康菲 (COP) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the ConocoPhillips fourth-quarter 2007 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, Jen, and welcome to everyone to our conference call this morning for the fourth quarter of 2007.

Joining me this morning is Jim Mulva, our Chairman and Chief Executive Officer and John Carrig, our Executive Vice President of Finance and Chief Financial Officer.

The presentation that we are going to be going through this morning has been prepared to help you understand more fully the financial and operating results of the company during the fourth quarter of 2007.

You can find this presentation and access it on our Web site, conocophillips.com.

On page 2, you are familiar with our Safe Harbor statement.

It essentially says that during our presentation today, and in answering your questions that you might have, that we will be including forward-looking statements based on what we expect currently and actual results may differ materially from those expectations.

You can find a list of items that might cause material differences in our SEC filings.

Now I'll turn this call over to Jim Mulva.

Okay, Gary, thank you and I appreciate all those who are participating in our conference call.

I am already on page 3, which is fourth-quarter highlights.

You can see in the fourth quarter, our net income was $4.4 billion.

Our operations in the quarter, we generated $6.9 billion of cash.

We reduced our debt-to-cap ratio to 19 percent and we purchased $2.5 billion of our common stock.

On our upstream business, we produced 2.26 million BOE a day and that includes an estimated 426,000 BOE per day from our LUKOIL investment segment.

On the downstream, we improved our crude processing capacity utilization by 1 percent from the previous quarter to 95 percent.

Now I am moving on to page number 4 -- total company net income, where we compare the fourth quarter to the prior quarter.

You can see in the fourth quarter net income of $4.4 billion.

That is $2.71 per share and that is about $700 million more than the prior quarter.

Let me start on the left side of the chart.

You can see that we had lower gains this quarter from our asset rationalization program, which reduced our fourth-quarter net income $211 million when you compare it to the third quarter.

Then moving over toward the right, prices, margins and other market impacts improved fourth-quarter income about $1.4 billion, while higher volumes in E&P were more than offset by lower volumes in LUKOIL and Chemicals, thereby reducing fourth-quarter net income $57 million when compared to the third quarter.

Now we had higher production taxes in Alaska, result of recent legislation and that also reduced fourth-quarter net income $234 million.

And then there were a number of other items that, in the aggregate, reduced fourth-quarter net income $243 million on a sequential basis.

I am going to talk about all these variances in more detail in the subsequent slides.

So I am going to move on now to page number 5 -- total company cash flow.

So again, we start on the left and you can see we generated $6.9 billion of cash from operations in the fourth quarter.

That is about $1 billion more than the third quarter.

And this, along with our beginning cash balance, provided about $8.3 billion in available funds that was for use in the fourth quarter.

So during the quarter, we spent, you can see, just about $4.3 billion on our capital program.

We paid $652 million in dividends;reduced our debt by $189 million; and we repurchased or purchased $2.5 billion of our shares.

We have $515 million in proceeds from asset sales and $243 million in other sources that gets you up near that $758 million green bar toward the right side.

That left us with a cash balance at the end of the fourth quarter $1.4 billion, just a little bit more than what we had at the end of the third quarter.

Now I am going to go on to page 6 -- total company cash flow where we look at what were all the funds that were available in 2007 on the left-hand side and then what did we do with all those funds.

Again, this summarizes for the full year 2007.

So if you look at the pie chart on the left, you can see that, during the year, we generated about $24.6 billion in cash from operations and we had $3.6 billion from asset sales and other sources, bringing us to total available funds cash, $28.1 billion.

Then you look on the right side, the pie chart on the right, you can see that we spent $12.9 billion on our capital investment program.

Now that is slightly lower than our announced program on $13.5 billion.

We paid out $2.7 billion in dividends and purchased $7 billion of our stock.

Of that $7 billion purchase of our stock, about $5 billion was in the third and fourth quarters.

And we reduced our debt by $5.4 billion.

So you can see essentially on the pie chart to the right, a little bit less than half of our funds were directed toward our capital program, a little bit more than half was debt reduction, share repurchase and dividends.

Now for 2008, we do not plan for debt reduction.

Our funds are really going towards our capital program, our dividends and share repurchase.

We have $10 billion remaining in our previously announced share repurchase program and we expect first-quarter repurchases to be between $2 billion and $3 billion.

I am going to move on to slide number 7.

We look at the capitalization structure of the company.

On the left-hand side of the slide, you can see we ended 2007 with $90 billion of equity, $21.7 billion of debt, brought our debt-to-capital ratio down to 19 percent, which is slightly below the bottom of our target range at 20 percent to 25 percent.

