康菲 (COP) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the ConocoPhillips fourth-quarter 2006 earnings conference call.

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

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

We will be facilitating a question-and-answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS).

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

Please proceed, sir.

Thanks, Gen, and welcome to everyone who is on the conference call today for ConocoPhillips' fourth-quarter 2006 results.

With me today are Jim Mulva, our Chairman and Chief Executive Officer, and John Carrig, our Executive Vice President of Finance and Chief Financial Officer.

The presentation material that we use today is going to help us explain the financial and operating performance of our company during the fourth quarter of 2006, and you can find this presentation on our website -- www.ConocoPhillips.com.

On page 2 of the presentation you'll find our Safe Harbor statement; it basically says that our presentation and the responses to your questions today will include forward-looking statements about our current expectations.

Actual results may differ materially from our current expectations and you can find a list of the items that could cause these material differences in our filings with the SEC.

So now I'll turn the call over to our Chairman and Chief Executive Officer, Jim Mulva.

Gary, thank you and good morning and appreciate everyone joining us for our fourth-quarter 2006 earnings conference call.

We appreciate your interest in our company and so I'm going to start my comments on page number 3.

You can see for the fourth quarter of '06 we generated $3.2 billion of net income, $5.6 billion of cash from operations.

Two previously disclosed impairments reduced our net income for the quarter by about $285 million and that's about $0.17 per share and I'll talk more about these two items in subsequent slides.

During the fourth quarter we were able to reduce our debt to capital ratio to 24%, so down 1% from the third quarter.

We reduced our debt level $700 million, so at the end of the year it was at $27.1 billion and we obviously continue to fund our capital and investment program.

For the fourth quarter of 2006 we produced 2.49 million BOE a day, now that includes about an estimated 438,000 BOE a day from our LUKOIL investment segment.

Again, I'll talk more about all of this in subsequent slides.

In refinery and marketing our refineries ran at 94% of crude processing capacity, so that's down 1 percentage point from the previous quarter.

With respect to the metrics of return on capital employed and income per barrel from upstream and downstream, we have some slides and we'll talk about that later in the presentation, so I'm going to move on to page 4.

This slide on page 4 shows a comparison of fourth-quarter net income to the third quarter.

Our worldwide refining and marketing margins were significantly lower than in the third quarter.

In addition, our crude oil and natural gas liquids prices along with chemical margins were lower than the third quarter.

So the net of all of this, along with other market impacts, resulted in a decrease in fourth-quarter net income of about $1.2 billion, that's the 1.158 red bar on the left side of this page as compared to the third quarter.

So we had higher E&P sales volume that were partially offset by lower volumes in our refining, marketing and chemical segments.

But these higher volumes improved our fourth-quarter net income by $153 million.

In the third quarter we recorded one-time negative tax adjustments as a result of recent tax legislation you recall in the United Kingdom, Alaska and Venezuela.

Now this shows up as a positive variance quarter to quarter, that's the $508 million on this chart, since we didn't have adjustments in the fourth quarter.

Then the other items, 182 million reduce, our fourth quarter compared to the third and that includes the absence of business interruption claims, higher operating expenses, dry hole costs and higher asset impairment, partially offset by improved foreign currency exchange impacts and lower DD&A.

As a result fourth-quarter net income is $3.2 billion.

I'm going to move on to page 5; it talks about total company cash flow.

We started the fourth quarter with a cash balance of $696 million; we generated about $5.6 billion from fourth-quarter operations.

We spent $4.2 billion during the quarter on our capital program and investments.

Investments included the acquisition of 1% of LUKOIL stock and that 1% cost us about $753 million. in the fourth quarter we paid off $593 million in dividends, reduced our debt by $700 million.

In addition, we repurchased 250 million ConocoPhillips stock in the fourth quarter.

So together with the Burlington Resources first quarter of 2006 share repurchases our pro forma repurchase program in all of '06 totaled approximately $1 billion.

Now after considering other sources of cash flow we ended the quarter with $817 million in cash.

Now I'm going to move on to page 6.

On page 6 you see the two pie charts -- they show the sources and uses of cash for the full year 2006.

Now with respect to the chart on the left, it shows total cash available for the year was $25.4 billion, about 85% of that was generated from our cash from operations.

As you look at the pie chart on the right you can see what we've done with $25.4 billion in cash.

We spent $16.3 billion or about 64% of available cash to fund our capital investment program.

So if you look at all of '06 we effectively reinvested a little more than 100% of our net income back into the growth and development of our businesses.

Further -- looking on the right hand pie chart -- we returned $8.3 billion or about 33% of available cash to our shareholders and debt holders in the form of dividends, share repurchases and debt reduction.

I'm going to move on to page 7 which this chart or the slide you can see how we compare our cash return to shareholders and debt holders for the year of 2006.

As mentioned previously, we returned about a third of our available cash, or about $8.3 billion, to shareholders and debt holders.

Now this is a little over half of what the other companies on this chart here averaged doing about 55%.

And this is a result because ConocoPhillips has a much higher reinvestment rate where we reinvest our cash back into the growth and development of our businesses.

Now for 2007 we expect to continue to show this chart in subsequent conference calls.

But for 2007 we expect to employ an even more balanced approach to the use of our cash.

So you could expect as we go through 2007 that we will have proportionately more cash allocated to dividend distributions and share repurchases.

In December we announced our reduced 2007 capital and investment program of $13.5 billion.

