赫斯 (HES) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Hess Corporation fourth-quarter 2007 earnings conference call. My name is Katina, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes.

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

Thank you, Katina. 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 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 will now turn call over to John Hess.

Thank you, Jay. Welcome to our fourth-quarter conference call. I would like to highlight key achievements of 2007 and provide some guidance for 2008. John O'Connor will then discuss our Exploration and Production business, and John Reilly will review our financial results.

Our Company generated solid operating and financial performance in 2007. Results benefited from higher volumes of crude oil and natural gas production and strong commodity prices, which were partially offset by higher industry costs and lower margins in Marketing and Refining.

Corporate net income was $1.8 billion. Exploration and Production earned $1.8 billion and Marketing and Refining earned $300 million. In 2008, our Company's capital and exploratory expenditures are budgeted to be $4.4 billion versus $3.9 billion in 2007. The majority of our 2008 spending will be targeted to Exploration and Production.

This year, our Exploration expenditures are expected to increase to $1.2 billion compared to $740 million in 2007. While we continue to reinvest the majority of our cash flow in Exploration and Production, we strengthened our financial position in 2007 with debt-to-capitalization improving to 28.9% compared to 31.6% at the end of 2006.

With regard to operations, Exploration and Production achievements in 2007 included growing proved reserves to 1.33 billion barrels of oil equivalent; replacing 167% of production at and FD&A cost of about $16.20 per barrel; lengthening our reserve life to 9.5 years, marking the fifth consecutive year in which we lengthened our research life; increasing crude oil and natural gas production by 5% versus the prior year of 377,000 barrels of oil equivalent per day.

In 2008, we forecast that production will average between 380,000 and 390,000 barrels of oil equivalent per day.

In terms of our Hess operated field developments, 2007 marked the commencement of natural gas production from the Pangkah Field in Indonesia, in which we have a 75% working interest, as well as a significant increase in crude oil production at the Okume Complex in Equatorial Guinea, where our working interest is 85%.

We also made significant progress in the development of the Shenzi field in the Deepwater Gulf of Mexico where Hess has a 28% interest. The tension-leg platform hull recently left the Samsung yard in Korea and, along with the topsides, is scheduled to be installed this summer. First oil is expected in the first half of 2009.

During 2007, we also advanced several Hess operated field development projects including Bakken Shale in North Dakota, Seminole residual oil zone in West Texas, and Pangkah oil in Indonesia. In addition we sanctioned during the past year two field developments -- the Hess operated Jambi Merang natural gas product in Indonesia and the Valhall field redevelopment in Norway.

In exploration, we continue the appraisal of the Pony and Tubular Bells discoveries in the Deepwater Gulf of Mexico. Results of both the Pony Number 2 and Tubular Bells Number 3 appraisal wells are expected by the end of the first quarter. Hess has a 100% interest in Pony and a 20% interest in Tubular Bells.

With regard to Marketing and Refining, our refineries operated reliably in 2007. However, full-year financial results for the HOVENSA joint venture refinery were impacted by the turnaround of the coker in the second quarter of last year and lower margin environment that existed in the second half of the year.

In retail marketing, fuel sales and convenience store sales continued to show annual increases. But the improvement in volumes was more than offset by lower fuel margins.

Finally, our energy marketing business had a strong growth in sales and margin improvement in both natural gas and electricity.

We are pleased with the operating and financial performance that our Company delivered in 2007. We are proud of our organization and excited about the investment opportunities we have to provide long-term profitable growth and create value for our shareholders. I will now turn the call over to John O'Connor.

Thank you, John. Good morning, everybody. The fourth quarter of 2007 production of 390,000 barrels of oil equivalent per day was up 7% versus the fourth quarter of 2006. This increase was underpinned by production from the recently commissioned Hess operated Okume Complex, Pangkah, and Phu Horm fields.

2007 was another year of strong execution and delivery for E&P. As John mentioned, in '07 our production increased by 5% and proved reserves increased by 7%. This performance resulted in year-end 2007 proved reserves of 1.33 billion barrels of oil equivalent and a reserve life of 9.5 years.