I am going to move on to the operating segments of the company, first E&P on page 8 and you can see the highlights when we look at the comparison of fourth quarter to the third quarter.

Our realized crude oil natural gas prices around the world were higher.

Our realized crude oil price was $84.53 a barrel in the fourth quarter.

That was $13.19 a barrel higher and our realized natural gas price in the fourth quarter was $6.66 per Mcf and that was $1.10 per Mcf higher.

Consistent with our previous guidance, E&P's production sales volumes were higher than the previous quarter, talk more about this on the next slide.

And also as mentioned, earlier in the fourth quarter, earnings were negatively impacted by the effect of the tax changes in Alaska, which increased our production taxes.

So now I am moving on to page 9, which looks at our E&P production.

Production in the fourth quarter from our E&P segment was 1.84 million BOE a day and that was 76,000 BOE a day higher than the third quarter.

So you can see starting from the left, we saw improved production in the United Kingdom and Alaska due to seasonality and lower planned/non-planned downtime.

We increased production 9,000 BOE a day, essentially in the Lower 48 and then when you add 426,000 BOE a day, which is our estimate of the equity share of LUKOIL's production, you can see our totals of 2.26 million BOE a day in the fourth quarter.

Before moving on, I refer back to our conference call in the second quarter.

Remember, in the second quarter, we recognized the effect of the expropriation of our Venezuelan position and we said at the second quarter that our full-year production, including LUKOIL, would be 2.325 million BOE a day and if you look at what we actually did in all of '07, we did that.

It was 2.324 million BOE a day.

So now I am moving on to page 10, E&P net income.

You can see our fourth-quarter income of $2.6 billion.

That is about $500 million higher than the third quarter.

So I start with the red bar on the left and you can see that we had lower gains from our asset rationalization program compared to the third quarter and its impact was a reduction of $103 million when comparing the two quarters.

Prices and other market impacts improved income $883 million.

Overall, our E&P sales and production volumes in the fourth quarter were higher than the third quarter and this improved income $34 million.

However, I would like you to note that our crude sales volumes in the U.S.

were about 40,000 barrels a day lower than the prior quarter due to timing of shipments in Alaska.

Essentially, we sold more in the third quarter, caught up in the fourth, so essentially, if you look at it as an overlift or underlift, we are just balanced as we go from '07 into '08.

I mentioned earlier Alaska recently passed legislation that retroactively increased production taxes.

The impact of this tax legislation reduced fourth-quarter income $234 million of which $95 million relates to periods prior to the fourth quarter of 2007.

We also had increased production taxes in the fourth quarter, the result of higher crude oil prices and production volumes and the majority of this is related to Alaska.

The resulting decrease in net income is included with other items in the red bar on the right, which shows a $54 million sequential decrease in net income.

Also included in the other category is the impact of the favorable effect of a one-time Alaska quality bank adjustment that occurred in the third quarter, but obviously didn't occur in the fourth quarter and we also had higher impairments.

These were partially offset by deferred tax adjustments in Canada as a result of a reduction in the Canadian federal income tax and the release of escrow funds in connection with the extinguishment of the Hamaca; that is the Venezuelan project financing indebtedness and other miscellaneous items.

So all these things were in that $54 million bar.

Now I am going to move from E&P to Refining and Marketing, so I am going to slide or page 11.

In our downstream business, we improved our crude capacity utilization to 95 percent, so that is up 1 percent compared to the third quarter.

Our realized, and I stress, realized worldwide refining margins were higher than the third quarter.

With our U.S.

margin at $11.56 a barrel now, that is $0.70 a barrel higher than the third quarter and our international margin was $6.72 a barrel and that is $0.67 higher than the third quarter.

I will go over our realized margins in more detail in the next slide and then the other last point I would like to make on this slide is our turnaround in utility costs were also higher in the fourth quarter.

So now I'm going to move on to the Net Income of Refining and Marketing on page 12.

Our fourth-quarter net income was about $1.1 billion, which is approximately $200 million lower than the third quarter.

You can see in the first red bar on the left that the fourth quarter did not have the $141 million benefit from tax legislation in Germany.

That was in our third-quarter results.

We also had lower gains, our asset rationalization program and that reduced fourth-quarter income $108 million as compared to the previous quarter.

Our prices, margins and other market impacts improved net income -- that is the green bar -- $229 million.

We previously indicated that we expected fourth-quarter results to benefit from our planned crude and refined product inventory reductions.

We estimate that prior year LIFO layer liquidation impact to be about $260 million and most of this is associated with the formation of our downstream EnCana joint venture.

Now as a result of our realized refining margins in the U.S., they were higher than the previous quarter despite lower U.S.

market indicators.

