

This accounting rule relates to asset retirement obligations.

Now, also, our discontinued operations generated a loss of $15 million that's mainly related to the marketing assets that remained held for sale.

When you combine all these items with income from continuing operations, our bottom-line net income in the fourth quarter is about $3.7 billion.

I'm going on to slide number six, total company cash flow in the fourth quarter.

So you can see, on the left-hands side of the slide, cash from operations of $4.7 billion.

We started the quarter with $2.8 billion in cash.

We did make some pretty large domestic and international tax payments in the early part of the fourth quarter, and that impacted the starting cash balance.

Capital expenditures and investments amounted to about $3 billion during the quarter.

Included in this number was $637 million for the acquisition of another 1.3% of LUKOIL shares.

You see we paid $429 million in dividends and reduced debt $981 million.

We spent $734 million on net share repurchases.

Through the entire year 2005, we purchased 32.1 million shares of our stock for about $1.9 billion.

So, after you consider all the other sources and uses of the cash balance decreased $589 million during the quarter.

I'm going on now to slide number seven.

Pie charts provide sources and uses of [available] funds and cash flow for the whole year of 2005.

And the pie chart on the left shows cash available is $18.4 billion, of which 96% is cash availability which was really generated from operations.

The chart on the right shows that 63% of our available cash or $11.6 billion is used to fund our capital and investment programs.

We continue to reinvest a significant part of our cash flow right back into the growth and development of our businesses.

The remaining 37% or around $6.8 billion of available cash was used to fund dividends, pay down debt and repurchase stock.

With respect to the net income for the year -- and you look also at what we made in investments to grow and develop the business lines of the Company -- we essentially reinvested 86% of our net income back into the growth and development of our businesses.

I am moving on now to slide number eight, Net Ratio Improvement.

You see we continue to strengthen our financial position [and resultant] debt-to-capital ratio of the fourth quarter.

The pie chart on the left shows our equities growing to $53.9 billion.

Total equity growth for the year 2005 was $10.1 billion; that's about a 23% increase from '04 to '05.

Balance sheet debt was reduced $12.5 billion through the year, and our debt ratio now is 19%.

Obviously, on the completion of the previously announced Burlington Resources acquisition, we will see our balance sheet debt-to-capital ratio rise in accordance and consistent with the terms of the transaction.

I'm going to move on to slide number nine.

You can see our realized gas prices are up 24% from the previous quarter.

That means it's up to about $7.94 Mcf.

Oil prices fell 6% to $53.05 a barrel.

Our E&P production in the fourth quarter was 4.5% higher than the previous quarter, and this is just what we expected.

The fourth quarter has averaged 1.59 million BOE a day.

For the full year of '05, our production averaged 1.56 million BOE per day; that's flat with '04, and it's just what we expected and put out on our interim results earlier this month.

Exploration expenses for the quarter were higher, mainly due to higher dry hole costs and lease impairments.

Operating costs were higher, and I'll show more detail on this subsequent slide.

I'm going to page ten now, Total Company Production.

The slide shows a sequential variance in production from one quarter to the next.

We saw higher production from the UK and Alaska; this is primarily due to reduced planned and unplanned downtime and seasonality, as well as higher gas production realized from Indonesia.

That comes from higher demand on production supply in Indonesia.

We also saw that production in Venezuela was down quarter to quarter, primarily due to the planned upgrader turnaround at Petrozuata.

And then we had some impacts from the other production operations, which increased fourth-quarter production about 6,000 BOE a day versus the third quarter.

Then when you add the 293,000 BOE per day of LUKOIL production to the E&P segment production, you get up to the total for the Company of 1.883 million BOE a day.

I'm going now to slide 11.

The E&P income from continuing operations in the fourth quarter shown on the slide was $2.4 billion; that's up from $2.3 billion the previous quarter, which you see on the left-hand slide side of the slide.

Our fourth-quarter results were $128 million higher than the third quarter, mainly due to higher natural gas prices.

This was somewhat offset by the negative impact of $197 million mark-to-market valuation on certain natural gas contracts in the United Kingdom, as well as lower realized oil prices in the quarter.

