雪佛龍 (CVX) 2003 Q2 法說會逐字稿

I'd like to welcome all of you to our 2003 security analyst presentation.

It's a pleasure to be here in New York City even though I understand it's been pretty wet here this year.

I'm joined today by John Watson, our CF, who's (technical difficulty);

Pat Yarrington, our Vice President of Public and government Affairs; our Controller, Steve Crowe; and our IR people, Pierre Breber who will be leaving to go on to another job within the company following this meeting and his replacement Randy Richards.

So I hope you get chance to visit with Randy and get to know him while you're at this meeting.

I'm going to start by reminding you that today's presentation contains estimates, projections and other forward-looking statements.

Please review the Safe Harbor statement on the slide, and while you're doing that I'm going to cover the agenda that we plan to cover today.

We're going to offer you a brief but comprehensive update on ChevronTexaco as we head into the second half of 2003.

If we don't cover something that's important to you, please ask me during the Q&A.

Or contact our IR team following the meeting.

Randy and Pierre will be reachable by phone and also here at the hotel all afternoon for follow-up questions.

This morning we're going to first look at our first-half performance, strong performance, and John Watson will walk you through that.

Next we'll visit our strategic framework that shapes the company and guides our actions, and then we'll update you on the key strategies for our upstream business, our gas business, and our downstream business and the implications for our portfolio.

Before turning it over to John I'd just like to cover some of the highlights.

We've delivered strong financial performance in the first half of 2003 and achieved a number of important strategic milestones as well.

These are shown in more detail in your books.

In the upstream we've had successful major project startups.

We've also sanctioned important future projects and continue to deliver excellent exploration success, particularly in the deepwater.

In the area of gas, we've restarted our natural gas and marketing group in the U.S. and made important additions to our global gas portfolio.

Our downstream has delivered strong performance and announced a restructuring that targets even further business improvements.

We've also announced and made some good progress in a number of asset sales.

And as we start the second half of the year, we're in excellent financial shape with a debt to capital of less than 20 percent -- 28 percent.

And now let me turn it over to John to cover second-quarter results.

John.

Thanks, Dave.

Good morning.

It's nice to see all of you again.

Today we did report second-quarter earnings of $1.6 billion or $1.50 per share.

This quarter's results included special items of $117 million, mainly from losses on anticipated sales of certain assets, and foreign exchange losses on $157 million from the continued deterioration of the U.S. dollar against major functional currencies.

The combined impact of these items was 26 cents per share.

We're pleased with this quarter's results and the results for the first six months of the year.

As many of you know, accounting rules dictate the timing of gains and losses on assets that may be disposed of.

For now I'll just note that we're generally required to record losses in advance of an actual disposition, while gains are not recorded until a transaction occurs.

This quarter includes net losses for U.S. upstream fields which we intend to sell.

We expect to record gains from other U.S. property sales in subsequent quarters that will substantially exceed these losses.

I'd be pleased to address any detailed questions you might have on accounting related to asset dispositions after Dave's remarks on our portfolio.

The press release compares second-quarter earnings to second-quarter earnings of last year.

My remarks this morning on the next set of slides will compare this quarter's results to the first-quarter of this year.

This chart shows a source of the changes in reported earnings between quarters, the net impact of special items including the impact of adopting a new accounting standard in the first-quarter and foreign exchange gains and losses were roughly offsetting.

Earnings declined more than $500 million due to lower oil and natural gas prices.

Partially offsetting were higher upstream volumes and higher U.S. downstream margins and volumes.

Strong underlying performance in both quarters contributed to the best back to back financial performance for the company since the merger closed.

In the U.S. upstream earnings were roughly flat.

The absence of the first quarter charges associated with the adoption of the new accounting standard governing abandonment costs had a favorable impact between quarters.

All of the factors worked to reduce earnings.

Of note, West Texas intermediate oil prices were off $5.00 per barrel and spot natural gas prices were down $1.25 per Mcf at Henry Hub.

Also, FAS 133 charges reduced earnings.

As the forward curve for natural gas prices increased significantly during the quarter, this curve is used in marking to market certain contracts that are treated as derivatives for accounting purposes.

Outside the U.S., upstream earnings were off sharply.

In the first-quarter we had favorable impacts from the adoption of the new abandonment accounting standard that we didn't have this quarter.

The largest impact between quarters was from the decline in oil prices, about $3 million, as you can see.

Higher liquids lifting, including bitumen production in Canada, increased earnings.

Higher operating expenses due to the weaker U.S. dollar and higher workover costs, and a few other smaller variance items, lowered earnings.

Worldwide oil and gas production, including other produced volumes, increased about 1 percent.

U.S. liquids and gas production decreased in part due to natural field declines.

Tropical Storm Bill and property sales had very little impact on U.S. production in the second-quarter.

About 20,000 barrels a day of oil and gas production was shut it on average during the month of July, however, due to additional storm activity, this production is largely back online now.

Production decreased in Nigeria due to civil unrest.

Production in certain on shore areas of Nigeria continue to be shut in due to safety concerns.

Oil and gas production increased in Indonesia due to higher cost recovery barrels, and in Venezuela at both Hamaca and Boscan as operations returned to normal following civil disruptions.

U.S. downstream earnings increased on higher margins and volumes.

Gasoline margins increased on the West Coast in part due to industrywide refinery outages.

Jet and diesel fuel margins decreased nationwide due to weak airline demand and high inventory levels.

Volume increases occurred in both our refining and marketing operations.

Refinery utilization increased following planned shutdown activity at our Pascagoula refinery in the first-quarter.

This enables us to increase light product production.

In addition branded gasoline and other sales volumes increased seasonally.

International downstream turned in another solid quarter.

Earnings were about $250 million in both periods.

We experienced little net net impact from margins as refinery margins were down but marketing margins increased.

An unfavorable swing in foreign exchange was offset by all other items including a change in inventory due to crude pricing effects.

Chemical was also improved due to higher olefin margins.

Gasoline prices increased while feedstock costs dropped.

The other bar is down from lower earnings in our (indiscernible) additives business.

The all other segment, which is not shown on this chart, was roughly flat as lower earnings from Dynegy were offset by a number of items including lower interest expense, lower corporate costs, and a couple of tax items.

That's a very quick review for the quarter.

Now I'll turn it back to Dave.

Thanks, John.

Let's step back a moment to look at how we got to where we are today.

This is our third analyst meeting since the merger closed.

We've completed the evaluation of our portfolio and we're moving to focus on the assets that fit our strategies.

And as John just reported, we're now delivering strong financial performance.

And, as I'll detail in a few moments, we're making progress in every business segment.

In sum, the company we introduced to you 22 months ago works and works well.

It can work better, of course, and it's going to do that.

Our vision and values are critical to us.

Earlier in the process we worked hard to shape a vision that would unify our employees.

We wanted to be admired not just for the goals we achieved but also for how we achieved them.

Our priorities are well considered and constant, we do what we say we will do.

If our performance does not meet our own high expectations, we take responsibility and work to improve.

We conduct our financial reporting to the highest ethical standards, and we strive to provide clear and transparent analysis of our results, as John just did, so that you can make your own judgments of both our absolute and relative performance.

I was very pleased earlier this week to hear that ChevronTexaco was one of only 17 companies out of 1,600 companies that were given the highest rating by Governance Metrics International, an independent governance rating industry.