The crude differentials, higher clean product yield and commercial trading and transactions contributed to the improvement.

Now in the first quarter of 2008, we will likely be building inventories in anticipation of the switchover to summer grade gasoline.

So we would -- and we normally do this -- so we would expect our refining business to return to a more normalized market capture, which, for the U.S., is around 75 percent.

Now given our hydroskimmer refinery at Wilhelmshaven, our international market capture is lower than 75 percent, so on a blended basis around the world, you might look at something like 70 percent.

So in other words, we don't see the inventory impacts that we experienced as a result of the EnCana joint venture and market movements that took place in 2007 to have the same impacts as we go into the first quarter in 2008.

Now overall volumes in Refining and Marketing were higher than the prior quarter and that is consistent with higher refinery utilization, but then you have to look at the regional mix.

The net impact resulted in a $36 million reduction in income.

Now we have the higher value West Coast and Gulf Coast regions.

We had higher-value West Coast and Gulf Coast refining volumes were lower than the previous quarter, but those volumes were more than offset by lower-value volumes from our East Coast operations and the central U.S.

and by much lower-value volumes from the Wilhelmshaven refinery.

And then there were other items in the aggregate.

You can see that red bar that reduced income by $129 million.

These items were higher operating costs, higher turnaround costs, utilities and higher environmental accruals.

Now I am going to go from page 12 to page 13.

This is where we talk about LUKOIL and the joint ventures and the Corporate costs.

Our estimate of fourth-quarter equity earnings from LUKOIL was $649 million.

This is $262 million higher than the previous quarter, mainly due to higher estimated realized prices and the absence of an $85 million reduction recorded in the third quarter to align our estimate to actual results reported by LUKOIL.

The net effect of alignment was an improvement in the fourth-quarter income regarding LUKOIL of $94 million.

Turning to the Midstream business, income was $162 million, compares to $104 million in the third quarter.

Chemicals joint venture with Chevron contributed net income of $99 million.

Now this included a one-time capital loss tax benefit of $65 million.

The $65 million is included in the $99 million.

So income in the third quarter was $110 million.

Our Emerging Businesses contributed $2 million in the fourth quarter.

That's down from $1 million from $3 million in the prior quarter.

Now our corporate costs were $271 million in the fourth quarter compared to $320 million last quarter.

This decrease was the result of lower net interest expense and lower acquisition-related costs, partially offset by the net impact of foreign exchange losses.

For guidance going forward, I think you should be looking at around $300 million in quarterly corporate costs.

Now moving on to the next page, 14, we look at our E&P metrics -- first, E&P and then second, the Downstream.

By the way, our peer group, when we look at our peer group, we look at the largest integrated, international oil companies.

That is made up of ExxonMobil, BP, Shell, Total and Chevron.

So this chart shows E&P's income and cash per BOE for the years 2003 through 2006, as well as the first three quarters and then we have the fourth quarter of '07.

The effective purchase accounting has impacted our earnings per BOE when compared to peers in both '06 and '07, but you can see our cash contribution per BOE remains very competitive.

Since we are the first international oil company to report, we just don't have comparisons at this point for the fourth quarter.

Now moving on to slide 15, Refining and Marketing.

The peer group is the same, the largest international publicly traded oil companies and you can see our income per barrel, our cash per barrel continues to be quite competitive with our peer group.

Then I move on to page 16, we look at Return On Capital Employed.

The shaded area shows the same international oil company peer group and the bar chart reflects our ROCE with no adjustments for purchase accounting.

We do make adjustments for the peer group to reflect purchase accounting and that is showing how the adjustments are made in table 3 attached to this presentation.

Our annualized fourth-quarter ROCE was 15 percent.

That is 1 percent higher than the first three quarters annualized.

And then I go to the last slide or page 17 -- Outlook.

We just recently announced, yesterday, we acquired 50 percent interest in the Keystone Crude Oil Pipeline.

This pipeline -- we have significant transportation requirements on the pipeline, so it is logical for us to have equity ownership.

The pipeline will play a critical role in supplying Canadian crude oil to refineries in the U.S.

mid-continent.

We also recently announced a decision to join and support the World Bank's Global Gas Flaring Reduction partnership.

We think this is a very good program, minimizing the environmental impact, improving energy and material efficiency of our operations.

I think this is going to have -- this partnership will do a lot of good things for reducing gas flaring around the world.

Now with respect to our production in the first quarter, we expect our E&P first-quarter segment production will be 1.8 million BOE a day.

Now remember, the 1.8 million BOE excludes the LUKOIL segment.

And we expect -- so it is essentially flat, the same as the fourth quarter.

We expect exploration expenses to be in the range of $250 million to $300 million in the first quarter.