[In addition] the fourth-quarter income improved $199 million due to higher sales volume, which resulted from higher production and the timing of our crude oil liftings.

We indicated earlier our exploration costs were higher, developing an $88 million lower income than the third quarter, of which $40 million is due to higher dry holes, $48 million is due to lease impairments and exit costs.

Our E&P operating expenses were negatively impacted by $60 million quarter to quarter, mainly due to the impact of higher natural gas price and operating costs, as well as higher overall production volumes, the cost of those higher production volumes, than we had in the third quarter.

Other items that negatively impacted the fourth quarter versus third quarter were higher DD&A, mainly as a result of higher production.

And we had somewhat lower equity earnings due to lower realized crude oil prices and higher taxes.

I'm going to page 12 now, going from upstream to Refining & Marketing.

Our Refining & Marketing earnings for the quarter were negatively impacted by lower worldwide refining margins.

In the United States, our fourth-quarter realized crack spread declined $1.90 a barrel to $12.71 a barrel.

Our international realized crack spread declined $1.71 a barrel to $8.73 a barrel.

Our turnaround costs were were $86 million in the fourth quarter; that's up $33 million from the third quarter.

Our utility costs were higher, as a result of higher natural gas prices.

In the US, our refinery system ran at 85% of crude processing capacity.

That's down from 93% in the third quarter.

That just really reflects the impact of the hurricanes.

Our international refining system ran 102% of crude processing capacity, slightly higher than the third quarter.

Overall, our worldwide refining system ran at 88% of crude capacity, down 7% from the previous quarter, primarily the result of the impact of the hurricanes.

Refining & Marketing earnings benefited this quarter from better worldwide marketing margins.

US marketing’s average margin improved $2.34 a barrel.

That's from $0.18 a barrel in the third quarter to $2.52 a barrel in the fourth quarter.

With respect to international marketing, the average margin went up $1.82 a barrel, so it went up from $6.80 a barrel in the third quarter to $8.62 a barrel in the fourth quarter.

I'm moving to slide number 13.

Our downstream generated about $1.1 billion of income from continuing operations in the fourth quarter.

Now, that's down from $1.4 billion you see on the left-hand side of the slide.

Our lower worldwide crack spreads were somewhat or quite a bit offset by higher worldwide marketing results, contributing to an $11 million reduction in the fourth-quarter income versus the third quarter.

As you move across the slide, the volume and cost impact of the hurricanes on our US Gulf Coast refineries decreased our net income by $240 million.

Now, our Alliance refinery was down for the whole quarter.

We have restarted partial operations, and we expect to be in full operations by the end of the first quarter of '06.

Other factors contributing to lower sequential earnings in the fourth quarter include higher turnaround costs, higher taxes, higher utility costs and somewhat higher DD&A.

I'm moving to slide 14, which is kind of a summary or bar chart showing a comparison of earnings in the fourth quarter of '05 and then -- let me go through this chart.

It shows the relative contributions of our downstream segments during the fourth quarter, as well as for the full year of '05.

You see most of our earnings are coming from Refining, but you also see some significant improvement in our Marketing results for the fourth quarter.

I'm just going to give you -- you might want to tabulate this -- where the earnings of $1.056 billion came from in the fourth quarter.

First, on Refining, in the fourth quarter of '05, US Refining earned $647 million.

International was $171 million, so the total was $818.

In Marketing in the fourth quarter, earnings $144 million in the US, $60 million internationally, total is $204 million.

Then if you look at the total Refining & Marketing, in the United States it was $805 million.

Refining & Marketing internationally was $251 million, so you get total, you get the $1.056. billion.

I'm moving on to slide 15 -- talk about the LUKOIL investment.

We continue to increase our ownership; it was up by 1.3% in the fourth quarter.

At the end of the year, 16.1%, so our average ownership in the fourth quarter was 15.5%.

Our estimated equity earnings in the fourth quarter from the LUKOIL investment was $189 million, which is $78 million lower than in the previous quarter.