Earlier this month we advised that our plan is to purchase 750 million of our shares in the first quarter of '07.

And then we're going to provide an update on our dividends and our share repurchase program later this quarter.

So I'm moving on to the debt ratio slide on page 8.

You can see we've made good progress since the first quarter of this year as we've improved our debt to capital ratio.

We've increased our book equity and reduced debt.

You can see our book equity has grown now to $84 billion.

The middle chart you can see we reduced our debt balance on the balance sheet by $5.1 billion from the high point at the end of the first quarter.

So if you look at the bar chart on the right you can see the debt ratio, 24% at the end of 2006, so that's 6 percentage points lower than at the peak at the end of the first quarter of this year.

Now moving on to page 9, start talking several slides on E&P performance.

Now our worldwide realized crude oil price in the fourth quarter was much lower than in the third quarter.

In fact, it's down $9.94 a barrel, went down to $55.10 a barrel for our realized crude production in the fourth quarter.

Our global realized natural gas prices were only slightly higher at $6.12 per MCF versus $5.91 per MCF in the third quarter with our realized price in the U.S. down $0.14 per MCF to $5.84 and our international realized price was up $0.51 an MCF to $6.36 an MCF.

Our E&P production and sales were higher in the fourth quarter than the previous quarter.

As I said earlier, we recorded one time negative tax adjustments in the third quarter as a result of tax legislation in the United Kingdom, Alaska, Venezuela.

So you see the impact on this quarter-to-quarter in a subsequent slide.

So I'm going to move on to slide, page 10.

Our production in the fourth quarter was similar to that of the third quarter.

Although we saw improvement in the production from our Prudhoe Bay unit in Alaska, the improvement was shorter than what we expected due to weather-related issues at Valdez which adversely impacted our oil liftings.

Although we saw improved production from the UK after completing planned maintenance that negatively impacted third-quarter production, the improvement wasn't as large as we would have expected due to on plant compressor maintenance issues at our Britannia facility.

These improvements we're talking about here on this slide were mostly offset by our share of production from the Timor Sea due to production sharing contract impacts and by completing the recovery of the other lifts in Libya early in the fourth quarter.

We under lifted, as you recall, the first several quarters of 2006, so we since got caught up in the fourth quarter.

Then you add the 438,000 BOE a day which is our estimate of our equity share of LUKOIL's production, so the total ConocoPhillips production approximated 2.49 million BOE a day in the fourth quarter.

I'm moving on to page 11, E&P net income.

Our E&P net income in the fourth quarter was about $2.1 billion and that's about $200 million higher than the third quarter.

Results in the fourth quarter were about $400 million lower due to lower crude oil natural gas liquids prices partially offset by higher natural gas prices and some other market impacts.

The higher sales volumes, mainly from crude oil from Alaska, some from Algeria and improved fourth quarter -- that all improved fourth-quarter net income by $159 million.

As mentioned earlier, the third quarter was negatively impacted by recent tax legislations at UK, Alaska, Venezuela, so this shows up in the $508 million positive variance when you compare quarter-to-quarter.

Then there are some other factors that reduced our fourth-quarter E&P net income $83 million when compared to previous quarter.

And that includes a Canadian asset impairment and higher exploration expenses partially offset by improved foreign exchange impacts and some other smaller items.

Now I'm moving from E&P to refining and marketing, so I'm on page 12.

In refining and marketing we experienced significantly lower refining and marketing margins compared to the third quarter.

Now in the U.S. our realized crack spread declined $2.71 a barrel in the fourth quarter to $11.39 a barrel and our international realized crack spread declined $0.24 to $6.22 a barrel.

Our U.S. refining system ran at 96% of capacity, that's the same as the third quarter.

Our international refining system ran at 87% of capacity, that's 2% lower than the third quarter and it's due to planned scheduled downtime at our Wilhelmshaven refinery.

So as a result our worldwide crude oil capacity utilization was 94% in the fourth quarter, 1% lower than the third quarter.

Our turnaround expenses in the fourth quarter were $94 million pretax, that's $52 million pretax higher than the third quarter.

Also in the third quarter we recorded a $111 million business interruption claim related to the 2005 hurricanes.

Of course, that wasn't replicated in the fourth quarter so it's a variance.

And we recorded an impairment on our domestic marketing assets held for sale.

I'm moving on to slide 13.

Our refining and marketing net income was $919 million in the fourth-quarter, so that's $545 million lower than the third quarter.

We had significantly lower worldwide crack spreads and marketing margins along with some other market impacts, so it reduced our fourth-quarter net income, as you can see on the slide, $486 million.

Then we had lower volumes due to slightly lower crude oil capacity utilization, that have an impact -- adverse impact to earnings of $10 million in the quarter.

And then we had some other items in the fourth quarter that reduced income $39 million, that includes the absence of business interruption claims in the fourth quarter, higher turnaround cost, operating expenses -- some of this was all partially offset by lower impairment on assets that had been held for sale, improved foreign exchange impacts and lower taxes.

I'm moving on now to page 14.

Our estimated equity earnings in the fourth quarter from the LUKOIL investment was $302 million, so that's down from the $487 million in the third quarter and that's primarily due to lower crude oil prices in the fourth quarter.

During the fourth quarter we completed our purchases of the LUKOIL shares, so at the end of 2006 we owned 20% of the authorized and issued shares of LUKOIL, but it represents also 20.6% of the estimated shares outstanding.

