雪佛龍 (CVX) 2002 Q3 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Chevron Texaco third quarter Earnings Conference Call.

At this time, all participants have been placed on a listen-only mode and the floor will be open for your questions and comments following the presentation.

It is now my pleasure to turn the floor over to your host, Mr. Pierre Breber.

Sir, the floor is yours.

Thank you very much, Jackie.

Welcome to Chevron Texaco's third quarter Earnings Conference Call.

Our remarks today will focus on comparisons to the second quarter of 2002.

In contrast, the press release issued this morning provides a comparison to the third quarter of 2001.

During my prepared remarks, I will refer to presentation slides, which are available at the ChevronTexaco website and were e-mailed to you this morning, along with earnings press release and investor supplement.

After my prepared remarks, John Watson, Chief Financial Officer of ChevronTexaco, will join the call to provide a synergy update.

After John's remarks, we will be available for Q&A.

We plan to wrap up the conference call around 12:00 noon eastern time.

I will begin by reminding you that today's comments will contain estimates, projections, and other forward-looking statements.

Please refer to the Safe Harbor statement on the second presentation slide and in this morning's press release for a discussion of some of the specific factors that could cause actual results to differ from those expressed in forward-looking statements contained in our remarks today.

Slide three shows that ChevronTexaco reported a third quarter loss of $904 million, or 85 cents per diluted share.

Excluding special items and net charges for merger-related items, third quarter operating earnings were about $1.24 billion or $1.17 per share.

Excluding foreign exchange gains of $65 million, operating earnings were $1.11 per share.

Slide four shows that operating earnings were essentially flat with last quarter.

A favorable foreign exchange swing and higher upstream realizations were offset by lower upstream volumes, lower downstream margins, higher exploration expense, and a number of net operating charges.

These charges include this year's impact of the U.K. tax increase, higher FAS 133 charges, higher inventory in foreign crude price charges, and exploration lease bonus writedowns.

These net operating charges and all other miscellaneous items produce reduced this quarter's earnings by over $135 million when compared to last quarter, or about 13 cents per share.

The third quarter net loss included special item charges of almost $2.1 billion.

Special charges related $1.55 billion.

This includes almost $1.1 billion for the writedown of the company's investment in Dynegy to the estimated fair value on September 30.

$305 million for the company's share of Dynegy's own asset writedowns and $149 million for the company's share of Dynegy's loss on sale of Northern Natural Gas Company.

At the end of the third quarter 2002, the book value of the company's investment in Dynegy totaled $412 million.

Made up of $112 million for common stock holdings and $300 million for the redeemable preferred shares.

Upstream asset writedowns totaled almost $300 million, mainly from asset impairments caused by writedowns of gas reserves for fields in the United States, Canada, and Africa.

Downstream asset writedowns totaled about $200 million, primarily due to the writedown of the company's investment in its Cal-Tech's Australia affiliate to the estimated fair value.

Other special charges were for environmental remediation costs, and the prior year's effect of tax law changes in the United Kingdom, partially offset by favorable prior year's tax adjustments.

This quarter also includes charges for merger-related items totaling $73 million.

Slide five shows that U.S. upstream earnings were up $5 million this quarter.

Crude oil realizations increased $1.35 per barrel.

This increase was less than the increase in WTI prices, primarily due to lag pricing for a portion of Gulf of Mexico Productions.

Natural gas liquids prices increased by over $3 per barrel, primarily due to the absence of last quarter's accounting adjustments.

Higher average liquids realizations benefited earnings by about $55 million.

Average U.S. natural gas realizations were down 27 cents per thousand cubic feet.

This decrease is more than the change in Henry Hub bid week pricing due to Rocky Mountain prices that decreased by over 80 cents per mcf.

Lower natural gas prices decreased the quarter's earnings by $40 million.

U.S. liquids production was down 25 mbd, primarily in the Gulf of Mexico shelf and deep water.

Productions shut in as a result of tropical storm Isidore reduced this quarter's production by about 9,000 barrels per day.

The balance was due to natural field declines, operational downtime, and the absence of last quarter's favorable ngl adjustments.

U.S. natural gas production was down about 100 million cubic feet per day, primarily in the Gulf of Mexico and Mid-Continent regions.

Half of the decline was due to productions shut in as a result of Isidore.

The balance was due to natural field declines and operational downtime partially offset by volumes from an acquisition of additional equity and certain leases operated by ChevronTexaco in the Gulf of Mexico.

On an oil equivalent basis, daily production in the United States decreased 41 mbd, of which 17 mbd was due to Isidore.

Lower production decreased this quarter's earnings by about $25 million.

Lower exploration expenses increased earnings by about $5 million, higher FAS 133 charges lowered earnings by about $30 million.

Co-generation earnings in San Joaquin Valley increased by $20 million, due to higher seasonal revenues.

All other factors increased earnings by $20 million net of estimated Isidore casualty losses of $10 million.

Note that including the effects of lower production and casualty losses, the estimated impact on third quarter earnings from Isidore was $25 million.

At this time, about 60 mbd of oil and gas equivalent production on the Gulf of Mexico shelf is shut in as a result of the impacts of hurricane Lili and tropical storm Isidore.

About 2/3 of this production is expected to be back online in early December, but with most of the balance back online by the end of the year.

The impact of the two storms on the company's fourth quarter net production is currently estimated to be 70 mboed.

In addition, estimated uninsured casualty losses in the fourth quarter are $20 million.