Over the long-term, a company that consistently demonstrates integrity, stakes its success on people, works sincerely to be the best partner it can be, and performs as it says it will perform, that company will succeed.

And I think ChevronTexaco is such a company.

Now we know that won't happen by chance.

We're creating world-class organizational capability in the four areas shown above the green bar on this slide.

We're building a culture that's rigorous and disciplined, if you talk to us in a year you're going to hear about these same priorities.

It takes time to do this light and to make it sustainable.

We're committed to running our business just this way for the long haul, to grew value in the company.

Over time the best measure of value creation is total shareholder return.

And when I became CEO I told you that our primary corporate objective is to be number one in total shareholder return relative to our peer group.

And we're going to get there by increasing our returns on capital to a competitive level.

This slide shows the company's returning capital employed versus the peer group for the last five years based on the standard definition of return on capital employed using both GAAP earnings and earnings excluding special items.

By either measure we trailed our competitors.

On a reported earnings basis we had too many write-offs and other large charges, our returns were 8.5 percent on average, and we trailed our competitors by 4 percent.

Excluding special items our returns were 12 percent and we trailed our competitors by a lesser amount, about 2 percent.

This is a gap I told you about at merger time that I wanted to close by improving our returns 2 to 3 percent through merger synergy, capital efficiency, and portfolio management.

We delivered $2.2 billion in merger synergy quickly with the full-year effects coming through this year.

Some of the synergy was masked by inflation and higher employee cost, factors that impact ChevronTexaco and our competitors.

We rationalized our capital program, cutting average spending by $2 billion annually.

The results of the investments we are making will be judged in the years ahead, and I'm confident that we're making better choices.

And today we'll talk more about our plans to focus our capital and resources on the areas of strength in our portfolio.

To increase returns and grow the value of this company, we have identified clear strategic imperatives for each of our business segments.

We'll grow upstream earnings in our base business and build new core areas.

We'll build a global integrated gas business that targets attractive markets and commercializes our large gas resource base.

And we'll improve downstream the turns by focusing on areas of market and supply strength.

Let's start our business segment reviews with upstream.

Last June of last year when Peter Robertson met with you and discussed his plans to grew value in the upstream built around strategies on this slide.

A significant area of focus for us is to identify and develop new large-scale business opportunities as well as improving returns on our base business.

We recently hired Sam Laidlaw to lead the business development effort.

He brings a wealth of industry experience to this new position.

And his efforts are focused on the upstream and two resource rich areas, the Middle East and the former Soviet Union.

Our near to mid-term focus is on maximizing the value of the opportunities we have already captured in our portfolio.

In our base business we are targeting a 2 percent reliability improvement over the next two years and our focus on achieving best in basin operating costs.

With our major projects we are committed to superior capital stewardship including execution.

Let's look at our base business on the next slide.

Our production is focused in the areas on this chart.

These are large, resource rich regions where we have very competitive positions.

Typically one of the top three producers in the area.

For example, we're number one in Kazakhstan, one in Angola, number one in Indonesia.

We're the only international oil company producing in the neutral zone between Kuwait and Saudi Arabia.

And the largest holder of uncommitted gas resources in Australia.

In the U.S., we're number one in the Gulf of Mexico shelf, number one in the San Joaquin Valley and number two in the Permian Basin.

By having these large positions, our operations are low-cost and efficient, and our investment opportunities have better economic returns.

Almost 95 percent of our production comes from these regions, and virtually all of our 2003 capital program targets these areas.

At the same time we're high grading our upstream portfolio.

We have a history of extracting maximum value from mature fields by selling them at the right time.

Given our global investment alternatives, we are better off redeploying that capital into higher value opportunities if the fields are worth more to someone else.

We plan to divest the Company's interest in about (technical difficulty) in North America, almost one-third of the total.

And in addition, we intend to sell interest and UK North Sea fields that are not part of our core asset positions.

We've already announced the sale of our interest in Papua New Guinea.

Total production from these planned asset sales is about 115,000 barrels a day, 115,000 barrels a day.

There are other modest upstream assets that we have decided are also non-strategic, but we're not prepared to disclose them at this point for commercial or other reasons.

Not all of the regions on this slide have the same growth prospects, some are more mature than others, but all have the potential to grew value.

The U.S. is a good example.

We're expecting our production in the U.S. to decline by about 6 percent per year.

We are spending less capital and we will sell mature fields that are worth more to others.

Significant production from a development like Tahiti will obviously help mitigate the decline, but that won't change the nature of the U.S. upstream business.

At the same time, we have a track record of delivering the leading upstream ROCE in the peer group.

Our sustained leading financial performance over the cycle is the result of a robust portfolio, prudent capital stewardship, and a focus on managing value and costs.

We like, for example, our number one position in the Gulf of Mexico shelf.

We managed and monitor our investments closely with frequent look backs on fast payout projects, we know that our investments are adding value.

The shelf is an important contributor to our financial performance in the United States.

In the mid-term, our growth in earnings and barrels will be driven by our major upstream capital projects.

These projects are concentrated in the six areas shown on this map.

These are areas where we have a large existing production, infrastructure and/or long-standing relationships.

This slide shows our major upstream capital projects.

They are phased within our capital management process, expected year of startup, and projected cumulative annual production.

We have a strong portfolio of long lived, high return growth projects.

Projects like Chad-Cameroon where production is expected to peak at 225,000 barrels a day, and Hamaca where the upgrader is expected to be online next year at a capacity of 190,000 barrels a day.

We're applying greater capital discipline to all of these projects.

For example, we're conducting rigorous peer reviews where teams from outside the business units independently evaluate the opportunity.

And if necessary we'll move a project back a phase in the process.

We did this at Agbami, and the project team stripped out capital cost of almost $1.00 per barrel by designing an alternate plan.

Four significant projects, Tengiz expansion, Benguela Belize, Agbami, and Tahiti are slated to come online in the 2006/2007 timeframe.

Our net share of production from these projects peaks at about 400,000 barrels per day.

The Tengiz expansion is under construction and production is expected to increase Tengiz throughput to 500,000 barrels a day in 2006.

Benguela Belize in Angola is also under construction and expected to start up in 2006.

Along with its satellite development at Lobito and Tomboco, total production from that development overall is expected to peak at 200,000 barrels a day.

Tahita was discovered last year and appraisal wells have confirmed our initial recoverable reserves estimate of 400 to 500 million barrels of oil.

We are planning a production test well early next year and first production in 2007.

Agbami achieved a major milestone recently when the partners signed key commercial agreements which enabled the start of the project bidding process.

Production is expected to start up in 2007 and peak at 250,000 barrels a day.

Our major capital projects drive our long-term volume growth.

During the next two years our production capacity net of asset sales will be flat to up a little, before growing more rapidly as major projects come online particular in 2006 and 2007.

Our production growth is back-end loaded, but it is underpinned by the four major projects I just discussed.

Two of these, Tengiz and Benguela Belize, are already under construction.

Agbami is requesting project bids, and as a U.S. project he can be managed on our timeline.

I'm confident in our ability to deliver these projects on time and on budget, driving strong growth in the out years.

We have a history of growing production and growing reserves.

However, given the uncertainty in our business, we cannot predict our production out five years from now with great precision.

At the same time, we believe how we invest the 6 to $7 billion of annual upstream capital is more important and an even bigger lever on growing value.