I'm going to move on now to the other segments that we report on and that's on page 15, other segments.

The earnings from our midstream business in the fourth quarter was $89 million, so it's down $80 million from the third quarter.

So the decrease is a result primarily of lower NGL prices and along with some certain favorable tax adjustments which we recorded in the third quarters didn't happen again in the fourth quarter.

With respect to chemicals joint venture, our net income was $98 million, that's $44 million lower than the third quarter primarily due to lower margins in nearly all of the productlines which is primarily olefins, polyolefins, aromatics and styrenics.

We also had an asset retirement of $16 million net, our share, related to the idled capacity in the K-Resin business of the chemicals joint venture.

Now on the emerging businesses, not all that large for a financial impact, results were $8 million of net income, just slightly lower than in the third quarter.

And then in the corporate segments our costs were $306 million, pretty similar to the previous quarter.

I'm going to talk about now the next slide income per barrel for the upstream and the downstream.

We have started showing this and will show this in subsequent conference calls for each quarter.

I'm on slide 16 and this chart shows for prior years and three quarters year-to-date where we can compare with large other oil companies and then we show the fourth quarter, what is our income in E&P or barrel of oil equivalent, and you can see $11.69 in the fourth quarter.

We don't have the numbers for the industry so obviously we don't have the blue bars.

So we feel that we continue to work on this to be competitive with the peer group.

Now I'm going to go to page 17.

We show what is our income per barrel for refining and marketing, and we show for the same period of time.

And you can see for the fourth quarter we have $3.36 a barrel and we feel we're certainly competitive with the peer group.

So now I'm going to go on to page 18.

We always show this slide and, just so you know, in the shaded area in the background we show as a peer group that's the return on capital employed for the larger integrated publicly traded companies so that's Exxon Mobil, BP, Shell, Total and Chevron.

So the bar chart reflects ConocoPhillips' return on capital employed with no adjustments for purchase accounting, adjustments though have been made to several of the other peer groups shown in this shadow area to reflect purchase accounting for some of their transactions and we always attach table 1 so you can see how I made the adjustments.

So what you can see on the right hand side of the slide, our annualized return on capital employed for the fourth quarter of 2006 is 13%; and then for the full year it's 17%.

And so when we get the information for the other companies when they report, obviously we'll update our charts.

But I'm coming to the final two slides or pages that we have in our presentation, so I'm moving on to page 19 which is the outlook.

We feel we've had another good strong financial year in 2006.

For 2007 we're going to place and continue to place a lot of emphasis on operating excellence both upstream and downstream.

And to do this well we need to operate obviously very well day in and day out execute our major projects, replace our reserves, constrain our cost.

In light of our preliminary reserve replacement that we announced earlier this month for 2006, I'd like to take a few moments and provide some additional insights on our reserve replacement picture.

Our reserve replacement history has been somewhat uneven, some years are stronger than others, as access to resources becomes more and more challenging, cycle times grow, investments are quite high as a result of the complexity of the major development projects that we have we would expect our reserve replacement to continue on an annual basis to be somewhat uneven.

A better indicator of how well we perform we always feel is a longer-term like a five-year average.

If you look at five years, our five-year pro forma average reserve replacement, excluding acquisitions, you might say organic replacement, it's been around 65%.

In the future we would expect to book reserves from our substantial on book resources associated with our legacy assets that we have in the lower 48, Australia, Alaska, Norway, growth areas of Canada, Russia, Qatar and China.

And we will continue to pursue new acreage opportunities to supplement and support our current resource base.

Now in 2006 our preliminary downward revisions totaled 260 million barrels with about 65% of that 260 million coming as a result of further technical assessment of our reserves in the Caspian.

Now we're talking about Kashagan.

Let me be a little bit more specific.

Initially when we booked Kashagan we booked a portion of the production expected from phase one development as opposed to a more limited area of reserves existing from the appraisal wells coming from exploration.

So that is the reason on Caspian and Kashagan.

Then the other part of that 65% relates to the accumulation of more information regarding corrosion, facility, lifespan, wave height data in the North Sea, particularly related to Ekofisk Elfisk facilities in the North Sea.

So if the longevity of the facilities is shorter than you plan then you're going to have to be making new investments to make sure that you capture those resources in the future.

We haven't approved those no plans yet, so we took some reserves off the books that we would expect over time with new investment.

We will be adding reserves back in.

So those two issues account for about 65% of the 260 million barrels.

Then another 25% of that $260 million -- so it all adds up to about 90%, these reasons of the 260 million -- came from well performance and contract extension issues in Alaska and our exit from Dubai.

We left Dubai, as you recall -- yes, we have reserves on the books, but we effectively were making essentially no money on the production and so we felt it didn't make sense to be pushing barrels and committing human resources at all when we could better deploy our human resources to other things to grow and develop the Company.

So as I've discussed on previous earnings calls, our oil and gas reserves governance process is strong.

We do this very thoroughly to enhance it further.

We, the management of the Company, last year we selected an independent third party to review our reserves analysis and procedures and we just believe that this is good governance.

That independent review enhances governance process and review third party of assessment of our reserve position.

And the independent review confirmed that our reserve position in the aggregate is correct.

The Caspian Kashagan revision that I mentioned earlier was an outcome of this review.

It represents less than 1% of our total reserves.

And just so you know, we expect -- we have an ongoing relationship and independent review of our reserve position and it's on a rolling three-year period of time so everything gets looked at on a routine basis and so we always keep updating our situation.

