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Operator
Good morning, and welcome to the ChevronTexaco first quarter conference call.
At this time all parties have been placed on a listen-only mode and the floor will be open for your questions following the presentation.
It is now my pleasure to introduce you host, Mr. John Watson, Chief Financial Officer of ChevronTexaco.
Sir, the floor is yours.
John Watson - CFO
Thank you.
Good morning.
Welcome to ChevronTexaco's first quarter earnings conference call.
As was indicated, I'm John Watson, the Chief Financial Officer of ChevronTexaco.
I will be joined today on the call by Randy Richards, our Manager of Investor Relations.
Before I get started, let me apologize for the delay in the conference call.
As you've gathered there were some technical difficulties.
A fire at the vendor's offices.
We hope there were no injuries or nothing serious at that event but obviously it's delayed us and we've scrambled a little bit to make alternate arrangements and I thank you for bearing with us.
I'll refer to the slides that were e-mailed to you this morning and are available on the web.
Before we get started I'll remind you that our presentation today contains estimates, projections, and other forward-looking statements.
Please review to the Safe Harbor statement on slide 2.
Turning to slide 3, I'll start with an update on our strategic progress.
Our portfolio hydrating continued.
Several U.S. upstream sales were concluded and progress continues on the previously announced program.
We are proceeding with urgency but at the same time trying to stay true to our requirements to obtain good value.
In the U.K. we reached agreement to sell three properties with about 20,000 barrels a day of production and two of these sales were closed in the quarter.
In the downstream we announced our intention to increase our ownership in the Singapore refinery from one-third to one-half, and I'll expand on that in a moment.
We are actively following up on recent exploration successes and prospects with drilling in the Gulf of Mexico at the Jack prospects near St. Malo, in the South Alaminos Canyon area, near Great White, and at Blind Faith where we've increased our interest to 50% and assumed operatorship.
In Nigeria we're drilling in Seco 2, a follow-up to last year's discovery on OPL block 249.
Additionally, exploration rights have been awarded for block 1 in the joint development zone offshore Sao Tome and Principe in Nigeria and we'll be the operator with a 51% interest.
A notable recent global gas development was the signing of an MOU between Qatar petroleum and Sasol Chevron to expand the existing ORYX GTO project from 34,000 barrels a day to 100,000 a barrels a day and examine base oil opportunities.
Finally, Quay Petroleum -- excuse me, QP and Sasol Chevron agreed to pursue the opportunity to develop 130,000 barrel a day upstream/downstream integrated project.
We've achieved several significant project milestones so far this year.
In Chad, central water treatment facilities came on line in February allowing production to ramp up toward the peak rate of 225,000 barrels a day expected to be reached in the second quarter.
In the Gulf of Mexico, front end engineering and design contracts were awarded for the Tahiti project and in Angola large offshore lifts of topside facilities were completed for the Sunjay Condensate project.
The project remains on track for a phased startup beginning in October this year.
Initially with crude production from the Bomboco field followed by start up of the Sunjay Condensate facilities early next year.
Turning to slide four many of you may recall in our analyst meeting last August Dave O'Reilly told you that we considered our Asia downstream assets to be core strategic holdings.
Margins have been poor for several years, but we felt the market held more potential for economic and income growth than other parts of the world.
That potential along with quality assets and good market shares in our countries of operation led to our decision to declare Asia downstream core.
Since then, as everyone knows, the region has felt the influence of very high energy demand in China.
Getting direct data on Chinese demand is difficult.
One indirect way to look at is it to track China's crude and product imports.
Looking at the graph we see totals over 2 million barrels per day in the second half of 2003 spiking to 3 million barrels per day early this year.
Much of the recent surge in Chinese demand has been driven by industrial consumption.
Demand for transportation fuels while growing briskly, was a smaller part of the recent story.
We believe the transportation fuels have potential for good growth in China and some other Asian countries for many years ahead.
Slide 5 shows improvement in Singapore refining margins in recent quarters.
While margins will always experience ups and downs we think we're seeing a better balance between regional refining capacity and product demand leading to long awaited solid refining margins.
Against this backdrop we recently announced our intention to increase our ownership in the Singapore refining company from one third to one-half.
This will add 47,500 barrels per day of refining capacity.
The price is $70 million plus our share of working capital and the transaction is expected to close at the end of June.
For ChevronTexaco we think it's a good deal at a good price and it fits strategically strengthening our refining position and supply chain in a core area and positions the company to capitalize on the region's improving economic fundamentals.
Moving on to financial performance on slide 6, the company had its 5th strong quarter in succession, achieving record quarterly earnings totaling $2.6 billion.
First quarter annualized ROCE was a strong 21%.
We continue to strengthen the balance sheet.
Our debt-to-capital ratio ended the quarter at 25% with a net debt-to-capital ratio that is debt less cash balances, of 13%.
In the first quarter we added $500 million to our pension plans after contributing more than $1 billion in the previous quarter.
Having strengthened our balance sheet over the last year and with our continuing strong cash flow we recently announced a significant stock repurchase program.
I'll have a few more comments on that a little later in the presentation.
On slide 7 I'd like to briefly revisit our company's performance as measured by return on capital employed.
Once again I'll refer back to the analyst meeting presentation last August.
At that time we showed that ChevronTexaco's average return on capital employed over the five-year period 1998 to 2002 trailed the average of our three super major competitors as represented on this chart with the yellow diamonds.
This was the case whether we used reported generally accepted accounting principles, GAAP earnings, or earnings excluding special items.
Excluding special items the GAAP was about 2%.
The bars on this chart show 2003 ROCE, again excluding special items on the same basis used at the analyst meeting.
We're using adjusted earnings mainly for comparability across companies.
