赫斯 (HES) 2006 Q4 法說會逐字稿

Good morning ladies and gentlemen and welcome to the fourth-quarter 2006 Hess Corporation earnings conference call. My name is Kelly and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS).

I would now like to turn the presentation over to your host for today's call, Mr. Jay Wilson, Vice President Investor Relations. Please proceed, sir.

Thank you, Kelly. Good morning everyone and thank you for participating in our fourth-quarter earnings conference call. Our earnings release was issued this morning and appears on our website, www.Hess.com. Today's conference call contains projections and other forward-looking statements within the meaning of the Federal Securities laws. These statements are subject to known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied in such statements.

As usual with me today are John Hess, Chairman of the Board and Chief Executive Officer; John O'Connor, President Worldwide Exploration and Production; and John Rielly, Senior Vice President and Chief Financial Officer. I'll now turn the call over to John Hess.

Thank you Jay and welcome to our fourth-quarter conference call. I would like to make a few brief comments highlighting some key achievements of 2006 and provide some guidance for 2007. John O'Connor will then discuss our Exploration and Production business, after which John Riley will review our financial results.

2006 was a year of record financial performance for our Company. Our results benefited from the strong commodity price environment which existed for much of the year. Consolidated net income was $1.9 billion. Exploration and Production earned nearly $1.8 billion, and Marketing and Refining earned $390 million.

Capital and exploratory expenditures and 2006 amounted to just under $4.1 billion of which about $3.9 billion was related to Exploration and Production activities. For 2007, our capital and exploratory expenditures are budgeted to be approximately $4 billion of which about $3.9 billion relates to Exploration and Production including our acquisition of a 28% working interest in the Genghis Khan Field in the Gulf of Mexico.

We enhanced the strength of our financial position during the year with our debt to total capitalization ratio improving to 31.7% at the end of 2006 versus 37.6% at the end of 2005.

During 2006 our operational achievements included growing our proved reserves to 1.24 billion barrels of oil equivalent; replacing approximately 230% of production at an FD&A cost of about $12.55 per barrel; lengthening our reserve life to 9.3 years, marking the fourth consecutive year in which we have lengthened our reserve life; increasing our crude oil and natural gas production by 7% versus the prior year; bringing four field developments into production; creating significant value from our high impact exploration program; and continuing the selective expansion of our Retail and Energy Marketing businesses.

With regard to crude oil and natural gas production, in 2006 our production averaged 359,000 barrels of oil equivalent per day. In 2007 we forecast that worldwide crude oil and natural gas production will average between 370,000 and 380,000 barrels of oil equivalent per day, which is within our long-term guidance of 3% to 5% production growth per year.

As to our major field developments, we made significant progress during 2006, including four field startups, ACG Phase 2, Atlantic/Cromarty, Phu Horm and Okume. During the year we sanctioned the Shenzi development project located in the Green Canyon area of the Gulf of Mexico and advanced the Pangkah oil development in Indoensia and the Seminole residual oil zone project in the Permian Basin, all of which are scheduled to begin production in 2009.

In terms of exploration, we continued to have good success in the deepwater Gulf of Mexico during 2006. We made a potentially significant discovery at our Pony prospect, on a Green Canyon Block 468, and drilled a successful appraisal sidetrack which confirmed our predrill estimate of 100 to 600 million barrels of oil equivalent on our acreage. We have 100% interest in the Pony prospect. In addition, successful appraisal drilling at our Tubular Bells prospect on Mississippi Canyon Block 683 and 726, in which we have a 20% interest, has been very encouraging. Appraisal drilling at both these discoveries will continue in 2007.

With regard to Marketing and Refining, our businesses were negatively impacted by margin pressures and milder than normal weather. Our refineries operated reliably with the exception of some unplanned downtime at our HOVENSA joint venture early last year. We successfully completed low sulfur fuel projects at both HOVENSA and Port Reading during the year.

In Retail Marketing, our annual convenience store revenues in 2006, excluding petroleum products, exceeded $1 billion for the first time. Energy Marketing achieved increased sales of both natural gas and electricity as a result of both organic growth and selective acquisitions, building a stronger and more profitable business for the future.

In summary, we are pleased with the performance of our assets and the strength of our organization. We remain confident that the investments we are making for the future will sustain profitable growth and create significant value for our shareholders.

I will now turn the call over to John O'Connor.

Thank you John. Good morning everybody. In the fourth quarter as 2006, production of 366,000 barrels of oil equivalent a day was up 16% versus the fourth quarter of 2005. Two new Hess-operated fields, Okume Complex and Phu Horm, started up ahead of schedule and on budget. In the Gulf of Mexico we drilled and cored a successful appraisal well to our Pony discovery and we announced the acquisition of a 28% interest in the Genghis Khan Field, which is the western portion of the large Shenzi development in which we also have a 28% interest.

