康菲 (COP) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the ConocoPhillips first-quarter 2009 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 call is being recorded for replay purposes.

I will now turn the presentation over to Mr.

Clayton Reasor, Vice President Corporate Affairs.

Please proceed, sir.

Thanks.

I'd like to welcome everybody to our conference call this morning.

It's great to be back in IR.

I look forward to working with all of you and just give us a call anytime you need to get answers to your questions.

Today we'll be discussing our first-quarter results for 2009 and joining me is John Carrig, our President and Chief Operating Officer, and Sig Cornelius, our Senior VP and Chief Financial Officer.

This presentation, along with other information regarding the quarter performance, is on our website.

You can find it at ConocoPhillips.com.

On page 2 you'll find our Safe Harbor statement, it's a reminder that we'll be making forward-looking statements in our presentation and the conference call and actual results may differ materially.

Our SEC filings contain information on the items that could cause material differences.

In addition, this presentation contains non-GAAP financial measures which are reconciled to their most comparable GAAP measure either in the appendix to this presentation or in the Investor Relations section of our website.

I'd like to turn the call over now to John Carrig.

Thank you, Clayton, and thanks to all of the investors and analysts for joining us on the call today; we're pleased to share our first-quarter results with you.

Now let's start on page 3, the first-quarter overview.

This slide shows a snapshot of our results for the quarter which reflects earnings of $840 million and cash from operations of $1.9 billion.

Our debt to capital ratio increased slightly and I'll take you through the details of that in a few minutes.

In the upstream we produced [2.36] (corrected by company after the call) million BOE per day including an estimated 439,000 BOE per day from LUKOIL.

In the downstream utilization was lower at 81% mainly due to planned maintenance in the United States.

We are also pleased to see that our operating costs are coming down due to the benefits from planned programs as well as some help from market conditions.

So now let's move on to page 4, which shows our earnings variance.

Our first-quarter earnings were $840 million compared with the fourth-quarter adjusted earnings of $1.9 billion.

Our largest variance is due to market prices.

Compared to the fourth quarter, our realized crude and natural gas prices decreased by more than 20%.

We also saw lower realized refining margins which I'll discuss later.

Our overall price, margin and other market-related impacts decreased earnings by nearly $1.7 billion.

Although our E&P production volumes were higher, the earnings impact of the lower downstream volumes for both ConocoPhillips and LUKOIL more than offset this benefit.

As noted on the previous slide, we did see a benefit of lower operating cost in almost every segment which improved earnings by more than $250 million.

This benefit excludes a severance accrual that we made in the fourth quarter and, while we think that there could be some timing-related benefits in the first quarter, we're clearly seeing some good progress on our cost reduction initiatives across the company.

There was a benefit in the first quarter of around $500 million from lower export and production taxes in our LUKOIL segment as well as in Alaska.

This improvement is in line with expectations given the decrease in the pricing environment.

Finally, there are other items that in the aggregate improved first-quarter income by $125 million which will be detailed in the segment information.

So let's move on now to review our cash flow for the quarter.

On page 5 you see we started the quarter with $800 million in cash and generated $1.9 billion in cash from operations during the quarter.

In addition, we borrowed an incremental amount of $1.9 billion.

We had capital spending of $3.1 billion and a dividend payment of $700 million and we ended the quarter with $800 million in cash.

Focusing on the debt increase for a moment, we announced a $12.5 billion capital program for 2009 that is directed at maintaining the operating integrity of our assets, funding major new projects and exploiting our core asset base.

Our first-quarter spend of $3.1 billion is on target with this full year amount.

A portion of the debt increase was related to a working capital increase of nearly $1 billion.

The lion's share of that increase was due to inventory builds in response to the commodity market structure and commercial storage opportunities.

Drawdown of these inventories in subsequent quarters will be dependent upon the underlying market conditions as we move throughout the year.

As previously indicated, we plan to access the debt market sometime during the second or third quarter.

So let's move onto page 6 which addresses our capital structure.

On the chart on page 6, if you look at the chart on the left you can see that we ended the first quarter with $56 billion of equity.

Along with the increase in debt that's in the middle, our debt to capital ratio increased slightly to 34%.