Our proved reserve additions totaled 280 million barrels of oil equivalent before PSC related revisions. Net of these revisions, which totaled 46 million barrels, we added 234 million barrels of oil equivalent.

In addition to the impact on reserves of fields operated under PSCs, the high crude prices that prevailed in 2007 will result in reduced 2008 production entitlements from Algeria and Azerbaijan due to the achievement of contractual rate of return thresholds.

In 2008, we expect production to be in the range of 380,000 to 390,000 barrels of oil equivalent per day. Obviously, depending on commodity prices, the workings of PSC contracts have the potential to impact our production volumes. As we see the year unfold, we will be better able to quantify this impact.

Gross production from the of Okume Complex and Ceiba Fields in Equatorial Guinea recently reached 100,000 barrels per day, with Okume at its design capacity of 60,000 barrels a day. At the JDA, another important milestone will occur in the second quarter of 2008 when we start Phase 2 gas production following the commissioning of new facilities. Net gas production from the JDA will double from about 120 million cubic feet a day to about 250 million cubic feet per day.

Turning to exploration, let me first give you an update on our Pony Number 2 well. We're currently drilling below 28,000 feet with about another 500 feet to drill to the next casing point. Following the setting of the next casing string, the objective Miocene section will be drilled.

While in 2007 our exploration drilling efforts were directed to appraising discoveries, in 2008 we will see an active high-impact wildcat program. In the second quarter we will drill the first of four back-to-back exploration wells on WA-390-P in the northwest shelf of Australia. In the second quarter we will spud a well on Block 54 offshore Libya. In the second half of the year we will spud our first well on the Cape Three Points permit offshore Ghana, and we expect that the operator of BMS-22 in the Santos space in offshore Brazil will spud the first of two exploratory wells.

Our 2008 exploration program also includes wells in the west of Shetlands, offshore the west coast of Ireland, and in the Deepwater Gulf of Mexico. We also plan to continue appraisal drilling at Pony.

2007 was a year of significant progress for the Company's E&P business. Objectives were met or exceeded, new resources were captured, and projects were delivered on schedule. Reserves and production grew in line with stated targets, cost effectively. We look forward with confidence to 2008.

Now I will hand the call back to John Rielly.

Thank you, John. Hello, everyone. In my remarks today I will compare fourth-quarter 2007 results to the third quarter. Net income for the fourth quarter of 2007 was $510 million compared with $395 million in the third quarter.

Turning to Exploration and Production, income from Exploration and Production operations in the fourth quarter of 2007 was $583 million compared with $414 million in the third quarter. Excluding the items affecting comparability and earnings, the after-tax components of the increase are as follows.

Higher selling prices increased earnings by $163 million. Increased sales volumes improved earnings by $139 million. Higher costs including exploration expenses decreased income by $129 million. All other items net to an increase in earnings of $19 million, for an overall increase in fourth-quarter adjusted income of $192 million.

In the fourth quarter of 2007, our E&P operations were overlifted compared with production, resulting in increased income in the quarter of approximately $15 million.

As indicated in the press release, the fourth-quarter results include asset impairments on two United Kingdom oil fields which are nearing the completion of their productive lives. The impairment charge resulted from reductions in reserves and from increases in estimated operating and dismantlement costs. The pretax amount of the impairment charge was $112 million and is included in the line item Depreciation, Depletion and Amortization.

The Exploration and Production effective income tax rate for the full year of 2007 was 50%. The E&P effective income tax rate in 2008 is expected to be in the range of 47% to 51%.

Turning to Marketing and Refining, Marketing and Refining earnings were $31 million in the fourth quarter of 2007 compared with $46 million in the third quarter. Refining earnings were $27 million in the fourth quarter of 2007 compared with $25 million in the third quarter. The Corporation's share of HOVENSA's income after income taxes was $12 million in both the fourth and third quarters. During the fourth quarter, the Corporation received a distribution from HOVENSA of $100 million.

Port Reading earnings were $14 million in the fourth quarter of 2007 compared with $10 million in the third quarter.