We just think this is good governance.

There's nothing new or unusual to further report.

We're just giving you more detail of what took place when we announced our preliminary reserve replacement numbers earlier this month.

Now information regarding our 2006 reserve replacement is going to be available later in February as part of our annual Form 10-K filing with the SEC.

I'll complete some comments on this final slide.

We're pleased to start 2007 with the closing of the transaction to create an integrated North America heavy oil business with EnCana.

I want you to know the integration efforts are progressing well in line with our expectations.

So having completed our LUKOIL share repurchase, we look forward to further strengthening our strategic relations with LUKOIL, looking at opportunities that we can be doing upstream/downstream.

Then turning to our asset rationalization efforts, you see we generated proceeds of about $500 million in '06.

We expect to get about $1 billion I'd say in the first quarter and you'll see that when we finish and report the first-quarter results.

The balance of our rationalization efforts is on target.

We expect to essentially complete that in '07.

Now looking at the first quarter, as we announced, we expect the Company's E&P segment -- this is not LUKOIL -- the E&P segment production to be lower than the fourth quarter.

Now let me explain this a bit.

We're going to see an increase of let's say about 25,000 barrels a day that we get our share of the upstream EnCana joint venture.

We expect that a lot of this is going to be offset by the effect of the disposition program that we have in the lower 48 and Canadian asset dispositions.

Continued improvement at Prudhoe Bay we expect we're going to see an increase in the first quarter of 20,000 barrels a day, but that's somewhat offset by planned downtime that we're going to have in the first quarter in the North Sea.

And then we no longer have this catch-up -- fourth quarter catch-up of the underlift position in Libya.

In addition, the OPEC production quota reductions do have an impact on us.

It's going to impact somewhat Venezuela and Libya and that's going to increase first-quarter production.

If the currently announced quotas continue through the first quarter then the impact of the quota reduction to our worldwide production is a reduction of about 30,000 barrels a day.

If we step back from all of this and you compare the fourth quarter of '06 to the first quarter of '07, we're thinking that we're going to be down somewhere in the neighborhood of about 25,000 barrels a day oil equivalent.

Now in our downstream refining business we expect crude oil capacity utilization to be in the mid 90% range in the first quarter.

Remember now, our crude oil refining capacity starting January of this year is 2,729,000 barrels a day, now that's down from the 2,901,000 barrels a day and this reflects the contribution of some of our refining capacity at Wood River and the border refineries into the downstream joint venture with EnCana.

Turnaround costs are expected to be about $60 million for the quarter.

As I said before, we announced in December our reduced 2007 capital and investment program to compare '06 to 07.

So our '07 capital investment program, $13.5 billion, and we told you earlier this month that we plan to repurchase 750 million of our shares in the first quarter of '07 and we're going to update you with more information regarding dividends and share repurchase.

The reason that we announced the 750 million is we're really completing the final part of a previously announced share repurchase program.

So we'll tell you more as we go through the first quarter because we will discuss dividends and share repurchase with our Board and that's why we've made the announcement we have -- expect more information as we go into the February/March time period.

And then, the last thing that I'll say, we look forward to updating the investment community on the status of our financial operating spending programs as well as our continuing asset rationalization efforts when we meet with you in New York at our March 14, meeting.

So that really concludes prepared remarks and so I think John Carrig, Gary Russell and myself will try to respond to whatever questions you may have of us.

Okay, Jen, I think we're ready to take some questions.

(OPERATOR INSTRUCTIONS).

Paul Cheng, Lehman Brothers.

Jim, given all the political noise or changes the way how they look at foreign investment in Venezuela, have you changed your view, in looking at Venezuela, the position within your portfolio as a place for future investment and how do you adjust or assess the risk profile right now?

Secondly, that last time you talked about some of the downstream projects are maybe under review and not necessarily going to be pursued forward.

Can you talk about any project that has been canceled or postponed and how you view on the sector at this point?

Thank you.

First, Venezuela obviously gets a great deal of attention in the media and the financial community.

I can assure you it gets a lot of attention within our company, ConocoPhillips.

We have good assets obviously in Petrozuata, Hamaca and the development of Corocoro.

There's also the opportunity of working with other partners for gas opportunities.

We continue to evaluate and look at that.

But our posture with respect to Venezuela, obviously it's a difficult situation that we have to make sure that we are communicating and working with the PDVSA, the ministry and the Venezuela authorities; we also have to certainly be looking out after the interest of our company.

So it's difficult given discussions and negotiations to comment too much more about that other than to say that in our portfolio we really look at this point in time to Petrozuata, Hamaca and Corocoro really is our position and I don't think you can see or expect that there's going to be significant additional investment at this point in time other than those three positions that we have in Venezuela.

Now with respect to downstream investment, we will continue to go forward with our investments at Wood River and Borger as we announced as part of the joint venture with EnCana.

One of the things, though, not just for the downstream would be the joint venture with EnCana, but everything we look at upstream and downstream there's been tremendous significant cost pressures on investment.

So we want to make sure that we slow down, we really take a good hard look to make sure that we don't try to accelerate projects, that we execute them with a lot of consciousness and good prudence in terms of making sure that we get value for our investments.

One project that I would like to talk about, that's the Wilhelmshaven refinery.

We made the acquisition of the refinery and announced that in the late part of 2005 and we said we were grow to have a very substantial deep conversion project that we would start executing immediately.