Overall, 2006 was a year of strong operational performance for Exploration and Production. We produced 359,000 barrels of oil equivalent a day, up 7% from 2005. More importantly, we replaced about 230% of production with new proved reserves of 310 million barrels of oil equivalent. Reserves growth year-on-year was 14%, resulting in year-end 2006 proved reserves of 1.24 billion barrels of oil equivalent and a reserve life of 9.3 years. Over the past three years we have replaced 162% of production at an average FD&A cost of $12.50 a barrel of oil equivalent.

During 2006 we continue to actively a high grade our asset portfolio by selling non-core properties in the Permian and U.S. Gulf Coast, and by entering the West Med block off short Egypt and reentering Libya.

In 2007 we expect production to be in the range of 370,000 to 380,000 barrels of oil equivalent a day net of planned asset sales, and within our 3% to 5% per annum growth initiative. Okume Complex production will step up through the year with the addition of some five new wells per quarter, achieving plateau production in early 2008. In the second quarter of 2007, we will start gas production from Ujung Pangkah in Indonesia and in the third quarter we expect to start production from Genghis Khan.

Gas production from that JDA fields will also increase in the second half of 2007 with the addition of some 200 million cubic feet a day gross of early Phase 2 gas to the current Phase 1 volumes of 350 million cubic feet per day. Full production from Phase 2 of the JDA is scheduled for first quarter 2008.

In 2007, our drilling activity in the Gulf of Mexico will focus on the development and appraisal of our three Miocene discoveries in the Green Canyon and Mississippi Canyon areas. Development drilling will continue on Shenzi and on the Genghis Khan while appraisal drilling is underway at both Pony and Tubular Bells.

2006 was certainly a year of high activity and of significant execution and 2007 promises to be just as active.

I will now pass the call over to John Rielly.

Thank you, John. Hello everyone. In my remarks today I will compare fourth-quarter 2006 results to the third quarter.

Net income for the fourth quarter of 2006 was $359 million compared with $297 million in the third quarter. As indicated in the press release, third-quarter 2006 results included a charge of $105 million for the additional 10% supplementary tax in the United Kingdom that was enacted in July with an effective date of January 1. The third-quarter charge represented incremental income taxes of $60 million on operating earnings for the first half of the year and $45 million to adjust the United Kingdom deferred tax liability.

Turning to Exploration and Production, income from Exploration and Production operations in the fourth quarter of 2006 was $350 million compared with $311 million in the third quarter, excluding the United Kingdom tax charge. The after-tax components of the increase are as follows. Lower crude oil selling prices reduced earnings by $97 million; higher crude oil and natural gas sales volumes increased earnings by $110 million; lower exploration expenses increased income by $47 million; higher operating expenses reduced earnings by $39 million. All other items net to an increase in earnings of $18 million for an overall increase in fourth-quarter adjusted income of $39 million.

Our E&P operations were overlifted compared with production in the fourth quarter, resulting in increased income in the quarter of approximately $35 million. For the full year, sales volumes approximated production. The Exploration and Production effective income tax rate for 2006 was 54%, excluding the effect of the adjustment to the UK deferred tax liability of $45 million in the third quarter. The E&P effective income tax rate in 2007 is expected to be in a similar range of 52% to 56%.

Turning to Marketing and Refining. Marketing and Refining earnings were $67 million in the fourth quarter of 2006 compared with $153 million in the third quarter. Refining earnings were $45 million in the fourth quarter of 2006 compared with $64 million in the third quarter. The Corporation's share of HOVENSA's results after income taxes was income of $20 million in the fourth quarter of 2006 compared with $43 million in the third quarter. During the fourth quarter the Corporation received a distribution from HOVENSA of $100 million.

Port Reading earnings amounted to $22 million in the fourth quarter of 2006 compared with $18 million in the third quarter. The decrease in refining earnings in the fourth quarter was due to lower refining margins at HOVENSA. The balance of the PDVSA note at December 31st was $137 million and principal and interest payments are current.

Marketing operations had income of $17 million in the fourth quarter of 2006 compared with income of $63 million in the third quarter, principally reflecting lower margins. After-tax trading income amounted to income of $5 million in the fourth quarter of 2006 compared with income of $26 million in the third quarter.

Turning to corporate, net corporate expenses amounted to $27 million in the fourth quarter of 2006, slightly lower than the third quarter amount. Net corporate expenses for the year 2006 were $110 million and are expected to be in the range of $115 million to $125 million in 2007.