Marketing results were $19 million in the fourth quarter of 2007 compared with $21 million in the third quarter. Fourth-quarter 2007 downstream results include an after-tax gain of $24 million from liquidating LIFO inventories. After-tax trading activities resulted in a loss of $15 million in the fourth quarter of 2007 compared with breakeven results in the third quarter.

Turning to corporate, net corporate expenses amounted to $59 million in the fourth quarter of 2007 compared with $28 million in the third quarter. The fourth-quarter 2007 results include an after-tax charge related to MTBE litigation of $25 million. Excluding this item, net corporate expenses for the fourth quarter and year were $34 million and $125 million, respectively.

Net corporate expenses in 2008 are estimated to be in the range of $130 million to $140 million.

The pretax amount of the fourth-quarter charge was $40 million and is included in general and administrative expenses in the income statement. After-tax interest expense was $45 million in the fourth quarter compared with $37 million in the third quarter, principally reflecting lower capitalized interest. For the full year of 2007, after-tax interest expense was $160 million. After-tax interest in 2008 is expected to be in the range of $165 million to $175 million.

Turning to cash flow, net cash provided by operating activities in the fourth quarter, including a decrease of $307 million from changes in working capital, was $806 million. The principal use of cash was capital expenditures of $805 million. All other items amounted to an increase in cash flow of $41 million, resulting in a net increase in cash and cash equivalents in the fourth quarter of $42 million. At December 31, 2007, we had $607 million of cash and cash equivalents.

Our available revolving credit capacity was $2,780,000,000 at year-end. Total debt was $3,980,000,000 at December 31, 2007, and $3,772,000,000 at December 31, 2006.

The Corporation's debt to capitalization ratio at December 31, 2007, was 28.9% compared with 31.6% at the end of 2006.

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

(OPERATOR INSTRUCTIONS) Mark Flannery, Credit Suisse.

Thank you. Good morning. I would like to get a little bit deeper into the PSC impact here expected for 2008. It feels like we have pulled the guidance down a little, or at least below where consensus might otherwise be. But can you quantify how much you are expecting roughly the PSC impact to be, versus let's say what you would have expected six months ago? In other words you must have an oil price forecast in that number, I guess.

Sure, and there's two components to that, Mark. Let me go back to what John O'Connor talked about. In two of our PSC contracts, and it's only in those two countries, and it is in Algeria and in Azerbaijan, there were rate of return thresholds in those PSC contracts. That is what John O'Connor alluded to.

If we were just going to do like-for-like compared to 2007 to 2008, those rate of return thresholds by themselves reduced our production entitlements by 12,000 barrels a day. So, again, if you were using our 380 to 390, probably to your question, it would have been more in the 390 to 400 range related to that.

Then when we are laying out our production forecast in the 380,000 to 390,000 for 2008, what we have done is used a $75 crude price to come up with that production forecast.

Then let me just give you some sensitivity to that. For every $5 change in the crude price there -- so if the crude price is higher by $5 -- it should impact our full-year 2008 production by about 2,000 to 3,000 barrels per day.

Great. Very full answer. Thank you very much.

Doug Leggate, Citigroup.

Thank you. Good morning, everybody. A couple of quick ones from me. The reserve replacement number, clearly very strong. Did I hear the finding and development cost number correct? Could you just repeat that for me? I think it missed it.

Sure, it is about $16.20.

Okay, I thought you said $6.20. Okay, thank you. Okay, could we get a little bit more of a breakdown as to where the bulk of those bookings came from? I am curious in particular if Egypt did actually make it into the bookings at the end of the year.

Yes, Doug, Egypt did not. In terms of the source of the proved reserve adds, I think we're particularly pleased with the fact that they come from 19 or 20 fields. So it really was an effort across the whole portfolio. So it is new field sanctions such as Pangkah or Valhall redevelopment, but it is also subsequent subsurface work across the rest of the portfolio.