ChevronTexaco's special items for the year 2003 netted to a fairly small amount.
You can see that our relative position improved in 2003.
In fact, at 16.3% we beat the average of our super major competitors by about half a percent with some of this relative -- while some of this relative improvement is attributable to the macro environment and other factors, it also reflects the full effect of merger synergies coming through and continuing improvements to our base business.
When we make a business decision our focus is on forward-looking value creation not book ROCE per se.
Nevertheless, we're working hard to improve the base business, make good investment decision and execute well on major investment projects and over time this will be reflected in our ROCE.
In this manner, we'll continue to strive to improve our relative ROCE performance.
Now I'll turn it over to Randy to run through the quarter's earnings details.
Randy Richards - Manager of IR
Thanks, John.
Slide 8 shows the fourth quarter net income per diluted share was $2.40.
During the quarter, the company recorded one special item related to a litigation matter resulting in a $55 million charge, or 5 cents per share.
First quarter foreign currency effects were a negative $43 million, or 4 cents per share.
The largest impact resulted from the U.S. dollar weakening against the U.K. pound.
Although currency effects were modest in the first quarter, I'll remind you that they primarily reflect balance sheet translations and other accounting calculations.
Not speculative or hedging trades.
I'll also remind you that under accounting rules, the choice of functional currency can make comparisons across competing companies very misleading.
We'll continue to manage currency exposures on what we believe is an efficient economic as opposed to book, basis.
My remarks on the variance slides will be comparing first quarter 2004 to fourth quarter 2003.
Keep in mind that the earnings release compared first quarter 2004 to the same quarter a year ago.
Slide 9 shows that net income increased by over $800 million.
Swings in special items and foreign exchange effects roughly offset.
Upstream, downstream, and chemicals all improved significantly in the first quarter.
Clearly, higher crude and natural gas prices and stronger refining margins provided most of the improvement.
We also saw stronger ethylene margins in our chemicals business.
Ongoing operating expenses were lower, particularly in the downstream.
And exploration expenses were below the typical quarterly level.
Slide 10 shows U.S. upstream earnings, which increased $139 million.
The first quarter included a $55 million charge related to a litigation matter which we've identified as a special item.
Fourth quarter special items were a net charge of $15 million.
Higher liquids realizations boosted earnings about $120 million.
Quarterly average prices for both WTI and Kern River crudes increased by over $4 per barrel.
Higher natural gas realizations added about $100 million to earnings.
Mid-week prices at Henry Hub were up more than $1 per thousand cubic feet with California border and Rocky Mountain prices up 70 to 75 cents.
Volumes were down 2.6%, primarily due to normal field declines and asset sales.
The variance for items captured in the other bar just about netted out, while below our threshold for recognition as special items, the fourth quarter benefited from one-time property tax refunds and adjustments while the first quarter included gains from asset sales.
International upstream earnings increased $277 million as shown on slide 11.
Swings in special items and foreign currency effects were largely offsetting.
There were no special items in the first quarter while special items in the fourth quarter included a favorable tax adjustment and gains on asset dispositions.
Foreign exchange effects netted to negative $20 million in the first quarter compared to a much larger loss impact in the fourth quarter.
Higher realizations provided an earnings gain of about $160 million.
Liquids realizations increased more than $2 per barrel, although not quite as much as spot Brant prices.
While total volumes were off slightly between quarters, the volume bar on the chart reflects the summation of country by country ups and downs which resulted in a small positive profit variance.
Exploration expense was quite low in the first quarter.
The other bar contributed over $70 million to the variance between quarters.
DD&A returned to a more normal level after some impairment impacts and abandonment adjustments in the fourth quarter.
Gains on sales of U.K.-producing assets also benefited the first quarter.
Slide 12 summarizes the change in worldwide oil and gas production including other produced volumes.
Volumes were off 1.4% between quarters.
U.S. production decreased 2.6% between quarters, about one-fourth of the reduction reflected the impact of asset sales and the rest was primarily due to normal declines.
Our expectation for full year U.S. production volume decline excluding asset sales remains at roughly 6%.
Outside the U.S., oil and gas production was slightly lower due to several maintenance factors.
In Thailand, the Ben Chamas field was shut down for about one month for planned maintenance and project expansion.
In the South China sea, an FPSO is dry docked March through May.
Also, we sold our interest in the Galley field in the U.K., effective at the end of January.
Lost volume due to the Galley sale was offset by the net impact of changes elsewhere.
Going forward, Chad, Kerichagnac, and later in the year Hamaka are expected to add significant international volumes.
On slide 13, U.S. downstream net income improved nearly $200 million between quarters.
There were no special items in the first quarter.
Strong improvement in refining margins more than offset somewhat weaker marketing margins.
Refining margins were higher on both the west and Gulf Coast, and the Gulf Coast spread between light and heavy product prices, which is an important indicator for our Pascagoola refinery also strengthened significantly.
The volume story was a little less straightforward.
Refinery input dropped about 6% but this was entirely due to lower asphalt runs, to some extent a seasonal effect.
Trade sales were also a bit lower mainly due to fuel oil sales.
Total gasoline sales actually increased although branded mogas volumes were slightly lower.
Looking at the first quarter compared to the same quarter last year, sales volumes were up 10% reflecting higher sales of unbranded gasoline, diesel fuel, and fuel oil.
Branded gasoline sales rose more than 1%.
Operating expenses were lower as broad-based cost reductions outweighed higher fuel costs.
Looking at the other bar, you may recall from our last conference call that the fourth quarter included several negative discrete items.
In the first quarter the absence of those items resulted in a sizable positive swing between quarters.
Turning to slide 14, international downstream earnings also recorded a significant gain in the first quarter led by strong margins in Asia.