Turning to interest, after-tax interest expense was $31 million in the fourth quarter, comparable to the third quarter amount. For the full year of 2006, after-tax interest expense was $127 million. After-tax interest in 2007 is expected to be in the range of $170 million to $180 million, primarily reflecting an anticipated decrease in capitalized interest due to the completion of several development projects.

Turning to cash flow, net cash provided by operating activities in the fourth quarter including a decrease of $67 million from changes in working capital was $779 million. The principal use of cash was capital expenditures of $961 million. All other items amounted to an increase in cash flow of $19 million resulting in a net decrease in cash and cash equivalents in the fourth quarter of $163 million. At December 31, 2006 we had $383 million of cash and cash equivalents. Our available revolving credit capacity was approximately $2,700,000,000 at year end.

The Corporation's debt to capitalization ratio at December 31, 2006 was 31.7% compared with 37.6% at the end of 2005. Total debt was $3,772,000,000 at December 31, 2006 and $3,785,000,000 at December 31, 2005. The Corporation has long-term debt maturities of $27 million in 2007 and $28 million in 2008.

This concludes my remarks. We will be happy to answer any questions. I will now turn the call over to the operator.

(OPERATOR INSTRUCTIONS) Arjun Murti of Goldman Sachs.

Thank you. A couple of questions. First one on the production guidance of 370,000 to 380,000. You allude to I think net of planned asset sales. Do you have an amount that you're assuming for asset sales that you can share with us?

Good morning, Arjun. One of the asset sales that we have clearly identified is the residual equity we have at [Southridge]. We basically have a purchase and sale agreement for that and then assets currently producing net to us about 9000 barrels a day.

Terrific. And are you assuming any additional asset sales beyond that or is that really the one you were talking about?

I think that with respect to production guidance for the year, Arjun, we have to be cognizant of the fact that we have really three new field startups incorporated in our projection for the year, the Phu Horm startup in late November, then Okume in December, and then looking to April/May time for Pangkah in Indonesia. Given all the moving parts I think there is even less certainty with respect to that range of production guidance for this year than would normally be the case. There's no question but that there is significant additional production potential being had into the developments.

How the drilling progresses on these new fields and how the wells perform as we bring them on and indeed how the new facilities operate, how much up time we get, are all moving parts that influence the guidance. To the extent, however, that we have opportunities to sell further assets to continue with the high grading of the portfolio, we would look at that in the context of that guidance.

That all makes a lot of sense. Is Genghis Khan not going to produce any volumes this year? I thought there was some early oil going through Anadarko -- I think Marco Polo facility?

We expect that we will see startup of Genghis Khan into the third quarter, Arjun.

And I apologize, just a final one. Tubular Bells there was previously a pretty wide range I think 75 to 350 million barrels. It sounds like this appraisal went well and I recall it being a fairly decent step out. Can we have confidence in the upper, at least middle portion of that range now or can you provide any color around that?

We are actually drilling currently the down dip sidetrack from the No. 2 will and drilling operations are still in progress there. Certainly I think as John said in his script that we have been very encouraged by the No. 2 well, the No. 2 sidetrack. But beyond that I would rather wait for the operator to put out an interpretation of how they feel about the range of guidance on the completion of operations here.

That is great. Thank you very much.

Nikki Decker of Bear Stearns.

Good morning everybody. I just wanted to ask a little bit more about your reserve bookings if I could. The numbers went by pretty quickly. But it sounds like your reserve replacement was quite decent. Did you say that you had booked 310 million barrels of new proved reserves?

Yes we did, Nikki. And should give that some color commentary by saying that we also sold 27 million barrels.

Sold 27 million. Were acquisitions a part of that 310 million?

It depends how you want to classify Libya. We booked Libya in 2006. If that is organic in other words returned to prior ownership, then all 310 would be organic. If you care to categorize it as an acquisition then the 310 less about 125 would be the organic adds.

125, great. And were there negative revisions in there, John?

Not really. There are always are onesies, twosies, ups and downs which net out. But as we continue to improve the capability of our reservoir management folks, negative revisions occur less and less, quite frankly.

Great. On the [F&D] I think I heard a three-year figure of about 1257. Did you provide a 2006 figure?

John did in his text and the 1255 was for 2006. The average for the three years is actually coincidentally a little less than that at $12.50.

Wonderful. That will do it for me. Thank you.

Doug Leggate of Citigroup.

Good morning everybody. John O'Connor, on the reserve replacement you mentioned in Nikki's question there, the answer rather that you had some sales, I guess that was the swap of the Apache. Would that be part of that?

Yes, the way the thing worked out is actually shown as disposal so there was part of the 27 was the sale as a quid pro quo for our acquisition of West Med to Apache in the Permian, and the other part is the exit from the Gulf Coast and near shore -- offshore Louisiana.