Okay, it is pretty widespread? Thanks. Just two more real quick ones. I think in the last quarter call, you had suggested Australia was going to spud in December and Tubular Bells was already underway at Number 3. They look like they have maybe been pushed back a little bit. Can you just give us an update?

I think Tubular Bells is somewhere below 24,000 feet at last report and logging. Obviously, for any more details of that, I would prefer you go to the operator. So they have indeed spud and they have come a long way.

In Australia, we're working a rig swap for one of our Gulf of Mexico rigs for a rig of opportunity that is currently working offshore Australia, to save on transportation and mobilization. Unfortunately it has had a mechanical problem impact its timing. So it will now come to us, we believe, the end of March or early April.

Great, thanks. The final one from me is, John Rielly, you normally give us some idea of production costs and DD&A expectations for the coming year. Could we maybe get some guidance for 2008?

Sure, I will break it up between cash cost and DD&A. Our guidance then for next year is on the cash side, our range is $14 to $15 per barrel; and on the DD&A side, it is $12.50 to $13.50. So overall unit cost per barrel in the $26.50 to $28.50 for the year.

That includes SG&A in the cash cost?

Correct, it does.

Great stuff. That's it. Thanks very much, indeed.

Arjun Murti, Goldman Sachs.

Maybe to John O'Connor. I realize it may be a bit early, but prospects for Tubular Bells sanctions, or not, after the Number 3 well?

I would love to be able to tell you, Arjun, but unfortunately I cannot. I think it has got to do really with the operator and their view of developments both in the Gulf of Mexico and elsewhere in their portfolio. So as a 20% owner of Tubular Bells, we're very much dependent on their assessment.

That is great. Pony, with this appraisal, do you think you will be able to meaningfully narrow the reserve range that you have currently got out there, the 100?

Yes, I think so. Just having moved aerially on the feature, results are definitely giving us some potential for narrowing the range. I would think though more drilling will be required to really refine the range of resources.

Got you. Then, just in Brazil, it sounded like versus maybe the year-end spud date that had been talked about that there may be some ability to accelerate that a bit. Don't know what your sense is of that actually happening closer to midyear versus year end.

Yes, I think actually, recent advice that we have got would indicate that there is a bigger, higher chance, I suppose, of it being early in the third quarter as distinct from fourth quarter. It is a newbuild rig and I think it is going to undergo sea trials in the second quarter. So following mobilization into Brazil it should be ready to go.

That is fantastic. Thank you.

Paul Sankey, Deutsche Bank.

Hi, good morning, everyone. John O'Connor, you spoke early last year about the importance of getting a good estimate of future crude prices for targeting your developments. You have just said that you're using $75 for your PSC and volume assumptions. Is it fair to say that you're now using $75 as your planning assumption as well?

No, not at all. A good question, Paul. We obviously have to pick a number to project volumes to give us a range of outcomes for the year and happened to pick $75. Just think it is not unreasonable, but for economic evaluation and for project determination we still run a full range of outcomes, medina premise of $60 TI, a low case sensitivity of $40, and then the strip. So we look at all three prices and then we decide, based on the nature of the project where the returns should be at any given price.

I guess just on the volume targets, despite the kind of slow patch we have got coming up over the next year, you're still sticking with a 3% to 5% volume target going forward?

Yes, we are.

Final one from me, John, on Ghana. I don't think we have mentioned that. Could you just update us on your best guess to what happens there? Thanks.

Yes, I think that, again, we have arranged to exchange some slot time on one of our rigs in the Gulf of Mexico for a rig in West Africa. We think that will come to us for one well in about September-October time. It is difficult to pin it down accurately, because it's going to come from another operator. But that is the timeline we are working on, Paul.

Great, thanks.

Robert Kessler, Simmons & Company.

Hi, good morning. I have got somewhat of an accounting question. But looking at your marketing results, they seem to have done a little bit better than I would have thought otherwise. That seems to have been offset by weak trading results. I know that trading is inherently volatile and tough to predict.

But I am wondering if you could provide some comments about any transfer pricing between, say, the refinery gate on through to retail; and whether or not some sort of mark-to-market there might have affected trading and marketing in similar fashion.