Slide six shows international upstream operating earnings increased $20 million.

Foreign exchange gains, primarily in Canada and Argentina, increased earnings by $132 million when compared with last quarter's losses.

Liquids realizations increased by about $2 per barrel, in line with the increase in Brent crude prices.

Higher liquids realizations increased earnings by about $90 million.

Natural gas realizations increased by 12 cents per mcf, higher prices in Australia more than offset lower U.K. prices.

Higher natural gas realizations increased earnings by $10 million.

Net international liquids production was down 47 mbd.

Production in Europe was down 38 mbd, primarily due to planned maintenance at a number of fields and unplanned downtime at Captain.

Production in Africa was down 19 mbd, primarily due to operational incidents that impacted July production in Angola and Nigeria.

Indonesian net production was down 6 mbd, primarily due to the expiration of the Costal Plains Concession on August 8.

Production was down in Canada due to scheduled maintenance at Hibernia in September.

However, Hibernia operated at record production levels in July and August.

These decreases are partly offset by higher [INAUDIBLE] production and higher [INAUDIBLE] production after last quarter's maintenance.

OSA production increased 5 mbd on production field testing.

During the third quarter, OPEC-related quotas lowered Balkan production by 16 mbd and net production in Nigeria by about 40 mbd.

Lower production and underliftings during the quarter reduced liftings by 125 mbd and lowered earnings by $90 million.

Natural gas production was down 58 million cubic feet per day.

Production was down in Europe, primarily due to planned and unplanned downtime at Brittaina.

Production was up in Australia, after last quarter's scheduled maintenance, and up in the Phillipines on the continued ramp-up of [INAUDIBLE].

Lower natural gas sales decreased earnings by about $5 million.

An unfavorable swing in market-to-market accounting of European natural gas contracts, pursuant to FAS 133, decreased earnings by about $15 million.

Higher exploration lease bonus amortization charges decreased earnings by $25 million, primarily due to the relinquishment of two blocks in Brazil.

Higher exploration expenses lowered earnings by $35 million, primarily due to the write-off of the Newburn and [INAUDIBLE] well costs.

Note that the company's full year worldwide exploration expenses are on track to total about $650 million before tax.

The current year impact of the change in the U.K. tax rate lowered earnings by about $25 million.

The U.K. supplemental tax was enacted in July and effective back to April 17.

All other items lowered earnings by $17 million.

Before I leave the upstream, let me comment about worldwide production year to date.

Slide seven shows that year-to-date BOE production, including OSA volumes, are down about 2 percent, versus 2001.

However, OPEC quota restrictions have been about 20 mbd higher than we planned.

Also, higher than expected prices have reduced ChevronTexaco's share of net production by almost 45 mbd.

Most prominently in Indonesia.

After adjusting for these two effects, production year to date would be up slightly, but still short of our one percent goal.

The difference is primarily due to third quarter operational incidents in our international operations and the impact of storm activity in September.

Slide eight shows U.S. downstream operating earnings decreased $21 million.

Street-to-crude gasoline margins were down on both the West and Gulf Coasts and higher crude costs were not recovered in the markets.

Gasoline marking margins in the gulf coast also decreased.

Quarterly jet and diesel margins increased for the first time in a year, partly due to tightening inventory levels.

The differential between light and heavy crude oils increased this quarter, helping the quarter's refining margins.

Slightly higher overall refining and marketing margins increased earnings by about $10 million.

Granted gasoline sales and diesel sales were about flat.

Jet fuel sales volumes were up over three percent, and low gas supply sales were down.

Refinery crude inputs were flat on continued strong capacity utilization.

Overall, slightly lower refined product sales had no impact on earnings.

Note that branded gasoline sales are up almost four percent and jet fuel sales are down 10 percent, versus the same quarter last year.

Non ratable costs of foreign crudes decreased earnings by $20 million due to higher prices late in the quarter.

All other factors decreased earnings by $11 million.

Slide nine shows that international downstream operating earnings increased $9 million.

A favorable foreign exchange swing increased earnings by $119 million.

Although European and Asian indicator margins increased slightly, actual refining margins decreased earnings by about $35 million.

Refining margins were lower in Australia and Korea, in part due to higher crude costs and lower product prices relative to the indicators.

Refining margins in Europe were about flat as operational downtime resulted in producing a less optimal product slate.

Marketing margins were higher in Asia, but lower in both the U.K. and Latin America.

Lower marketing margins decreased earnings by $15 million.

Crude refinery inputs were down due to discontinued operations at the Panama refinery, which will be convert need a terminal.

Refined products were flat in Asia and Latin America and down in Europe.

Lower refinery and marketing sales volumes and lower trading volumes decreased earnings by $5 million.

Changes in inventory lowered earnings by $30 million.

All other factors decreased earnings by $25 million, in part due to lower lubricant earnings.

Slide 10 shows that chemicals operating earnings were down $14 million.

Foreign exchange losses decreased earnings $3 million.

The company's share of Chevron's chemicals, olfins and polyolfins earnings were up $20 million on higher margins, partially offset by lower sales volumes and small asset write-offs.

The company's share of aromatic earnings were down $20 million on lower benzine margins, lower styrene sales volumes, higher turn around costs, and small asset write-offs, partially offset by higher styrene margins.

All other items lowered earnings by $11 million.

In all the other segments, lower net operating charges increased earnings by $5 million.