What we found is that the escalation of the cost of the deep conversion project was far more than what we expected.

So essentially we stopped and we said we want -- we don't have to do this as quickly as we would like.

We want to make sure that we get this right.

So we slowed this down, we're doing a lot of analysis and I would have to say that I don't think you're going to see us approve a deep conversion project at Wilhelmshaven in 2007.

On the other hand, what we are doing is we feel reasonably good that we will have a good project, but we're going to take more time.

And I think that is something that's going to be more of a 2008 time period for going forward, not 2007.

So I'm trying really to respond to your question.

That's good.

Jim, can I just -- I had a follow-up on -- how about the Saudi Arabia joint venture refinery project, the (indiscernible) refinery, is there any change in your view about the viability of that project?

I would say with respect first to Yanbu and working Yanbu with Aramco, we feel really good about this project, we like it, it certainly has all the issues though in terms of escalation, making sure we get this right.

I know Saudi Aramco feels the same thing, let's make sure we take the time and we get this right.

But we haven't changed our expectations in terms of what we'd like to do at Yanbu with Saudi Aramco.

I'd have to say though that the other opportunities in the Gulf, in the Mideast really are quite challenged.

And so I'd have to say we'll have to really take a good hard look at whether we want to do something more in that regard.

Cost of the projects and cost per capacity is pressing pretty hard and we as a company have to step back and say we can't do everything, we have to prioritize what we want to do in terms of upstream and downstream.

And the other thing that we want to really make sure is increase our distributions to our shareholders in the form of dividends and share repurchase.

So we just want to make sure we're very prudent and so we're going to be quite a bit more constrained and modest in terms of our capital spend.

John Herrlin, Merrill Lynch.

With $55 oil we forecast you with your asset sales to have close to $8 billion in free cash.

I know you're going to talk about the buyback program later in the quarter, but if you're going to split that $8 billion, how would it be divided between common stock repurchases and debt repayment?

I think what you're going to hear from us obviously, as we said, we like the discipline of increased dividends, so we're going to take a good hard look at increasing our dividends at the next board meeting.

Share repurchase, we've essentially given you a signal when we say we're buying $750 million in the first quarter.

So when we come out with our hopefully increased dividends and share repurchase and announce that, what we expect to do for the remainder of the year -- and we announce that later in the first quarter -- then essentially debt reduction becomes whatever it is.

And so we then look at say if we have a stronger environment both in oil gas prices and crack spreads we'll pay down more debt.

We don't change our share repurchase or our dividends.

But on the other hand, if the market environment is not as good as we expect we don't contemplate changing dividends obviously or share repurchase.

So debt reduction becomes a swing sector, but if the marketplace for one reason or another becomes even stronger than we would expect, then I think what you're going to see is we would ramp up share repurchase.

Okay.

One other follow-up for me.

You ended 2005 with about 26% of your proven reserve base PUDs.

Your peer group is more like 40.

You addressed some of the reserve changes like Kashagan, but do you think that your company gets penalized for actually having one of the lower PUD counts in the industry?

Well, I don't know.

John, do you want to say anything on that?

We recognize we have the percentages that you mentioned, I don't know the figures of the others exactly, but order of magnitude we agree with what you say.

And we think that in order for us to mature those potential PUDs that it requires some work that we need to focus some effort on.

And our EP folks are -- in fact have that in hand.

We don't think it's a reflection of our resource base as such, but there is additional intensive -- manpower intensive work to make those PUDs -- to bring those PUDs to fruition if we try to do something.

Well, that's the reason why we spend the money that we do.

And we also think that we have a strong resource base that gives us the opportunity to do it.

Maybe in the eyes of many it's a mature area, but it does give us the opportunity to capture resources.

And it's one of the reasons when we go through our meeting on March 14th why we spend the money that we do so that we can capture these resources and create value for the shareholders.

And we intend to really cover that in quite a bit of detail on March 14th.

Thank you.

Doug Leggate, Citigroup.

Two questions if I could.

The first one is numerical, it's related to the DD&A and the upstream.

I think last quarter you had given us some guidance that that had stepped up.

But this quarter in the U.S. it seems to have come down quite a bit again.

So I wonder if you could maybe just comment on that?

My second question is more I guess strategic and it kind of relates to everything you've discussed in terms of the five-year reserve replacement, the slowdown in investment in Venezuela, and I guess John's question about the free cash flow.

Are you happy with the portfolio debt that you have right now and do you think that perhaps there is further acquisitions down the pipe that maybe you need to try and bolster the outlook going forward?

John Carrig will cover and Gary DD&A.

We're never satisfied with our portfolio.

We always want to have more acreage, we want to have more drillable prospects, but we do like our portfolio.

We do think we have quite a bit of opportunity, but we'd always like to be doing more than what we have.

In terms of acquisitions -- I thought I was pretty clear on that.

We made a very substantial acquisition in Burlington Resources earlier in 2006.

I think the market environment, the availability, the cost, whenever.

I don't see acquisitions.

We may buy something for $500 million or 1 or $2 billion if it's the right opportunity, if it's the right kind of asset.

But I don't think for cost and everything else buying availability or whatever reason -- cost, politically, everything -- I just don't think those opportunities are there.

So we're very focused on our organic capital spend at $13.5 billion and ramping up our distributions in terms of dividends and share repurchase.

We're getting our debt down some, but not quite as aggressively as we did in 2006.

So I don't see the prospect for large acquisition.