No. Again, we do all -- any kind of if you want to say intercompany movements of products, they are all done at market prices. Now, you did hear that in my comments that I mentioned we did have a LIFO gain in the quarter. So we liquidated some of our prior-year LIFO inventories, so there is a $24 million gain that predominantly is in the Marketing results.

Okay, that helps. Thank you.

Nikki Decker, Bear Stearns.

Good morning. Thank you. On Egypt, I did not see anything on West Med in your CapEx plans. Has there been any change in your plans at West Med?

No, I don't think so. I think that we have made a lot of progress, frankly. We are about -- we have completed the multiazimuth seismic survey. Starting to load and process that. We are about 60% through front-end engineering and design from KBR, who are the engineering consultancy working that up in the UK.

We have completed a pipeline survey to go from the production facility onshore; and we have secured a location onshore for the gas processing plant. So come a long way, and we are far advanced also in terms of commercial discussions for the pricing of [gas amounts].

Okay, thank you. Then just switching to the Gulf of Mexico, first of all, do you have an update at Bob North?

Bob North is in our results in the fourth quarter. It was a dry hole. It was an expense of $70 million approximately for Bob North in the fourth quarter.

And has -- will [Kaben] spud?

No, it has not been spud yet.

Okay.

It is supposed to be imminent, though.

Okay. Just on Pony, we are hearing that appraisal on Knotty Head is proceeding slowly and it sounds like there are some rig constraints, difficulty in getting a rig that is suitable for the environment there. Have any of the partners sort of approached you? You obviously have a rig working. Has there been any more dialogue between you and the Knotty Head partners?

I would not say there has been no dialogue. I think I have mentioned before, Nikki, that we have exchanged data and we do have dialogue with them.

But I think in terms of securing drilling equipment suitable for working in that environment, that is pretty challenging. It is fair to say that drilling on the Pony prospect is sort of world-class. I will give you some sense of this.

The casing load that we ran on Pony Number 1 was 1.85 million pounds, and that was a world record hook load. Deepest core ever been recovered in the Gulf of Mexico was recovered from Pony Number 1. Only two Gulf of Mexico wells have ever drilled below 33,000 feet; and the current projected TD for our Pony Number 2 well is 32,500.

So I just mention that to give you a sense that this is not bread and better drilling.

Sure.

It is challenging. I think the industry is up to it obviously. The Knotty Head well went down ultimately successfully. We have drilled one and getting ready to get into the objective section with Number 2. But the equipment required to do this is typically tied up well in advance, and securing a rig capable of operating with that sort of load to that depth is difficult.

Just one final one, at Okume Complex are you still on target for a plateau in first quarter of '08?

We are, in a word, actually on plateau at Okume Complex. In other words, we have gone past the 60,000 barrels a day gross volume design capacity. But we still have some additional well capacity to tie-in.

So yes, the answer is we are at plateau. But in addition we have the potential to maybe produce somewhat above design dependent on debottlenecking some of the production facilities.

That upside would occur in the near term, in the (multiple speakers)?

Yes, it would happen during 2000 -- I would not make a big deal about it, but I just want to give you the impression that maybe there is another 5,000 barrels a day on top of the 60,000 that we designed for in terms of well capacity. If we debottleneck the production facilities, that would be added. But we are currently above 60,000 barrels a day gross design capacity.

Thank you very much.

Mark Gilman, Benchmark Company.

Hi guys, good morning. I had a couple things. John O'Connor, could you possibly give us a more specific idea of the Shenzi and JDA contribution to the reserve bookings for year-end '07?

Ask me that again, Mark.

I was looking for a more specific number regarding the impact of additions at Shenzi (multiple speakers) and JDA to the reserve adds in '07?

Okay. I mean, Shenzi, through Shenzi itself on the Genghis Khan Purchase, rough order of magnitude plus or minus 20 million barrels.

JDA, about the same order of magnitude; and this is out of the total of 234.