Higher coal and powering gasification earnings and lower interest costs were partially offset by an unfavorable swing in foreign exchange, lower Dynegy operating earnings, and all other miscellaneous items.

All the other segments had a great deal of variability from quarter-to-quarter.

Our best guestimated average run rate for the all other segment is a net charge of $195 to $225 million, excluding the company's share of Dynegy's earnings.

That concludes my prepared remarks.

Let me now turn to John Watson, CFO of ChevronTexaco, who will provide a synergy update.

Thank you, Pierre.

I will follow with a few remarks around synergy.

I direct your attention to chart 12 in your deck.

For those that have followed us closely, we've announced three goals on synergy in the last couple of years, the first was back in October of 2000.

We said we would achieve $1.2 billion in synergy in six to nine months.

We achieved that in six months.

The other goal was to achieve $1.8 million in 18 months.

Back in November, we achieved that in 12 months.

The third goal is $12.2 billion, achievable in 18 months, we're on track to achieve that.

So, we've achieved the first two goals and expect to accomplish the third one, as well.

I would like to remind you, this is a run rate concept where we've taken actions to achieve the amount indicated and realize the annual savings on a go-forward basis from that point.

The next chart, chart 13, shows the math for the amount you might expect to see in earnings, based on the run rate milestones that we reached during the year.

And if you go through that math, you will see that the after-tax improvement to earnings is between $500 and $550 million, after-tax in the year 2002.

As you'll see in a minute, this amount has reached the bottom line, but depending upon the line item on the income statement or in total, a variety of effects can mask the savings in our financial statements.

I will direct you to chart 14, which I'd just like to reinforce our approach in demonstrating the capture of synergy to ourselves and to you.

It is really a three-point approach to synergy capture.

The first, on the top of the triangle, is the specific actions that we've taken to improve earnings.

These are quite transparent and in prior meetings, I've given you examples and will give you more in a moment.

The second is the visible evidence of the actions taken, which are improvements in the published financial statements.

These sometimes are quite transparent, sometimes require an explanation and I will come back to the subject in more detail in a moment.

The third element of the triangle is improvements our competitive position.

Now, these require more time and analysis and published data from our competitors, I won't talk about those today, but certainly over time we will do so.

Today I will talk about the first two actions taken and our financial performance.

Well, perhaps the most visible action on chart 15 is the effects on our workforce from the synergy actions that we've taken.

We have actually hit our manpower reduction target and, in fact, we've exceeded it.

We reduced manpower by about 5500 employees relative to our target of 4500.

We've had some modest offsets in the actual employee count from government-mandated conversion to contractors and a couple of small acquisitions, but in total, we have reduced manpower as we've indicated.

In fact, we're at about 53,000 employees today, which is where we said we would be when we completed our workforce reductions.

Chart 16 shows a number of examples of our integration success and specific actions that we've taken.

I won't cover them in detail here, these are just illustrations of the many things that we have done to reduce costs or improve revenues.

I can assure you that we continue to track them very rigorously in our database with assigned countable parties, et cetera.

And these are the many things, among the many things contributing to the improvement our performance.

I will now direct you to chart 17, where I will take a little bit more time and talk to you about not just the actions that we've taken, but how it is showing up in our financial statements.

The obvious question is can you see the synergy impacts in the financials?

And the answer is yes, though in some cases an explaination is required.

This chart shows the quarterly average for operating expense on the left and exploration expense on the right, which are two big areas where synergy directly hits the financial statements.

I'm showing them for quarterly averages in 2002 relative to 2000.

You will recall 2000 has been our base year for measuring synergy, the year the merger was announced.

Exploration expense is very straight-forward.

We've put together a more efficient and effective program that will save over $300 million per year.

We've actually saved about $100 million per quarter through the first nine months of the year.

At the same time, we've announced a number of discoveries, notably Tahiti, and great white in the deep water Gulf of Mexico.

Operating expense and selling general administrative expense, which is on the left-hand side, does require some explanation.

First, from the published financial statements, we have stripped out a couple of items that distort the trend.

We've stripped out the impact of special items and merger costs, along with the operating expenses from Chevron Phillips Chemical Company, which is no longer a consolidated company.

So, essentially we've put the comparison between 2000 and 2002 on an apples-to-apples basis.

On this basis, operating expense is flat at $2.75 billion per quarter.

As you can see, the operating expense component of synergy is present, but it's largely been offset by increases in salary, pension, and benefits.

I think salary increases for a couple of years are probably no surprise to you.

Similarly, I would expect there would be no surprise of having slightly higher medical costs, as well, if you followed the trend in the United States, in particular.

However, the most significant impact is in the area of pension costs, it's been significant.

We actually had pension credits in the year 2000 versus expense in 2002.

The change on a quarterly average basis between 2000 and 2002 is about a $90 million before-tax per quarter.

Now, you can see the credits in the annual report in 2000, but the increase in 2002 will show up when we publish our financial statements at the end of the year.

The change arises from several factors, but primarily the weak equity markets in the U.S. and revisions to actual assumptions.

I will note that while the increase is significant, we're hardly alone in the regard, both in our industry and in other industries as well, particularly those that are more labor-intensive.

The last thing that I will talk about on synergy is chart 18 and this is -- does synergy hit the bottom line?

I've talked about synergy hitting operating expense, about it t hitting exploration expense, but how does it get to the bottom line in total?

In a similar fashion, this chart reconciles earnings per quarter from year 2000 versus nine months 2002 on a quarterly average basis.