This estimated reduction is mainly the result of lower crude oil prices, higher taxes in the fourth quarter, somewhat offset by a slight adjustment, a true-up when we realized and saw the third-quarter results ultimately reported recently by LUKOIL.

I'm going to slide 16 now, the Midstream & Chemicals.

You can see the earnings for the Midstream business, $147 million.

That's up from $88 million in the third quarter.

The sequential increase in earnings is primarily a result of natural gas liquids prices and associated impact on inventories.

In terms of our chemicals joint venture, income increased to $114 million in the fourth quarter; that's up from $13 million in the third quarter.

And the contributing factors were higher olefins, polyolefins margins as well as recovery from hurricane-related impacts in the third quarter.

Now, all of our joint venture CPC chemical operations, hurricane-affected facilities, resumed operations during the quarter, with all but two of the facilities fully operational in the first week of October 2005.

I'm going from slide 16 now to slide 17, look at the corporate.

You can see the corporate segment, the impact on continuing operations, a loss of $150 million in the fourth quarter and a loss of $242 million in the third quarter, shown on the left-hand side of the slide.

And that interest expense was $9 million more than the previous quarter.

Corporate overhead was $49 million lower, and that's mainly due to reduced benefit compensation-related charges.

Other factors, which include positive foreign exchange impacts, improved the results by $34 million.

I'm going to slide 18, Return On Capital Employed.

The numbers for our peer group are not yet available for the fourth quarter or for the full year of '05, so when we talk about the peer group, we are really talking about the publicly-traded companies that are larger than ConocoPhillips.

Now, our return on capital employed continues to be quite competitive with the largest companies in the industry.

In the fourth quarter, our return on capital employed with certain transactions adjusted for purchase accounting was 33%.

For the full year, our ROCE with certain transactions adjusted for purchase accounting and excluding DEFS restructuring was 31%, although we did see strong commodity prices and margins.

We did operate quite well.

This has had quite a good impact, in terms of return on capital employed.

If you look at the different segment pieces in getting the 31% ROCE for the year, E&P did 39%, Refining & Marketing 34%, Midstream & Chemicals combined 28% and LUKOIL 17%.

And the total was 31%.

Going to, really, the last slide that we have in the presentation, slide number 19 is the outlook.

Basically, our strategy, objectives, finance goals we laid out in our operating and capital plans consistent, remained unchanged.

We did see the continuing impact from the hurricanes as we went through the fourth quarter.

We're quite pleased that we have reached agreement with Burlington Resources, confident of the new opportunities it provides our respective companies and our shareholders.

The integration teams composed of our employees in both companies are working to transition details aggressively and thoroughly, and we continue to anticipate completing the transaction in the first half of 2006.

We're also pleased to resume our partnership with the people in the State of Libya.

This relationship provides a strong basis for us to invest in our line goals.

We increased reserves of production and the training and development of our Libyan workforce.

In December, we announced our participation in the Qatargas 3 LNG project.

When fully operational, it certainly is going to help meet global energy demand, especially in the United States.

Our Darwin LNG plant has commenced production.

It's on target to start LNG delivery here shortly, certainly in the first quarter of '06.

Our incremental US Refining & Marketing investment program of $4 to $5 billion over the next five or six years is going to result, as you've seen in our prior presentations, in enhanced capacity and increased refining flexibility.

You also know we recently announced the acquisition, about the Thanksgiving time period, of the Wilhelmshaven refinery in Germany.

You see that it provides us a good opportunity to further enhance our position in Europe and strengthens our ability to supply products to key export markets.

We expect this acquisition to close here in the first quarter.

We continue to grow and develop the business lines of our company.

Our plans are to invest about $14 billion in 2006.

The $14 billion includes the investment that we see will bring us up to our ownership in LUKOIL from 16.1% at the end of '05 to 20% at the end of '06.

That really concludes the slides and the opening comments and presentation I wanted to go through.

So I think Gary, John and myself -- we are ready to open up for questions, and we will do our best to respond to your questions.

(OPERATOR INSTRUCTIONS).

Doug Terreson, Morgan Stanley.

Good morning, Jim, and congratulations on a record fourth quarter.