Okay. Back to the production sharing and the entitlement threshold issue. John Reilly, the 12,000 that you mentioned, is that a full-year number? In other words, were these thresholds hit in '07, or is it something you anticipate and in the $75 environment will be hit in '08?

No, the thresholds were hit in 2007. So that 12,000 barrels a day is the full-year effect in 2008.

Okay. John O'Connor, can you possibly give us an idea whether in your mind, based on the Company's technical work, whether your prospect on BMS-22 is or is not an extension of the Carioca feature?

I honestly don't have any insight into that, Mark, and I think it is best to leave it there.

Okay. Finally, just an update on the Bakken program, current production, and what is anticipated from an activity standpoint in '08.

Okay, a continuing active program in the Bakken. I think we will see additional acreage being acquired. We will be adding two rigs next year and moving up to 10 the following year.

Currently production is around 5,000 barrels a day, but this is not something where you take the average well rate times the number of wells, multiply one by the other to come up with a rate. It has got to do with tying back production facilities, and it's got to do with gas handling at the target gas plant.

So in a word, very pleased with the position, like where we are, and like where we are going.

Reserves per well running 0.75 million barrel?

Yes, that is the sort of a number we're using, Mark.

Okay, thanks very much.

(OPERATOR INSTRUCTIONS) Paul Cheng, Lehman Brothers.

Hi, good morning, gentlemen. I think this is for John O'Connor. John, I think last October that you mentioned Pony, you're hoping that to be finished by year end. Of course, we probably have some delay there. Is there anything changed or that you have learned or that has come as a surprise?

Absolutely not, Paul, but I am glad to address the issue. In October, we expected the rig, having come out of the shipyard after its five-year annual inspection, to go back to work and make some progress. In point of fact, after three months in the yard, came back on location and then had to take a further two months to resolve some mechanical issues which in many ways had been caused by the contractor during its work in the shipyard. So we lost another couple of months there. That is really what has sort of held us back.

Partially as a consequence of some earlier problems, we also ran into lost circulation fairly severely coming up to the end of December. That put us back about 20 days probably. But we have sidetracked around that. We have over come it. As I said in my comments earlier, we should today or tomorrow probably be in a position to run casing immediately above the objective section.

You still feel confident? I think last time you said that it's a great learning experience and you believe you have found a solution there to get around the drilling difficulty. So that is still the case?

Yes, that really has not changed since we talked about that in October. What you're referring to, Paul, was we encountered in the first half of 2007 bitumen at a shallower level than has previously been encountered by other operators in the area. We did have learnings about how to overcome that, but it took some time to do that.

Yes, very important, new tools have been developed by the service companies in the industry to help us and other operators drill through this bitumen.

John, I think, for the last several quarters that you guys have not talked much about your Russian operation after you purchased it. Any update there where we are in terms of production? Any plan on that, whether that should be considered part of your core operations going forward? If it is, any plan on that?

I think probably we were not asked any questions and there was nothing abnormal to report. It is performing as planned, as projected, Paul. We are perfectly pleased with having it in the portfolio.

We have talked in the past about it providing us with an opportunity to understand the nature of the industry in an area with significant hydrocarbon resources. Of course that is the business we are in, so it is serving that purpose.

What is the current production there?

It varies between 21,000, 22,000 barrels a day pretty much.

Are they increasing or that is pretty much flat for you guys?

It has the potential to go somewhat higher. But I wouldn't see it going much beyond 25,000. Plus or minus 25,000 barrels a day, Paul.

I have a number of short questions for John Reilly. John, on the year end -- I mean in the fourth quarter you have an overlifting. At year end is the inventory now underlift or balanced?

It is balanced right now. So the guidance I would say for the first quarter is just to factor in production and assume that our sales volumes would equal production. Our inventory levels are at appropriate amounts.

Obviously, there can always be timing on lifts. But right now we're in a balanced position.

On the Bob North, you're saying that the net charge to you guys is $17 million or $70 million?

Sorry, it's 70, 7-0.

$70 million? Did you carry it or this is your share, the 30%?