As you can see, total synergy on a realized basis does appear.

You can see it on the right-hand side of the chart.

Now, that number, that bar that's titled synergies, is equivalent to the $500 to $550 million after-tax number I showed you previously, divided by three, to put it on a quarterly average, or $175 million.

Unfortunately, we've had offsets this year, weaker prices in margins, slightly lower volumes, the salary and benefit items I noted earlier.

I'll also note that other includes a few items that offset that I didn't detail here, notably lower interest and fuel expense, on the plus side versus the absence of earnings contributions from [INAUDIBLE], Dynegy, along with some tax items.

My point in showing you this chart is that the synergy is there, but the world doesn't stand still and this can obscure the real benefits we see in our numbers.

That concludes the remarks that I had on synergy.

Pierre and I are now here for you to take questions on earnings and synergy and other items.

Thanks, John, let me remind everybody, like last quarter, we ask you to limit your question to one question per turn.

That's worked well.

We got to everyone in the queue last quarter.

We'd like you to honor that this time around and we will try to wrap up here in 30, 35 minutes, around 12:00 noon eastern.

Jackie, will you open the phone lines for questions, please?

Thank you, the floor is now open for questions.

If you do have a question or a comment, press the numbers 1 followed by 4 on your touch-tone phone at this time.

If your question has been answered, you may remove yourself from the queue by pressing the pound key.

While you ask your question, please pick up the handset to provide optimum sound quality.

Once again, that's 1 followed by 4 on your touch-tone phone.

The first question is coming from Paul Ting with Salomon Smith Barney.

Please state your question or comment.

Hi, John and Pierre.

Hi, Paul.

Hi, Paul.

I just want to follow up on your comments on synergy, for the accomplished amount of $1.8 billion, can you give us an idea functionally how does it compare with your original target you stated for the $2.2 billion, ie, is it 55 percent from upstream?

And if I could just sneak in a quick one, do you have any sense whether you're going to change the synergy target at all?

Let me answer the second question first.

We're not changing the synergy target.

We've changed it a couple of times and it's been a pretty aggressive number.

The $2.2 billion number is still the synergy target.

We've broken out the actual synergy that we will capture on a couple of occasions.

Of the $2.2 billion that we had, we said about $1.2 billion was up in the upstream and about $700 million downstream. $300 million in the corporate and other category.

And I would tell you that the synergies that we've realized is roughly in that proportion.

So, I won't give you specific numbers tying to the $500 to $550 million actuals, but what we've realized is roughly proportional to the segment.

Thank you, John.

Okay, Paul.

Thank you.

The next question is coming from Douglas Terasin with Morgan Stanley Dean Witter.

Please state your question or comment.

Good morning.

Guys.

Good morning.

I have a strategic question.

There's been some commentary recently that the Federal Energy Commission in Russia is interested in reclassifying the CPC pipeline as a monopoly, which as the concept goes, would allow it to regulate across Russia, probably leading to higher costs for users, like yourselves.

Do you have an update on that situation, if there is one?

And what recourse or strategy that you may have in dealing with this situation or the CPC situation?

And that is a pretty high return project for you guys.

Sure.

I'll be happy to make a few comments.

When we've signed our agreements around the world, particularly in nations where the legal structure is developing, we're very specific in those agreements that the commitments and the contractual obligations in the agreements will be honored in regard to subsequent changes in law.

It is no surprise that as Russia evolved, they've passed a system of laws.

In some cases, the laws are countered to the provisions of our contractual agreements.

We're confident that our agreement will ultimately be honored, even though at times and in the example you illustrate for CPC, the declaration of certain industries is natural monopolies, could have impacts on the CPC pipeline.

But we're confident that the provisions of the original agreement will be honored and expect that to be the case.

We have the right to set our own tariffs on those lines and expect the provision to be honored.

Thanks a lot, John.

Okay.

Thank you, the next question is coming from Tyler Dann with Banc of America Securities.

Please state your question or comment.

Yes, I guess I -- if I can have one comment, it might be interesting to see the sequential realization from quarter-to-quarter of the synergies and then in terms of my question, could you please -- I believe there is at least $600 million still on -- for the Dynegy investment on your books.

Is that accurate?

Or is it less or more than that?

Let me give you a little bit of information on the second item first.

And I will give people a little bit of history if it will be helpful on Dynegy on the investment value.

Prior to our writedown in the second quarter, our carrying value of Dynegy was $2.7 billion, which is a billion and a half in the preferred convertible and $1.2 billion in the value of our common stock.

And since you'll recall that back in the second quarter we took a writedown on a before-tax basis of about $700 million.

So, our carrying value was $200 billion coming into this quarter.

And the way the writedowns work, the carrying value of the common stock was about $700 million.

We record our equity share of Dynegy's -- in this case, losses and charges and the difference between where our carrying value is after we record those charges and the fair value at the end of the third quarter, which is $1.16 a share or $112 million is the additional writedown that we took.

So, the carrying value for the common stock is about $112 million at the end of the third quarter.

With respect to the preferred convertible, we had a relatively modest writedown in the second quarter from $1.5 to $1.3 billion.

It reflected the value of the preferred convertible essence as a zero coupon bond based on the yields that were present at the current time for debt instruments for Dynegy.

Obviously in the third quarter, what we've seen is subsequent to June 30, a number of ratings downgrades and impairment in Dynegy's credit worthiness and based on those changes over the course of the quarter, it's been deemed that the preferred convertible has undergone impairment its value, as well.