Downstream, we expect worldwide refining crude oil capacity utilization to be in the mid-90 percent range.

Turnaround costs in the first quarter to be about $125 million before tax.

With respect to our share repurchases, we will be repurchasing about between $2 billion and $3 billion in the first quarter.

Remember, we've got a remaining $10 billion on our program that we have for 2008.

And then we continue to work on our asset rationalization efforts as we go into 2008 and that includes the completion of disposition of our U.S.

retail assets and we are always looking at other assets that we feel may have more value in a tax-efficient way to others and then, as you know, we look forward to discussing in far more detail our 2008 and subsequent years' capital and operating plans when we meet the investment community in New York on March 12.

So that completes the presentation and the comments on the slides.

So Gary and John, I think we are ready now to take questions that anyone has of us.

Okay, Jim, I think we are ready for questions if you will queue them up.

(OPERATOR INSTRUCTIONS).

Your first question comes from Dan Barcello with Bank of America.

Hello?

Hello.

This is actually Dave Gutterman with Herant Research.

A couple of questions for you guys, actually James.

What are your operational improvement initiatives this year for lean manufacturing, TP into Six Sigma and how do you see those benefiting your business?

Well, operating excellence is obviously so important, first and foremost, for good safety and environmental performance and we have been on a program over the last several years, a multiyear program, to continue to improve our operating excellence.

And we believe good financial results come from good operations and good safety and environmental performance.

So it is a multiyear effort.

A lot of emphasis on process hazard analysis, continuing to update everything that we do upstream and downstream and pipelines and so this program is never over, but we are always looking for that operational reliability of another 1 percent or 2 percent.

So you will hear, if you come to our March 12 financial community presentation, a lot of emphasis that we have and continue to place on operational reliability.

If you have reasonably high oil prices and gas prices and crack spreads, you don't realize them if you don't run well.

And so by running well, we realize that better financial performance, but by running well and not taking operations up and down, we know that we have far more safer operations and it really does contribute towards lowering and constraining our cost of operations.

Thank you, sir.

Your next question is from Doug Terreson with Morgan Stanley.

Hi, Jim.

Congratulations on your results.

Thank you, good morning.

In E&P and Refining and Marketing, profits were penalized by what you guys called lower net gains from asset rationalization by right around $0.13 per share in relation to the previous period.

So for clarification, my question regards the absolute level of gains from asset rationalization during the period,meaning while the sequential earnings benefit was lower, by what amount did it positively affect profits during the period?

Okay.

I don't know if John -- I don't have that number immediately at hand for myself.

Doug, what you're saying is just what are the gains?

Yes.

The net gains from what we sold in the --

That's right.

-- in the fourth quarter?

Well, while they look at that, we also had some impairments because we wrote down some assets.

Even though they weren't sold, we did write down some things like our position in Ecuador and other places, but I don't know.

Maybe we might have to come back --

Well, I can tell you in E&P, they were about $48 million and R&M --

Doug, I think if you look at the certain items page, you'll pick up about 25 million for the U.S.

E&P and $147 million for international E&P and a few other nits and nats, probably total $170 million, $180 million.

Okay.

The gains from asset disposition are pretty modest in the fourth quarter.

The other thing I would say, we have always put a lot of emphasis on making sure that when we sell something it is tax efficient.

I just saw a report here this past day that if you look at our disposition program that we announced in the latter part of 2006, if we go through 2006 and '07, what we have already sold, it has been very tax efficient.

I don't want to go into the exact number, but that is what we thought was important and we are not interested in selling something at a high price and then paying half of the proceeds to tax entities.

So it has been very efficient.

But we continue to look as we go into 2008, what else can we be looking at selling and making sure that it doesn't hurt us in any way in terms of our strategic objectives, but it is also tax efficient.

Okay.

And Jim, I also have a strategic question, too.

On Sunrise, a variety of different fields may eventually be included in that project and liquefaction and regasification options are multiple too and so I wanted to see whether you could provide an update on this project, specifically planned drilling activities in the area in 2008 that you may have and also whether a most likely development outcome has emerged if there is such a thing and if so, what it might be in your opinion.

Well, Sunrise is important to us and we feel that, as a result of Bayu-Undan, we have a really nice position in Darwin to look at doing Sunrise by taking LNG to Darwin.

Shell is our partner at Sunrise and they have always had an interest in doing a floating LNG concept.

Our other large partner is Woodside.

Now what we do, we feel that the time has come to advance and develop Sunrise.

I know that East Timor feels the same way.

So here recently, the CEOs of Woodside, Shell and myself really have come to a decision that this is the year that we need to be moving out on Sunrise in terms of whether it's a Darwin proposal or it is offshore or something else.