With all that said, we expect industry demand for oil to increase by 1 to 2 percent a year and gas at a slightly higher rate.

And I anticipate that our production capacity will grow in line with these rates over that time.

Turning to exploration, our program has been delivering great results.

This was an area of top priority at the time of the merger, and I'm pleased that we've made so much progress.

Our program is focused on the deep waters of the Gulf of Mexico, Nigeria, and Angola.

We are the largest holder of deepwater acreage in Nigeria and among the top few in the deepwater Gulf of Mexico.

In Angola, we were the first to bring deepwater production online and now have 9 discoveries in Block 14.

We also have important test areas for our exploration program.

These are areas where we hope to have major success and turn them into focus areas, and if not, we will exit them.

By being more focused with exploration, we are spending less money and having more success.

Our total exploration capital budget for 2003 is about $1 billion.

That's down about $500 million from premerger levels.

Some of our recent successes are shown on this chart.

We like having wells with twos or threes next to them.

As with Hollywood movies, you need to have some success with the first one in order to produce the sequels.

More importantly, this successful appraisal activity confirms the extent of our recent discoveries and helps optimize development plans as these discoveries mature into projects.

We have important appraisal and exploration wells to come later this year.

We will keep you apprised after these wells have been drilled and evaluated.

Another part of our exploration budget is focused on lower risk delineation drilling, primarily in the Gulf of Mexico shelf.

This activity has high success rates and quick cycle times from discovery to production.

A good combination in this strong U.S. natural gas market.

Our exploration team is committed to fully competitive metrics.

In 2002, our cost of finding was below our $2 per barrel target.

Also, our exploration expense was around $600 million in 2002, down about $400 million from premerger level.

Year-to-date, our exploration expense is on track with last year's performance.

We have a consistent, long-term strategic focus on the upstream, a stable capital program, a commitment to improving capital efficiency, and a broad and deep portfolio.

This has resulted in strong historical performance.

During the past five years, Chevron Texaco has led our peer group in growing reserves.

We have added more than 10 percent to our proved reserves base during this period.

And we've done this at a competitive cost, about $4.50 per total cost of finding, development, and acquisition.

Growing proved reserves leads to future production, and delivering production at low cost enhances returns.

While we have been growing our reserves, we also been adding to our resource base.

The resource base shown here conforms to the Society of Petroleum Engineering industry adopted definitions of 6-P (ph) resources, including contingent resources.

We have a very large resource base, about 50 billion barrels of oil and gas equivalents.

It's grown over the years as we've made discoveries and additions to our portfolio.

A large part of our unproved resource base is about 100 Tcf of natural gas, which includes over 40 Tcf of gas in the greater Gorgon area.

We're committed to accelerating the development of the company's gas resource base into reserves and production.

Let's turn to the gas business.

We already have a substantial gas business globally with production on every continent, with particular strength in North America.

Building off this base we plan to grow a global integrated business that has an initial focus on the U.S. as a major market and will position us to build global capability in LNG.

We've added John Gass to our senior management team to lead this effort.

John has an extensive background and deep understanding of the natural gas business in addition to broad commercial and operational experience.

As a previous managing director in both Australia and Angola, John has direct experience on the successful northwest shelf venture and the development of the potential of Al Angola LNG.

We are managing our gas business within the Pacific and Atlantic Basin strategies with the U.S. and Asia as primary target markets.

With the termination of our gas sales agreement with Dynegy, we re-established our gas marketing presence in the U.S. during the first half of the year.

And this effort has been fully operational since April and is already rapidly emerging as a major player in the market.

Our Pacific Basin strategy is anchored by our huge resources in the Greater Gorgon area with over 40 Tcf of gas.

We are aggressively pursuing development of the Gorgon Fields and currently expect a site decision by the end of the year.

The target customers for Gorgon gas are the traditional markets in Asia.

In addition, we continue to work to develop a North American West Coast regasification terminal and are making good progress in evaluating two site alternatives.

Our Atlantic Basin strategy is anchored by the Port Pelican regasification project in the Gulf of Mexico which is expected to secure its U.S. government permits by the end of the year.

We expect that Port Pelican will be the first offshore regasification terminal permitted in the United States.

Poised for delivery to our terminal are our large resource bases in west Africa and our growing position in the Caribbean.

Earlier this year, we added Plataforma Del- tana block offshore Venezuela with an existing gas recovery to our portfolio.

And while LNG is the primary focus of our gas business, we continue to pursue regional pipelines and focus development of gas to liquids projects through our joint venture with Sasol.

We have been working down the capital cost estimates for our Escravos gas to liquids project in Nigeria and expect to award construction contracts next year.

I know this chart contains a lot of data, but these specific milestones and activities show the level of work and activity in our gas area.

Let's turn now to the downstream.

Last June, Pat Woertz had ambitious ROCE goals of 12 percent in the U.S. and 10 percent internationally by 2005 at midcycle conditions.

She also discussed our strategic plan to achieve these objectives by reducing costs and focusing on attractive markets where we have leading positions and advantaged supply.

As this map shows, we are focusing on our areas of strength, the U.S.

West Coast, Asia, and the U.S.

Gulf coast/Latin American region.

In all of these regions we have strong brands, advantaged supply, and top market shares.

For example, we're number one in the West Coast add five region of the United States.

California is one of the largest gasoline markets in the world where margins have historically outperformed the U.S. averages.

We're number two in South Korea, and number two overall in South East Asia.

We know it's tough in Asia and has been tough for some time.

But we are managing our company to create long-term value.

We've looked at the alternatives there and we aren't willing to give away high-quality assets in growth reasons.

We expect long-term refined product sales to grow in the export driven economies of Asia along with growing populations and income levels.

We're number one in the Caribbean and have an (technical difficulty) around our refinery at Pascagoula on the Gulf Coast.

We also have a strong business in sub-Saharan Africa supported by our refinery in Cape Town.

And although this business is small, it generates robust returns and the Company has a long history of operating effectively in the area.

We've decided that our refining and marketing interests in Europe and Australia are non-strategic.

Where we market we want to have leading positions.

This chart shows that we have a top three market share in almost three quarters of the markets in which we participate.

And we decided that about 20 market areas are non-strategic, including our retail marketing interest in Europe, Australia, the Andean countries and the Middle East.

At the same time, we are realigning our service station network taking capital account of about 1500 sites around the globe.

We'll be selling company-owned or leased service stations to dealers and jobbers, about 550 of these are in the United States with another 900 being offered in Asia and Africa.

Our refinery network aligns well with our marketing focus.

Almost three-quarters of our capacity is in North America and the export oriented economies of Asia including South Korea, Thailand and Singapore.

Our goal is to make all of our core refineries in Asia and North America top tier as measured by Solomon Data.

One way of doing this is by producing more high-value products, gasoline, diesel and jet.

In North America over the last five years we've added 50,000 barrels a day of high-value production without any significant capital upgrades.

This increase is due almost solely to increased reliability and utilization of existing assets.

Last year, we converted our Guatemala and Panama refineries to terminal operations.

And at the same time as hydrating our refinery network, we decided that certain other refineries are non-strategic including our Batangas refinery in the Philippines.

Earlier this year we announced the sale of our El Paso refinery and we expect that transaction to close soon.

Achieving top tier performance in our refinery network will be greatly facilitated by our new functional organization.

Let's talk about that for a moment.