It's something other than temporary.

We've written it down to $300 million.

So, the total carrying value of our investment in Dynegy is the $300 million for the preferred convertible, plus $112 million for the common stock or $412 million.

That's a little bit of a long answer, but it is 412 versus the 600 you referenced.

That's as of September 30?

That's correct.

Okay.

And Tyler, let me address your comment, we take your comment and appreciate it.

We did show in slide 13 the synergy captured by quarter.

The incremental synergy captured is about $35 million.

We do not provide that in the conference call variance analysis because synergy is not a line on the income statement and the conference call variance analysis we do is based on our financials and is not analytically derived, we wouldn't be able to pull out synergies from the Op Ex or wherever it may be showing up.

But we're trying to give you the overall number and again, incremently versus Q2, you would have seen $35 million after-tax of synergy capture.

Thanks.

Next question, please.

Thank you, the next question is coming from Steve Pfeiffer with Merrill Lynch.

Please state your question or comment.

You know, I have a question not on the writedowns for Dynegy, but on the upstream, you took reserve revisions for Canada, Africa, and also in the U.S.

If you could just characterize the nature of what prompted the reduction, were these Texaco heritage assets, Chevron?

And related, but I think hopefully the same question; this part of your, you know, capital high grading as you look at what projects you're going to be investing in the future?

Thank you.

Sure.

The short answer to the question is that every year we go through a reserves determination process.

We have a reserves advisory committee that visits all of our business units around the world and conducts a fairly rigorous review to the changes in reserves both up and down.

And in this case, there were downward revisions.

It applies to both Legacy, Chevron, and Texaco assets.

In Africa, it happens to be a Legacy/Chevron asset.

In the U.S., it happens to be a mix of Legacy, Texaco, and Chevron assets that are the source of the writedown.

In essence, when there's a change, a down revision reserve, there is a test you go through under the financial accounting standards, and if, in essence, the undiscounted cash flows are less than the carrying value, a writedown to the net present value is required.

When you reach the trigger for an impairment, the writedown can be substantial.

Now, this case it also can be disproportionate to the amount of reserves written down.

So, in this case, the actual reserve writedowns were modest, but the financial effects were what were indicated.

The answer is that it is part of our annual review process.

As opposed to what I would call high-grading.

I will say, though, that the process of high-grading continues.

And for example, we had a couple of leases we relinquished in Brazil and our ongoing plans does, you know, our ongoing plans do high-grade the assets where we're going to spend money, et cetera.

But, as you know, we haven't yet had the -- we're still in the pooling period, we're about halfway through the pooling period and have another year to go.

And so, while we can divest moderate amounts of assets, we haven't yet made significant divestitures or high- graded, if you will, the portfolio at this point.

Yeah, let me just add a little bit.

You know, the largest impairment was related to, as John said, Chevron/Legacy field in Africa, [INAUDIBLE], and the Congo.

The reserve writedown is fairly modest, it is 11 million barrels.

If you add up the three largest impairments were triggered by reserve writedowns that totaled 22 million barrels, which, on our reserve replacements of last year of 1.2 billion is less than two percent.

I'd like to point out did not only John talk about the fact that the writedowns can be disproportionate because of the nature of the tests, particular with [INAUDIBLE], because it is a PSE and the structure of that, no tax offset.

So, the before tax writedown is, effectively, the after tax writedown.

Which makes the number seem larger.

Thanks, next question, please.

Thank you.

The next question comes from Arjun Murti from Goldman Sachs.

State your question or comment.

Thank you.

Gentlemen, my question relates to pooling versus purchase accounting, you've all used pooling for the Chevron/Texaco merger.

The only real benefit is to keep the capital lower which is important for valuation.

Given how far the valuation has fallen, you're in line with the domestic oils now, why would it not make sense to start a more aggressive asset sales program, which you might want to do, and I know that risks pooling, but how does it matter to the extent that your valuation has already fallen so far that the benefits for that return on capital number is not shining through anyway?

Well, the pros and cons of pooling versus purchase accounting, we could probably debate for some time.

I won't do it here.

What we are committed to maintaining pooling accounting on this transaction, whatever the relative merits might be.

I will say that there is some -- it isn't as though as we can't sell any assets.

We've chosen to be fairly conservative and not get close to the head room test that's are required.

There are four very specific and, frankly, fairly complex tests that we look at that determine just exactly how large the asset sales can be.

It is related to revenues, earnings, it's related to book value, et cetera.

And I made the comment that we haven't undertaken significant asset dispositions.

I think as we get closer to the end of the pooling period, you will start to see asset sales.

For example, we do have a moderate service station sales program going on in the U.S., that's a part of the normal rationalization, but our reason for being conservative is quite simple.

There are a number of transactions that might not be intuitive, at first, that can qualify as asset sales and use up some of the head room and you also at times don't have control over dispositions of assets and affiliates and the like that also count.

And so we have chosen to play it fairly conservative.

But the short answer is we've been committed to maintaining pooling accounting.

And the asset rationalization that we have taken, while it's perhaps less than will ultimately be the case, we have high graded our exploration portfolio, we have not been impeded from doing that.

There have been some shut down of redundant and uneconomic chemical facilities.

We have shut down two refineries in Latin America.

So, it isn't like we haven't taken actions, we have.

It is just we haven't engaged in significant dispositions at this point.

Thank you.

Thanks.

The next question is from Frederick Loufer with Bear Stearns and Company.