I think this is the year that we have all agreed that we need to advance Sunrise.

So hopefully as we go through the year, this is going to come on our list of a project to be developed.

Okay.

It sounds like real progress.

Thanks a lot.

Thank you.

Your next question is from Michael LaMotte with JPMorgan.

Thank you, good morning.

Jim, first question is just one of clarification.

In the press release, U.S.

crude differentials was also mentioned as one of the reasons why the capture rate was so high, as well as the clean product slate.

And in your comments, you mentioned just the inventory factor.

I was wondering if you could give us a sense of how much of that capture was inventory versus those other items such as --

Okay, we said in our comments that $260 million really relates to quite into the LIFO layer that is associated with the formation of our WRB joint venture with EnCana.

Now, we also had some pretty -- we had commercial trading results associated with how we build and reduce inventory as we go through the year to support our operations and so that is really where it comes from.

Okay.

So on the product side, nothing really there?

No, it is just the way we always build inventories as we go through the year, getting ready for different seasonality in the summer to the winter and we do that in a way that fits our operating plans for our downstream operations and so we don't speculate in any way, but we do take positions that support our physical volumes and the way we handle that was done really in the right way with the market movements that create a lot of value capture in our results.

Great, thank you.

And then secondly, there is a lot of assets on the block right now, both upstream and downstream and obviously you have been in a rationalization mode for a while.

I was wondering if you could talk about the M&A environment as we head into '08, what you are thinking about value on the buy side.

We always get this question because, as a company, if you look at how we have been formed since 1999, we have done mergers, we have done joint ventures, BD developments, acquisitions, and here recently, we really haven't done that much because we really have created the company that we like.

We don't feel we have any glaring holes in our portfolio, but I just don't see that the M&A environment fits into our plans as we look at 2008, 2009.

We have a lot on our plate in terms of our capital program.

If you look at the M&A environment or substantial asset acquisitions, they just don't seem to work in terms of really what is available, the quality necessarily or the price or whether it is even doable.

So we are really staying -- despite what we have done and how we have created our company, we are really sticking with our knitting of our capital program that we have announced, which is $15.3 billion.

The cash side of that is $14.6 billion.

We are going to be very aggressive in terms of our share repurchase and we like to raise our dividend each year.

So I don't see the M&A markets and sizable acquisitions fitting into our plans over the next several years.

That's great.

Thanks, Jim.

Thank you.

Your next question is from Paul Cheng with Lehman Brothers.

Good morning, gentlemen.

Jim, can you give us an update about YK, your Timan-Pechora joint venture.

How is that for your development focus?

Okay, we have a small amount of production, very small, but I think it really -- I can't remember the exact month, but it really does come on production as we go into 2008.

It is a challenging project because you know it is way up there in the north, Siberia, so it is challenging technically and it's challenging just because of the harsh climatic conditions, but we expect -- we can come back to you on this -- ramping up our production as we go through 2008.

When do you expect to get to the 200 now?

Any change from the previous guidance?

No, there is no change in previous guidance and in terms of any new or changes to that, I am not aware of, but we will go through that in our financial, or our presentation, on March 12.

Okay.

Jim, wondering for the Burlington Resources acquisition, it's now close to two years.

If we do a look back, I am sure that you guys did it, any positive or negative surprises from that transaction that you have learned and that may lead you to do somewhat differently going into the future?

Okay, first of all, the volumes or the resource base and the volumes of production is spot on.

It is not really different from what we expected when we did the transaction.

The synergy capture is higher than we expected and in terms of the Henry Hub price that we used when we made the acquisition, in the first two years, it was less than what we assumed and as we go through 2008, the gas prices were are seeing today are higher.

So we are -- essentially, as we go through 2008, to the extent that natural gas prices, Henry Hub, are north of $6 to $6.50 per Mcf, we are essentially capturing back where we were lower on 2006 and 2007.

And so if you continue with the kind of markets we are seeing today, at the end of three years, we essentially are going to be, for a three year's average, where we thought we were going to be.

So you think that the process at the time you are looking at, Burlington Resources is the right process and you don't see any changes to that?

Well, in terms of the assumptions that we --

No, not assumptions, but the way how you look at say transaction or looking at how to evaluate those assets.

You think that the process is -- you have reasonably satisfied that -- other than the macro environment -- that nothing is fundamentally changed from what you previously assumed when you are getting into the transaction?

Well, fundamentally, we look at -- yes, inventories in the U.S.

are higher than we would have expected as a result of weather and all weather that summer or the winter.

