康菲 (COP) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the ConocoPhillips fourth-quarter 2008 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).

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to Mr.

Gary Russell, General Manager of Investor Relations.

Please proceed, sir.

Thanks, Jen, and welcome to everybody on our fourth-quarter conference call.

Joining me today are Jim Mulva, our Chairman and Chief Executive Officer; John Carrig, our President and Chief Operating Officer; as well as Sig Cornelius, Senior Vice President of Finance and Chief Financial Officer.

Jim will be taking you through our presentation today that's been prepared and intended to help you with your understanding of our financial and operating performance in the fourth quarter of '08.

This presentation along with other information regarding the fourth-quarter performance can be found on our website, ConocoPhillips.com.

Now if you'll turn to page two, you will find our Safe Harbor statement, which simply says that forward-looking statements made in our presentation today and in the conference call today represent our management's current expectations.

Actual results could materially differ from those expectations and you can find in our SEC filings the information on items that could cause material differences.

Now this presentation today also contains non-GAAP financial measures which are reconciled to the most comparable general accepted accounting principles measure either in the appendix of this presentation or in the investor relations section of our website.

So I will now turn this call over to Jim Mulva.

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

Before I begin going through the slides, I would like to briefly review the significant changes we encountered in the fourth quarter.

As you know, commodity prices, crack spreads experienced sharp declines and early in the quarter, we came to the conclusion we would experience a significant multiyear recession.

We suspended our share repurchase program in mid-October and commenced downsizing our 2009 and 2010 operating and capital investment programs in a way that is consistent with the anticipated business environment.

During the fourth quarter, our share price experienced a sharp decline and resulting decrease of market capitalization along with lower expected prices lead to large impairments which I will discuss in the slide presentation.

Our capital investment plans have been adjusted so we continue with our committed and strategic key projects while deferring other investment opportunities.

We are planning for a prolonged and difficult business environment.

2009 and 2010 will be very challenging for our global economy and the energy business.

We believe our decisions, actions, and plans will enable us to live within our means; that is, generate sufficient cash flow to fund our capital investment program and fund our dividends.

So with those opening comments, I'm moving now onto slide three.

As you can see on slide three, our adjusted earnings for the fourth quarter were $1.9 billion.

That excludes $33.7 billion of adjustments and I will discuss those in more detail in the following slides.

So with these adjustments, we reported a loss of $31.8 billion.

We generated $3.1 billion of cash from operations and our debt to capital ratio increased to 33%.

Now on the E&P business, we have produced 2.32 million BOE a day and that includes an estimated 451,000 BOE a day from our LUKOIL segment.

So if you exclude LUKOIL, our production was near 1.8 million BOE a day.

In downstream, our crude processing utilization was 93% and in fourth quarter we completed our Origin transaction.

Now moving on to slide four, fourth-quarter adjusted earnings were $1.9 billion.

You can see that sort of in the middle of the slide.

So we start with the gold bar on our far left of the chart, third-quarter net income was $5.2 billion and then as we move to the right, prices, margin, and other market impacts reduced fourth-quarter net income.

Higher volumes increased income $743 million.

There was a benefit in the fourth quarter of $1.1 billion from lower taxes, predominately lower production tax in Alaska and the Lower 48.

We also saw lower estimated extraction in export taxes in our LUKOIL segment.

This was expected given the sharply lower price environment in the fourth quarter, but these taxes in our LUKOIL segment were much higher than would be implied by the price environment because of the lag effect.

Then there are other things in the aggregate in the fourth quarter improved income by $11 million.

That brings us to our adjusted earnings of $1.9 billion and we recorded the adjustments of $33.7 billion as we previously outlined.

Now most of our adjustments are the result of sharp decline in global equity markets, commodity prices, margins, and then as well as revised capital program that we announced the 16th of January.

You will see the segment impact of these items as we go through each of the segments on the slides.

So with these adjustments, we had a net loss in the fourth quarter of $31.8 billion shown by the gold bar on the far right of the slide.

I go to the next slide five, total company cash flow.

Started on the left, we started the quarter with cash balance of $1.1 billion, generated $3.1 billion of cash from operations.

Then moving to the right, you see we had proceeds from dispositions of $911 million, $5.4 billion increase in debt due primarily to the Origin transaction and working capital needs.