At the time of the merger we took the operations of three legacy companies in the downstream, Chevron, Texaco and Caltex, and organized into four regional refining and marketing businesses and four global businesses as shown on the top of the chart.

We saw the opportunity in forming global businesses and, in fact, last year at our meeting we highlighted our successful lubricants business as an example of how this worked.

However, at the time of the merger we were committed to a rapid and smooth integration and we didn't feel the organization was quite ready for globalizing all of the functions at the same time while we evaluated the portfolio.

Now that almost two years have passed, we are ready to take the next step.

As announced earlier, we are restructuring the downstream into a much simpler, global, functional organization to reduce costs and drive efficiency improvements.

This chart shows that our downstream restructuring targets $500 million in before taxed savings and earnings by 2005.

More than two-thirds of this is reduced operating expense.

By going from a regional to a global structure we are reducing overlap and management layers.

In addition, we are initiating cost reduction programs at all of our wholly-owned refineries.

We are targeting a further 2 percent increase in refinery utilization by achieving top tier performance in plant turnarounds and other operational improvements.

Our new centralized supply and transportation organization is targeting a more economic crude slate, lower transportation costs, and increased system efficiency.

In summary, we are transforming the downstream into a leaner, more efficient business.

Building off a strong financial performance earlier this year, these business improvements that we are talking about should put the downstream on its way to its goals of 12 and 10 percent.

We've now covered the major areas of the portfolio upstream, downstream and gas.

And before I turn to your questions, I'd like to leave you with a few thoughts.

We want to build a highly competitive set of businesses, businesses that are cost competitive, generate strong returns and have growth potential.

We don't have to be everywhere, however, where we are we want to be big and to be able to compete effectively.

And in most places where we compete, we either are or plan to the number one, two or three.

By focusing the portfolio we are investing in our most competitive businesses, the ones that will earn the best returns over time and grow shareholder value.

Our portfolio choices are consistent with our macro views.

We will continue to be heavily weighted to the upstream and particularly growing our international upstream business, and this has been our strategic direction for more than a decade.

We are building a global gas business predicated on our bullish view of North American natural gas markets where we are the third-largest producer today.

And our company's strong resource base overseas.

Our downstream will be smaller and focused on the U.S.

West Coast and Asia.

We like these markets over the long-term.

And we expect you to judge us on the choices we make, and I feel good about these choices.

Not all of our businesses that have leading positions are likely to be competitive.

As I've discussed today, we decided certain assets are nonstrategic.

These include mature production fields in North America and the North Sea, our European downstream operations and over 1500 retail stations across the globe.

For commercial and other sensitive reasons I won't identify the other non-strategic assets specifically today.

We will prudently limit future capital investments in our noncore assets while evaluating various alternatives and assessing the marketplace.

Over time, these assets may become candidates for sale or they may be retained in our portfolio and managed for cash flow.

During the next few years, we expect to be selling $1 to $2 billion worth of assets every year.

And this is in line with the historical asset sale averages for the companies prior to the merger when we had consistent and significant asset sales programs.

Our commitment to hydrating the portfolio is strong, and we'll do so in a way that maximizes value.

I'd like to wrap up with our dividend increase announced earlier this week.

This increase extends our record to 16 consecutive years of higher annual dividends.

It also sustains our dividend leadership position within our peer group.

Our policy is to increase the dividend consistent with the growth in earnings and cash flow.

Our financial performance this year has been strong and we are bullish on the company's future prospects to grow earnings and cash.

Dividends are our preferred method of returning cash to shareholders, they are consistent and provide a constructive disciplining factor on the Company and the organization.

At the same time we are not opposed to share buybacks.

We have done them in the past and are prepared to do them again in the future under the right conditions.

Today, we've talked a lot about how we intend to grow value of the company by focusing the portfolio, strengthening our performance, and investing in profitable growth opportunities.

The market will be the ultimate judge of our success.

And that's why we show this chart every time we meet with our management team and every time we meet with you in the financial community.

We have delivered strong financial performance this year.

We have clear strategies in each business segment and a strong focus on core assets, and we remain committed to increasing our returns on capital employed.

And I'm confident that we will create long-term value for the Company and its shareholders.

Now that concludes my prepared remarks and John I will be happy to take your questions.

In order for each of you to get a question, I think what I'd like to do is have -- take one question at a time.

We have some people with microphones in the room.

And because there are people listening in on the Web, I would really appreciate it if you would identify yourself when you get the microphone so that the people that are listening in know who's asking the question.

We've got a number in the front here.

How about here -

Thank you, Dave.

First, just wanted to thank Pierre for all his help over the years.

I am personally sorry to see him move on, though happy for him that he doesn't have to talk to the likes of us anymore.

Regarding your global gas business, your mix of gas as a percent of your assets is below some of the other super majors, you've got a number of projects you're pursuing that look good, but most of them, the impact it seems will be felt towards the end of the decade.

You mentioned you're bullish on North American gas, are you considering or willing to take the steps necessary to accelerate the mix of gas as a percent of your assets, or should we assume this sort of organic strategy over time will follow that issue?

And related to that, how are you seeing Dynegy given the evolution of that company?

Let me just answer the last piece of that first.

And that is obviously in the gas business we've taken the gas marketing business back because of the issues of Dynegy last year and their inability to really finance their presence in that market.

So, in fact, I think in retrospect having done that that strengthens our position in the U.S. because we're already back to the market actively and we have, as I said in the remarks, we are the third largest producer of natural gas in the United States.

I think you're going to see a combination of organic growth, like you mentioned.

This is a long-term business, it does take time to develop the assets, like you've said.

I think the key issues for us in the acceleration mode would be the permitting issues around regasification where we're quite far along in the Gulf of Mexico, we're the first to file for an offshore permit in the Gulf of Mexico.

And that gravity based structure, if it's permitted, could be on stream with in three to four years.

It's just a matter of when the permit comes.

Clearly, getting access to the market is the critical issue.

We have the resources, and that's what's going to drive the development of these resources.

So in the case of North America, it's getting a gateway into the market.

And then in the case of Asia, it's a question of kind of broader market access, not just a gateway, you've got to develop the market as well as figure out how to get it there.

So I think the North American piece in a sense could move somewhat faster than the Asian piece if we can achieve these milestones that we've set in our plan around the gateways.

(inaudible)

No, we know we have the gas.

You saw the PCS.

A lot of the unproven PCS are there, it's the commercial development that's going to drive the development -- the time factor.

Paul Balting of UBS.

You talked briefly about the preference between dividend and share repurchasing.

A lot of oil companies have made a lot of announcements regarding those two issues recently.

With your dividend already fairly high compared to some of the other integrated oil companies, and your debt level at very low levels, and you talked about various conditions that's going to be required for you to consider share repurchasing, can you layout for us just exactly what are those parameters you're looking at?

What are the parameters you're considering for you to look at future possibility of share repurchasing?

In general terms, and I'm going to ask John to amplify this.

He's the guy that makes the recommendation here.

I think we would have to be satisfied that we would have a significant and sustainable cash situation to pursue dividends -- to pursue share buybacks.

And it's our judgment right now that -- with the tax law changes, you've got about -- for long-term holders you get about the same tax consequences of both.

But as I said, if we determine that the conditions are ripe and if our Board approves it, I would think we would consider doing it if we felt we were going to sustain it for a significant enough period to make it meaningful.