But our view towards natural gas markets in North America have not changed and in fact, I think we feel more bullish about natural gas markets longer term in North America than we did at the time we announced and did the transaction.

And the reason for that is less imports coming from Canada for all the reasons of why there would be less imports from Canada and we also think that the availability of LNG coming to the U.S.

is going to take longer and less amounts because I think a lot of that LNG is going to be competed away to stronger markets in Europe and Asia.

So compared to when we actually did the transaction, we feel just as strong or stronger about natural gas in North America than at the time we did it.

And there is one other thing about Burlington -- even though the natural gas prices for '06 and '07 are somewhat less than we expected when we did the transaction are really catching up in '08.

This has a very sizable cash flow.

And you can see cash flow from the production and the asset base and you can see it in our cash flow per BOE.

You may not see it in the net income per barrel because they are using purchase accounting, but you do see the impact already even in the fourth quarter a little bit better natural gas price and oil price has quite an impact on our cash flow per barrel.

Sure, a final short one.

This is for John.

John, in your pension asset -- pension plan asset, is there any meaningful exposures to the CDO or other exotic debt instruments?

No, we have not identified any meaningful exposure to the CDOs.

Thank you.

Thank you, gentlemen.

Your next question is from Erik Mielke with Merrill Lynch.

Good morning.

Thank you for taking my question.

My question relates to your strategy for increasing long-term access and exposure to the Middle East, particularly with respect to Qatar and also Abu Dhabi and how we should think about some of your initiatives in that region.

You reason you signed an MOU with Qatar Petroleum to pursue energy projects outside Qatar.

Do you think this could be linked to opportune projects in Qatar or are you looking at downstream projects, particularly in the LNG value chain?

And other than gaining a credible partner, do you expect this partnership will improve your access to further projects in Qatar when the moratorium is lifted?

Well, first, with respect to Qatar, we have had a really strong relationship and it has been a great investment for us, first on the chemical side and now what we are working on, which is Qatargas 3, our LNG project, which is planning to start up in 2009.

Now obviously we want to do a good job with anything we have in Qatar, because to the extent there is more opportunity after they see the developments of credit score performance of the north field, we know it will be strong competition, but we would like to do more in Qatar.

We talk about more in Qatar both on the Chemical side through our joint venture, but also we would like to be doing more on both the oil and liquid side, as well as natural gas.

The MOU that we signed, and they do sign with other companies, of course, is because of this relationship, what more could we do to some extent inside the country, but really outside the country both upstream and downstream.

And those discussions have really just started, so it is premature to say just what they would lead to.

But we really do like and respect each other.

We are looking for more things to do.

There are other countries in the Middle East that we would like to do more with.

Obviously we are in competition.

We would like to be doing things.

Sell our gas with Abu Dhabi and hopefully other things in Abu Dhabi.

Kuwait has not really opened up yet, but we would like to see possibly maybe we can do something in Kuwait and to the extent that we have petroleum oil and we have security, we would like to be doing things in Iraq.

We can't do anything with Iran, but to the extent that maybe at some point in time sanctions get lifted and better political relationships, Iran would be a country where we would seriously want to take a look at.

So the Middle East has and we expect will be of strategic importance to our company.

Just staying on that, thanks, on Iraq, any updates on the West Qurna project with LUKOIL or is it not on the table at the moment?

No, I think we will talk more about this at our March 12, but continue to work with Vagit Alekperov, the CEO of LUKOIL, working both the Russian political side, as well as the Iraqi side and the U.S.

government side to see -- we really believe that the contract should be affirmed and we are the right company technically and commercially to do West Qurna and so we work that very pretty hard.

Thanks very much.

Thank you.

Your next question is from Doug Leggett with Citigroup.

Good morning, gentlemen.

It is Doug from Citi.

A couple of questions if I may.

The first one I guess on the upstream.

John Carrig, the tax change in Alaska, does that come through on the tax line or does it come above the tax line as production taxes?

Can you just give us some clarification on where we should look for that?

You should look for that in production taxes, not in the income tax line.

Okay, so it is counted -- it is obviously not stripped out then in the tax line this quarter?

That's correct.

Okay.

The second question is just a guess really following onto Eric's question.

In the event that you are successful in winning some of these projects and obviously there has been a great deal of speculation about Abu Dhabi in particular, can you just give us some idea of what your anticipated headroom on capital expenditure would be?

Where does the CapEx line go?

Assuming you get everything you were aiming for, how would you expect your CapEx guidance to move?

I don't think you're going to see a great deal of movement in our capital expenditure in 2008.

It is going to be more in 2009 and subsequent years.