In Refining & Marketing, on slide 13, you mentioned that hurricanes and high utility costs affected profits by over $300 million in the quarter, which is obviously pretty significant, even for a company your size.

And on this point, I wanted to see if we could get some clarification on the specific expenses that are included in those two components of the chart, and also whether you have an estimate of what the opportunity costs might have been related to the hurricane effects in the quarter -- that is, with the lines being down.

I think John Carrig is going to answer that one.

On an after-tax basis, if you just take the volumes quarter over quarter, we estimate that about $183 million was volume and margin-related from the downtime, and then there's about $55 -- $53 million or so of after-tax maintenance costs associated with Lake Charles and the like.

Also, on the Mackenzie Delta pipeline project, it appears as if significant progress has been made with respect to the native peoples and the Canadian government since your November analyst meeting.

So on that point, I wanted to see if you guys considered the progress to be meaningful, as well -- that is, whether or not you believe that this thing is back on track, and also whether or not you think it can really can transition from the design to the construction phase during the next 12 months or so, and if not, what you consider to be the major obstacles at this point.

Yes, we do believe that progress is being made compared to what we saw and went through in 2000 and earlier parts of 2005.

It's very important for us and our company to really aggressively pursue and push this, because we need the resources and we need to develop this.

We also know that it's important, from a Canadian perspective, that we get this pipeline and this project going as quickly as possible.

We want to make sure that this pipeline goes -- it really needs to go and it's ready to go -- before the Alaska gas pipeline.

So we want to see Mackenzie Delta project go forward first and then followed by the Alaska gas pipeline.

So yes, progress is being made.

And I think we're going to see this thing really move forward as we go through 2006.

And our company, along with the other producer, are doing everything we can to make this happen.

Paul Sankey, Deutsche Bank.

Relative to the various moving parts we've had since the analyst meeting for '06 volumes, I wondered if you could either reiterate what the growth rate you expect to be in '06.

As far as I remember, it was a 6% growth off the base that you talked about in November.

Specifically, I was thinking about any impacts from Venezuela, from the UK tax changes and, of course, from Libya and anything else I've missed.

You point out all the various things that, from one period of time to the next, seem to be moving around.

But we feel pretty confident that what we said back in November, in terms of our production objectives for '06, remain valid.

So even we have some things that will positively or negatively impact us, we still feel very strong about what we said in November.

So we should just stick with the 6% outlook?

Because I think the full-year number here for '05 has come in pretty much exactly in line with what you said it would.

Yes.

Our number for '06, I think, Gary -- I can't recall exactly --

1,650,000, I think, was the number.

1.65 million, and that excludes LUKOIL.

And without wanting to get too involved here, I guess there's some margin implications from the replacements of, say, for example, Libya volumes, UK volumes with Libya volumes.

Is there any comment that you could make about that?

No, really not at this point.

Is there anything -- and again, you may not want to answer this, and I appreciate that.

But if you could say anything else about your turnaround schedule, or at least what has been going on so far this year and how it looks for '06, that would be very helpful.

Well, I think we pretty well gave our views on turnaround and cost when we had our presentation in November, analyst presentation.

But on the other hand, we do know that for the industry there's a lot of turnaround, and it's taking place during the first quarter and as a result of some of the deferrals and delays on turnaround, and as a result of keeping supplies up in the United States as a result of the hurricanes last year.

So it has some impact on us as well.

But I don't know;

John, you have anything further to say?

In the outlook, we indicated that the volumes would be relatively flat in the first quarter of 2006 for us, in the outlook section of the earnings release.

So that's indicative of the kind of activity we are going to be having.

And the last one for me is just on the LUKOIL announcement this morning.

I wondered if you had anything to add on the major announcement they made.

No.

Obviously, as a shareholder of LUKOIL, we are quite pleased with these kind of announcements.

And they really are enjoying some very positive exploration success, and we work closely with them, and really nothing further that I can say other than congratulations on good exploration success.

Neil McMahon, Bernstein.

Just a few questions really around the CapEx.