We continue to have a long-term debt-to-cap target of 20% to 25%.

In the near term lower commodity prices may mean that we stay at 34% or potentially trend higher.

However, we will continue to exercise our capital discipline as well as implement cost reduction initiatives to mitigate some of the impact -- some of the effects of these price impacts.

So now let's move on to our operating segment starting with E&P on page 7.

Consistent with the total company variance, our E&P segment results were lower due to commodity price decreases.

Our realized prices for both crude oil and natural gas decreased by around 20%.

For crude oil our realized price was $41.56 per barrel which was $11.26 per barrel below the fourth quarter of 2008.

Similarly, realized natural gas prices decreased by $1.39 per MCF to $4.93.

Offsetting these price decreases were lower operating costs and lower production taxes.

Additionally, we saw improvements in production volumes which I will detail now as I turn to slide 8 which discusses our production volumes.

Production from our E&P segment was up again this quarter.

Total production in the first quarter was a little over 1.9 million BOE per day which was 3% or 58,000 barrels per day higher than the fourth quarter of 2008.

Moving to the first green bar, the biggest increase for the quarter came in Indonesia as we benefited from the positive effects of lower prices and increased cost recovery as well as the higher sales nominations.

In Russia we had additional benefits from the ramp up of the YK field and are now close to the sustained production rates there.

In the same vein we had additional production in Vietnam from the Su Tu Vang development which came on line at last quarter.

In Australia we benefited from a full quarter of APLNG production as well as lower planned downtime.

When these increases are netted against a small decrease in all other regions our total E&P volumes were 1.925 million BOE per day.

Adding the estimate of our LUKOIL share of equity -- our equity share of LUKOIL's production, ConocoPhillips' first-quarter production totaled 2.364 million BOE per day.

Now moving on to page 9 which addresses E&P earnings.

Starting at the left, E&P's adjusted earnings for the fourth quarter were $1.4 billion.

Prices, margins and other market impacts reduced our first-quarter income by $1 billion.

Although there were fewer days in the quarter we benefited from an increase in overall sales volumes driven by production growth.

On the cost side, we were improved by nearly $200 million versus the last quarter.

Now some of this is timing as our exploration spend during the quarter was a bit less than ratable and the first quarter tends to have less maintenance activity than other quarters.

But even after you factor in these items, we are seeing cost reductions and expect these to continue to persist as we move further through the year.

Consistent with the lower price environment we had a benefit of $153 million on the production taxes primarily in Alaska.

There were other items which in the aggregate decreased earnings by $73 million, these included first-quarter foreign currency losses which were partially offset by lower dry hole costs.

This brings us to our total first-quarter earnings of $700 million.

Now let's move on to the R&M segment.

Like E&P, R&M's earnings for the first quarter were impacted by prices and margins.

We saw significant decreases in our global marketing margin as prices stabilized compared to the fourth quarter.

We also saw a big change in our overall refining market capture, predominately in the United States, and I'll talk a bit more about that on the next slide.

Domestic refining capacity utilization was 80% in the first quarter.

This is 14% below the last quarter due to planned maintenance that impacted all of our Gulf Coast refineries as well as the East Coast region.

International refining utilization was 85%, down from 89% in the previous quarter, due to slightly higher market-driven reductions at our Wilhelmshaven refinery in Germany.

Worldwide, that gave us total refining utilization of 81%, which is 12% lower than the previous quarter.

So the next slide addresses R&M's earning variances.

Starting on the left on page 11, R&M's fourth-quarter adjusted earnings were $753 million.

Overall, prices and margins decreased earnings by $325 million.

Around 60% of this decrease was due to lower marketing margins.

Another component of the decrease was lower international refining margins, which declined by nearly 40% compared to the fourth quarter.

Although refining margins were up by $5 per barrel, the realized margin refining margin in the US increased only $0.59.

Another way of looking at this difference is our market capture, or the realized margin versus the market indicator margin.

Refining capture in the fourth quarter was 118% of the market indicator while in the first quarter it was closer to our normal range at 69%.

There were two big factors that drove that change.