Foreign exchange effects provided a $29 million favorable swing between quarters.
Fourth quarter U.S. dollar weakness against the Australian and Canadian dollars caused a greater impact in that quarter.
Our benchmark Singapore refining indicator increased almost 50%.
Asian marketing margins were also higher compared to a relatively subdued level in the fourth quarter.
Our indicative northwest Europe refining margin was essentially flat and our U.K. and Latin American marketing margins were down slightly so the strong margin improvement is entirely due to the Asian market.
Operating expense decreased in both refining and marketing.
In refining, the reduction in expense was partly due to the absence of shutdown costs incurred in the fourth quarter at our wholly-owned refinery in Pembroke, Wales.
On slide 15, chemicals net income recovered from near break-even in the fourth quarter to more than $70 million in the first quarter.
The Olefins line of business under our affiliate Chevron Phillips Chemical Company, benefited from much stronger Ethelyne earnings.
The CMAI industry cash margin for Ethelyne improved 50% to more than 10 cents per pound.
The other bar includes our Orinite additives business which benefited from higher sales volumes and the absence of several discrete items in the fourth quarter.
The All Other segment is covered on slide 16.
There were no special items in the first quarter while the fourth quarter included a $40 million charge reflecting our share of Dynegy's write-down of its Illinois power subsidiary.
The variance in foreign exchange effects reflects lower gains on centralized currency hedging activity.
As was the case in the U.S. downstream segment, the other bar here essentially reverses the variance we saw last quarter.
You may recall we told you that the fourth quarter included several favorable event-driven tax items recognized as we brought segmented earnings together in consolidation.
The absence of such items in the first quarter explains the negative variance.
And that completes our brief analysis of the quarter.
Now I'll turn it back to John.
John Watson - CFO
Okay, thanks, Randy.
I'll close with a focus on return to shareholders starting on slide 17 with a brief review of the stock repurchase program we announced about a month ago.
Our board authorized a program of up to $5 billion over a period of up to three years.
You've seen that we've reduced debt down nearly $4 billion over the last five quarters.
During the same time period we contributed nearly $2 billion to pension plan.
Cash and marketable securities at the end of March totaled $6.9 billion.
Our three-year business plans are balanced from a cash perspective at much lower commodity prices than we're seeing today.
At current high prices and at prices above our assumed levels we're generate surplus cash which we believe can be prudently applied to repurchase shares in the open market.
We know the market conditions can change and we'll monitor our cash flow, debt and other coverage ratios in light of any changes in business conditions.
Our priorities really haven't changed.
We want to retain a strong balance sheet, fund a value creating capital program and pay a sustainably high strong quarterly dividend.
We began buybacks in April.
Although we've observed a blackout period in advance of our earnings announcement, we did get the program started with the purchase of 1.2 million shares for a few days early in April.
And finally, slide 18 is our customary total shareholder return slide that we have shown you many times to track performance since the beginning of 2000.
Our stated goal was to be number one in TSR over a five-year period compared to our super major competitors.
Here we are in the fifth year and so far we're in first place.
On the right-hand side we've shown TSR for the current year to date.
Our returns continue to perform well relative to competitors and the market for this period.
We'll now take your questions.
Consistent with our practice, we'll ask you to limit your questions to one per turn so that we can get to as many of you as practical.
We'll plan to wrap up at the top of the hour.
Operator, please open the lines for questions, and we'll take that first question now.
Operator
Thank you.
The floor is now open for questions.
If you have a question, please press 1-4 on your touch-tone phone.
If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key.
Questions will be taken in the order they are received.
We do ask that while you pose your question that you pick up your handset to ensure proper sound quality.
Please hold as we poll for questions.
Our first question is coming from Frederick Leuffer of Bear Stearns.
Frederick Leuffer - Analyst
Good morning, guys.
How are you doing?
John Watson - CFO
Good morning, Fred.
Frederick Leuffer - Analyst
John, Randy, I'm having trouble reconciling the international E&P earnings.
When I adjust for price, volume and exploration expense, my model is still a large gap and then in the press release you indicated that operating expenses were up about $50 million.
My question is, you know, are there other expense reductions in here that haven't been identified or are there other factors that may explain why the results were so very strong?
John Watson - CFO
Yeah, Fred, good question.
Thanks.
If I can direct to you chart 11 in that reconciliation there is another bar that's about $70 million or so, and there are a couple of things that are in there.
One, there are some small asset sale gains that are under the threshold for treating of special items in the quarter so there is a gain in that it category.
In addition, in the fourth quarter we had some small impairments and abandonment adjustments that went the other way, so the delta between quarters is largely a function of those two items.
That swing in opposite directions between periods.
But you're right, there is that piece that isn't covered by what I would call the standard -- the standard explanations of realizations of volumes and exploration expenses.
Frederick Leuffer - Analyst
And I imagine the margins on higher foreign gas sales were pretty good, you know, just because the swing weather factor, right?
Randy Richards - Manager of IR
I'm sorry, the margins on what, Fred?
Frederick Leuffer - Analyst
You know, your seasonally high gas sales in the first quarter would incur very little incremental cost but yet you enjoyed the higher revenue, so I imagine you enjoyed margin expansion as a result of that, too, right?
John Watson - CFO
We did have higher gas production in Europe between the fourth and first quarter so there's a positive variance there.
The change in Australia volumemetrically was not significant and the price impact overall for realizations between the first quarter and fourth quarter, however, wasn't very large.
As you know Australia is primarily geared to crude but margins were clearly good across virtually every business unit in the international upstream.
Okay, thanks, Fred, we'll go to the next one.
Good questions.
Next question.
Operator
Thank you.