When you did the Burlington deal, you had in CapEx [and other] in your cash flow estimates there $17.2 billion for 2006 and $15.4 billion for 2007.

Just wondering -- do you have an updated number on that including Libya?

Because it looks like Libya was not included within 2005 CapEx numbers.

The number that Jim mentioned, the $+ 14 billion, reflects about a $700 million increase in CapEx associated with Libya for 2006.

And John, just on that, I'm sort of presuming as you are taking the CapEx hit in 2006, you won't be able to book any of the reserves associated with Libya in your 2005 reserve replacement rate?

And do you have any guidance on the reserve replacement for '05 yet?

We are continuing to apply our reserve management process, and we are not prepared at this point.

But we'll have an announcement out probably mid-February.

We are not prepared to indicate whether we expect to book reserves for Libya or any other country right now.

Reserves are either going to be in '05 or '06.

Yes, they will be one or the other, but -- we consult with our experts, including our auditors.

I think what John is saying is we haven't yet really come down on this, and you can expect us to comment on where it's booked for all of our results later this month or early in February.

We will come out with reserve replacement and what the numbers are and what's included in that here in a couple weeks.

So there's no sort of hard and fast rule that it has to be booked at the same time as your CapEx spend, is sort of where I was going with it.

And then, just lastly, given the change in the tax rate in the UK, have you got any -- in terms of like CapEx number, have you thought about changing your activity in the UK and how you look at the UK in terms of investments there going forward?

And really, maybe Jim, just a viewpoint of where does the UK sort of stand now, when you start to think about the world and future opportunities for investment?

A few things.

We have a number of projects underway that we are committed to, and we are certainly going to complete those projects.

In terms of future investments, it's a pretty mature province.

And we don't think that this most recent announcement on change in taxation, as have other companies responded already, is not going to be very helpful for looking at new investment and encouraging you to making the marginal investments to add to incremental capacity.

But anything that we've already approved and committed to, we are going to carry out and do.

It's a pretty mature province and not very helpful to add any incremental capacity [day] that might come along.

Nicole Decker, Bear Stearns.

My questions are on the downstream, primarily.

One, on the German any guidance as to what the potential income contribution might look like in 2006?

Well, in terms of the German refinery, obviously it's going to depend upon when we complete the transaction.

But we say we think we will have it done, certainly, in the first quarter.

So we get the results of this for maybe three quarters of the year.

We are not going to see the real strong financial results of this until we upgrade the refinery for deep conversion.

That's going to take investments over a number of years.

So it's a rather modest income and return for the investment.

But we have made this acquisition, and we are making the deep conversion investment as something developing a strategic legacy asset that will be in place here four or five years from now.

We are quite pleased with it, but it's going to have modest returns and will go up and down with what you would expect of a Northern Europe refinery; it doesn't have the sophistication that we would like it to have when we complete our investment program.

And you'll see the financial results are rather modest until we do complete that deep conversion.

And when would we expect to hear results or progress on negotiations with Saudi Arabia at Yanbu?

You are talking on the new (indiscernible) refinery.

Yes.

We continue to work and talk with Saudi Aramco, and I think it's just premature at this point in time.

We don't have any more information that we have or are prepared to disclose at this point in time.

But we are certainly very interested in the project, and hopefully this will become an opportunity for investment we can talk more about in the marketplace, should we be selected to go forward on this project.

And finally, on the Lithuania refinery, is it fair to assume that you are not participating in the bidding process?

I think what we've done is we, along with LUKOIL, submitted a bid a number of months ago.

We were informed that our bid was not competitive, so as a result we have kind of withdrawn into the background.

And, should this opportunity ever come back to us, we would be interested.

But I think there are some other companies that might have a more aggressive bid that Lithuanians may be talking to.

We'd be interested in it, but we have really put this on the back burner at this point in time.

Gene Gillespie, Howard Weil.

Congratulations on a great year.

You guys are spending a lot of money.

You spent a lot of money last year; you're spending a lot of money going forward.

I guess my question is, how sensitive is particularly your 2006 E&P budget to the dramatic rise in service costs and that relationship to commodity prices?

Gene, good point.