In terms of the DD&A, what we saw is we continue to push down the purchase price to the asset base, further down into the asset base.

And just as it went up in the third quarter it did come down somewhat in the fourth quarter.

So our view is that it's probably best to take the three quarters, annualize them to get a more reasonable rate for 2006 in terms of DD&A.

That's great, thanks very much.

Gene Gillespie, Howard Weil.

Jim, you talked around this a little bit, or referred to it anyway, in several of your comments.

But it was somewhat interesting and a little bit alarming to me to look at the return on capital numbers of 13% analyzed and for the fourth quarter and 17% for the year -- and this is an industry question more than anything or an industry observation and I'm using you as an example because this is your call.

But looking at similar numbers and assuming that the peer group is in that 17, 18, 19, even 20% range, in a $66 oil price environment that compares to about a 17% average for the same group in 2003 and a $31 oil price environment.

That suggests to me that there's a tremendous amount of cost escalation on the margin and I know that you're dealing with that with your capital program, capital reallocation program, but am I missing something here or is that correct?

No, I don't think you're missing anything, Gene.

The situation is frankly speaking, increased price in terms of oil price and whatever is not necessarily a friend of the industry because it leads to cost escalation.

Just as you pointed out, it goes to fiscal take as well.

And so essentially for the reasons of cost escalation and fiscal take, the increases in prices -- I know it's not dollar for dollar -- but essentially for one reason or another it doesn't come through in terms of return on capital employed.

So what we're faced with is increased fiscal take, increased costs, difficulty on access in terms of getting access to new resources.

And so the real dilemma for the companies is if we don't have the right opportunity we've got to be careful we don't throw money at whatever the opportunity is.

If it's not a good opportunity then we need to return the capital in the form of dividends and share repurchase.

You've outlined the scenario, I agree with you and I kind of amplified hopefully the points of how I see it and confirming what your observations are.

Thank you.

Mark Gilman, Benchmark.

Jim, John, Gary, etc., good morning.

I had a couple very specific things if you wouldn't mind.

First, could you comment briefly on the performance of the Ekofisk growth project?

It frankly seems for a period now as if it's been somewhat disappointing?

Secondly, could you quantify what you're putting on the books for Burlington Resources' reserves at year-end relative to what Burlington had on its books at year-end '05?

Thirdly, I'm having trouble with the first-quarter production arithmetic.

It would seem to me the decline you're talking about is roughly equivalent to your expected OPEC curtailment.

I don't see any allowance for a rebound from the intensive level of North Sea maintenance that adversely impacted the fourth quarter.

And finally, with the projects in the Middle East that you referred to in general terms regarding additional discipline, is that the Abu Dhabi project?

Thanks a lot.

First, on Ekofisk growth, the issue on Ekofisk growth, we think there's always the opportunity and we're quite really excited about Ekofisk 2, 3, 4 growth there because we know we've got a great resource -- a lot of oil and gas resources that are there to be developed.

The issue for us is if you look in this past year we've really haven't operated well in the North Sea.

And in many regards that's both on the Norwegian side and the United Kingdom side.

So I don't want the operations to impact the view with respect to what are the growth opportunities.

So we are excited about and really looking at how we can go onto the growth of Ekofisk.

It's technically challenging; we cam add a lot of resources by doing it and we think we can do it, and the challenge is to do it in a cost-effective way.

Because everything that we do offshore now, even in the North Sea, like around the world, we're getting pushed on cost escalation.

And we want to make sure that really when we look at Ekofisk growth we think we're going to sort out technically that we can accomplish the challenges of growth at Ekofisk and redevelopment of Ekofisk.

I think it's going to be more a challenge on the cost side.

In terms of the reserves at BR, what they had in 2005 and all, I don't know.

John may want to comment but I think that really comes out in the 10-K and the people can look at the 10-K and compare what we have but I don't know.

Right.

I think we indicated in the interim the purchases were about 2.5 billion, but I don't have a specific breakdown with me right now and that will be, but we can certainly address that -- I just don't have it in front of me.

The next thing that I would say is going back to the production numbers, more detail on that, first quarter compared to the fourth quarter -- maybe, Gary, you could call Mark and talk to him after the conference call.

Yes, I'll call and give you some details, Mark.

In terms of your question on Abu Dhabi, that is one of the projects that I was essentially referring to with respect to -- really challenging with respect to capital cost, where is the source of the feedstock and all of that.

It has issues that are different from the Yanbu refinery that we're working on with Saudi Aramco.

Thanks a lot, Jim.

Paul Sankey, Deutsche Bank.

Good morning, gentlemen.

Jim, forgive me;

I may have missed this.

I just slightly missed what you were saying.

But did I hear you reiterate that on a five-year rolling average you would be replacing 100% of your reserve on an organic basis?

I think you may have said that I'm just not sure.

No, no, no.

What we were saying -- I think on a longer-term basis, yes.

But on a five-year basis I think I was saying it was closer to about 65% organic.

We more than replace our reserves when you bring in the acquisitions.

Okay, I've got it.

Because it was kind of 265 what with the Kashagan thing.

You also give quite a long --

And the other thing that I will say is on March 14th we will share with you our plans in terms of how we see reserve replacement and all as we go out and over the next number of years, you'll get that on March 14th for future years.

Right.

This might be one for then, but you listed quite an impressive number of places where you can add reserves -- Australia, Alaska, Norway, Canada, Russia, Qatar, China, but you didn't mention Kashagan.