Our next question is coming from Steve Pfeiffer of Merrill Lynch.
Steve Pfeiffer - Analyst
Hi, guys.
I'm going to try to structure this so I can maybe get a little more than just one quickie.
We're just trying to go through the international refining and marketing which is where you beat us pretty significantly in trying to find out what might be some, you know, kind of noise, if you will.
But if you would, what would be any kind of -- for example, shipping can be kind of volatile.
Was there anything there?
And the other thing was, marketing was up sequentially in Asia from 4Q to 1Q which if you could just maybe give a little bit of color because it was obviously being squeezed in 4Q on your indicators then came back pretty nicely.
And if there were any price funnelization effects.
John Watson - CFO
Well, it actually is a fairly clean quarter in the international downstream this time, so let me make a few comments.
I did show a chart early on that has showed what's happened to refining margins in Asia which are indicative of performance you know, really across all our operations in that area which would include Korea, Australia, and Thai affiliates that we have as well as our other operations.
So performance was really good across the board in the refining side of the business.
In the marketing side there are no particularly unusual items.
I will say that we did have higher shipping earnings in the period, and that's included in the other bar.
Freight rates have been high, as you know, and so we did have strong shipping earnings and we also had some small write-offs in Latin-American businesses in a prior period, but other than that, maybe I'll see if Randy wants to add anything to the comments because it was a fairly clean quarter just with strong margins.
Randy Richards - Manager of IR
No, I'd just remind you that, you know, with the strong shipping earnings being in the other bar one of the reasons that the other bar is a flat bar is that, you know, we had inventory profits at the end of the year, LIFO inventory profits in the fourth quarter so it's a little bit offsetting for the variance.
Steve Pfeiffer - Analyst
Got it.
So obviously you had a positive in the fourth quarter and a positive sort of one-off in the first quarter, and as a result the delta is 0 but there were some -- maybe a little bit of noise.
But marketing, was it just a function that the price at the pump was finally passed through in the local areas and that's why you're seeing improved marketing, and is that continuing in the current quarter?
Randy Richards - Manager of IR
Yes, I guess that description is as good as any.
It's very broad-based, better performance, and, again, this fourth quarter was a fairly subdued unit margin for marketing.
Steve Pfeiffer - Analyst
Thanks a lot.
John Watson - CFO
Yeah.
Good question, Steve.
We'll go on to the next one.
Operator
Thank you.
Our next question is coming from Arjun Murti of Goldman Sachs.
Arjun Murti - Analyst
Thank you.
John, there seems to be growing industry interest especially amongst the majors in ultra deep drilling on the Gulf of Mexico shelf.
I wonder if you could just provide any color on whether Chevron has an interest in this play.
Obviously you have a large shelf acreage position and if you do have interest if you can comment on any specific drilling activity for 2004.
Thank you.
John Watson - CFO
I'll make a brief comment then I'll let Randy comment a little bit more.
We do have interest in this area and it's an area that's been -- really developing over time and trying to be proved as an area that can be kind of a sustainable play.
For the most part we've been doing some farm-outs and allowing others to spend some money so that we can learn a lot from it, but we do have a strong acreage position but, Randy, you want to add -- anything else to add?
Randy Richards - Manager of IR
Yeah, you know, we've taken this mixed approach kind of drilled some of our own and used leverage where some other people want to spend money on our acreage and drill the well, and then we can back into the information and part of the position if it's successful.
For the shelf as a whole and not just deep gas we try to stay on an even keel with rigs run about eight to 11 rigs all the time and not go way up and down, and, you know, we don't know what the significance ultimately will be of the shelf play so I think just saying that we're interested in it and we'll pursue it as far as it takes us is the way to go.
We've had some success there.
South Marsh Island, block 223, so-called Jim Bob Mountain, has been one successful area, also Mountain Point.
So, you know, we've really had an increase in our gas production of the deep wells in the shelf in the last year or so.
Arjun Murti - Analyst
Can you comment on how many wells you might be drilling this year either as a farm-out to others or you as the operator?
I'm really talking about the 25,000-plus foot wells.
Randy Richards - Manager of IR
Yea, I'd have to follow up later on after the call on that one.
I think we can get some information for you but I don't have it on the tip of my tongue.
Arjun Murti - Analyst
That would be fine.
Thank you very much.
John Watson - CFO
Okay.
Thanks, Arjun.
Operator
Thank you.
Our next question is coming from Doug Harrison of Morgan Stanley.
John Watson - CFO
Good morning, Doug.
Doug Harrison - Analyst
Hi, guys.
How are ya'll?
In international R&M, you guys are the dominant super major I think it's safe to say in South Korea, and while trends have improved considerably in the country there's also been discussion over the last couple years about securitization of a portion of that part of the business at some point in the future and so I wanted to see if we could get an update on your strategic thinking as it relates to your existing position in South Korea.
And within that context you also talked on the call today about exercising your preemptive rights on Singapore refining which obviously appears to be pretty timely although I haven't heard whether or not you're interested in the Enchon plant in Korea which was up for bid.
So could you also talk about whether you had interest in that plant and why or why not given the fact that you have such a strong position in Korea to begin with.
John Watson - CFO
Okay.
Well, let me first make a couple of points.
I know you're well aware of.
Our interest, we've been in South Korea for a long time.
Through our 50% interest in LG Caltex so it's an equity company, we have 50% interest and we've been a longtime partner and are really have a fairly unique position relative to some of our larger competitors.
It's a good and longstanding relationship.
You are correct in that there have been -- there have been various discussions around public offerings of a number of different firms in South Korea, including potentially the one that we have an interest in.
At this point that is not moving forward but I -- because we have a partnership to respect I won't make -- I won't comment any further.