State your question or comment.

Hi, John, Pierre.

Hi, Fred.

Hi.

First, appreciate appreciate you for spelling out the offsets to the cost savings.

That's very helpful, I think.

My question is this, obviously there will always be offsets, but is it reasonable to expect that as the synergies build, that we will see an acceleration in the net benefit to the bottom line as we go through the next two quarters?

Yeah, I think that's right.

If you think about where we are now, where we've said year to date we've achieved savings of $500 to $550 million after tax and think through to when we've achieved all the synergies of $2.2 million and tax effect that, you would say on an annual basis, the impact will be, depending upon the average tax rate for all of these, will be more in the neighborhood of a $1.3 billion to a $1.5 billion after tax.

So, certainly as we accomplish all of these, and as you get a full year where all of the synergy benefits have been realized, the bottom line will be larger, correct.

And the other point was I make is that the masking factors we pointed out, as John said, you know, are impacting our peers and competitors, also.

Thank you.

Thanks, Fred.

Thank you.

The next question comes from David Wheeler with JP Morgan Securities.

Please state your question or comment.

Hi, John and Pierre.

The questions on gas trading, can you give color about reassuming the responsibility from Dynegy and what involves, and what are the costs of having to restaff to do so?

I can't tell you a great deal at this point.

What we did is put out a release that indicated that we were in discussions with Dynegy, and that the discussions were really at Dynegy's requests.

Dynegy, as many of you know, is exiting the marketing and trading business for a variety of different reasons, but they've chosen to exit it and determined that the GAAP contract really no longer has a strategic value to it than it did at one point.

And Chevron/Texaco showed an interest in taking that gas contract back.

So, they are discussions taking place as we speak.

Whether the two companies will reach agreement remains to be seen.

I don't have detail on the costs at this point because the discussions are preliminary.

Precise to say that that in essence, what we would get is, the gas back and the marketing revenue we would derive from that would need to offset the costs.

Our goal is really to make sure there is continuity in the delivery of gas to our customers.

Dynegy indicated they will maintain smooth operations.

They indicated that previously when they announced they were exiting the marketing and trading business.

And certainly it would be in Chevron/Texaco's interest to lower its ongoing exposure if the gas isn't, in fact, benefiting Dynegy.

And John, has it been smooth?

As you sit there and watch the gas getting marketed, have they done a good job as they've had their problems.

They've gone an excellent job.

In the storm activity in the past month, they've done an outstanding job of getting gas to customers and getting gas back on-line.

That's really testimony to Dynegy during a very difficult period where, as you have all read, they have many, many difficulties, not the least of which is employment security for some of the people in the gas business.

Thanks.

Thank you.

The next question is coming from Michael Young with Girard Klauer Madison Company.

Yes, good morning, John and Pierre.

John, I hoped you could clarify the swing in pension costs that you discussed in the synergy conversation.

Let me be specific; is there any way you can estimate what the change in pension cost is for the year 2002 versus what it was?

And if you could, you know, describe that number for 2001?

Yes, I can.

I can give you some of that information.

If you went back and looked in our annual report on, let me see, page 66, and if you have a reasonable understanding of pension accounting, which is not an easy subject, what you would see is in the year 2000 we actually had pension credits, in other words, negative pension expense on the order of $68 million.

And what I indicated earlier is that our pension expense in 2002 on a per-quarter basis is running about $90 million a quarter higher than it was in 2000.

What that means is that for the year, our before-tax pension expense will be on the order of $360 million higher that be it was in 2000.

So, it's a very significant change.

The increase versus 2001 is a somewhat smaller number.

It's more on the order of $50 million a quarter.

Or $200 million.

And again, once the annual report is out, you will see the detail of this.

But the biggest reasons for the change is -- it's really -- it's really two factors.

And it has to do with how pension accounting works.

One, we've been fairly conservative and we've lowered the actual assumed rate of return on pension fund assets.

We already at a low number for our U.S. plan of 8.75 percent last year.

We lowered it to 7.75 during the year and will lower it still further in the fourth quarter.

That return is also applied to a lower amount to the pension fund obviously because U.S. equities in particular have been hit very hard.

So, you have the case of a lower assumed return being applied to a lower balance in our pension funds.

The net effect is that amount effectively winds up showing up as increased pension expense.

Now, I wanted to distinguish pension expense from what we have to fund for our pension funds there.

Have been a variety of things published using a number of assumptions that may or may not be accurate.

In our case, we don't expect to have any funding, actual contributions to our pension fund, this year or next.

And we'll review 2004 shortly, but we don't -- unless some dramatic changes happen to our pension fund over the next six months, we don't expect to see funding in 2003.

So, that's a short course on a complex subject.

That was terrific.

Thank you.

Thank you.

The next question is coming from Matthew Warburton with UBS Warburg.

Good morning, guys.

Just a quick question on the downstream.

You took a charge against the Cal Tex Australia business in the quarter, obviously conditions have been tough in the market for several years.

Is that an isolated case or are you, as you have done in the upstream, re-appraising the current values of the Cal Tex assets?

It's a very special case.

The impairment tests that you make for companies that are publicly traded versus other assets are slightly different.

And Cal Tex Australia is a publicly traded company with a stock price, a fair market value, that is readily determined.

Cal Tex Australia has worked very hard over the last few years to make improvements in the business.

It is a pretty tough market for everybody that's involved.