And, John, is there anything you'd like to add to that?

I'll just make a couple of comments.

Our debt to debt plus equity ration, we've worked it down over the course of the year, Dave mentioned it's 28 percent.

If you look on a net basis it's at 21 percent now.

So we have made good progress and have been generating good cash.

Obviously commodity prices have been strong and are higher than they might be on a sustained basis.

Our forward planning is for lower commodity prices.

If you really look at our share repurchase program, the benefits of it, those that have benefited from them really have had them of some size and duration so that you can sustain them.

And we want to be confident that if we still have them we can complete one that would be of some magnitude.

At this point, we're content to continue to reduce our debt or net debt to capital employed -- to capital ratio over time.

And frankly, we want to get a look at our three year business plan that we're putting forward here in the fall, and get a look over time and take a look at the capital commitments that we have and the balance sheet.

We're not adverse to share repurchase, we've done them in the past and we're willing to do them in the future.

But at this point, a strong dividend policy seems to be the best for us and we'll evaluate it later in the year.

Mark Flannery, Credit Suisse First Boston.

You mentioned a capital program of $6 to $7 billion in the upstream.

Could you comment on whether or not that you think that's going to be enough over the next few years given the amounts of very large projects you have, and particularly moving into a big -- a gas business which tends to be capital intensive at the front end, at least in the LNG side?

Well, based on our current assessment of the next few years, we see our budget being approximately the same level as we have this year, which I think is about -- the total capital is around $8.5 billion.

We don't see it varying much from that.

And we've built into that certain assumptions about the gas business.

Now, if we were fortunate enough to get earlier permitting of some things than we anticipate, you could see some little unevenness on the front end.

That would be good news, frankly.

But we think the budget level is going to be about the same based on our own current assessment, and we're committed to putting everything through a very rigorous assessment before we commit ourselves to moving forward.

Charlie Ober (ph), T. Roe Price (ph).

Could you remind us of the midcycle conditions under which your return on capital employed targets are derived?

And it appears that about 12 percent of your portfolio is nonstrategic.

What's the ROCE under midcycle conditions or normalized conditions for that portion of the portfolio?

I'll have to answer the second part of your question somewhat indirectly, but let me answer the first part.

Our long-term view of oil and gas is around low 20's, 20-21 for oil, that's WTI, and 350 for gas at Henry Hub despite the current $5+ range or $4 to $5 range we've been experiencing recently.

The long-term view is what drives our major capital decisions.

Naturally in the near-term, our near-term cash flow projections are based on somewhat higher gas and oil prices.

This year we were using $4 gas and we've had a pleasant upside to that, and $24 oil, and that's been surprisingly strong as well.

Now on the midcycle conditions, the nonstrategic part of the portfolio, exiting the nonstrategic part of the portfolio would be modestly return accretive.

So that part of our portfolio amidst (indiscernible) conditions earns less than the average return that we have in our portfolio.

Fred Leuffer, Bear Stearns.

You've taken steps to cut $2.2 billion in cost out of your system, there have been a lot of offsets to that, I think you've promised to get 400 million to the bottom line.

But it doesn't look like in the first-half we've seen that yet.

So can you address the timetable to get those costs to the bottom line?

And exactly what happens to get them.

I realize there are merger-related costs that creep in even well after the merger is completed.

So either what incremental costs are cut or which merger-related stop to allow you to achieve that?

The merger-related costs after the first quarter, Fred, are very nominal.

And I think they are really insignificant to your question.

The first-half of the year, there were three major incremental or additional costs that went very, very high relative to even last year.

The first is natural gas prices have been higher than last year and that's taken a significant hit.

Shipping costs which we report as an expense in our cost structure but also frankly make some money on the ships and the chartering themselves were at the highest levels in sometime.

That was a very significant expense and pension expenses again are higher.

So you combine those expenses, that was 3 to $400 million of my recollection in the first-half alone.

If you look at our progress if you project our cost you would expect the costs to be even higher when you add in other employee costs to be higher because wages and salaries are up by 3 to 4 percent, medical costs are up by 7 percent.

You don't see those coming through in our cost structure because they have been overwhelmed by some of the synergies that we're achieving.

I think you will notice in particular you are starting to see improvements in our downstream operations and the cost structure that are flowing through particularly on the international side.

So we are seeing evidence of our costs improving even though it may not appear to you as an observer from the outside in.

I just want to add something.

You are planning on $400 million and I talked about that last quarter, what we talked about is the 2.2 billion dollars in synergy that we captured is on a run rate basis going forward.

And the full-year effects 2003 versus 2002 as some of the improvements that occurred late in the year in 2002 are being felt this year in our results. (indiscernible) Talked about some of the offsets but the benefits from the synergy we're getting, it's been difficult at times to see those in the results.

I guess the best way to look at it is on a relative basis and while its early days if you look at the first six months of the year based on a quick analysis we've been able to do was six-month results for us and our competitors, you do see that the ROCE (ph) Gap is narrowed just a little bit during that period.

It's obviously early days but frankly relative results are going to be a better measure because there are a lot of changes that take place since this synergy goal that was put out that affected us and our competitors.

Most of the items Dave talked about have impacted our competitors at least as much as they have us.

So the synergy is there, in some cases there are offsets to those as Dave described.

We are going to go to this side for a minute, and come back here in a second.

You said it has been more of a long-term view not in terms of your synergies or anything else, clearly everyone knows that Middle East and Russia area for the entire oil business including you and historically Chevron has been able to take some courageous bets, within Geece (ph) for example.

If you look out five to seven years for you who could take a longer perspective, given the risk profile how much of your capital employed is appropriate to have in those two regions and just looking at the Middle East, who knows and I (indiscernible) speculate about that and what form that might take, but if you look at Russia and we see your operating experience and (indiscernible) has done, what type of the framework of sedation (ph) makes sense both economically and practically for a company like yours?

We have had pioneering spirit in the company about developing new legacy positions and we've had a long history back to the early days in Saudi Arabia in the '30s and Indonesia in the '40s.

And more recently in Kazakhstan.

I think the issue is if you look at our portfolio, that you don't put all of your eggs in one basket.

We need to go where the resources are clearly and the Middle East and the former Soviet Union offer -- certainly in the case of the former Soviet Union offered access to resources.

And there are indications that the Middle East will offer access to resources as we move forward.

So clearly these are two areas that we are very, very interested in.

From a risk profile, we have to maintain some balance between how much money we bet in each of these segments.

If you look at our capital employed and our current spread of assets you'll see that we have -- we don't bet the company in one place -- we are in many, what people call risky places, whether it's parts of Africa or parts of Asia, sometimes even California is a bit risky.

But we spread the risk and we analyze that and don't put all of our bets in one basket.

Can you clarify because I'm a little unclear, the $500 million before tax earnings improvement that you receive that you are targeting the downstream, how much can we expect to fall to the bottom line and is it all 500 million that's required to get to the 12 percent and 10 percent returns that you targeted as a goal?

I think you should see under normalized margin conditions you should see this fall to the bottom line.

That certainly is what our intent is by 2005.

What we are trying to do is solidify our grasp on achieving those 12 and 10 percent improvements.

Looking at the downstream areas that you were talking about areas of strength and areas of nonstrategic intent.

Could you explain where the operations in Brazil for us, I can't seem to --

Brazil is in, marketing in Brazil is in this area.