I can't recall the exact percentages, but obviously we are seeing quite a bit of pressure, in terms of the cost side of operations and maintaining production.

And we also see that for the large capital programs and all that we carry on going forward on the capital side of the business, cost pressures as well -- availability of contractors, costs.

They are not as aggressive, in terms of lump sum, as they were in the past.

So you see fewer lump sum bids and more bids that are cost plus.

And the impact to us as an industry, both for operations and for the capital program, is cost pressure upward.

And we indicated what we thought those numbers were, in terms of our November presentation by E&P to the financial community up in New York.

I don't think that has really abated much, at all.

And so it's going to push, in terms of higher finding and development costs, ultimately, operating costs on the industry.

So I can't really say too much more, other than a confirmation of what we said in November.

Mark Flannery, Credit Suisse.

This is a simple question on the corporate charge.

What should we expect for guidance going forward on that number?

I think you should expect somewhere between $175 to $200 million a quarter.

Right, so back to sort of the previous run rate, as it were?

Well, we indicated in November we thought it would be around 660, and that would equate to around 165.

That continues to be our guidance.

Doug Leggate, Citigroup.

Guidance on the tax rate going forward, John Carrig, if you may -- thinking specifically about the impact of the UK changes.

And I have a follow-up, if that's okay.

Well, the UK changes, should they be enacted -- assuming they are enacted, we would expect that sometime in the second -- midyear.

And overall, that would increase the marginal rate in the UK by about 9.5%.

So that would have an overall impact on the total company, but I would say we are still between 40% and 50% on a total company basis.

And a lot of that depends on the price and the mix of earnings.

Would that number include this impact of Libya?

I know it's kind of a little bit convoluted, but net-net, I guess the incremental tax rate would go up because of the contribution from Libya.

Is that fair?

The government take goes up.

I don't have a good, firm number for you on how much of that is taxes, and how much of that is other government take.

But we will come back to you on that.

That's a good question and a good point.

My follow-up is also on Libya.

Just as a point of clarity, the production guidance for 2006 -- I'm assuming you guys get somewhere around 45,000 barrels per day net out of Libya.

So does the guidance change as a result of that contribution, or does that already include Libya?

No, everything is included in our guidance we gave in November.

We assumed that we were going to get some production, hopefully, out of Libya.

We concluded our agreement in the latter part of the year, so there's no change in our guidance of what we said in November.

Paul Cheng, Lehman Brothers.

Oftentimes, there's a lot of debate talking about whether the Company should hedge or not to hedge.

Given your big reinvestment in Burlington Resources, can you just strategically, talking about also what's your view on that subject, whether you are inclined more towards the hedging or that not at all?

Well, we have heard quite a bit of feedback when we announced the Burlington acquisition about hedging.

And we indicated that we would give this a real thorough look, which we have been doing and are in the process.

We have not put in place in any hedging at this point in time.

We continue to look at it.

There are three aspects of it that I would say about hedging.

First of all, you have to look at what is the cost of hedging.

Then you have to ask yourself, can you put in place a really good hedge?

Because you know that the production of gas has a differential, basis differential.

We have to be concerned about what is the cost of hedging?

Can you put in place a really good, clean hedge?

Next, you have to be looking at is the marketplace there, does it have the depth and the duration, which ties also back to the cost.

And then the last point is we have to be careful also about financial reporting.

Do we so distort, from one quarter to the next, the financial results of the Company such that they are so impacted by movements in the valuation of mark-to-market on hedging?

So for all of these reasons, it's a more complex subject than the initial question might be.

So we haven't put anything in place.

And you know our bias historically is we don't do any hedging of oral/gas production or crack spreads.

But we are looking at it, we are studying it.

But I think any thought that we would put in place, a significant hedging of all of the production of Burlington or in the duration or period of time is really unlikely.

In Asia, I think in your presentation back in November, Jim Nokes was talking about he would like to expand the exposure in Asia.

When we are looking at Asia, are you guys interested in sort of the merchant refining operation, or that you will be interested more in an integrated system?

And is there any particular countries that it would be (indiscernible) or not?