In this case, although they've made some positive improvements, they've lowered debt, refinanced their debt, they've seen improvement in their Australian dollar earnings.

The net effect on their share price hasn't been enough to increase it over the carrying value that we have.

We've taken our carrying value for our 135 million shares from some $250 million down to about $120 million.

And that's the write-off that we referred to.

There is no tax impact of that.

I would describe that as a basis bit of a special case because it is a publicly traded company.

I will tell you, there are other impairment tests for assets not publicly traded am we regularly review upstream assets and downstream assets.

That's been an ongoing requirement, that was for Cal Tex, Texaco, or Chevron.

In this case, we've reached a conclusion, despite the many positive changes that have taken place for Cal Tex Australia, it's not showing up in the fair value and writedown is appropriate.

But it isn't as though we're -- I'm not trying to foreshadow other charges, but we do conduct impairment tests regularly for all of our assets in the upstream and downstream.

Thank you very much.

Sure.

Thank you, the next question is from Mark Gilman with First Albany Corporation.

State your question or comment.

Guys, good morning.

Good morning, Mark.

Good morning, Mark.

There were trade press comments regarding the development projects, suggesting that due, in part, to one resolved ownership issue, that development has been put back.

Can you comment on that?

Mark, I will jump in here, I mean -- first of all, I have not seen the trade press and Jay, prior to yesterday, you know, conducted some pretty wide-ranging interviews in Nigeria.

So, I saw a lot of press results on what he said and there was no discussion about [INAUDIBLE].

There was discussion about the emphasis in Nigeria being in the deep water and going to the gas projects.

That said, we have it as a 2006 start-up and that's where we've had it and, you know, we're working through the various issues that are out there, including unitization.

But this is what we do to get complex projects developed in various parts of the world.

I haven't seen the press reports you're talking about, it is hard to comment on them.

But there is no comment on our view that the project is 2006 time start-up.

It's not saying -- obviously, we're working through the steps that very to work through in this point in time.

I will pick it up with you offline.

Thank you.

Thank you.

Next is Timothy Gary with ARC Asset Management.

State your question or comment.

Thank you.

Two quick questions.

One, on the pension side; is there any likelihood that you will have to writedown equity as, you know, -- even though there is not any cash that's going to go on because the pension assets or liabilities on your books, the liabilities will be written up, or if you have a pension asset will be written down?

I'm not sure I follow completely what you're commenting on.

I will tell you that our pension fund, while outperforming the benchmarks that we measured against this year, it is down, along with reflecting, you know, the decline in equity values.

The way that reductions in the fair value of the pension portfolio will rachet through the accounts is such that I don't expect a writedown per se.

The way it works out, is you wind up increasing the pension expense both in the current year and on an ongoing basis to the extent that you're underfunded, but that happens over time.

So, I'm -- if it runs all the way through, there are some effects on other comprehensive income.

Which not P&L, per se, it hits the equity accounts.

That's what I'm referring to, you know, whether or not -- we've seen several companies announce rather large expectations with rather large hits to their equity account that will be run through the accumulated comprehensive incomes.

To the extent that the changes to other comprehensive income, you will see it in -- in our 10Q.

And we'll -- we'll certainly disclose something on that subject either in the third quarter or -- or fourth quarter as appropriate.

Okay.

And then as far as the -- the write-offs, the asset impairments that you've taken, how --

I'm sorry, I will try to honor the one question rule.

Sorry about that.

We can take it offline.

Thank you.

Thank you.

The next question is coming from Mark Flannery with Credit Suisse First Boston.

Please state your question or comment.

Hi,.

I'm also asking a question about the asset impairments.

Talking about regular reviews of both the upstream and downstream, it strikes me that since the first quarterly report, the fourth quarter of '01, it's been quite a lot of asset impairment reported by Chevron Texaco.

I wonder, could you give us a feel for, you know, should we expect another set of these in the fourth quarter or the first quarter or, what is your sense for the ongoing progress of potential asset impairments of this?

I guess I'd make a couple of comments.

First, your comment is fair.

We have had charges in the fourth quarter and continuing toward today.

I guess what I would tell you is if you go back and look at both companies over the last decade or so, we've had special charges that are both positive and negative.

And some of the positives that come through typically result from asset sales and things of that sort.

And we haven't had those lately because we have not been selling assets under pooling.

But during the course of a merger, I guess it is reasonable to assume that as we take a look at the combined companies that we are making choices.

Some of the writedowns that we saw have reflected those choices.

We talked a little bit that in the fourth quarter.

In the other cases, you have a fresh set of eyes that are looking at assets.

We also have changes in the character in nature of the assets based on the reviews that take place, whether it is reserves or the market conditions, whatever it is.

So, we have had write-offs predominantly in the upstream, but also in the downstream.

I would tell you that I don't -- it is not as though I'm withholding charges and planning them them for the fourth quarter, the charges that we've recorded are appropriate.

If I knew of other charges that were appropriate to record in this period, we would record them.

Having said that, because the business changes over time, we do have to continually review the carrying value of those assets.

So, I guess I don't know exactly how to answer your question other than to say we're taking the charges we've always been known to be relatively conservative in our accounting.

We're taking the charges when we think they're appropriate and we do have, you know, a different set of eyes looking at the business now than perhaps a year ago, given Cal Tex, Chevron, and Texaco, three separate companies coming together and changes in management over all assets.

Maybe the way to answer it would be to say how far through the review of the entire company do you feel that you are?

I mean are you moving through the company quarter by quarter, reviewing different sets of assets?