Let me clarify -- it's primarily the Gulf Coast built around Pascagoula, the Carib and that northern wedge down to including parts of Brazil from a marketing standpoint.

What is nonstrategic is the Andean side of the chart as it is shown here.

If you look to be clear the blue parts are the parts that are nonstrategic, if that will help your analysis.

Paul Cheng, Lehman Brothers.

If we look at this year could be somewhat of a transition year for you; before this year you spend the past two year (indiscernible) going forward (indiscernible) integration, make sure everything is doing OK.

Moving forward, it seems like you are starting to shift more focused into the growth.

Now when people are talking about growth clearly that one of the potential options will be acquisition, so the question is is there any particular area of interest that you want to be in but you think you don't really have a platform that may require acquisition for you to jumpstart your businesses, and if there are, what is the criteria when you look at acquisition?

What (indiscernible) that you need in order for you to pursue it?

I'm not going to comment on the specifics of acquisition.

But I can give you criteria.

The same sort of criteria as we would use in our capital decisions.

The first is, does it fit the strategy?

Is it upstream, does it add resources, does it add production, does it help us with our gas strategy?

Those are the things would be the first kind of set of hurdles.

And then of course the financial implications.

Is it affordable, is it accretive, does it meet our return standards.

Will it build value for the shareholders?

These are very critical questions.

Other than those broad kind of criteria, I don't know how to answer it any more specifically.

Other than to say we evaluate acquisitions as a potential means of getting to where we need to go just like using capital to build new facilities.

And those are clearly not out of scope but I don't want to speculate about what role they might play, because it's entirely dependent on opportunity and not just the opportunity strategically but the opportunity financially.

Neil McMann with (indiscernible) Bernstein.

Back on capital discipline again.

First of all, what percentage of your time is spent on inorganic growth versus organic growth?

And secondly, around the organic (indiscernible) wedge, what can you tell us that gives us confidence that processes, internal processes in terms of peer reviews and exploration committees are actually going to make a difference in terms of the capital discipline going forward?

On the first question, it is more on the organic and less on the inorganic.

But that's driven by assessment of what the opportunities are and how much time should be devoted and where the most leverage is.

On capital allocation, the first thing again is if I can go through our process a little bit.

We have a process called we call it the Chevron Texaco chip dip process which is project development execution process.

First is a decision quality itself and having the right parameters around the decision.

For example is the project framed right.

There is a process for framing.

Can we identify the value drivers for example, early on so we focus on value drivers and are we considering all of the alternatives for what we are trying to accomplish.

That is kind of the first step.

And clearly one of those steps around framing is does it fit the strategy, is it going to help us with our upstream strategy?

Is it going to help us with our downstream, is it going to help us with our gas strategy.

The next thing is make sure that that that gets built into our planning process that has those strategic milestones.

These are what we need to achieve to get to the plan.

Then in terms of the nitty-gritty, we have project review teams that are made up.

We have to make sure they are constituted with the right combination of people and that as they develop their work, that there is a peer review where people from outside the group come and look at what this group is proposing.

I'll give you an example, our exploration.

No expiration project is approved without a review by our exploration review team, using the same criteria, the same definitions, and assessing it using the best skills, combination of skills, highly talented people we have in the organization.

We bring teams like that to look at each of these capital opportunities that we have.

From a technical standpoint, once you've made the choice, is it properly engineered, have we done enough engineering definition, and that's not just on the surface but subsurface where we bring in a reserves assessment group which actually takes a look at our reserves bases, and have we got the right degree -- built in the right degree of uncertainty in the range of reserves?

Because one of the critical issues before you put stuff on the top, above the ground, is assessing what you think the range of reserves are underneath the ground and how does that impact the economics and what you build on the surface.

Following construction, we conduct a learning look back on how did we do on construction and how is the operability.

The learning look back itself involves -- at that stage involves a competitive assessment using an independent assessment group called IPA, independent project assessment.

This is from outside the company, and their data shows that we're getting better at building on time and on cost and improving our time and cost profile on the projects that we're doing.

Two years after the project is up and running, we then take another learning look back, and this look back is at the whole project holistically including the economics.

These projects -- anything over $25 million comes back to our executive committee for each of these look backs.

And we probe, we try to understand what have we learned, what turned out better, what turned out worse.

And then we push that back into our training programs and our website where you can go into our internal website and see the key lessons learned, what are the systemic learnings that have impacted projects in a positive way in the past and in a negative way in the past, and what can we do to further the positives and to mitigate the negatives?

So this process has been now in place for a few years, and that process is showing early signs I think of delivering better discipline into the organization.

Everybody know that you just don't wait.

You've got to go through this process, you don't spend money, you don't get the approval to spend money.

And I'll give you some other examples.

We shifted Agbami back for commercial reasons as well as for engineering reasons.

We shifted the gas to liquids project back in Nigeria because we weren't satisfied with the cost.

It's gone back into being reengineered and I'm confident we'll come up with a better design.

We've delayed Heatron (ph) because we weren't satisfied with the earlier project analysis and the expected expenditure level.

And Mobabilanga (ph) in Angola, has also been sent back and kicked back into the hopper for rework and re-engineering because, frankly, compared to the reserves that we think are there, the capital cost was too high.

So I see -- I'm in the middle of this and I can tell you this is a very intense process and it's one that I think we're getting better in, and it's going to lead to better decisions, better outcomes and better returns.

Steve Pfeifer with Merrill Lynch.

I have two questions, just really a quick on on the divested volumes.

If you could just for our models, help us in terms of how much of the 115,000 barrels a day was U.S. versus international?

And then secondly, when you go back to the presentation that you made when you merged Chevron and Texaco, one of the rationales that you gave was the desire to drive return on capital back up to where I guess Chevron had been before you merged with Texaco and ultimately closed the gap versus some of the top tier competitors.

Could you just step back at this juncture and talk about your performance in closing that gap in terms of step one, if you will, of the cost cuts that you implemented; step two as you go forward now and restructure the assets; and then ultimately I suppose, step three is you ultimately upgrade the future investment portfolio in some sense on where you see your competitive position on ROCE and going forward.

Thanks.

John, do you want to talk the volumes for that and then I'll come back to your ROCE question.

Dave talked about 115,000 barrels a day of divestitures -- of worldwide upstream volumes.

The majority of that is in the U.S. at this point.

We've got about -- it's roughly 80 or so that's in the U.S., the remainder is in the UK and there are some others that are elsewhere.

I think that's pretty close.

Yes, Papua New Guinea is about 6,000 barrels a day if I recall.

So it's not very much there, but it's out of the portfolio.

You asked kind of a broad question -- I guess maybe -- I know you asked lots of pieces to that question.

I think you violated our rules, but that's okay, don't worry about it.

Let me try to get at -- I think the core of your question is what are we planning to do to get our returns back to where they were, where we had much higher performance relative to competition in the old premerger days.

As you pointed out, at the time that we did the merger a couple years ago, we said that it was going to be dilutive to returns at the beginning.

And that we acknowledged that when you took the two companies together we had a higher return profile combining with a lower return profile.

But also we had some book accounting effects, because we were taking some things that were being reported on an equity basis, and now were being reported on a full book basis.

That further diluted the returns.

But those are book effects and not necessarily economic effects.

So yes, you saw a dilution in returns.

And we said that it was going to take some time to get -- to start working our way back up, but that's what our intent is.