First, the relationship between gasoline and distillate spreads changed significantly.

In the fourth quarter gasoline spreads were essentially breakeven, so the fact that we yield around 20% less gasoline than implied by the market crack did not hurt our capture rate.

In the first quarter gasoline cracks were up by about $11 per barrel and we did not get the full benefit of this increase because of our lower gasoline yield.

On a sequential basis this factor reduced our capture rate by some 30%.

The other large driver of our lower US market capture was the compression of crude differentials.

During the first quarter the sour, heavy crude such as Maya and Canadian sour traded much closer to WTI.

In addition, for the quarter, Brent traded at a premium to WTI.

These crude differentials decreased our relative crude advantage and the rate of market capture.

Now moving on to the other variances, you can see that the impact of our lower refining throughput and corresponding sales volumes was around $250 million.

On the cost side, like upstream, we are also seeing reductions in the downstream.

This quarter we had larger turnaround spending, but this was more than offset by the savings in our base operations.

Finally, there were other items that in the aggregate decreased income by $14 million bringing us to R&M's earnings of $205 million.

Now I'll move on to slide 12, earnings and other segments.

Our estimate of the first-quarter earnings from LUKOIL is $48 million compared to an adjusted net income of zero in the fourth quarter.

This increase is due to lower estimated export tariffs and extraction taxes and a change in basis difference amortization stemming from the fourth-quarter LUKOIL impairment.

These improvements were partially offset by lower estimated volumes and prices and the absence of fourth-quarter positive true up.

Earnings from our Midstream business were $123 million which is $54 million higher than the previous quarter.

As we indicated in the interim update, in the first quarter we booked an $88 million gain on shares previously held by -- previously issued by a subsidiary of DCP Midstream.

This gain was partially offset by lower realized prices and volumes.

Our chemicals JV had earnings of $23 million compared to a loss of $6 million in the previous quarter.

And in the Emerging Businesses segment our earnings were zero for this quarter which is down from an adjusted earnings of $60 million in the fourth quarter.

This decrease is primarily attributable to lower international power margins.

Finally, our corporate expenses were $259 million which is $95 million lower than the previous quarter due to reduced foreign exchange losses.

And continuing the theme from our operating segments, we also so saw lower corporate cost this quarter.

So let's move on to the per barrel metrics that are starting on page 13.

You can see that income and cash per BOE in the upstream have come off with commodity prices.

And, compared to our peers, we could see a greater impact this quarter due to the heavy weighting of ConocoPhillips to North American natural gas.

That said, we still see good cash generation with the changes to our cost and capital structure; we expect that we will be competitive in a lower price environment.

Page 14 shows the similar comparisons for the downstream.

Like upstream, our downstream performance also remains competitive with our peers.

First-quarter performance does reflect the market conditions that we discussed earlier along with higher level of turnaround activity.

So now let's move on to page 15 which addresses the return on capital employed.

This chart shows our return on capital employed for the fourth quarter of 2008 and the first quarter.

Compared with previous periods, we're no longer adjusting for purchase accounting, but we have adjusted for certain items that you can see in the appendix.

Our returns were lower in the first quarter in conjunction with the decreased prices in margins.

While we don't yet have data for peers yet, we could see the peer group decrease as well.

Going forward we're focused on closing the gap between ourselves and the peer group and we'll be showing the sequential progress quarter by quarter in this area.

The next slide addresses our outlook.

In E&P we expect our full-year 2009 production will be slightly higher than 2008.

However, the second quarter is anticipated to decrease somewhat due to higher levels of planned maintenance and seasonality that will overshadow new production growth at Bohai Bay and other areas.

In the downstream we expect our global refining capacity utilization to be in the upper 80% range.

In the US we expect to improve to the low 90% range.

This improvement in our global utilization rate will be partially offset by lower utilization in our international refineries due to planned maintenance.

Throughout the remainder of this year we will continue to implement our cost reduction programs as previously outlined.

On the capital side our major projects are progressing well and we expect to see first production from Bohai Bay Phase II in the second quarter.

We are also nearing completion of the San Francisco hydro cracker project at our San Francisco refinery.