So with these resources, we funded $8.7 billion of our capital program, paid nearly $700 million in dividends, and purchased about $750 million of our shares.

Then there were some other items in the aggregate provided an additional $392 million, leaving us with a cash balance of $755 million.

Moving on to slide six, the pie chart on the left shows the cash available during the year was $31 billion.

$22.7 billion or 73% came from operations.

The remaining $8.3 billion or 27% and was generated from a combination of debt increase and proceeds from asset sales.

If you look on the right, you can see how we used the $31 billion.

We spent nearly $20 billion in our capital investment program including the Origin transaction.

We purchased a little more than $8 billion of our common stock and paid $2.9 billion in dividends.

So I now move to page seven, looking at the capital structure of the company, you can see the chart on the left.

Our equity down of '08 was $56 billion.

That reflects the impact of the impairments recorded in the fourth quarter.

With debt at $27.5 billion at the end of the year shown in the middle part of the slide, our debt to capital ratio at year-end was 33%, which is 14% higher than at the end of the third quarter shown on the chart on the right.

So of this increase of 14%, 10% is due to the adjustments that recorded in the fourth quarter and 4% is due to the increase in debt.

Then you can see in all the charts the year-end balances since 2003.

We are confident that we manage our financial position going forward in a way that returns our debt to capital ratio back to our target of 20% to 25%.

I would also like to point out that the rating agencies just confirmed our AA-1 credit ratings.

I am moving on to E&P, page eight.

As mentioned earlier, our E&P segment was significantly impacted by impairment adjustment of $26 billion in the fourth quarter.

Crude oil prices were significantly lower during the fourth quarter as our realized crude price was $52.82 a barrel.

Now that is $59.37 a barrel lower than the third quarter.

Now turning to natural gas, as gas prices were lower as our realized natural gas price was $6.32 an Mcf and that is $2.59 per Mcf lower than the third quarter.

Our fourth-quarter production volumes were higher than previous quarter and that is consistent with our guidance.

You will see more about this and details on the next slide.

So I am on slide number 9.

You can see production from our E&P segment in the fourth quarter was 1.867 million BOE a day.

That is 119,000 BOE a day higher than in the third quarter and you can see this in the gold bar on the left of this chart.

So we move across to the right.

Production in the UK was 53,000 BOE a day higher and that's due to the ramp up of production from the Britannia satellites and we also had lower planned and unplanned downtime.

With respect to Alaska, production improved 44,000 BOE a day and this is due to less planned downtime and seasonality.

And then we also had improved drilling and well performance.

In the lower 48, we had improved drilling a well performance somewhat offset by unplanned downtime and normal decline.

But yet there was an improvement of 9,000 BOE a day.

Then we had some other small variances that in total improved production 13,000 BOE a day.

Then we add the segment from LUKOIL and the total was 2.318 million BOE a day in the fourth quarter.

So for the full year, our production average excluding LUKOIL 1.79 million BOE a day, which includes the effect of hurricanes and production-sharing contract impacts.

If you adjust for these, then 2008 average production would have been 1.81 million BOE a day and that compares to 2007 full year average production of 1.88 million BOE a day which includes two quarters of production from our expropriated Venezuelan assets.

When averaged over the year, that impact was 42,000 barrels per day.

So if you look at this, we said early in 2008 our production excluding the LUKOIL segment would be about 1.8 million BOE a day and that is what we essentially did in 2008.

So moving on to slide 10, E&P's adjusted earnings for the fourth quarter -- you can see toward the middle or a little bit to the right, $1.4 billion.

Let's start with the gold bar on the far left.

Income in the third quarter was $3.9 billion.

Then you move to the right.

Prices, margin, and other impacts reduced fourth-quarter income by $3.4 billion.

We had higher sales volume that helped us $432 million.

And with significant lower crude oil prices or natural gas price and production taxes, essentially in Alaska and the Lower 48 improved income $505 million compared to the third quarter.

And we had some other items which in the aggregate improved earnings $41 million.

That includes lower DD&A, lower operating costs, higher equity earnings somewhat offset by higher dry hole expense mainly in the Gulf of Mexico and South America.