What I think I've tried to project through this presentation, and in answering the question that I just did here about our processes, is we are committed to working to get it back.

Back to the -- we said it at the outset, we want to get our returns back, we have this 2 to 3 percent gap.

Actually if you look on a book basis, at a gap basis it's even wider than that.

And we're committed to getting that back by, A, getting the benefit of combining the two companies; by B, getting better -- making better capital choices, and the earliest indication that we have that I can point to where we have the most data is around exploration.

You can see that we're -- from a 1.5 billion combined CAPEX we're at a one billion combined new CAPEX.

And from an expense standpoint we're at a billion expense per year, now we're down to 600 million expense per year.

That was the one that, frankly, is the easiest to fix early on because you can get into the very front end of it and measure the progress.

It's harder to see the progress that we're making when you're looking at $50 billion of assets because it takes time for some of that to trickle through.

So I'm giving you some signposts to look at that I think are positive and showing progress.

And then the third area is the portfolio, and by working on the portfolio to enhance the portfolio.

As you can see, we've identified what's non-strategic and there's some upstream -- mature upstream stuff in there and there's some non-strategic downstream primarily.

And by working those three handles I think we're going to consistently, and making that our top priority, we're going to see improvements for the long-term.

And that's kind of the best kind of broad answer I can give to what I thought was a pretty broad question.

(indiscernible) & Company.

I guess the jewel in the crown of your downstream has been the West Coast.

But the West Coast is sort of a changing situation, and over the last few months it hasn't necessarily been as good as it had been in the past.

And indigenous supplies that have accrued from Alaska and the valley are declining, your refinery in Richmond is surrounded by refineries owned by two independent refiner marketers.

A lot of things are changing out there.

Now you're going to carb gasoline, MTBE withdrawal, which you've already done, how do you think these things will affect the competitive structure and your position in the years to come?

Yes, the market is continuing to change, but I don't see its isolation changing very much Al.

And the reason is we're now -- we're into even the newer gasoline in the region. (indiscernible) is quite difficult to make and even more difficult to make when you back out MTBE as is required by law by the end of the year and substitute ethanol which has to come from the long supply lines for ethanol and other components that are coming from different places.

And that's on the market side.

So the market fundamentals, although it's been -- (indiscernible) this year one of the issues in the West Coast has been lower demand because of the economy.

If you at the API numbers you'll see the lower demand for gasoline, and you'll see a lot lower demand for jet fuel because of the reduction in transatlantic flights.

A lot of big airplanes refuel in Los Angeles and in San Francisco and Seattle that are going across the Pacific, and with the economy and with SARS those got hit pretty badly in the first half of the year.

But the fundamentals, again, for the Pacific basin are good, and the West Coast is sitting on the edge of the Pacific basin.

Very high standards for environmental -- environmentally clean gasoline, and a lot of pressure on refiners to perform in the region.

And we're not ignoring the fact that the refining structure is getting more competitive.

And one of the areas we're targeting an improvement in our improved -- business improvement that I characterized on that side is further improvements in the efficiency of our refineries.

And I'm confident that with our presence there, with our focus, that we can compete very handily.

And I still think that the fundamentals of that market are better then many others.

Jay (indiscernible) at Deutsche Bank.

Going back to that question, when you evaluated the alternatives in the reorganization for the downstream, the alternatives for Asia, what were some of those that you considered including a write-down?

And over the long-term, you say you're in it for the long-term over there, but at what point do you see the returns in Asia reaching your international target?

Let me just kind of address the write-down issue for a moment.

We don't write things down unless the accounting convention or a decision that we made that drives accounting requires it.

We're going to be very transparent in our analysis.

You just can't write stuff down because it happens to be maybe some asset over here might have a higher capital than you would like and some over here has a lower capital.

So you get it on both ways.

I think the fundamental question, though, is what's our view of the region from a future standpoint and what led to our decision process?

The fundamentals in Asia for the long-term just have to be good.

If you just look at it -- if you look at where the GDP growth in the world is going to occur, I'm convinced for this -- the next 20 years, maybe 50 years, it's going to be the Americas and Asia that are going to drive the world economy.

And we have very good quality assets in Asia, we have excellent refineries and Thailand, in Korea and in Singapore.

We have excellent market positions.

We're the number two in South East Asia, and number two in Korea.

We have excellent positions there.

So we have good quality assets, excellent positions, yes, it's been a tough market and SARS didn't help it at all.

But the long-term fundamentals are good and I just have a very -- from our perspective as we look at the alternatives we really believe this is the place that we belong for the long-term.

In contrast, if you look at Europe, we see Europe as low growth, we see the demographics on a negative trend.

There are some parts of Europe where populations are declining.

We just don't see the opportunities in Europe that we see in Asia.

So the macroeconomic outlook and demographics are driving this decision.

And will it be next year?

Maybe not.

But somewhere in the time period -- we make decisions for the long-term.

We talk about making an oil field investment in Nigeria or in Venezuela or in the deep water Gulf of Mexico.

You talk about a 20 year window.

We've got to use the same criteria here I think.

We've got assets, we've got them on the ground, they're well-positioned and we're committed to being in Asia, and at some point here I'm convinced it will turn upwards.

Now we did have stronger performance in Asia this year so far, and part of it was driven, despite the SARS, it was driven by improved margins because of the difficulty with nuclear power in Japan and the fact that there was more product demand than was expected utilizations were higher.

So that tells you that there's not an awful lot of balance to be tipped.

If we get a spurt of economic growth in Asia I think these margins are going to improve and we're going to be glad we stayed there.

Can you make a comment on the impairment issue?

One of the other questions was around impairment, and I'd be happy to talk in more detail after the meeting.

And Steve Crowe, our Controller, is here and Steve is quite knowledgeable on this subject as well.

But let me make a general comment because there has been some speculation on this subject in the media and elsewhere.

We and other companies for continuing operations regularly evaluate our assets for impairment.

And the rules are -- for continuing operations offered are generally that you look at undiscounted cash flows and compare them to your book value.

And we've done that over time and occasionally we've had an impairment on that basis.

We haven't had impairments on that basis of any significance this year.

When it comes to portfolio actions, there are some very specific tests that you conduct, and the general rule is that if an asset is more likely than not to be sold, you really run through a different set of impairment tests.

And the more likely than not comparison is more to a fair market value.

And obviously a fair market value generally, particularly for a downstream business, will be less than undiscounted cash flows will be.

Our Asia business, or continuing operations and continuing business is most of the big assets that Dave talked about.

So really it's the standard impairment test that we conduct and we haven't -- write-downs haven't been necessary.

For assets that are labeled as non-strategic, some of those assets are more likely than not to be sold, and we've conducted impairment tests for those, and you saw some that I referred to in the upstream and a couple that we haven't identified for commercial reasons in other segments.

But it's possible going forward, that some of those assets that are currently non-strategic, if we make a determination that the best course of action is to sell those, you'd need to conduct an impairment test for those as well.

So it's a fairly complicated subject, but that's a quick summary of it.

Ray Annello (ph) from Guardian Life.

A question for John.

You guys reduce your net debt by about 3.2 billion in the first half.

If you have similar conditions across all of your businesses, do you expect a similar amount of debt reduction or is there something unusual in there?

And then just part two quickly, as you get the program up and running, divestitures, acquisitions, what is your optimum capital structure?