I guess where I'm going with this is clearly there seems to be quite a lot of -- left in reserve if you pardon the pun in terms of where your bookings could come from next. Could you maybe lay out for us how you see '07, '08 in terms of how deep the portfolio is? And maybe comment on BP's discovery this morning and how that might impact your (indiscernible) in the region in the Med obviously?

Yes. Obviously we were very pleased basically to confirm what we believe to be the deeper exploration potential on the very sizable West Med block so that was good neighborliness on behalf of BP and his partner in the next door block. We're encouraged by that. We continue to work our development options to optimize what we are looking in West Med. So that is all a good news story.

In terms of forecasting reserves for '07, 08, I think it's fair to say as you look at the full categorization of our resource base I think at the time of the May investor conference we talked in terms of [6 P] of 3.5 billion barrels and I think at the end of the day after we've shown our reserve situation to the Board next week that number will be over 4 billion barrels in terms of 6 P. So the question then is at what pace do they move into SEC proved reserves. But the resource base is very substantial.

Okay. I guess a couple of just additional questions from me. The exploration program, the read through I guess for me anyway is that you are moving into a fairly heavy appraisal period. How do you see the volatility, let's say of the dry hole cost as we move through the year in '07?

I think you are right. Given that we have two rigs under contract in the Gulf of Mexico and that is where the bulk of our exploration and appraisal spend occurs, as we switch efforts to funding the appraisal, Pony we believe will be on appraising, the Pony prospect for the full year. There is still containing work to be done on Tubular Bells. Of course we have drilling activity both developments in terms of Shenzi and later on in the year Genghis Khan. We also have some production work to do in the Garden Banks area which would use the rig that is currently on Jack Hays.

So it goes without saying that the capacity to drill wildcat wells this year is reduced by comparison with 2006. But this is the consequence of success; when one explores and finds something, the next phase is appraisal and so it's appropriate for us that we move into the appraisal phase in the Gulf of Mexico.

In the international arena of course we're looking forward to drilling a wildcat on block 54. We have shown it in late fourth quarter of this year but given the exigencies with which drilling rigs become available from others or not, as the case may be, it's conceivable that will slide over into the early part of 2008.

We have a couple of wildcat wells in West Africa where we are fully carried by partners so they are not contributing to the expense. So all in all although we don't forecast exploration expense and while we will have an increase in our acquisition and processing of seismic particularly in the Gulf of Mexico, I think you can see that by comparison with the high activity on wildcats last year this year will be less so.

Just on the subject of carry, Jack Hays, you have a full carry there as well?

That is correct, yes.

Final one for me. Cost guidance, John, on a cash and non-cash for 2007, please?

Our 2006 unit costs were $19.80. That was $10.90 for cash operating costs and $8.90 for DD&A. Our guidance for 2007 is a range of $12 to $13 for cash operating costs and a range of $10 to $11 for DD&A.

Great. Okay, thanks a lot.

Bruce Lanni of A.G. Edwards.

Good morning gentlemen and congratulations on a good year. Real quick, probably John O'Connor. It's a follow-up on the previous questions more or less. The first one dealing with reserve replacement, John. You mentioned Libya being a portion of that. Could you break out the balance of where the other reserves came from? That would be the first question.

And the second one would be on Pony, still a very wide range again similar to Arjun's comment on Tubular Bells. Could you kind of break out when you think that you may be able to fine-tune the Pony number and why the range is still so wide?

And then a third question would be on Libya. Not really that much mention of it. Wondered how active you are going to be in that region over the next year or two?

Okay, Bruce, let me talk to those in reverse order. As you know, we have 8% equity in Libya. I think it is fair to say that things do not move at warp speed in terms of the operation of the oasis concessions and that is okay frankly. We have acquired a lot of updated information, we and our partners, working with the NOC through 2006 and frankly and it's about at the pace that I expected.

But we are a lot more knowledgeable about the assets and we're putting together the opportunity sets. So I don't see a significant change in terms of our commitment and our spend in Libya. But I do think that for the longer-term, it represents a significant opportunity for us.

In terms of Pony, the original discovery well plus the -- Bruce, can you hear me?

Yes, I can hear you I don't know (inaudible).

All right. The original discovery while together with the sidetrack basically confirmed the lower end of the 100 to 600 million barrel range, slightly more than that. The second well that we're currently drilling will hopefully add to that but I think that the real narrowing of the range will occur after the third well is drilled. So I think unfortunately given the depth of the target horizons for this well unlike the more instant gratification that one gets from exploration and appraisal of other shallower prospects, this one is going to take some patience.

And John, where is the third well kind of located?