So you are correct in that that has been a trend and has been a subject of some discussion.
As far as our interest in --.
Doug Harrison - Analyst
Enchon?
John Watson - CFO
In the Enchon plant, we -- LG Caltex has one very large refinery -- 600,000 barrel a day refinery, but I'm not aware of an additional purchase opportunity or plans for any other purchases of additional plants.
I would say in general as I think you've heard over the last couple of years, we have been very, I would say, cautious in the area of adding refinery capacity.
In fact, we have rationalized our refinery ownerships with the sale of our El Paso interest and converting several refineries around the world to terminals.
We felt that the circumstance in Singapore was fairly unique.
First, we felt it was very consistent with being a strategic source of supply.
We already had an interest in that refinery.
We know it well and we had just, remember, converted our Batangas refinery to a terminal because it wasn't an efficient source of supply.
So we felt that made good sense, but I wouldn't suggest that it's a barometer of a lot of additional purchases in refining capacity.
Doug Harrison - Analyst
Okay.
Thanks a lot.
John Watson - CFO
Okay.
Thank you.
Operator
Thank you.
Our next question is coming from Paul Ting of UBS Securities.
Paul Ting - Analyst
Good morning, gentlemen.
John Watson - CFO
Good morning, Paul.
Paul Ting - Analyst
Question on the -- your financial strategy.
If I recall correctly in your August strategic presentation you were very clear in terms of determining the priority for free cash redeployment, specifically debt reduction first dividend, cap ex, and share repurchasing.
The $5 billion of share repurchasing announced recently, does that mean there's some new thinking behind your redeployment of cash strategy and specifically does it mean that you are very happy with your current level of cap ex program?
Could that be -- could we see some upside to that?
John Watson - CFO
Thanks, Paul.
Good question.
No, our priorities really haven't changed at all.
We want to maintain a very solid balance sheet and we've not only reduced debt but, of course, funded pension plans.
So we've really shored up the balance sheet during the period of high commodity prices.
We also have wanted to keep discipline in capital spending and our priority is to fund those projects.
As you know, we've emphasized good stewardship over capital.
Our budget this year is $8.5 billion including our equity share of affiliate spending and that number really hasn't changed.
So I wouldn't look for a significant increase from that number.
Timing of individual projects can vary up or down from year to year, but the $8.5 billion number is still the number for this year and I'll emphasize that that includes equity share affiliates.
Cash spending is 6-7.
As far as share repurchases go, with the kind of cash that we're generating today, and we'll publish our Q here in a few days, we are generating surplus cash but our balance sheet is in good order, the capital program is well funded at these kinds of prices, and so the board has authorized us to approve -- to repurchase 5 billion shares over a period up to three years.
So we think that's a good use of cash, returning it to shareholders.
I'll also tell you that you didn't ask, but obviously the board also has had a policy of paying a consistent and sustainable dividend and we've increased payouts to shareholders for about 16 years in a row on dividends, so really the priority that I would tell you is balance sheet, capital program, dividends, and share repurchases with the surplus cash that we're generating at high commodity prices.
Paul Ting - Analyst
John, just by way of clarification, out of the $8.5 total you're still looking at about 6.5, 6.4 for upstream, is that still a good number?
John Watson - CFO
6.4 is the upstream number.
Yes.
Paul Ting - Analyst
Okay.
Great.
Thanks a lot.
John Watson - CFO
Thanks, Paul.
Operator
Thank you.
Our next question is coming from Mark Flannery of Credit Suisse First Boston.
John Watson - CFO
Hey, Mark.
Mark Flannery - Analyst
Hi.
I have a fairly simple question.
The international exploration expense was quite low this first quarter.
I'm assuming this just reflects timing in your previous guidance for exploration expense still stands and if so could you just remind us what that is?
John Watson - CFO
Sure.
No, that's a good question.
Exploration expense in total for the company was fairly low.
The last couple of years exploration expense has been a little bit under $600 million a year, you'll recall that's down from over a billion dollars prior to the merger.
Our target this year is in that same general range.
It's likely to be a little bit over $600 million for the year, so when you look at exploration expense, this time we had $37 million internationally and $47 million in the U.S. for a total of $84, so that's certainly running at a low rate relative to the -- either the fourth quarter or our plan for the full year which again will be a little bit over $600 million.
Obviously it's a little bit of function of activity and the timing of well write-offs and things of that sort.
Mark Flannery - Analyst
Thank you.
John Watson - CFO
Thank you.
Operator
Thank you.
Our next question is coming from Paul Sanki of Deutsche Bank.
Paul Sanki - Analyst
Hi, John.
Just on the production side, guys, you said there's some disposal to be made in the U.S.
Could you talk a little bit more about the declines including disposals in the U.S.?
And further to that also, I noticed your cap ex in the U.S. is rising quite strongly in the first quarter against the previous year.
Any comments on that would be great.
One little one additionally.
There's a $200 million cap ex in the other segment in the U.S.
Could you just tell me what that is?
Thanks.
John Watson - CFO
Let me make a note to myself here.
Okay.
With respect to production in decline, depends what your reference point is, but if you look at production first quarter to first quarter, kind of year-over-year, and you can look at it a variety of different ways our production, including other produced volumes, was down 1.8% or about 48,000 barrels a day.
And that includes about -- an impact of about 30,000 barrels a day in asset sales, so a big portion of it was assets sales.
In terms of the sales that we've closed, in 2003, at the time that we made the sale, we had asset sales of 22,000 barrels a day.
For those properties that were sold.
In the first quarter of '04 there was another 22,000 barrels a day of volume at the time of sale were 22.