If so, how far through that process are we?

I will talk specifically about upstream.

That's the most systematic review that we have.

Last year in the fourth quarter, when we took charges, our reviews reserves process takes place in the second half of the year.

And we merged in the beginning of the fourth quarter.

So, we didn't go through what I would call one company process.

Both companies went through the separate processes.

So, this year is the first time we've been able to conduct the reserves review in the systematic way the company would expect to conduct it.

As you have seen there, have been changes that took place and writedowns associate we did that.

So, I guess I would say we've gone -- we're going through all the upstreams portfolio now.

We routinely review all assets in the carrying value and reserves each year and so we're working our way through the entire portfolio here in the second half of the year.

We also periodically conduct tests of downstream assets.

The test is a little bit different than in the upstream and we also conduct those reviews.

I think I went through the Cal Tex Australia and the specific nature of that one.

We have another writedown in the U.S. that we're not disclosing for commercial reasons, but I guess I would say we're taking a hard look at all of the assets in the portfolio.

We've wanted to take a year, because we can't sell assets of any magnitude in the first couple of years, we're getting a fresh look at the whole portfolio, seeing how the assets performed, trying to understand the businesses to the extent that they're new, very well.

And we've taken charges as appropriate.

I want to emphasize it's not my intent to have charges and write-offs continue.

But we have to record them when we see them.

Okay.

Thanks.

Thank you.

The next question is coming from Mike Mayer with Prudential Securities.

State your question or comment

My questions were answered, thank you.

We will take one or two more questions here.

Thank you.

The next question is from Paul Sankey with Deutsche Banc.

State your question or comment.

Hi, good afternoon, gentlemen.

First, to what you've been saying about synergy benefits and also the way that you've broken that out, can you tell me whether or not you're on track in terms of how that synergy benefit breaks down divisionly in the way you outlined?

And that is between upstream, downstream and other?

And further to that, can you talk about your returns by division to some of the targets you have both for downstream returns, international downstream returns, and wider group returns?

And how we're panning out, on some kind of divisional return on capital?

I made a comment earlier that the $2.2 billion target and the $1.8 we've achieved to date is roughly in proportion to the $1.2 billion we talked about earlier.

So, what we've realized is approximately proportional to what we've outlined for the segmentation of the total $2.2 previously.

With respect to return objectives for the company, we've made several comments on our [INAUDIBLE] and we said the linear combination of putting the two linears together and consolidating Cal Tex, Legacy, and Chevron, anyway, knocked it down a couple of a percent.

And the synergy would get that two percent back.

We have not given a specific [INAUDIBLE] target because with the changes in commodity prices that take place, et cetera, we continue to talk in terms of relative ROC.

We want to improve our standing relative to competitors.

If you look at the return on capital over the last few years, we've trailed our competitors between two and four percent on a return on capital employed and our objective is to close that gap, between the synergies and through the high-grading of the portfolio and better improved returns on projects going forward.

We have indicated a specific return on capital employed objective in the downstream business, where we have indicated that our objective is to get it into the 10 to 12 percent range.

Obviously with market conditions where they are today, returns in the U.S. and internationally are nowhere near that level.

But the improvements to the business are taking place, but with the industry conditions that we and others are facing, obviously we haven't hit those targets.

I can tell you we have in the U.S., in the past, achieved return on capital employed in that range.

The downstream, we've got a ways to go.

And we're working on it.

Okay.

I think we will take one last question, please.

Thank you.

And the last question comes from Paul Cheng with Lehman Brothers.

Please state your question or comment.

Hi, guys.

I have one comment and one question.

The comment is that Pierre, in the quarterly update since the market -- [ INDISCERNIBLE ] -- so for some of the one-time but non-predictable items such as the higher lease bonus expense or the FAS 133 market-to-market, that information, if you could provide would be very good.

On the question, John, given that the integration of the two company are now that pretty much done, at what point at the company will start to shift more to within the growth initiative, either through looking at acquisitions or a variation of the organic growth by higher capital spending?

That's a fair question.

I appreciate your comment on the Investor Relations supplement.

I will invite everyone to -- on December 19, we will publish our next IR supplement in a remote date and we've been enhancing that and thank you for your comments.

With respect to merger completion, when do we get into more of a growth mode, we will continue to report on the synergy and consolidation benefits until they're achieved. but I would tell you at the same time, you know, we have indicated that we're pursuing a world of strategy that's balancing improved returns with more growth.

Dave says we're not going to chase barrels, but talked about our production targets.

We have modest growth in our upstream business, more of a maintenance level capital in the downstream business going forward.

But I will tell you right now we have a sizeable portion of the organization that is very much devoted to growth.

We have a number of significant projects that are in the pipeline and developing.

We've really not only gotten our expenses down in the exploration area, but have high-graded the effort to go after the bigger targets in the deep water around the world.

So, I would tell you we're trying to strike the balance between improving returns, but having that profitable growth at good rates of return going forward.

But it's fair to say that as we get through 2002 and get into 2003, we'll have more of the organization geared toward building the business, and obviously less of the consolidation and systems implementation and things of that sort to deal with.

So, I think the focus will just become more weighted toward some of the growth projects.

It's a fair question.

Thank you.

Thanks very much and thank you all.

We will an available for other questions at our office numbers.

Thanks for listening.

Bye-bye.

Thank you.

This does conclude today's teleconference.

Please disconnect your lines and have a wonderful day.