The last question is the nature of Venezuela.

From time to time, we have heard some rumor or news coming out from that country, talking about changing the upgrading project, (indiscernible) more in line with the 2001 hydrocarbon [more].

I'm wondering if you guys have been contacted by the government on a similar subject?

Well, first, with respect to Asia, Jim Nokes indicated -- he's right.

Our company is quite interested in seeing how we can enhance our position in Asia on the refining side of the business.

But not in marketing?

Well, it could be in marketing, but the primary emphasis is on the refining side.

And some of the objectives we have is that we like the business, we would like to tie it back, if we can, to our own existing production in the area.

That gives you the integrated aspect.

Also, we look at it, from a business development point of view, how could we make investments ourselves or with strategic partners in a way that could tie back to feedstock, whether it's coming up from the Middle East, coming from Asia or potentially even coming from Russia.

So we look at all of those potential opportunities, and I think we are quite interested in doing that.

But it has to have -- we are not just buying a merchant refinery.

We' d like to make sure it has some relevance to our own production and operations, as well as to our strategic partners.

And we are already very concerned and interested in making sure that we know where the feedstock is coming from for the long term, so that ties you back to those producing kind of areas.

With respect to Venezuela, obviously, as we have to heavy oil projects, [Petrozuata] and Hamaca, we have read the same information that you have.

But no real discussions and negotiations between ourselves and the Ministry.

It's one of those things that I need to be and plan to be in Venezuela talking about here pretty soon.

Mark Gilman, Benchmark Capital.

There's reference in the earnings release to inventory impact in the midstream.

I wonder if you could qualify what that was in the fourth quarter?

I think it was on the order of $25 to $30 million, and it related to both physical sales, as well as to the mark-to-market on some contracts to get mark-to-market.

And that's after tax, John?

Yes, I believe that's after tax.

Jim made a comment about the mark-to-market impact in terms of the UK gas contracts, $197 million.

Is that an after-tax number?

And what did that number look like in prior quarters?

Yes, that's an after-tax number.

Regarding the prior quarters, it's moved around, but I --

Pretty small.

Okay, it's pretty small.

I noticed that in the fourth quarter, both in international as well as Alaska, we saw a very significant jump in DD&A.

Could you give us some color as to what is causing that effect in both those regions?

Alaska, I'd have to come back to you on it.

It's increased production, I believe, in Alaska, in part due to seasonality; it had good volume performance.

As well as internationally, as well, I think it's more to do with increased production.

We went from 15.20 to 15.60 or so, something like that.

15.90.

My calculations, John, suggest it's the unit rate that's going up, not just the total dollar rate.

I can get back with Jason online on that, Mark.

There's nothing that's unique or attributed to a single area or to a single as asset, I don't think, John.

That's correct.

In the S-4 that you filed regarding Burlington, I assume that there was a particular price [deck] that you had assumed with respect to the purchase price allocation.

Can you give me some idea as to what that was, and what adjustments might occur if the price were to be different from that assumption, in terms of the allocation as published in the S-4?

As you know, Mark, the S-4 is filed but not yet effective, and we are really not in a position to discuss what the filing was until we become effective.

And we would be happy to engage in dialogue after it becomes effective.

Jennifer Rowland, JP Morgan.

Just a question on reserve replacement.

I know you said it might be a bit premature.

But do you have any sense yet whether or not you would be able to re-book the reserves related to Surmont that you had to take off last year?

Our expectation is we would not re-book those.

That's just based on the price information that I have, that was available at year end.

But I don't believe we would.

But that, again, is subject to our final determination.

Where is Alliance refinery now in the restart process?

And when do you expect that to be at full run?

We have already started the process of restarting, and we expect to have it in full operation by the end of the first quarter.

Okay, good.

We do appreciate your interest and your participation this morning in our conference call.

I want to remind you that you can find the earnings release and all supplemental information, as well as the slides that we walked through this morning, on our webpage, ConocoPhillips.com.

Thank you.

Ladies and gentlemen, we thank you for your participation in today's conference.

This concludes the presentation, and you may now disconnect.

Have a good day.