We had some lease impairments and severance accruals.

That brings us to our adjusted earnings of $1.4 billion.

There were impairment adjustments in the fourth quarter.

You can see $25.7 billion bringing our total reported net loss to $24.3 billion shown in the gold bar on the far right.

Now I am moving from E&P to refining and marketing shown on slide on page 11.

Refining and marketing net income in the fourth quarter was also impacted by impairment adjustments and also refining margins in the U.S.

were significantly lower than the third quarter.

Our U.S.

realized refining margin in the fourth quarter was $6.96 a barrel.

Now that's about $2.07 a barrel lower than the third quarter.

The significant decline in market cracks were only partially offset by the benefit we get in higher margins from secondary products and improved sour crude differentials.

On the international side, our refining -- realized refining margin was $8.31 a barrel.

That is $2.93 a barrel lower than the third quarter and is mainly due to the continued poor hydro-skimming margins.

The domestic refining and crude oil capacity utilization in the fourth quarter was 94%.

That is 4% higher than our prior quarter.

In the international side, utilization rate was 89%.

That's up from 75% in the third quarter but primarily due to -- we saw some increased production in economic runs at our Wilhelmshaven refinery in Germany.

So worldwide, our crude oil capacity utilization was 93%, which is 6% higher than the previous quarter.

Now I am going to page 12 and we show fourth-quarter adjusted earnings were $753 million, so we start with the gold bar on the left side.

Third-quarter income was $849 million.

As we move to the right, prices, margins, other market impacts reduced income $147 million and we had higher utilization, improved sales volumes which helped us $40 million.

And then there were some other items in the aggregate improved income $11 million, which brings us to $753 million and we had adjustments in the fourth quarter of $464 million, which brings our total net income in the fourth quarter $289 million shown on the gold bar on the far right.

Now I am moving on to slide 13, which is the other segments, where we compare fourth quarter to the third quarter.

We do not estimate fourth-quarter earnings from the LUKOIL segment.

This does include a positive true up of $101 million for the third quarter of 2008, but excludes the $7.4 billion reduction in the book value of our investments.

Our reported fourth-quarter income for the LUKOIL segment was a loss of $7.4 billion.

We had some other items impacting LUKOIL segment in the quarter which include lower estimated realized prices somewhat offset by lower estimated extraction, export taxes, and higher estimated volumes.

Turning to our Midstream business, income was $69 million.

That is $104 million lower than the prior quarter primarily to lower realized natural gas liquids prices.

This was somewhat offset by higher volumes in the fourth quarter due to restoration of operations that were down in the third quarter due to hurricanes.

Our Chemicals joint venture had a net loss of $6 million in the fourth quarter compared to income of $46 million in the third quarter.

The variance is primarily due to lower margins and volumes in the fourth quarter.

Now our Emerging Businesses segment, adjusted earnings for the fourth quarter was $60 million, higher than the third quarter income of $35 million due to higher international power generation results.

But our reported income of the fourth quarter when you include the adjustments was a loss of $25 million.

Now our adjusted Corporate expenses were $354 million.

That's $73 million higher than the third quarter due to higher net interest expense, which included lower capitalized interest and higher environmental accruals.

The reported Corporate expenses including the adjustments were $388 million.

Now moving to the profitability of upstream and downstream, slide 14.

On these slide, we compare our performance on income per barrel and cash contribution per barrel against what we see as the peer group, the large publicly traded international oil companies shaded in green, or shaded in gray and that includes ExxonMobil, Chevron, BP, Shell, and Total.

So this chart shows our E&P income and cash per BOE for the years 2003 to 2008.

And in the green bars, peer group is shown in gray and while we don't have data at this point because for the fourth quarter of 2008, we expect our income and cash contribution to be competitive.

If I go down to slide -- now to slide 15, which shows the same metrics of income and cash contribution for refining and marketing, the peer group is the same.

We have the same time period and we would expect when the results are known for with peer group for fourth quarter we would expect to be competitive in both metrics.

Now I go on to slide 16, return on capital employed.

Again, it's the same peer group shown in the gray shaded area.

And it reflects our return on capital employed with no adjustments for purchase accounting.

As we have shown in the past, adjustments made to our peers are reflected that -- to reflect purchase accounting shown on table 3, our ROCE for the fourth quarter was 7%.