We have seen a reduction in day rates for rigs in North America E&P and we expect to see lower drilling costs for our exploitation programs.

For now we do not see any significant change to our announced capital program of $12.5 billion.

So with that said, Clayton, I've now completed the prepared comments that we have and we'll open the call to questions.

Great, thanks a lot, John.

Jen, do you have any questions for us?

(Operator Instructions).

Arjun Murti, Goldman Sachs.

Thank you.

Just a follow up in terms of some of the operating cost reductions in E&P that you were discussing.

It sounds like you're feeling good that those are and will come through.

If I look at your sequential comparison you show here on I think it's page 9, you certainly -- I think that's inclusive in the operating cost of the exploration expense which sequentially was down quite a bit.

So I guess I'm just wondering on the production cost alone ex exploration, what you've seen so far in terms of reductions and what you're sort of expecting over the course of this year in the E&P segment?

Thank you.

Thank you, Arjun.

When we've discussed with you at our analyst meeting in March the objectives for the year we expected that we would see about a $1.4 billion reduction in our controllable costs and we believe that we're on target to achieve that.

Yes, the first quarter did include some reductions in exploration costs and some other timing issues, but we feel we're on track.

We had in excess of a $400 million reduction in controllable costs and we feel we're on track to deliver the $1.4 billion that we set out to deliver.

Got you.

And is that both North America and international or is one area more important than the other -- in terms of the split?

Well, it's both and actually the 400, I was -- yes, it's both.

Yes, it's both US and international.

That was the consolidated number I was addressing, but yes.

Okay, thank you very much.

Paul Sankey, Deutsche Bank.

John you just mentioned that you don't anticipate any changes to your CapEx program for 2009 -- for now, you quite clearly said.

I wondered, could you talk a little bit about the sensitivities there in terms of replanning, what your spending may be for the year given the way the cash flow matched up against the CapEx for Q1.

Thanks.

Thanks, Paul.

What our plans -- what the first quarter reflects is largely in line with expectations -- our expectations given the commodity pricing environment.

We really think it's premature for us to be making any adjustments in the overall capital program.

We have indicated that we would expect to see -- if the current environment persists that we'd expect to see debt trend up somewhat.

We will continue to evaluate this and look further as the year progresses, but right now we don't foresee an adjustment in the capital program.

My sense is that you're likely to defend the volumes somewhat up I think slightly higher is the exact language you've used for volumes in 2009 over 2008.

So I guess that if you were to cut CapEx later in the year you'd be looking more at the downstream?

Well, we take a rigorous look across the board and would cut -- without getting into where, we would cut where we felt it made the most sense.

I don't want to try to prejudge that at this moment.

Fair enough.

On the working capital that you've talked about, I guess taking advantage of contango in the market, has that position changed throughout the quarter?

I know that we've had some variation in the amount of contango.

And going forward if we continue with a very steep contango would you expect that working capital commitment in storage to rise more or have you reached, if you like, the limits of what you're prepared to do?

Well, as you know, we have a commercial organization that trades around our assets including taking advantage of market structures for the things like contango in the market.

The storage economics in the first quarter, as you indicated, were favorable and we took advantage of that to some extent.

I don't want to say we wouldn't increase materially, but the -- I don't want to say we would increase -- would or would not increase materially, but we think that we're taking advantage of about the right amount right now and I don't anticipate a significant working capital draw or cash draw or cash investment beyond what we've got today.

Now what are the -- are you physically at the limits?

I guess your tanks might be full just about.

But you know we don't comment on commercial terms or what we're doing in the commercial arena.

So I'd hate for us to comment on what capacity utilization we're using on storage.

Okay.

I'll try one last one for me, thanks.

Just of the 80% utilization you mentioned in Q1, was that entirely owing to turnarounds or was there some voluntary shutdown and could you indicate the extent?

It was a modest amount of reductions that were impacted by hydro-skimming margins in Europe.

But this was by far the heaviest turnaround portion of the year for us.

So you expect, as you highlighted, that your utilization will ramp up in Q2 without -- given what we're seeing right now in the market?

The expectation is therefore that you'll hit the low 90s I think is what you said?