Well, at the present time it is notionally located as you know this to the northwest of the discovery; the next one will be located to the northeast. But I would keep that as tentative until we find the results from the No. 2, together with No. 2 sidetrack because we've had a sidetrack to the No. 2.

So we're trying to delineate the down dip edges of the structure as we move to the north both at westerly and easterly directions.

Your third question was with respect to the additional reserve ROZ over and above those from Libya and I would tell you that we added significant reserves in Shenzi upon sanction of that in the JDA on the back of an drilling program in 2006; in the UK on the back of activity and performance in some of the core fields. They are Bittern, Clair, Schiehallion and Beryl.

In West Africa again as a result of drilling in both Equatorial Guinea and Gabon; in the U.S. as a result of drilling and performance at our U.S. assets, (indiscernible) [Allegro] began as a result of drilling activity there. So this sort of bears out my observation in my prepared remarks that we've had a very active year executing around our program in 2006 and of course the benefits flow through in terms of reserve [outs].

Excellent, congratulations again.

Paul Sankey of Deutsche Bank.

Good morning everyone. Still on O'Connor, if I could just press you a bit more on the wildcats and try to get a better feel for the risk reward that we're looking at this year as opposed to last year. It seems that you are actually carried on all the wildcats you have this year. I would be interested to know how that compares with the number of wildcats you drilled last year? If you could just conform the location of those and just confirm that I'm correct about the outlook for '07 that would be great. Thanks.

It's not true actually, Paul, but we are carried on all the wildcats this year. We are carried currently on the Jack Hays well and I indicated we're carried on a couple of West African wells. We have got various equities in a number of wells that we have penciled in in the Gulf of Mexico and of course we would be 100% in the block 54 offshore Libya Wildcat.

The issue really is with respect to moving parts on rig timing and the priorities that may occur. And so while we have budgeted for those wildcats some or all may not be drilled this year. And so it's very difficult to give you a credible forecast. I would merely indicate that with respect to exposure to wildcat drilling, it will be less in 2007 than it was 2006.

Just to confirm the '06 number which I guess we know, could you just talk about how many drilled and how much exposure you had at the end of the day?

I can't read that. Okay we had Ouachita, we had Alsace, we had [Brook Down at the Pharaohs], we had Andros and we had Norman. That is the one, two, three, four, five, six. The total exposure, John Reilly might care to comment on that -- $240 million, Paul.

That's great. I appreciate it, thanks a lot. Just pressing a little bit more on the disposal question, you are saying that you've confirmed more or less the 9000 barrel at day disposal. Is their a potential for a step disposal, a really large sell down or do you still see the asset base you've got in front of you as one that you are broadly speaking happy with allowing for the trimming around the edges that you are doing?

I believe that the asset portfolio is significantly better and more robust than it was a few years ago. We have been continually disposing of the weaker properties over the past three to four years. And while we have got a short list of as you would say trimming around the edges type properties, that is about the size of it quite frankly. We like the assets that we've got. We think we have a lot of running room with it. There is obviously room for improvement with respect to both costs and longevity. But in terms of assets sticking out that you say I wish I didn't have that, we are pretty much near the end of the road in terms of cleaning the portfolio.

Great, that's helpful. Thank you. And one final one from me, a change in direction slightly. There are some quite concerning headlines coming out of Venezuela on an ongoing basis. Could you just address the level of risk that you face regarding the potential for nationalization or other contractual changes from Venezuela? Thanks.

Well as you know, our investment with Venezuela is not in Venezuela. It is in the U.S. Virgin Islands. So in terms of nationalization risks, it is really not a risk. Number two, our joint venture there has operated very well and profitably since its inception, since 1998. The Venezuelans have honored their supplier agreements on crude as well as their financial commitments. And the partnership continues to be an excellent where both sponsors are very supportive of the joint venture.

Great, that is helpful. Thank you, gentlemen.

Mark Flannery of Credit Suisse.

This is a question for John O'Connor. More of a longer-term conceptual question. You've got 165% reserve replacement over three years, about $12.50 a barrel. And that is actually five years ago that would have been seen as a bad result, now it's probably going to be seen as a good result. If you look forward with the assets that you know about, reach into the resource base if you like, what do you see happening to F&D over the rest of the -- let's say over the rest of the cycle? We are not necessarily looking for a number but what -- if everything goes to plan, what kind of charges and the rest of it are going to be working their way through the portfolio do you think?

Good question, Mark. I think that generically for industry we are seeing significant year-on-year increases and F&D as a result of cost push occurring in terms of where the industry is moving into perhaps more challenging and even more marginal hydrocarbon resources. Obviously rig suppliers are extracting their pound of flesh from industry. Service companies find that this is their time in the sun as well. So all of these and there is the people issue too that as the industry loses people we are having to compete heavily to acquire new professionals to execute on the developments that we all need.