For the full year 2008, 15%.

I am going to the last slide in our presentation on 17, so I am going to summarize.

As we said in our most recent release to the media, we have created a self-sustaining competitive integrated energy company and our long-term strategy remains unchanged.

Through organic growth and prior business transactions, we have the resources, the opportunities for growth.

Our existing portfolio of high-quality assets will enable us to replace our reserves, maintain our current production levels, and operate in a low price environment.

We anticipate the company's first-quarter E&P segment production will be near fourth quarter 2008 production and we expect exploration expenses to be around $400 million for the quarter.

Comments with respect to E&P segment production, this is before consideration of OPEC cuts, but we don't see significant impact of OPEC cuts on our production.

Downstream, we anticipate worldwide refining crude oil capacity utilization rate.

In the first quarter, we will be in the low 80% range and this is primarily due to the -- we have a lot of turnaround activity both in the United States and international and we expect run reductions at the Wilhelmshaven refinery.

Our turnaround costs for the first quarter of '09, we expect to be around $225 million before tax.

So in light of the business environment, as I outlined as I started, we are reducing our cost structure and constraining our capital to live within our means.

And then we look forward to sharing these plans, operating capital plans, with you when we meet the investment and financial community in March 11 in New York.

So that concludes the prepared comments.

And I think, Gary, we are now ready to entertain questions from those participating in the teleconference.

Good.

Thanks, Jim.

Jen, we are ready for questions.

(Operator Instructions) Arjun Murti, Goldman Sachs.

Thanks, Jim.

I was wondering if you could provide an update on the relationship with LUKOIL.

I know you took an impairment charge, but otherwise still own the stock.

With Russian supply looking like it's probably going to decline as a country this year and probably next year, are you starting to see the potential for more opportunities, given your ongoing partnership with LUKOIL?

Or in light of all the things that have gone on in Russia with oil price having fallen so much, has the relationship changed in a way where we shouldn't think about gaining additional opportunities?

Just hoping you could provide some update on LUKOIL and what you see in Russia going forward.

Okay, Arjun, thank you.

First, the relationship with LUKOIL continues very strong and I really shouldn't comment on the forecast that they have with respect to their production levels at all.

But we are working quite well with LUKOIL on some investment opportunities both inside and outside of Russia.

So hopefully as we go through 2009, those organic growth opportunities we can make known to you and hopefully we can update some of that in March with our presentation to the financial community.

The other thing is is that we continue to work with Gazprom on things that we can be doing inside and outside of Russia to a lesser extent Rosneft.

But I was just in Russia this past week and I can tell you that the ministry and that the authorities are certainly looking at ways in which they can help promote investment opportunities for companies like ConocoPhillips to be working in Russia as well as outside Russia.

As I said, both with LUKOIL, Gazprom, and Rosneft and others.

So hopefully as we go through 2009, we can roll out some of these opportunities.

They are in the formative stage and we recognize that there's a different pricing environment but also say the Russian authorities recognize the importance of having the right fiscal take to generate and support those [new] investment opportunities.

So pretty bullish on Russia, but it remains to be seen whether we can bring these new opportunities to the finish line.

Jim, thank you.

That's very helpful.

If I can ask one second one, you did announce that the Origin Energy investment closed in the fourth quarter.

Obviously the natural gas and the oil price and the LNG price environment is very different.

Can you just talk about your plans to move forward with really developing the LNG project there or should we think that that is on hold until the cycle recovers more strongly in the future?

Okay.

First of all, we announced the $5 billion, the Origin transaction and fortunately we did hedge a significant part of that expenditure, so the net cost of the investment at the start was $4.5 billion.

In terms of our plans, we have not cut back at all on the drilling program.

With the feed and the studies at work for the LNG that we have in mind to develop, our first train that we have in mind is going to be in 2014, so we continue to work.

Obviously we know what the oil price and gas price environment it is today, but we look through that, we see a better pricing environment when we get into 2014 and subsequent periods of time.

So we continue our drilling program at Queensland and the results that we get from our drilling program is just as we expected.

So there's really no change in that regard.

I appreciate your comments, Jim.

Thank you.

Mark Flannery, Credit Suisse.