The last question first.

Over the years we've been pretty consistent in wanting to maintain a AA credit rating.

Now the standards for the rating agencies can vary over time, but typically we've wanted to maintain a AA rating.

And there are lots of ratios, as you know, and lots of things that the rating agencies look at.

But typically they've been comfortable in the -- certainly at the 30 percent debt to debt plus equity ratio, and obviously can go a little higher than that.

In terms of cash flow in the second half of the year or in going forward, several things influence that.

We have had robust cash generation in the first part of the year.

Must of it is due to earnings.

But if you look forward to the second half of the year, our capital spending tends to be a little more heavily weighted the letter part of the year.

So if you look at our -- or spinning the second half of the year -- it will be higher than in the first half.

So that will -- other things being equal, reduce cash from operations.

Also, certain working capital effects, including the timing of tax payments, etc., can -- has an impact, and some of those have been positive in the first half and maybe a little bit -- there are some payments that we know will be made in the second half of the year.

But if we repeat the kinds of conditions that we saw in the first half, and that's not necessarily my assumption, but if we repeat those, we'll still have -- we would still have cash generation notwithstanding those impacts.

And that excludes, of course, any proceeds from asset sales which would be additive and we had nothing significant in that regard in the first half of the year.

Vince Mattie (ph), Solstace Equity Management.

The question was really on the timing and magnitude of the asset sales.

When you look at the capital employed on the chart it looks like it's maybe 12-13 percent, the next chart says a billion to 2 billion proceeds per year.

Basically the assumption is you're going to sell it at book value?

And the second part of the question really is, to the extent you do generate $5 or $6 billion of proceeds, it sounds like you've got pretty good cash flow now.

What's the likely use?

It sounds like you're kind of at your target debt to cap.

Is it higher dividends, more CAPEX or stock buybacks?

One of the reasons that we have not been specific about the exact profile and timing of our sales, first of all is that for commercial reasons we don't want to disclose some of them.

And secondly, frankly, I think on the upstream side this is a -- probably a good time for mature non-strategic asset sales, on the downstream side it may be somewhat more difficult.

So projecting the timing requiring (technical difficulty) about when one might do everything that's on this chart, and I don't think we want to -- we can commit to that, and that's why the range is as projected.

Also, although we've identified $5 to $6 billion worth roughly as you calculated there of non-strategic assets, that doesn't mean that all of them will necessarily be sold.

Let me give you an example.

Four years ago we tried to market our coal company.

We have a small coal company, doesn't make much money but we try to market it.

And we got just lousy offers.

We've already returned more cash to the corporate coffers in three and a half years than that offer, and we still have a coal company that's worth something -- that's worth cash.

So we're not going to give anything away here.

We're going to put it to the riggor of the test of what it is we can get relative to keeping it.

So that's just (indiscernible) That's why it's somewhat vague.

The second part of your question is, you'd have to project out I think a year or two.

And if commodity prices were very, very high, and if our assets sales program went faster than we've projected here, yes, we would have additional cash.

And I think under those conditions we would certainly look at not only strength -- it would help us reaffirm our dividend program I think, but also continue our dividend program.

And also, certainly share buybacks would be something we would consider at that point.

Because you would have a cash capture that is kind of -- somewhat of an anomaly, higher than normal commodity prices.

So we would look at other alternatives at that point, but we certainly are committed to our dividend program and we're committed to capital discipline, and we're not just going to spend more money on assets because we happen to be incurring a windfall.

That's not what we're about.

Dave Wheeler with J.P. Morgan.

A two part question on production.

Your prior forecast for U.S. volume declines was 2 to 3 percent, and today you've told us the U.S. is going to decline at a 6 percent rate.

Why is that and does the 6 percent decline include Tahiti or is that just for the base?

And the second part of the question, you provided us a list of new projects on slide 23.

In sum, how do those new projects compare to your existing base on tax rate, operating and DD&A costs and returns?

The production -- let me start with the production chart just for the moment.

The reason for the decline in the U.S. at higher rates than we said before has been capital.

We have looked at the value proposition and concluded that we are exiting some of the assets that were using capital and we feel that we don't want to chase barrels with extra capital, that it just doesn't make the value proposition -- it doesn't make our value cut off.

So you're seeing higher rates, and there's a little bit of a hurricane -- we lost some hurricane stuff permanently last year that comes out of that.

Tahita is essentially not a big factor in this because it's back end loaded, so it's not really affecting us.

At some point, once we know more about the successes we're having in the deepwater we're going to reevaluate what our guidance is.

But in the meantime we're looking at that type of a range and we think it's (indiscernible).

The second part of your question was what are the -- I guess basically the margin characteristics of the new projects that are coming in.

And there are four of them in here and they're kind of all over the map a little bit.

For example, they're all deep water, they tend to have better margin propositions than our current production because they're either in attractive environs, tax royalty regimes like we have in the U.S. on Tahita, for example, whom would get that done, or Cottageton (ph) which is a similar sort of structure.

Or they're production sharing structures in Nigeria in contrast to the margins that we generate in the kind of joint venture partnership structures that we have today.

But they are -- they're a big capital.

So you're seeing heavy capital but better margins.

John, do you want to add to that?

I'll just add, just to reinforce what Dave's saying.

At the time of the merger we were spending capital in the U.S. at a higher rate.

It was about $2.4 billion in 2001 and, just for reference, it's more like 1.7 this year.

So it's a substantial change in spending which you'd naturally expect to see less production associated with that.

I'm going to take one more question.

You've been very kind with your time.

So we'll take one more, and then there will be opportunities to follow up.

Matthew Warburton from UBS Investment Bank.

It's a question on the noncore R&M operations.

If you look at the Australian, Scandinavian, and the Northwest European operations, in the case of Australia you're got a public quote and inherently low profitable market, you've got a joint venture in Scandinavia and where you are in Northwest Europe the other competitors typically have very high country marketshare that could cause regulatory problems for your disposal plans.

Given these characteristics how realistic is it that you're going to achieve acceptable prices on disposals given obviously all the problems you had trying to get rid of (indiscernible) at the time of the merger?

I think I made a point earlier that when downstream margins or markets are tough that it's maybe not the optimum timing.

So we have a timing issue to begin with on some of these.

And I also made the point that it doesn't mean we're going to exit everything that's non-strategic, unless we can achieve a price that's commensurate with what we think the value proposition is on a retaining (indiscernible).

We're working at improving them.

Just because they're non-strategic doesn't mean we're not working at improving them, improving the quality of the performance, improving our market position.

For example, in recent weeks we traded some marketing assets in the UK to consolidate further in the Southwest and get out of some assets that were up in Scotland.

And we think that's a good thing to do.

So we're continuing to improve the position of these assets, we're continued to improve the performance.

They're getting minimum capital and in particular because of our plans here, but that doesn't mean that we're not investing to sustain them so that we don't destroy value during this time period.

So your point is a good one.

It's one of the reasons we've been -- we haven't been as specific about the timing of sales here.

But I appreciate the question.

I know we've gone over time.

Thank you again for being with us.

We're here to answer questions.

Pierre and Randy will be here in the hotel this afternoon.

Please call them if you've got follow-ups.

I appreciate you coming in on a Friday in August.

Thank you very much.

This does conclude today's conference.

We thank you for your participation, you may now disconnect.

(CONFERENCE CALL CONCLUDED)