So my belief is that costs squeeze are going to continue to occur. And then I leave it to other commentators as to what that means with respect to margins and prices would be.

Right. So you really don't see any eminent relief from any of that?

I really don't, I really don't. Because the nature of where we are exploring, where we're developing and the fundamentals that lie behind all of that, I really don't see a downturn. In fact I see a continued increase in trend of (inaudible) costs.

Thank you very much.

John Herrlin of Merrill Lynch.

Hi, three quick ones. With West Med, John, what did you book for that?

John, good morning. We haven't sanctioned West Med yet so there will be no bookings there.

Great, that is what I thought. With Pony should we expect given the kind of drilling you are talking about kind of a third-quarter type update or will you update us once you are done with the next well?

I think it's probably incumbent on us as the sole meaningful in terms of shareholder information that on completion of operations on that straight hold we would update you.

When do you think it will TD?

Well it's going very well, frankly. But I think we had planned about 120 days and say it spud in the beginning of the year. So you are looking at four months, end of April possibly. And we'd like to try to beat that if we can.

Great. And how about the Jack Hays?

Jack Hays also is a very tight hole, confidential and very strategic in nature. A (indiscernible) check will probably tell you it is drilling below 25,000 feet currently.

Okay. Last one for me is with respect to hedging. Any changes at all with that for WTI? I mean prices have been pretty volatile; you have a fairly large program, John.

No plans to add to the edges we have. We are very comfortable taking the price risk with the balance sheet that we have and the cash flows we're getting from the new developments.

Great, thank you.

Robert Kessler of Simmons & Company.

Good morning gentlemen. I had a question on your reserve bookings this year. Genghis Khan sounds like it was not booked in 2006. Can you confirm that that transaction had not closed by year-end? And what you might book for 2007 as initial reserves there?

Robert, you are right that it was not included in year-end 2006 reserves. In fact the transaction has not yet closed, I believe. It is in the final stages, it's eminent but it has not yet closed. And unfortunately I don't recall off the top of my head what we're going to book but I don't think it's going to be significantly material initially.

Okay, I think you have guided to a resource range of 65 million barrels to 170. Is it fair to say you'd start at the low end of that range and then the optionality would be included in future years?

That sounds like that would be gross number for the three partners of which we would have 28%. So if you took 28% of 60 or thereabouts, that might be appropriate.

Fair enough. Thank you very much.

It might be actually on the high side.

Thank you. And then on the exploration obviously you have a lower year in terms of your net exposure for the exploration wells. Particularly in the first quarter with Jack Hays being carried by Maersk and then obviously Pony still drilling on through the quarter. Can you give us a sense for baseline G&G kind of exploration expense on that basis on top of which we could layer in any dry hole exposure?

Let me pass you to John Rielly.

That type of exploration expense on numbers we don't give out because again it really is -- it depends on where the program ends up, where the seismic, what the timing, getting all the boats and the work done so it is very difficult for us to forecast that and like you said, what happens with dry holes and the success or lack of success. At this point we can't really guide you on the exploration expense and all we will do is quarter to quarter is give you updates on the wells we are drilling.

Okay, thank you.

Mark Gilman of The Benchmark Company.

Guys, good morning. I had just a couple quick things. Can I assume, can I be safe in assuming that Shenzi was the largest single element of the non Libyan reserve bookings in '06?

Yes.

Okay. U.S. production, liquids and gas fourth quarter really seemed to have slipped to a much greater extent. Was there downtime, John, associated with that or is the decline rate accelerating? Could you put some color on it?

Yes sure, Mark, I'd be happy to do that. In point of fact it was facility issues both on Llano and on Conger. And the irony is that they are both not operated by us. Llano goes to the Auger Platform and Conger goes to Enchilada. In one case actually Enchilada I believe suffered from storm impacts whereas Auger was planned maintenance. So both of those had a significant impact on the production delta between the fourth quarter and the third quarter.

Now it's also fair to say, it would be disingenuous not to, that both Conger and Llano are of course continuing to [decline].

Could you quantify at all what the impact of the downtime might have been, John, on those two?

Yes, my estimation of the downtime is around 5500 barrels a day for the quarter, quarter versus quarter, Mark.

Okay. One final one if I could. On Phu Horm, can you give us an idea what the tax and royalty provisions look like and what kind of base gas price we're looking at there?

Sure, Mark. From a base gas price right now let's just say what we had in the fourth quarter from our initial production is approximately $5 Mcf for the gas price. We have the -- in Thailand it is the normal tax and royalty type process there and the tax rate in Thailand is approximately at the 50% range.