Thank you, yes.

I am interested in the [new] capital program.

Maybe you could just give us some general color on the kinds of things or specific things that you will not be doing now versus what you might have had in the plan, say, one or two quarters ago.

In other words, where is the capital being extracted from?

Well, the details of this will all come in our March presentation in New York.

First of all, there has been absolutely no cut back or reduction in expenses or capital spent on maintenance of our facilities around the world.

The second point is all of our committed major projects, multiyear projects like LNG projects in Qatar, Shah project, all of these different ones that we have in mind doing or that we have committed to doing, we still have in the $12.5 billion that we've announced.

Some of the upgrades in the refineries we are deferring where you have deferred somewhat waiting for new capital investment numbers on Yanbu.

We have cut back some of our drilling in the Lower 48 and in Canada.

Of course, that kind of a swing factor that we have to look at what we think the prices are and returns are.

But those are some of the areas that we have cut back.

But we will outline this in full detail when we come to meet with you in March.

Great, thank you.

Robert Kessler, Simmons & Co.

Good morning, Jim.

I wanted to see if you could provide your latest thoughts on the North American Natural Gas market.

Your opening comments certainly presented a fairly conservative or a weak view for the energy markets in general for 2009 and 2010.

And I suppose that speaks to a lower expectation for demand for natural gas.

But in combination of that and the recent success on the Shale plays, I'm wondering what your thinking could be the supply/demand balance in North America for natural gas in the next couple of years?

Well, the next -- the short period of the next two years or so, we see certainly having plentiful supply.

The real question is what's taking place with respect to demand.

Demand has a lot to do with the economy, industrial activity, weather and all of that.

So when we look at natural gas prices today, we are somewhat surprised that [they hold] $5 in Mcf and our plans going forward over the next year or two we expect to see some improvement in natural gas prices, but not a lot more than $5 in Mcf.

The market gives us $6 or more but obviously that's -- it's helpful to the industry and to drilling programs.

But with these prices, I think what you are going to have is most likely less investment.

And that will lead to some correction in supply/demand, but a lot has to do with -- we don't only know what's taking place on demand because of the strength of the economy.

So our view is that we see natural gas prices in the short term being around $5 an Mcf, maybe a little bit better, but maybe that gives you the color of what we plan and expect as we go over the next year or two.

Sure, that's helpful.

Thank you for that.

And then a real quick question on Qatargas 3, where that project stands now in terms of expected startup.

I want to say it's already slipped into 2010, but any additional color would be helpful.

I think you're right.

I don't have the exact specific date.

But so much is being done over at Ras Laffan and it does take longer for each of the trains.

Of course our train follows each of the trains ahead of us and that's the way it works.

And the trains ahead of us have been -- have some delay but I think 2010 is the right year and we'll update specifically that date when we see you in March.

Okay.

Thanks, Jim.

Neil McMahon, Sanford Bernstein.

I've got a few questions.

First one, maybe I'll get a quick answer on this one, maybe not the best question to ask.

But Jim, I think if you look at your return on capital employed, 2008 came in at 15% at $100 per barrel oil price.

2004 came in at 15% at a $42 oil price.

From the outside looking in, it just doesn't seem like the strategy of acquiring companies for growth is working all that well.

Maybe you could have some comments on that.

Well maybe -- really two questions in some ways.

First from a historical perspective, when we look at what we've done in acquisitions and the assumptions that we used when we made the acquisition whether it was ARCO Alaska, it was Tosco, it was Burlington or the merger of the two companies, Conoco and Phillips, I'll tell you our experience historically and we have either met or -- we have exceeded our expectations when it came to prices and costs and synergies.

Now as you look forward with the pricing environment, I just think it's going to be most difficult to be looking at doing acquisitions of large entities versus picking up acreage and picking up an asset that's close to you that seems to fit with where you have a large position.

So historically in hindsight, you can look at the low price environment we are seeing today, the returns aren't as great.

If you see prices that are $70, $80, or $90, obviously they are much better, but I can tell you that everything that we've done in the past so far, the history has been that the premises that we used when we did the transactions we have exceeded.

But I don't think you're going to see much of this going forward for ConocoPhillips.