Does that mean the booking is essentially a terminal debooking or was it just an omission?

No, no, no.

What we are saying -- first of all, I was trying to say with my comments on Kashagan is that we've taken a more conservative view of reserves on the phase one development of Kashagan well by well and what we can claim reserves around the well.

But we expect with more drilling we'll put those reserves right back on for phase one development.

We are not signaling in any way any change our view of what Kashagan will ultimately do.

So it would be wrong for us to be giving or incurring any negative signals on Kashagan.

Okay, that's good.

I think we could say that one of the problems of reserves replacement in '06 was a lack of a final investment decision on any major projects.

It seems to us that the outlook over the next couple of years is also somewhat thin.

Is that a fair reflection and is that the reason why we're going to the 65% number?

No, I think we'll just talk more about that at March 14th, but what we are trying to say is a lot of the places where we are, North America and Europe, is mature.

But we also -- this comment came up earlier -- we have a really substantial resource that we think that we can add a lot of reserve replacement.

But on the other hand, we're looking for the new LNG opportunities and other things around the world like Timor Sea North of Australia.

We think there are opportunities of doing some new LNG projects.

But these are all challenging and tough to do.

But we'll go through all of that March 14th.

The other thing I want to say about Caspian and Kashagan -- hopefully we addressed Kashagan.

We like Kashagan.

It has its technical challenges, it certainly has its cost challenges.

But the Caspian is an area for ConocoPhillips that we're really interested in and we're pretty aggressive in trying to get more acreage, particularly in the Caspian.

Good.

And just finally from me.

I think the vague guidance if you want for this year's disposals was around $4 billion once your program was complete.

I noticed an announcement yesterday that you'd be adding -- I don't know whether you're adding or not -- a refinery in Ireland to that program.

Could you, first, confirm that I'm in the right ballpark for disposals this year.

And secondly, is that incremental what we're seeing from Ireland and are you adding to the program as we go on?

Thanks.

No, what I would say is -- two points.

I think we've said that we're going to be in the neighborhood of $3 to $4 billion and hopefully we've got something that we try to sell -- are interested in selling.

If we don't get the right price we won't; if it's not tax efficient we won't sell, we'll look at something else.

But guidance is still the same, it's not changed -- 3 to $4 billion.

With respect to the White Gate refinery, we look at everything, but I think it's premature to be saying or formally talking about trying to sell White Gate.

It's unfortunate that it gets out like that, but we study White Gate, we study just about everything to see whether something might have more value to someone else than ourselves.

But on the other hand, I [don't] also want to say we're not interested in ever parting with legacy and strategic positions.

Okay, I appreciate it.

Thank you.

Nikki Decker, Bear Stearns.

My question is on your production in OPEC member nations.

You talk about 3000 barrels of impact for next quarter, how does that work?

Have you taken that production down or will that ramp down during the quarter and is the actual production volume impact greater than that?

First of all, two things.

We mentioned not 3000 but 30,000 impact.

The next thing I would say is we received very firm direction what the production levels must be.

So when we derive this number it comes from directed designated fields in different parts of the world so we know how we get to that number.

The other thing though I think is very interesting about ConocoPhillips is proportionately I don't know -- I would just say this -- I think proportionately we have a smaller amount or lower amount of OPEC production compared to our total worldwide production as compared to many other companies.

I just want to clarify, the OPEC impact is 30,000 barrels?

That's right.

Has that come off already, that 30,000?

Some of it's coming off now, that's right.

Great, thanks.

Your exploration expense was a little higher than I think what you had been guiding two in the fourth quarter.

Can you talk about that?

I can't speak for other companies, but we like to think whenever we see something that's not materializing or meeting expectations or we need to suspend it well, we need to write something off, our acreage is not what we thought, we immediately write it off, get it behind us and move on.

The other thing I'd say -- and we'll share more with this on the March 14th date -- when we talk about our total exploration spending we need to do a better job of communication.

A lot of our exploration spending has to do with development -- exploration infrastructure led where we have it's not just pure rank wildcat exploration.

We have infrastructure where we think there are resources.

We drill around in areas where we expect a high probability of add in resources.

So maybe we need to communicate better that the total exploration -- what we call exploration spend, is not all on just pure rank wildcat where the probability of success is 10 or 20%.

A lot of our money that we call exploration is appraisal drilling and it has probability of success well in excess of 50%.

But we're going to share that with you when we meet with you on March 14th.

Great, thank you.

Neil McMahon, Sanford Bernstein.

I've just got a few questions as a lot have been answered.

The first is really around your discussion on CapEx and being as you sort of say a lot more cautious about big increases and just where you're spending it.

Would that also apply to exploration expenditure in 2007 and 2008 given the fact there's been a big step up in dry hole expense?

And then I've got a few other questions as well.

Obviously if we cut back on our spending we have to also look at our exploration program, how much do we want to be spending on exploration.

I just made some comments on that in the last question.

But we also want to look at do we have good drillable prospects.

So I would say that for our company we have the portfolio that we do, but we're putting more and more emphasis on getting -- doing the study and the technical work and getting into the new acreage positions that we feel are the new frontiers that we'd like to be in.

So we're putting more money of our money proportionately into doing that than to just drilling wells if we don't feel we have the drillable prospects that we would like.

And we're going to cover that with you when we meet on March 14th.

Just a few more questions.

It looks like Iraq is going to open up to foreign investment probably sometime this year if they pass their new oil law within the next month or so.