Low 90s in the US and high 80s overall because we do have turnarounds, as you know, in Europe.

Second-quarter seasonally, that is a time when we do have turnaround.

So we do expect to have turnarounds internationally.

So overall high 80s, US mid-90s.

Okay, thanks, guys.

Paul Cheng, Barclays Capital.

Two questions.

One, John, when you guys were talking about the cost reduction, I presume that you guys are not talking with all your suppliers or your vendors about a cost reduction.

What's their -- are they being receptive to looking at even on the existing contract or those are off-limits, that you would be only looking at any new contract that you may -- going to sign onto?

Well, thank you, Paul.

The relationship with vendors -- we have a wide variety of relationships, many of which, I would even say most of which are long-term relationships.

We don't consider that anything is off the table.

And what we try to do is to address our needs, which are we cannot wait for cost -- the cost reductions to naturally occur, we have to go get them.

And we need the commitment and cooperation of the vendors on a long-term basis to achieve that.

So without getting into the details of what we might be doing, we do have some contracts that roll off and we do have a lot of flexibility in our existing contracts.

So we're both addressing new as well as the flexibility inherent in many of the contracts that we already have (multiple speakers).

John, can I ask in another way?

You guys have indicated $1.4 billion of the controllable cost -- reduction target.

Yes.

Out of that how much of them may be just your target related to existing contracts but not the new contracts?

We don't really break it out that way, Paul.

Because many of the existing contracts have the capacity to address changing market conditions in them already, so they're not fixed priced kind of contracts.

So we -- I just don't have -- we can try to look and help you with -- to quantify some how we see this, but we don't address it I don't think in precisely the way that you're asking the question.

How about out of the $1.4 billion, how much of that is related to the headcount or human cost?

Well, we said we'd have a 4% reduction.

So when we took a $100 million accrual in the first quarter -- so I would say the lion's share is not in the headcount.

It's in -- there's some benefit of lower inflation including vendors and within the vendors is rig rates.

There is trying to do things to take more advantage of the overall environment that we have today.

There are also some market related items, Paul, around utility cost or market sensitive costs that obviously as commodity prices fall our cost structure falls.

So that's something we can get into detail with you if you'd like more information on that.

Okay.

A final one, Qatar LNG, can you give the progress, is it still going to be on stream in 2010 or given the market conditions that you guys may decide to go a bit slow?

Thank you.

Our current expectation is that we will come on stream in 2010.

Thank you.

Mark Flannery, Credit Suisse.

Just further on the cost issue, you mentioned the $1.4 billion reduction in controllable costs.

I'm sorry if I missed this, but what is that as a percentage of your total controllable costs?

That's 10%, Mark.

So you think you've already done (multiple speakers).

I'm sorry, it's 10% of 2007 levels, to be just clear (multiple speakers) I'm sorry, 2008 levels.

Okay, so 10% of last year's baseline (multiple speakers)?

Okay.

Just changing over a little, you point out the over 5% return on capital for the quarter.

I'd just like an update on how you're thinking about that and it's obviously fairly low; you're obviously expecting some kind of improvement.

But where do you think that needs to get to to be in the acceptable level?

What we've indicated and what we want to do is to get it firstly within the target -- in the peer range and then continue to improve it over time.

Let me ask it another way which is if you end up at current commodity prices with a single-digit return on capital, are you minded to take further action to improve that?

Well, right now we're focused on our cost reduction efforts and I don't want to anticipate any further actions that we would take.

We'll just have to evaluate what we might do going forward.

Clearly we are focused on delivering capital efficiency.

But this is a -- we recognize that this takes a concerted and persistent effort to achieve this gap closure over time.

Okay, thank you very much.

Mark Gilman, Benchmark Company.

Good morning, guys; I had a couple things.

First specifically the refinery utilization rates, John, you quoted for the second quarter, does that include any economically oriented curtailments?

Not -- I don't believe that includes a significant amount.

I can't recall whether the -- what the premise is for Wilhelmshaven, but I don't believe it's -- I don't believe it's based on hydro-skimming margins.

Okay.

Secondly, I wanted to clarify the Bohai Phase II comment that you made.