If you remember, what we have is combined between Bob North and Will K. We were exposed, the guidance we gave, to approximately $100 million, which does include well costs and promote. So as it relates to Bob North, $70 million was expensed.

Okay, so it is not like the well (inaudible) 230 million?

Correct.

Okay, a final one, on the DD&A for the full year. You say 2008 is going to be about 12.5 to 13.5. 2007 is around $10; and we are looking at in the fourth quarter, about $11. What is the new project coming onstream that is going to be much higher in terms of the DD&A?

There's many variables, obviously, in there, and the production mix is one of it. As you know, there's really not too many new projects per se coming in. Okume is going to be there for the full year; obviously, that had some acquisition costs associated with it, so that has some higher DD&A.

But I would point you back to what John O'Connor talked about on the reserves, that $45 million, $46 million of PSC related price revisions were part of our reserve adds. Obviously that impacts the DD&A on our ongoing projects and just on the same projects will increase the DD&A rate as it relates to those individual assets. So that was also part of the drive in that --

John, any idea then, how big is the increase related to the PSC?

We would say approximately $1.

$1? Okay, thank you.

Kate Lucas, JPMorgan.

Hi, good morning, gentlemen. Just a quick question. Thinking about the slate of upcoming exploration opportunities you have, as you look at possible developments through the next decade or so, how do you go about prioritizing how you would allocate your upstream CapEx? Either regionally or type of asset or keeping diversification within your upstream portfolio?

Everybody is looking around here, Kate, trying to see who is going to answer that question. It is a most complex question. It drives a lot towards corporate strategy in addition to E&P strategy, quite frankly.

Oftentimes you don't have the luxury of picking which one you do when, because the timing is driven by rig opportunities and expiry of areas. I think it is fair to say that we would be happy to see our OECD component of production and reserves increasing as a proportion of our total portfolio.

At the same time, we have to be exposed to some of the more prolific oil and gas basins around the world, because that is where the resource is. So it is partially driven strategically; it is partially driven by an opportunity set.

All right. Well, in light of the fact that you have fairly large working interests in potentially large resources, have you been approached at all about potentially taking on partners? Or been approached about selling down maybe some of your interest in some of these larger -- where you hold a larger working interest?

The properties we have are very attractive. It is premature now to previous pose ourselves to selling down or trading. We are happy to have a portfolio of opportunities. They need more delineation and definition. Once we have them delineated, defined, then we will figure out how we prioritize them for developments.

If during that time period we can strategically reposition and strengthen the portfolio that is something we would consider. But it is not something that is imminent.

Okay, great. Thanks very much.

Mark Gilman, Benchmark Company.

Thanks. John O'Connor, the production forecast for 2008, what does that assume in terms of any summer gas shut-in at Atlantic-Cromarty?

Yes, it does assume -- well, let me say this. That when we put the portfolio together for the production projections for '08, one of the flexibilities we have got is the gas management strategy depending on the price for the UK gas in the summer. So at this stage, we are more of a mind to have it shut in than not. We will make a final decision as we see how the prices are between summer-winter and June.

Can you quantify the potential swing on that, John?

Well, it is probably less than 10,000 barrels a day average for the year of an impact. It is probably closer to 5,000 than 10,000, frankly.

Okay. John Rielly, capitalized interest dropped to a negligible level in the quarter. Yet I guess I am not aware of any particular project going into service that would be responsible for it. Could you explain what happened there? What is the assumption embedded in your 2008 interest expense forecast?

Sure. What it has to do is -- and it is not intuitive as you look at it. But the Shenzi project actually went into production because of Genghis Khan. So when we purchased Genghis Khan, it's the western extension of the Shenzi field, we now just look at that project now as the Shenzi project, with some additional areal extent due to the acquisition of the Genghis Khan acreage. So when the Genghis Khan wells started production, we ceased capitalizing interest on it.

Okay. So that it is a fairly nominal amount in your 2008 interest forecast?

Yes, sorry, you did ask that. Yes, it is a nominal amount in the 2008 forecast as well.

Thanks very much, guys.

Ladies and gentlemen, with no further questions in queue, I would like to thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day.