In aggregate, the amount of sales that we -- that Dave O'Reilly indicated last August is that we would sell worldwide about 115,000 barrels a day, and since that time we've talked about our interest in Canada as well.
So the sales are progressing but we do have more to go.
The exact timing for those sales is obviously a function of when we reach commercial agreements with others, but I can tell you that we're very close on the third of the three properties in the U.K., and we do have active efforts underway in Canada and in the United States.
So we're making progress but there's more to come later in the year.
Paul Sanki - Analyst
That's great.
Just to clarify on that, then, the August guidance remains about the level that you'll see plus the Canada stuff?
John Watson - CFO
Yes what I will tell you is, depending upon the timing, obviously some of these are declining fields, so the aggregate amount will obviously depend upon the timing of those sales, but, yes, the guidance holds.
Paul Sanki - Analyst
So you better sell them quickly, huh?
On the cap ex side could you just reference the U.S. cap ex spend moving up and then finally the 200?
That's great, thank you.
John Watson - CFO
In the other category there's a real-estate item that was in that number.
As far as the U.S. goes, capital spending is really sort of on plan with what we're targeting, $1.9 billion in capital spending for the year in our U.S. upstream business and obviously the timing can vary a little bit period to period but we're basically on track for that level of spending.
Paul Sanki - Analyst
Okay.
Great.
Thank you very much indeed.
John Watson - CFO
Thank you.
Good questions.
Operator
Thank you.
Our next question is coming from Neal McMann of Sanford Bernstein.
Neal McMann - Analyst
Hi, guys.
John Watson - CFO
Good morning.
Neal McMann - Analyst
Just a quick one, really.
Just looking at West Africa, and could you give us an update on the Nigerian situation and the disruptions there and are you seeing any disruptions in Chad caused by the recent problems between Chad and Sudan?
John Watson - CFO
On the second one I'm not aware of any problems in the Chad-Camaroon project.
In fact, to the contrary they've just got the water treating facilities on and have been ramping up.
That's the latest I have.
I'd have to refer you to the operator for any other issues.
That's ExxonMobile.
As far as Nigeria goes, it's a very unfortunate circumstance that took place in Nigeria.
There were seven fatalities last week following an attack on our facilities and people, including government forces and contractors, and I can tell you right now that, you know, our biggest concern and the concern of our people is really foremost.
And you also know that we've been planning to reenter those facilities and have been working with the government, both at the national level and at the local level to make the facilities safe and be sure that as we reenter it's consistent with safe operations and the support of all levels of government.
So it's quite surprising for that to feel the attack that we did, and we're just trying to make sure that, you know, we're trying to take care of the people, and at some point we'd like to reenter those facilities but right now our focus is on making it safe to do so.
Neal McMann - Analyst
Is it having any other effect on your other projects in Nigeria at all?
John Watson - CFO
Not -- no, not, per se.
No, we're still continuing with the deepwater developments that we have and producing operations in other offshore areas.
Neal McMann - Analyst
Great.
Thank you.
John Watson - CFO
Sure.
Operator
Thank you.
Our next question is coming from Paul Cheng of Lehman Brothers.
Paul Cheng - Analyst
Hey John and Randy.
Good morning.
John Watson - CFO
Hi, Paul.
Paul Cheng - Analyst
Congratulations.
Very good quarter.
On the cost side, in U.S., you indicate that the operating cost is lower.
Can you give us a number what is the unique cost in the U.S. upstream, if not in absolute, maybe, perhaps adversity in the fourth quarter, given that I think Peter Robertson had indicated the target is to reduce that by $1.50 boe (ph) by 2005.
Also in the downstream with your cost reduction there for the [inaudible], the target $500 million, how much of that has been recognized, or realized in the first quarter and should we assume going to have an incremental improvement in the second and third quarter later this year?
John Watson - CFO
Well, let me take the latter question first.
Pat Wirtz has put out a target of $500 million in before-tax improvements across the downstream units completed by the end of 2005 so that's a work in progress, and there's lots of effort underway.
I think last quarter I talked about operating expense reductions at Richmond refinery and continuing efforts to apply the same processes elsewhere in our refining system as well as reorganizations that were underway.
Those organizations have -- reorganizations have largely been completed but there's still more work to do to apply the standardization and other practices that were pushing down across the downstream units.
So you'll be seeing the benefits of that gradually over the next couple of years.
As far as the upstream side --.
Paul Cheng - Analyst
John, can I interrupt?
How much is we actually realize in the first quarter?
Is that something that you can quantify for us?
John Watson - CFO
I don't have the number to give.
Randy, is there any particular number?
Randy Richards - Manager of IR
No, we're not going to do a play-by-play, quarter-by-quarter rack up of this thing.
I think as Dave O'Reilly kind of as a proof point mentioned in the last quarterly call, was a $65 million operating expense improvement from the year 2002 to 2003 just at Richmond refinery, and then he purposely was conservative there because he didn't include the top-line benefits coming from some changes that improved the yield of high-value products.
The stuff that's not in the operating expense category.
So you're going to see a number that's a healthy number just in that one refinery.
But we're not going to go quarter by quarter and count down to where the 500.
John Watson - CFO
I think the way you'll see -- so you may ask how will you see the benefits and I think the best way to look for benefits for these improvement programs, whether it's in the downstream or upstream is to look at the numbers competitively.
And I think when you rack up the downstream numbers, whether they're in the U.S. or internationally, I think what you'll see is our competitive standing is improving and will continue to improve.
Some of that, of course, is due to margins but it's also the benefits of these ongoing improvements and I already talked about our aggregate ROCE improving.
As far as U.S. upstream goes we’ve still got work to do.
Peter Robertson talked about improving our targeting a dollar per barrel improvement in op ex in the U.S. upstream and we have a reorganization that's underway that's really got -- it's -- there are two parts.