I'm just concerned that when you try and look at metrics going forward -- and I know you make the argument about purchase accounting versus pooling -- but since that's (inaudible) not quite a long way in the past and it's going to be very, very hard to catch up with some of your other peer companies if you continue to have returns that are massively down on competitors.

And I'm just trying to understand how you are going to try and improve those returns on your cost base if you are relying more and more on acquisitions for growth?

Well, I just said, Neil, that we are not relying on acquisitions for growth going forward and our $12.5 billion capital program has nothing in acquisitions in it.

Obviously we have the portfolio that we have today and that's what we are going to manage.

And we have historically been pretty good on exploitation and operations so there's a lot of emphasis as I said in opening comments and the slides, that the real emphasis in this challenging business environment that we are in is we have got to run well and we have got to get the cost structure right.

That cost structure is not only day-to-day operations, but we have to also be quite aggressive on procurement when we buy goods and services.

The suppliers aren't going to just offer it up to you.

You've got to be pretty aggressive to get it.

But we have the portfolio that we do.

If our returns are less than the peer group, then it's up to us to take actions in our plans and how we invest our money and operate to close that gap.

And we intend to do that.

Just one maybe quick final one.

Just looking at the first quarter, in terms of your cash position which fell from Q3 and Q4, you are now carrying less cash than [Hess] is into Q1 and with LUKOIL potentially likely to make a loss in Q1 as well, I'm just wondering what you are looking at in terms of increasing debt in Q1 or indeed through the first half of this year or if you've got any plans there?

First of all with respect to LUKOIL, there's no requirement for us to be putting any cash into LUKOIL.

So all of their operations and investment is done by the corporate entity of LUKOIL.

So we get a small dividend back but its cash flow positive, so there's no drain or requirement or call on cash from ConocoPhillips to fund or support LUKOIL.

So when we look out, we are adjusting our operating plan in all such that with the oil price environment we want to operate and fund our dividends and our capital spending program without a change in debt.

Now if you look at so far this year based on what we would expect for the full year that oil prices might be just about what we expected.

The crack spread is a little bit better than we expected and natural gas price lower than expected.

So that's so far in the first month of the year that is how we look at it.

Of course it is the first month of the year and it is the first month of the quarter.

Okay, so no plans to increase debt in the first quarter if conditions continue the way they are?

Well, our plans are we don't want -- as we go through each quarter and as we go through the whole year, our plans are not to increase debt.

Our plans are to hold debt constant.

If the market helps us a little bit better then we would be reducing debt.

I am not really disclosing or trying to disclose our internal forecast of prices or margins.

But if you take the First Call assessment of what our company is going to do, it has a cash flow in the neighborhood of around $16 billion, $15 billion or $16 billion.

If we spend $12.5 billion on capital and $3 billion for dividends, why that essentially is living within our means.

That means that debt won't go up or won't go down.

So if the marketplace is helpful to us, a little bit helpful to us than what First Call has, then the debt will go down.

If the environment is not as good, it goes up a little bit.

Okay, thanks.

Erik Mielke, Merrill Lynch.

I'd like to follow up from the question that Neil just had around acquisitions and I realize that you have an analyst meeting planned for March and you may want to defer some of these questions until then.

But given that you've just had to take a very significant write down on various assets on your balance sheet, are there things that you would do differently going forward?

I'm particularly thinking about such actions like Origin, is that the sort of deal that you might still continue to do or is it the sort of thing that we should not expect to see going forward?

First, we always, like any company will look at all opportunities.

But in the case of the Origin transaction, what we see is a minimum of four LNG trains, the first one coming in 2014.

We expect to see a better pricing environment than we see today.

We expect natural gas to be tied to oil price and we see a significant amount of resource there over and above what's already publicly been noted.

So we see a lot of upside in that.

Now until we look back at what we've done, we are -- we like what we've done.

We look at our investments for the long term.

We are going to spend $12.5 billion in our capital program.

There's nothing in it for acquisitions.

And we say we are going to live within our means.

So there always is that opportunity to spend $50 million or $100 million or $200 million if we got the right asset, acreage, or producing property where we already have a position of strength, but our plans do not envisage doing multibillion dollar transactions as we go through this near-term period of time.

Okay, thank you.