I think your reference was the start up of Bohai Phase II, yet it's been my understanding that several platforms associated with that project have been online now for quite some time.

Could you just clarify that and talk a little bit about the sequencing going forward?

Yes, you're correct, Mark.

We have started up some of the platforms and I'm sorry for the confusion that may have caused.

What I was referring to is the mating and hookup of the floating production and storage offloading facility that will permit us to get our production I believe up to 69,000 barrels per day net sometime this year or in 2011.

We expect to be at 50,000 a day by 2010.

We're at about 20 (multiple speakers).

Sorry.

Sig, why don't you repeat that.

We're at currently around 20,000 net today, we're going to ramp up to around 49,000 to 50,000 by the end of the year and in 2011 we'll peak out at about 70,000 barrels a day.

Okay, just shifting gears a little bit.

You commented I believe about, John, some increased nominations regarding Indonesian natural gas sales which were up quite a bit.

Were those just increased nominations under existing contracts or was there a new contract that kicked in that generated those increases?

No, those were under existing contracts, but there was -- there have been -- like one new field came on, but they're basically combinations under existing long-term contracts.

So one that shouldn't be wedded necessarily to the sustainability of those volumes going forward?

Well, they're demand-based, Mark.

Right.

Yes, and looking at that 30 million or so increase in Indonesia, about half of that is PSC related.

Okay.

And finally, just one more for me.

The coalbed methane LNG industry in Australia seems from a competitive standpoint to be taking off, to say the least, with a lot of competitor projects out there including yours with Origin.

Yet it has appeared I guess to me that the proposals being put forth by BG as well as Santos seem to be moving ahead at a slightly greater clip than yours with Origin.

Is there some reason that things are moving a lot more slowly or seemingly so for your project?

No, Mark.

That project is exactly on track as where we premised it to be when we went into it.

We've approved the work program up to FID; the upstream work program is in place.

We have filed the advice statement with the coordinator general approval stating the timeframe in which we are advancing the project and certainly along with our -- marching along with our expectations right now.

Okay, guys, thank you.

Erik Mielke, Merrill Lynch.

Thank you, I have two questions, the first one probably for Sig and I guess the second one will be for John.

Firstly, on the upstream segment in the first quarter, looking at the US relative to international, your margins in international held up significantly better.

And I know you've already touched on some of these issues around crude pricing and I guess taxation would also be a factor.

Was there anything else playing into the relative performance of international versus US?

I'm thinking foreign exchange; I'm thinking new projects that came on stream that may have had a lower unit cost.

The change was quite significant.

Yes, it's primarily US gas prices related where the gas prices around the world held up better and are not going to be reflective of what's going on in the US.

And as you know, we're a heavy US natural gas player in the Lower 48.

But nothing beyond realizations?

No.

Okay, all right.

My second question relates to the leadership that you have shown as a company around US energy policy and particularly around climate change through your participation in US cap, and also I noticed that one of your representatives was a witness yesterday at the hearings in Congress.

I was wondering if you could maybe comment a little bit on how you see the current proposals and how that might impact the oil industry.

Well, as you indicated, we are a participant in US cap and we testified, -- Red Cavaney, a representative of ConocoPhillips' Washington office testified yesterday on behalf of ConocoPhillips.

We see that there are a number of issues as you get into the details here.

We specifically mentioned yesterday a comment on the allocation of allowances, cost containment, the impact of the low carbon fuel standard versus the renewable fuel standards and how they overlay and whether they should overlay.

So those kinds of things we think were -- the kinds of comments that we made we believe were heard and we hope that we will have some favorable response.

And so that's part of the effort that we want to do, we want to make our views known and help shape the outcome.

Okay, thank you.

Robert Kessler, Simmons & Company.

Good morning, gentlemen.

Your interim update from early April indicated anticipated losses in the US Lower 48 and Canadian E&P operations.

To what extent did you lose money in those regions in the quarter?

Well, in the report that's associated with the -- that we've attached to the -- it's on our website.

The US is broken out and I believe we lost $71 million in the Lower 48.