One are the property divestments that we've talked about which I've already covered and then the other is once -- as those are completed, and the reorganization takes hold we'll be able to focus on the 400 or so fields that we have left and the concept is very similar to the downstream in that we want to apply greater standardization of practices across the business.
In internal meetings we had recently we saw examples of just that sort of thing where practices are being shared across the units and pumping technology and other practices, so we think that most of those benefits will not be from people reductions but from better application of practices.
And, again, it's going to take place gradually over the next couple of years.
And I don't have a quarterly number to give you but we'll give you updates as best we can of specific examples such as we gave with you the downstream illustration at the Richmond refinery as we have something specific that will give you some comfort that we're proceeding with those reductions.
Operator
All right.
Thank you.
John Watson - CFO
Okay.
Thank you.
Operator
Thank you.
Our next question is coming from Jennifer Roland of J.P. Morgan.
Jennifer Roland - Analyst
Thanks.
I just have a question on the downstream.
Can you break out the other bar that you showed in the various analysis for the U.S. downstream?
I know Randy had mentioned that it’s basically a reversal of the negative charges in the fourth quarter but if you could just remind us what those were that would be great.
John Watson - CFO
I'll give you a little bit of information.
It may not be everything you want but what Randy has indicated, and it's a fair question.
If you go back to the fourth quarter, there was a bar that went the other direction of a similar magnitude, and at that time I indicated that we had some pretty poor results in several of our businesses, notably our fuel and marine marketing business as well as our aviation business, and I also indicated at that time that we had other bookings during the quarter, litigation, environmental liabilities, et cetera, so there were a number of things that were booked that were recorded in that period that we didn't consider to be of a special nature.
On the other hand, they weren't indicative, necessarily of, what ongoing returns were likely to be so in response to a question last time about those negative items, I suggested that they were a part of the business and we needed to obviously reflect them but we didn't think they were representative of the ongoing business.
And what you're seeing this quarter is just a reversal of those but it's really in several different buckets that -- it's no one single item.
But that's probably the best I'm going to be able to give you.
The point I would make is that the other bar is not something unusual this quarter, it's the absence of some things that were recorded in the fourth quarter.
Jennifer Roland - Analyst
Okay.
Fair enough.
And it's the same situation with the chemicals?
Is that the other bar there was pretty large.
John Watson - CFO
The chemicals business, I would tell you there were three segments where there were -- where there was that effect.
One was the U.S. downstream, the other was in the chemicals business.
What we highlighted a little bit last quarter was that the Orinite additives business is a tough and competitive business and we said there were a couple of discrete items that were booked in that period, notably severance expenses for manpower reduction that was taking place and some charges associated with patents during the period.
And, again, those were items that were booked.
Now, I will say this.
That other bar does include stronger underlying earnings from our additives business this period as some of the benefits that they've been going after to try to improve its competitiveness have come through in the numbers so it's the combination of both the absence of the items recorded in the fourth quarter as well as ongoing improvements.
I would tell you that more than half of that bar was the -- there were items, the negative items that were booked in the prior period.
Jennifer Roland - Analyst
Okay.
Great.
Thank you.
John Watson - CFO
Sure.
Operator
Thank you.
Our next question is coming from Mark Gilman of the Benchmark Company.
Mark Gilman - Analyst
John and Randy, good morning.
John Watson - CFO
Good morning, Mark.
Mark Gilman - Analyst
Over the last 12 months, or roughly thereabouts, you've had a reasonably active deepwater Gulf of Mexico drilling program in the area of Great White and in the Perdito cold valve.
We've heard very, very little about the results of the program and the efforts, also beginning to hear, I guess, a few questions regarding or disagreements regarding the potential size and scale of Great White.
Can you add anything in terms of, you know, clarification in terms of your recent results and how you see Great White as a development candidate?
John Watson - CFO
I'm going to let Randy take that one.
Randy Richards - Manager of IR
Well, Mark, we probably are not going to add too much, and I think in terms of what you hear or don't hear about the Great White, you know, we'll defer it to the operator Shell there.
We've drilled some wells in the area, as you say.
We drilled Toledo, we drilled Trident earlier, and just this year we've drilled Tiger, and all I can say about Tiger is it was spudded in January, it did reach target depth in March, and other than that, due to the partnership agreements, we're not talking about Tiger.
So I'm afraid it doesn't help you too much, but that's the pallet of wells that we've been drilling down near Great White.
Thanks, Mark.
Mark Gilman - Analyst
Do I get another one due to the lack of responsiveness?
John Watson - CFO
Okay, Mark, we'll give you one more.
I wouldn't say it's lack of responsive business.
We gave you what we're prepared to give you.
Mark Gilman - Analyst
All right.
I'm going to give you a real easy one.
Can you quantify the shipping earnings in the fourth quarter and the first quarter?
John Watson - CFO
Well, we typically don't give out that information in any specific detail but just for you, Mark, we'll tell you there's about a $50 million improvement from the fourth quarter to the first quarter.
Very strong margins.
Mark Gilman - Analyst
Thanks very much, guys.
Appreciate it.
John Watson - CFO
Okay, Mark.
Next question.
Operator
Thank you.
Our next question is coming from Doug Leggette [ph] of Smith Barney.
Doug Leggette - Analyst
Hi, good morning, guys.
John Watson - CFO
Good morning.
Doug Leggette - Analyst
One thing we haven't heard too much about is the nonstrategic assets that you highlighted last August.
Just wondering what your latest thoughts are there particularly on what steps you're taking to improve performance?
Are you actively pursuing disposals?
Thinking specifically of the international downstream assets.