Have you, through LUKOIL, got any idea if you're still going to be able to have the old Saddam era contracts that were awarded to LUKOIL still maintained under the new law or do you think they're going to scrap those contracts?

First, don't know the answer to do but we're working very closely with LUKOIL because we think that that contract should be confirmed.

So we worked through the political process of Iraq; we enlist hopefully the support of our respective countries from which we come from.

So we're certainly not given up; we're working hard to get the West Qurna contract with LUKOIL.

We also look on our own, ConocoPhillips, what can we be doing with the Iraqi ministry and the opportunities like the other international oil companies to participate in Iraq.

So we feel that we have good relationships, we're working on it, but obviously we've got to get the framework of how you make investment, sorted it out, new investments, other than the West Qurna contract with the Iraqis.

And then we also have to make sure that we have security because we certainly at this point in time don't want to have our employees or contractors in Iraq until the security situation sorts out.

And just a last really quick one.

It seems a bit strange given the fact that with Kashagan, tons of money is getting spent on this field.

The operator is quite keen to suggest that they're progressing in terms of developing the field and you're debooking reserves.

Does -- this sort of suggests to me that it looks like the start-up time on the field is probably looking more like 2010 than earlier if you feel that you're not quite there with the reserves, would that be a fair assessment?

No, there are two points I'd want to make, Neil.

First of all, when we talk about debooking some reserves, that's very unique to Conoco, has nothing to do with Kashagan, the attributes of Kashagan, what it is and what it will become.

We have taken a more literal conservative view of only recognizing reserves drawn on a very tight radius around wells that are already drilled.

We know that the reserves -- this is a ConocoPhillips change that we did.

We expect those reserves with more drilling in oil and production to come write back on the books.

In terms of Kashagan, obviously you know it's challenged.

It's challenged technically and it's certainly been challenged on the cost side.

It's been frustrating in terms of how long it's taken us and the cost of Kashagan.

It is very frustrating to all of the participants.

In terms though of what the schedule is, that's something that I think Eni needs to address as operator.

And it would be not appropriate really for us to be commenting outside of what the operator would be saying.

Okay, great.

Let's hope Eni for once tells us something about the schedule later this month.

Thanks.

Dan Barcelo, Banc of America.

A quick downstream question.

In light of the State of the Union initiatives yesterday, I didn't know if you could comment on Conoco's ability to basically I'd say handle some of the logistics associated potentially with the use of more alternatives maybe short-term and long-term.

Also related to that, any concerns with ethanol production increasing late '07 into '08 in terms of pressures on gasoline?

And then a second question.

I just wanted to see if I could get an update on Burlington Resources, just in general kind of a year-end update -- integration, employees, any potential that you've been exceeding the $500 million synergy expectations that you set out earlier in this year?

Thank you.

First, I'll cover the Burlington transaction.

It's gone in many respects very smoothly in terms of what we expect our Synergy capture will be.

In terms of production, we tried to address that in terms of our media release production essentially where we thought and it was right in the fairway of what the old Burlington indicated production would be for 2007.

So hopefully we've given the information as it's gone pretty much like we thought production wise and Synergy wise.

One of the challenges though is retention of employees and so we haven't retained as many as we would have liked, but we do a lot of work on this and this doesn't change in any way our capability to capture the optionality of the resource that's there that has not yet been developed.

So the strategic and long-term plans haven't changed.

So hopefully the Synergy capture is going to be there.

We haven't retained as many employees as we would have liked.

Now in terms of the President's State of the Union speech last night, I listened to it.

Obviously within the industry, within the American Petroleum Institute we're talking about all these things, a lot of new changes.

The industry has always been very responsive.

In terms of whatever is required we take the actions to meet the new rules.

On the other hand, I would say we feel that technology is awfully important.

We're very supportive of alternatives and renewables as a company.

I know the industry is.

We're supportive of ethanol, but we want to make sure that we do this in a way that's cost efficient, meets the expectations of the consumers.

We also want to make sure that from an environmental point of view that we're making fuels that do meet the expectations; cost wise they work well.

And we also want to make sure that we're meeting the new requirements of emissions.

And so we think that the use of technology and doing this in the right way, we're very supportive of it.

In fact we came out a couple weeks ago very supportive in working with Gov. Schwarzenegger's plans where what he'd like to be doing on transportation fuels and the environment out in California.

We think this is quite interesting and we know also is another way of considering how to provide transportation fuels.

And a lot of times what's done out in California becomes a model for other states and maybe for the entire country.

So we know what the bottom line is, we just need to be working with the House, the Senate, Congress, the Administration and the industry and our company very open to making sure that we're looking at all the alternative renewables, pushing this in the right way, being very aggressive on the environment.

And we also need to do a great job on conservation, far more than we've ever done before in terms of conserving more efficient use of energy.

And I can say as a company we really are supportive of new cafe standards (technical difficulty) transportation fuels leads to more efficient use of energy.

Thank you.

Ladies and gentlemen, this will close our question-and-answer session.

I'll turn the call back to management for closing remarks.

Thanks, we do appreciate everybody for joining us on the conference call today and I'd like to remind you that you can find the slide presentation and other materials that we went through this morning on our Web page at www.ConocoPhillips.com.

And you'll be able to view the transcript of this call as well.

So again, we thank you for participating and we wish you good day.

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

This does conclude the presentation and you may now disconnect.

Have a good day.