Can I ask, do you have any update on leasing exploration, any exploration that you have included within your $12.5 billion budget for 2009?

No, I don't think so, and of course we'll update what we are doing in exploration on March 11.

Thank you.

Paul Sankey, Deutsche Bank.

Good morning, everyone, three very specific ones if I could.

In U.S.

oil particularly, historically your realizations have tended to be below headline market prices.

Just for Q3 and now Q4, those realizations have moved to a premium.

Could you just help me understand the dynamics of that please?

Thank you.

Maybe John Carrig could help out of that.

I think it has to be just the portfolio.

There's nothing unusual taking place with respect to the operating costs or taxes.

We ran well.

We are watching our costs very carefully.

I don't think there's anything really unusual there.

John, I don't know.

Well, I would have to come back to you.

There's nothing in my mind that stands out.

Certainly it's an observation worthy of our reply to you.

But I don't have anything at the moment that stands out.

Okay, thank you.

Secondly, you mentioned a very low utilization in Q1 for refining.

I was wondering whether that's a level of utilization that you have seen already in January or whether the downtime that you were expecting is actually back-end loaded in the quarter?

Well, we've got some major refineries down 30, 45 days turnaround.

It was all scheduled.

I guess what I am asking is are they down now or are they going to go down?

They are down now.

We just don't disclose that.

Okay.

But essentially, I guess, we can rate the downtime over the course of the quarter as opposed to thinking of it as back-end loaded?

You know, what we give, Paul, is just 80% for the quarter.

So you know, the precise allocation of that in a typical environment, these are timed to deal with a variety of factors.

So which one?

How much is down in March versus February, I don't have that available right now.

Fair enough.

And finally, were there any goodwill implications from the Origin deal?

No.

Okay, that's a straight answer.

Thank you.

Paul Cheng, Barclays Capital.

I just have a quick question.

John or Jim, I presume that given you want to live within the mean, we should assume a share buyback right now is probably on hold.

Well, we suspended it in early or mid October and the plans are that it will continue to be suspended.

Okay and you gave a first-quarter outlook for production say similar to the fourth quarter.

Any rough estimate at how your 2009 target may look like?

We will give that to you in March.

Okay, headcount reduction, can you tell us where is the bulk of the headcount is being cut, what functionality?

Well, we are really in the process of continuing to work our 2009 operating plan all the way down to the business units.

And when we say the business units, that geographical location in E&P and by individual refineries and so we will share that with you in March, but the detail of that is not yet really known.

Okay, but Jim, can you tell us that is it more on the administrative side or in the technical functional side of the business?

It's a bottoms up process, Paul, and it's based on the needs of each individual staff and operating unit.

So we are still in the midst of finalizing these plans and we will review them internally shortly, so we don't have a breakdown for you of the where.

Maybe we'll be able to give a little more color on that in March.

Okay, two final short questions.

One, EnCana joint venture, is both the upstream and the downstream development plan still remain on track or based on the previous program or that that has been changed?

Second one, wondering if you can give us some color in terms of the industry wide cost trend?

Have you guys started seeing some meaningful job in the spot rate?

Then if you do, when do you think that the company will start to see some benefit showing up in your operating result or financial result?

First on the downstream joint venture with EnCana, there is no change in what we are doing.

In terms of the upstream, there's no real change.

It might be that some of the investment and adding on the wells has slowed down somewhat.

No change strategy wise what we are ultimately going to do, but may be some slowdown in terms of the capital and how quickly we bring on the production.

Cost trend, we know that costs are coming down somewhat, but I can't really comment on that.

Maybe John or Sig can whether we've really seen significant reductions yet.

I would comment that as you might expect, we are aggressively pursuing reductions not just with our own direct costs but also the companies with whom we do business.

And we are starting to see some reductions -- I don't have the multiplier factors for you at hand, but the time that that will take to work its way into the system, a lot of it is capital.

A lot of it -- a lot of those costs get capitalized and some is operating costs.

But there's a lag effect just like there was a lag effect on the way up.

And in many regards, around the world, both upstream and downstream, some of the projects that we defer -- we are deferring -- not that we're not going to do them, we just defer them because we want to go back and rebid or wait six months or 12 months because we think we are going to get a better cost structure.