And we do build in something -- and we will talk more about this on March 12 -- but I think the '08 program, if we said $14.6 billion in cash, I mean realistically that could be between $13.5 billion and $15.5 billion and that will enable us to essentially do anything that we have in mind that we would be tasked with or win or have opportunities to do because a lot of these projects, you don't immediately spend a lot of money, you spend a lot of time working and sorting through the technical aspects and working through the project.

Okay, thanks.

And I guess my final question is actually related to LUKOIL.

I think John Lowe had made some comments late last year regarding how that relationship was going in terms of securing international joint ventures and basically the overall partnership.

Could you just give us some update as to how you currently view the effectiveness of that relationship in terms of securing additional opportunities?

Well, I meet with Vagit about every six weeks or so.

We feel that the relationship between the two companies is very strong.

It is a very strong personal relationship, friendship.

We are looking at what we can do together inside and outside Russia, upstream and downstream.

What are the new opportunities and we would like to do things quicker than -- it is always that way.

We are not that patient, but we would like to do things more quickly, but a lot of these kinds of things just take more time.

But there is no change whatsoever in the intent of what we are doing and we are very pleased and satisfied with the LUKOIL relationship.

Okay, that's it for me.

Thanks.

Thank you.

Your next question is from Mark Gilman with the Benchmark Company.

Guys, good morning.

Jim, I had a couple of tactical questions and then one very specific numbers-oriented question.

Jim, can you give us an idea what kind of unleveraged returns you are expecting from your enhanced Keystone investment and also your investment in REX and to what extent those lines are likely to be FERC regulated?

Also secondly, I'm looking for some clarification in terms of your decision not to divest the Whitegate refinery and exactly what went into that.

Finally, John Carrig, could you give us an idea what is in the international upstream earnings in the quarter for the reversal, if you will, of a portion of the impairment associated with the Hamaca project finance guarantees?

Okay, first, Mark, on the pipelines, Keystone and REX, given our operations, we are taking transportation obligations, long-term transportation obligations both effectively and economically.

We have signed up and have support for those pipelines.

So we look at that and we say well, what is the equity return and the equity return on those pipelines is pretty similar for any type of pipeline.

They will be leveraged to the point that most pipelines are, which is a fair degree of leverage, so effectively we look at it economically.

We have signed up for the use and put our credit behind these pipelines.

So having an equity ownership is a way to essentially either lower our cost of our transportation or realize some of the benefit that comes with equity.

But in terms of how they are structured and the financial returns is really no different than what you would expect on transportation.

It really comes from the point of view that we have essentially, economically, have taken a substantial ownership in these pipelines, so why not get the benefit of it through equity ownership.

It doesn't amount to that great an impact on our cash capital program because a great deal of this is supported by all the other shippers and use of leverage.

In terms of Whitegate, the marketplace in terms of refineries has changed pretty dramatically.

We looked at that, and as I said, when we look at selling assets, we want to make sure we get good value and good after-tax proceeds from it, but we really didn't see that that was forthcoming with respect to Whitegate, so we, essentially, are embarking on a long-term program of retention and how we can improve its performance and its value to our portfolio.

In terms of the specific question for John Carrig, John, do you --

Well, in terms of the impact of Hamaca on the earnings, we really haven't disclosed that.

We can say that it is in page 3, which we generally call special items and we don't plan on getting more specific than that.

Okay, thanks, guys.

Thank you.

And the final question is from Neil McMahon with Sanford Bernstein.

Good morning.

Two questions, the first really is on the LUKOIL earnings.

There are obviously estimates in the sense that LUKOIL hasn't reported, but in terms of the taxes on these LUKOIL volumes, do you think there could be much difference in your estimated numbers for those volumes given the fact that they were quite high and benefited very much from the higher crude pricing for the quarter?

Neil, if what you are referring to is the fact that the tax rates are established two months in arrears, that obviously does have an impact on fourth-quarter results.

We would expect that to be reflected in LUKOIL's results as well.

What we do is we construct a model based upon publicly available facts that we are aware of and then we apply that in a disciplined way to try to reach -- to come up with the results and if something is not publicly reported, we don't put that into the estimate.

But certainly, as I said, the tax on exports, which is two months in arrears, will have an impact on fourth-quarter results and of course, as a result of the higher prices, if that changes to the downside, it will have a negative impact -- it will have an impact on first-quarter results as well.

Okay, thanks for that.

And the second question may be for Jim, it's really on Libya.

When you just look back at your volumes over the past year and a half really, they are sort of stabilized around the 47,000, 48,000 barrels of oil a day level.

What can we read into those numbers going forward?

We continuously hear that you are planning on investing more money and you should see more growth, but frankly it doesn't seem like we are seeing that over the last year.

Just wondering if you will walk through what we should be thinking about Libya.