Canada we really don't break out and Canada of course is itself -- the way I think of it is you've got the Arctic, you've got ongoing exploration to the extent there is some on the East Coast, the heavy oil or heavy oil and then Western Canada gas.

Western Canada gas performed broadly in line with the way the US did.

But the others we just don't break out.

And of course that Lower 48 loss of $71 million was more than offset by the $244 million earnings that we had in Alaska.

Got you.

I guess looking particularly at the US Lower 48 losing money and then Western Canada gas losing money, assuming current commodity prices persist when would you return to profitability in those segments do you think given the cost-cutting initiatives you have in place?

I don't know if we've come out with breakeven cost around net income, maybe that's something we can work with you on, Robert, based on the information that we've provided externally.

Okay.

But let us come back to you on that one.

Fair enough.

Thanks very much, guys.

Doug Leggate, Howard Weil.

Thank you, good morning, John.

John, my question is on LUKOIL.

I'm trying to understand exactly what you meant by essentially what you've done to rebase the way that you account for that in the quarter.

And what I'm referring to is that you I guess don't know what the quarter is going to report ahead of time, so in the fourth quarter you assume zero.

And then LUKOIL came out with a fairly hefty loss and you did not take any retrospective negative adjustment as you would normally do.

And then obviously in Q1 you're assuming $48 million positive.

Can you just help me reconcile what is going on there?

Because I would have expected you to take that retrospective loss and it looks like you didn't touch it this quarter.

Well thanks, Doug.

I'll try to address that at a conceptual level, but beyond that maybe Sig can help out.

But the reason for the phenomenon that you referenced is associated with the fact that you have a mark to market event.

So when there's a mark to market event and an impairment I mean, you're essentially writing it down to the investment down to market value.

Yet if there is any subsequent true up of a negative nature, or even positive nature, but certainly of a negative nature for sure, that has the effect of recording a negative equity earnings and reducing the investment, thereby lowering the mark to market which gets you back to the same answer mechanically in every situation.

So it's a phenomenon associated only when there is a mark to market event and we would not expect it to be an ongoing feature of the earnings analysis.

Yes, I think as John said, Doug, it was a unique situation driven by the mark to market accounting.

Related to the first quarter, the earnings -- there are really two things going on with the earnings, underlying loss that we're projecting of around $10 million and then we are recording earnings from the negative amortization of around $17 million a month, which we'll see as long as the stock price continues to ride above the value that we wrote it down to.

Okay.

I guess I understand the mechanics of it.

Can you help me understand what -- had you done it the normal way what would the number have been in the first quarter, the retrospective adjustment to make you consistent with LUKOIL's reported earnings?

Are you just asking what's 20% of $1.6 billion?

Well, I guess there were some -- well, the $1.6 billion included some write-off, so I was guess I was looking for a clean adjusted number, which I assume you've got more -- your view on that would probably be more accurate than mine.

I think that's going to be -- wouldn't you have to wait until (multiple speakers)?

Doug, the number if we would have done a true up, as we've done in the past, we would have had a negative true up of $255 million.

And as John said, that would have been immediately offset by the same amount on the write-off to the investment, so effectively it would have had no impact on first-quarter earnings results.

Got it.

Alright, thanks very much indeed.

That's it for me.

(Operator Instructions).

Mark Gilman, Benchmark Company.

John or Sig, I think that you made reference to, if I heard you correctly, intent to access the debt markets in the second or third quarter of the year.

And I'm wondering whether that's incremental borrowing based on your outlook or whether it's funding of shorter-term debt that you may have taken on up to this point?

It would basically be to roll our current short-term balances into longer-term maturities.

Okay, so it's not an indication at this point of the expectation of an increase in the debt level per se?

That's correct.

Okay, thanks a lot, guys.

Gentlemen, there are no further questions in the queue.

I'll hand the call back to Clayton Reasor for closing remarks.

Great.

Well, we really appreciate everybody's participation in the call this morning.

If you've got any questions or follow-up, I think the number -- or our number is on the bottom of the earnings release.

You'll find copies of our presentation material on ConocoPhillips.com and I look forward to working with you in the future.

Thanks so much.

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

This concludes the presentation and you may now disconnect.

Have a good day.

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