Okay, all right, very good, thank you.

Mark Gilman, Benchmark.

Guys, good morning.

I had a couple of quick things.

First, the release indicates you took the impairments in the downstream side on two refineries.

Can you identify which ones they were, please?

No, Mark, we haven't -- obviously we haven't identified that.

I don't know that we have any plans to do that.

Wilhelmshaven or not, John?

I don't think we have any plans to do that.

We don't identify for competitive reasons.

Okay.

Do you plan to be able to formally sanction the Shah Gas project in 2009?

That's the plan.

And it's not changed by anything in the environment that you envision?

Not that we see right now.

Can you give us a rough idea of the impact in 2009 of the royalty changes in Canada with respect to both the natural gas as well as the oil sand side?

What is it going to cost you in terms of production?

In 2009, we would not expect a material impact because we are in our heavy oil projects.

We're in the early phase and that still persists until -- there's an early-stage reduction that's still persists.

How about the natural gas?

Natural gas -- we don't see -- there are obviously going to be some impacts.

It's muted at lower prices, but we don't see a major impact.

Okay, finally in your interim, you talked a little bit about reserve adds in 2008 and other adjustments.

Was there any production-sharing contract related price benefit implicit in the additions number which you provided at that time?

Yes, there were price reductions that were to some extent offset by the impacts of production sharing contracts and Canadian royalty effects.

Can you quantify the positive impact of the PSC effects, John?

No, we haven't done that, Mark.

Okay, guys.

Thanks very much.

Doug Leggate, Howard Weil.

Good morning.

Thank you, guys.

I've got a couple of questions really around reserves and on portfolio depth.

And I guess the first one is on LUKOIL.

Just as you said, you can't estimate the earnings for LUKOIL, neither can you estimate what they are going to say about reserves when they come out with [that].

Is there any risk or have you fully taken account of any possibility that they are going to have significant impairments also?

We have certainly -- are you referring to the current outlook?

Yes, I'm talking about the reserve, the reserve changes that you've already announced.

How have you taken into account what might happen with LUKOIL in terms of potential impairments because you fully consolidate, obviously?

Well, it is an equity affiliate, but yes we have taken -- we apply the same rigor.

Obviously, they are an equity affiliate.

We do get -- work with LUKOIL and we are not going to get ahead of what LUKOIL is going to determine.

But from our perspective, we followed the same processes this year that we followed in the prior years.

And it includes our assessment of LUKOIL's reserves.

So you have full access to the appropriate ceiling test information and so on?

It's not a full cost accounting exercise, but yes.

Right, okay.

Over the past few years now, if you look at the averages, obviously the reserve replacement hasn't really been there.

And I guess the question is do you feel confident with what you have right now?

And this kind of relates I guess to the acquisition question.

Have you got the portfolio depth to sort of maintain the targets you had laid out over the last few years?

What you will see from us in March is that we believe that we have the resources that we will replace our reserves over the next five years without banking or having to have exploration success or having to make an acquisition.

I guess, Jim, the follow-on from that is and again I understand if it is not something you want to disclose at this point, but under what pricing scenario -- is that possible in a $50 environment or does it require a recovery to an $80 environment?

No, no, let's put it this way.

I don't want to give you the specific numbers, but it doesn't require a $70 and $80 price environment.

Okay, I guess the final one is just going back to Mark's question on Shah.

Shah and Origin are both fairly big CapEx items that you committed to last year.

Could you give us an idea in light of just how significant those capital commitments could be, what are some indication of the breakeven economics?

Where do they not work if -- given that you've recommitted to potentially sanctioning Shah this year?

Well, I don't have that right at hand and for competitive reasons, I don't think we would want to give that to you.

But in terms of commitment and the amount of money that's going to be included in our capital budget, you're going to see that when we come to you in March.

Right, all right, I'll leave it there, thanks.

As there are no further questions in the queue, I will turn the call back to management for any closing remarks.

Thanks, Jen.

And again, we appreciate everybody that participated on the call this morning.

Let me remind you that you can find the presentation that Jim walked through this morning along with the transcript of the call today on our website, www.ConocoPhillips.com.

I wish everybody a good day.

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

This does conclude the presentation and you may now disconnect.

Have a great day.

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