John Watson - CFO
I'll make a couple comments and then I'll let Randy say a little bit because he just not too long ago returned from Europe which is one of those areas.
But a couple of comments.
First, we did label some assets nonstrategic and what that really meant is that we were going to concentrate our resources in the areas that were strategic for us.
So, for example, in the downstream we highlighted Asia as being -- most of Asia as being core to our holdings, obviously the U.S.
West Coast and Gulf Coast, Latin America and Africa.
So those were broadly speaking our core areas.
In the absence of that are areas where they just weren't going to draw a lot of capital, and we were going to try to improve those operations.
In then in some cases, you could see over time some portion of those being sold.
I will tell you that we have had nonstrategic assets that we've retained for quite a long period of time just because we saw it was a better value proposition to hold than just not have it draw a lot of capital.
But as far as some of the activities we're doing to improve maybe I'll let Randy talk a little bit about Europe.
Randy Richards - Manager of IR
Yeah, I mean, I think we're pretty proud of what's been going on in Europe.
We've upgraded the Pembroke refinery, and it's capable of meeting the fuel specs that will come in the future.
As you know, it's a terrific export refinery and can make a lot of motor gasoline, big cracker, big alchy unit.
But beyond that, we've really feel that we've improved the marketing side of the business over there as well.
They've really put a good program together, identified preferred marketing areas at a much smaller degree of granularity than across all countries, for example, and concentrated in areas of strength like southwest England, for example, and they've been doing better as well.
So it's a good story, but a tough part of the world to be competing against, tough competitors in a tough market.
John Watson - CFO
I'll mention two other items in following up.
One is we did spend a modest amount of money at Pembroke to enable it to handle doba crude out of Chad which upgrades the value as well so that's an example of some good integration.
The other item going across the world, is it's a publicly traded company so I can't say very much but Caltex Australia has had a very dramatic turn around in their performance as well.
As it's a publicly traded company I'll refer you to them but that's a notable improvement and it's been reflected in their equity valuations.
So hopefully that gives you a little bit of a flare.
There are other nonstrategic aspects, but those are probably the biggest ones.
Doug Leggette - Analyst
So basically, there's no urgency to look to be disposing of some of these assets?
John Watson - CFO
We haven't made comments about our plans for disposition on any of those assets.
And probably wouldn't do so until the -- until that time.
One of the things we commented on back in August was if you telegraph what you're doing it puts you in a very poor -- very poor negotiating position with those that might buy it.
But having said that I'm not suggesting those assets are for sale, I'm just saying we're not likely to telegraph it until after the fact.
There or anywhere else, where we have nonstrategic assets.
If it would jeopardize commercial consideration.
Okay.
Thank you.
Very good question.
Next question.
Operator
Thank you.
Our next question is coming from George Gaspar of Robert W. Baird.
George Gaspar - Analyst
Yes, good morning.
Hello to John and Randy.
I'd like to -- and congratulations on your big win in the JDZ block one.
You certainly deserve operatorship.
My question to you on it is, I believe your original bid was in excess of $120 million for block 1, and you ended up with 51% interest.
What is the total amount of money that you actually had to pay for your interest in block 1, and then I'd like to ask you about your near-term intentions on formulating a program.
Is there a possibility of an exploratory well going down by year end?
John Watson - CFO
It may be a little early to -- the award was just finalized recently.
What I can tell you is -- probably the best thing to do is refer you to the press release that we had.
What we bid was $123 million, and that's public information for that lease, and we were awarded 51% of it and operatorship.
So that's actually public information.
And as you’ve pointed out it's a very sought-after, very sought-after block.
I don't have much information at this point on our plans but obviously if we -- with that kind of a bonus being paid, it's something we're going to try and move on with some diligence, but I don't have any additional information on the next step at this point.
George Gaspar - Analyst
Okay, so can I assume that your bid of $123 million is what you actually basically paid, then, for the 51% interest?
Randy Richards - Manager of IR
No, no.
When Exxon eagerly came in -- backed into their 40%, they were saying that they liked the price and they're going to pay their share.
George Gaspar - Analyst
Oh, I see.
So basically, then, your net cost there would probably be about half of the original bid, which was for the whole block originally?
John Watson - CFO
Correct.
George Gaspar - Analyst
Okay.
Great.
Thank you.
John Watson - CFO
Okay.
Operator
Thank you.
And our final question is coming from Steve Pfeiffer of Merrill Lynch.
Steve Pfeiffer - Analyst
Hi, guys.
I just had one quick follow-up.
Randy, on page 12 you went through and talked about the variances for volumes and we were just trying to make sure we have it really clear what the organic volumes were.
You said that divestments in the U.S. negatively impacted about a quarter of the 23, so I guess year-over-year there's about a negative 5,000 in the U.S. from divestments, and then you mentioned the U.K., and I just want to make sure I had really what, if you think about what were the organic changes or the divestment effects year to year.
Randy Richards - Manager of IR
Well, again, Steve, you said year-over-year, and my comments had to do with the fourth quarter versus the first quarter.
So let's go to year-over-year, if that's the framework that you want to ask the question.
Year-over-year the impact of asset sales in the U.S. was about 12,000 barrels a day, and outside the U.S., the impact was about 18,000 barrels a day.
That's obviously a bigger number than quarter to quarter.
Steve Pfeiffer - Analyst
Thanks.
That's what I needed.
John Watson - CFO
Okay.
With that, we'll conclude the call for today.
Again, I'll apologize for the delays in getting started.
Obviously some technical difficulties.
Appreciate your bearing with us, and we thank you for your participation.
Good-bye.
Operator
Thank you.
This does conclude this morning's teleconference.
You may disconnect your lines, and enjoy your day.