And the royalty about 10% or 12%, if I remember, John?

I can't remember that off the top of my head, Mark. I will have to get back to you on that.

Okay, thank you.

Paul Cheng of Lehman Brothers.

Good morning gentlemen. Actually only several quick questions. John, do have a number what is the Libyan production for the year and if you already (indiscernible) with any inventory and over lifting or under lifting?

As far as the overlift, underlift, there was the overlift that I spoke about in the fourth quarter, the biggest piece of it came from Libya. But from an overall standpoint in 2006, now our sales volumes are equal to our production volumes.

Right. John, what is the fourth quarter Libyan production?

It was 23,000 barrels a day.

23. And on a going forward basis, what is the sales stand?

The sales -- are we are expecting it again within an overall year period to equal the 23,000 barrels a day.

Right, but what is in the fourth quarter, you say there is an overlifting?

Oh, I'm sorry. So in the fourth quarter we had an additional -- just under 1.2 million barrels overlifted in Libya.

We've caught up on the underlifts.

You caught up on them?

Yes.

Yes. But in the fourth quarter we were overlifted about $1.2 million barrels (multiple speakers).

So going forward we [shouldn't] be in balance on a year-on-year basis.

Perfect. John, you gave a full-year production guidance. Do you have a number for the first quarter?

No, Paul, we are not really providing the guidance specifically on the first quarter. There are, as John O'Connor has mentioned, various moving parts that happen within the portfolio including even things with JDA and getting Phase 2 gas on line. So there will be some downtime and we're not exactly sure where that will link in with the Thailand operation. So at this point I think you follow the basic guidance that John O'Connor spoke about earlier that we will be having a ramp up. Okume will be ramping up; Genghis Khan doesn't come on until the third quarter; Pangkah doesn't come on until the second quarter. So we have a normal ramp up there. So you can see kind of towards the fourth quarter where that production will be higher than (multiple speakers).

How about can you tell me what is the current production rate for the Okume or (indiscernible)?

Sure. It is running about 11.5 thousand barrels a day right now.

Net to you or that is gross?

That is gross.

11,500 gross.

That is from three wells that are on stream. And as I said in my remarks, Paul, we expect to bring a five wells per quarter on. To underline what John Reilly has just been saying, you can see that the production profile for the year is heavily back-end loaded towards the fourth quarter. Bear in might also that we expect the normal third-quarter seasonal outages for a heavy maintenance activity in the North Sea and also at the turn of the first quarter into the second quarter we expect the JDA to be down for roughly 40 days for brownfield tie-ins and for connection of the 42-inch line to Thailand.

I'm sorry, John, JDA will be down in the second or third quarter?

It will be down -- it's going down at the middle of March as currently planned, Paul, for 40 days. So its major impact will actually be in the second quarter.

And the [Alsace] sales in UK, when that going to be finalized? Is it first quarter event or second quarter?

That is projected to close in the first quarter by the end of the first quarter, Paul.

By the end of the first quarter. And the 9000 barrel per day, that is just a weighted average for the year I presume?

It is the current production rate.

That is the current production rate.

Right.

Also I think John, you have touched based on that. Wondering some people have said that they start to see a relief in the rig availability and also the cost pressure in the upstream side of the business. Have you guys noticed that that is really true? And any comment that you can add?

We haven't actually been in the market to secure new equipment, Paul. But I see the same information I guess as you and others do. It looks like at least there's a flattening off in the escalating rates that we have seen over the prior three years and if nothing else that is encouraging.

How about on the development side, has the cost pressure start to tail off or that it is still rising pretty rapidly?

We don't -- we're not out in the market for any new developments currently. And it's very difficult for me to comment on what's happening.

Yes, the concept of a plateau in cost is appropriate given that the cost of steel is still pretty high.

I see. Very good. Thank you very much.

Kate Lucas of JPMorgan.

Good morning. I have a question about the Genghis Khan development and the Shenzi development. Given that you've sanctioned the Shenzi project before you announced the acquisition of Genghis Khan and that they are part of the same structure, are you looking at changing any of the development plans for Shenzi as a result of the Genghis Khan acquisition?

We are indeed, Kate. One of the attractions and if you like the synergies through the existing partnership in Shenzi acquiring the western portion of the prospect which is called Genghis Khan is that it allows us to optimize well locations which are significant in this development.

Okay. And then just one quick question on your international E&P tax rate. It was about 58% over the course of the quarter. Is this a good representative international E&P tax rate going forward or was it favorably or unfavorably impacted by your sales volume mix?