Well, with respect to Libya, the volumes are pretty close to what we expected in the initial reentry into Libya.

But we are disappointed that the volumes haven't ramped up more quickly and the reason for that is not that we can't ramp them up, in fact, we think we could do even better than we initially thought when we went into Libya.

Our problem is getting the people, the technical resources into Libya, into the country, so as to do the work, spend the money to get the volumes up.

So it's not a question of capability, it is capability.

We can get the people into the country quickly or there is a lot of administration and to sort through the administration, if we could, and do it more efficiently, we could get the volumes up pretty dramatically.

Now, the next thing is, the volumes, if you look at the financial income that is associated with Libya, the financial take is quite high in Libya.

It's not just for us.

I think it's for all international oil companies.

So one of the things associated in the volumes can up, but the financial returns strongly favor Libya.

So if you look out, yes we want to get the volumes up, but they don't translate to the same after-tax income per barrel that is associated with the rest of our portfolio.

Okay, great.

Thanks.

Ladies and gentlemen, this does conclude our Q&A session for today.

I will turn the call back to management for any closing remarks.

Great, thanks, Jen and we do appreciate everybody's participation this morning and your interest in ConocoPhillips.

I would remind you that the presentation we went through this morning, along with a transcript of the call today, will be available on our Web site, conocoPhillips.com.

Thanks again.

Have a good day.

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

This concludes the presentation and you may now disconnect.

Have a good day.

CAUTIONARY STATEMENT FOR THE PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This transcript of a presentation given by ConocoPhillips' management on January 23, 2008 includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by the safe harbors created thereby.

You can identify our forward looking statements by words such as "anticipates," "expects," "intends," "plans," "projects," "believes," "estimates," and similar expressions.

Forward-looking statements relating to ConocoPhillips' operations are based on management's expectations, estimates and projections about ConocoPhillips and the petroleum industry in general on the date the presentations are given.

These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict.

Further, certain forward-looking statements are based upon assumptions as to future events that may not prove to be accurate.

Therefore, actual outcomes and results may differ materially from what is expressed or forecast in such forward-looking statements.

Factors that could cause actual results or events to differ materially include, but are not limited to, crude oil and natural gas prices; refining and marketing margins; potential failure to achieve, and potential delays in achieving expected reserves or production levels from existing and future oil and gas development projects due to operating hazards, drilling risks, and the inherent uncertainties in interpreting engineering data relating to underground accumulations of oil and gas; unsuccessful exploratory drilling activities; lack of exploration success; potential disruption or unexpected technical difficulties in developing new products and manufacturing processes; potential failure of new products to achieve acceptance in the market; unexpected cost increases or technical difficulties in constructing or modifying company manufacturing or refining facilities; unexpected difficulties in manufacturing, transporting or refining synthetic crude oil; international monetary conditions and exchange controls; potential liability for remedial actions under existing or future environmental regulations; potential liability resulting from pending or future litigation; general domestic and international economic and political conditions, as well as changes in tax and other laws applicable to ConocoPhillips' business.

Other factors that could cause actual results to differ materially from those described in the forward-looking statements include other economic, business, competitive and/or regulatory factors affecting ConocoPhillips' business generally as set forth in ConocoPhillips' filings with the Securities and Exchange Commission (SEC), including our Form 10-K for the year ending December 31, 2006, as updated by our subsequent periodic and current reports on Forms 10-Q and 8-K, respectively.

ConocoPhillips is under no obligation (and expressly disclaims any such obligation) to update or alter its forward-looking statements, whether as a result of new information, future events or otherwise.

Cautionary Note to U.S.

Investors - The U.S.

Securities and Exchange Commission permits oil and gas companies, in their filings with the SEC, to disclose only proved reserves that a company has demonstrated by actual production or conclusive formation tests to be economically and legally producible under existing economic and operating conditions.

We may use certain terms in this transcript such as "oil/gas resources," "bitumen," "Syncrude," and/or "Society of Petroleum Engineers (SPE) proved reserves" that the SEC's guidelines strictly prohibit us from including in filings with the SEC.

U.S.

investors are urged to consider closely the oil and gas disclosures in our Form 10-K for the year ended December 31, 2006.

This transcript of the presentation includes certain non-GAAP financial measures.

Such non GAAP measures are intended to supplement, not substitute for, comparable GAAP measures.

Investors are urged to consider closely the comparable GAAP measures and the GAAP reconciliations available by reference to the listing of previously disclosed items in the company's earnings release dated January 23, 2008, footnotes to the tables provided in the presentation, and the appendix to the presentation which, in each case, are available on our Web site at www.conocophillips.com.