It was the volume mix that I spoke about just a little bit earlier. We were overlifted in Libya with obviously Libya having a greater than 90% tax rate so that drove up the international tax rate in the fourth quarter.

Okay, thanks very much.

Bernie Picchi of Wall Street Access.

Good morning. A question, John O'Connor, about Okume. You said that reduction will plateau in the first quarter early in '08 and you laid out the development program quarter by quarter. Could you give us an idea what the plateau term will be, how long production will remain at that plateau and then how quickly the decline rate will set in? Question one.

And then also in Equatorial Guinea, in a general sense, could you talk about additional development opportunities you may have within the lease in terms of additional satellites or exploration or development opportunities elsewhere within Equatorial Guinea?

Let me start with the last one. I don't anticipate any greenfield exploration opportunities to emerge from our remaining concession area in Equatorial Guinea. We pretty much drilled what we thought was viable and we have relinquished the non prospect of acreage so we are pretty much down to the areas surrounding the production assets. There are -- there is certainly one if not two possibilities to tie into the production facility and there may be more as our experience in the currently producing areas grows with time. But I would not look to see substantial change.

I think that the issue with respect to Equatorial Guinea will be the expectation that recovery factors will turn out to be better than currently perceived as we continue with pressure maintenance and [secondary] recovery in both the Ceiba field and in the Okume Complex.

As to the plateau, the facilities in Okume Complex have been designed for 60,000 barrels a day plateau gross. Generally speaking these facilities can be debottlenecked and [nudged] and certainly the well capacity will exist to meet if not exceed that plateau rate. The issue will be one more of subsurface. How connected are the various geobodies, how effective is water injection and thus far I would say that we have been pleasantly pleased with the drilling results. But there's a long way to go.

As I said, we will be completing five wells per quarter so we have a lot of learning to do on Okume through the year. As far -- and that of course is going to impact how long the plateau will last but currently I think our projection would be that we will see the plateau last for four to five years, very uncertain at this stage. And thereafter we'd probably decline somewhere between 5% to 7% a year. So this is a long duration activity.

Excellent, thank you, John.

Daniel Volpi of Barclays Capital.

Good morning, gentlemen. Have you had a chance to share your reserve results with the rating agencies prior to their release or do have an update on your discussions with Moody's specifically in regards to investment-grade ratings?

Typically right before our earnings release calls we will update the rating agencies on results and we did discuss the reserve replacement with all the rating agencies. Our discussions with Moody's have been positive and have been positive for the last several quarters. They see the improvement in the business. As far as any timing for them to do something with our rating it is up to Moody's and we will -- we just will be answering their questions as they send them to us.

Great, thank you very much.

Doug Leggate of Citigroup.

Apologies for the follow-up. I just wanted to come back on one of John O'Connor's comments. You said part of the reserve bookings, John, were in the JDA. Are you now in a position to put the third phase of the JDA?

Sorry, Doug, I missed the last piece. You asked me about the third phase.

Yes, I think you have a put option essentially.

On the put, sorry. We retained that option. I think that it is certainly premature to exercise it. There are a number of moving parts. Very clearly we have the gas resources that we have contracted for in both phases 1 and 2. We also have a lot of drilling under way. A well to watch out for this year will be a deep well in [Bome]. That is basically a very high-temperature well, not quite high pressure so not quite HPHT but certainly HT. And the success of that well will give us an indication of how much unbooked and uncontracted resource we have in the central [emersion] zone in the block.

So I think the best answer to give you is we retained the put option. The market is very, very strong and is looking for additional gas volumes. We just have to be sure that we have got incremental gas and sufficient of it and that the economic terms would be right to exercise the put option.

Great, thanks. Just one final one for John Reilly. John, you have about -- I think at the end of 2005 something like $5 per share of net operating losses and net asset value. Can you tell us what that number was at the end of '06? And just walk us through the mechanics of how you realized that value?

Sure. For the net operating loss what we will do is obviously as the U.S. has taxable income, we will be able to utilize that NOL to offset current taxes. As of the end of 2006, we have approximately 3.3 billion of NOLs remaining to be utilized and so we see that asset being utilized over the next several years.

What was the MPV of that number?

Again it all depends on -- I'd have to make a guess on commodity prices of what the taxable income would be in each year here going forward. So it would be difficult to do that.

Not dissimilar to the '05 number. I think that was about 1.6 billion or something like that?

Well, again, are you talking about the deferred tax asset associated with it?

Yes.

Oh, okay. That's just that the tax rate in the U.S. So again you are using an effective 35% to 37% effective rate on those NOLs.

Thanks a lot.

Ladies and gentlemen, that concludes our question-and-answer session for today. We thank you for your participation in today's conference. This also concludes the presentation and you may now disconnect. Have a good day.