洛茲集團 (L) 2008 Q2 法說會逐字稿

Good morning. My name is Elsa and I'll be your conference operator today. At this time, I would like to welcome everyone to the Loews second quarter 2008 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. (OPERATOR INSTRUCTIONS) Thank you. It is now my pleasure to turn the floor over to Darren Daugherty, Director of Investor Relations. You may begin.

Thank you Elsa. Good morning, everyone, and welcome to Loews Corporation second quarter 2008 earnings conference call. A copy of the earnings release may be found on our website, loews.com. On the call this morning are Jim Tisch, the Chief Executive Officer of Loews, Peter Keegan, the Chief Financial Officer of Loews. Before we begin, I would like to make a few brief disclosures concerning forward-looking statements. This conference call will include the use of statements that are forward looking in nature. Actual results achieved by the company may different materially from those projections made in any forward-looking statements. Forward-looking statements reflect circumstances at the time they are made and the company expressly disclaims any obligation to update or revise any forward-looking statements. This disclaimer is only a brief summary of the company's statutory forward-looking statements disclaimer. We urge you to read the full disclaimer which is included in the company's 10-K and 10-Q filings with the SEC. I'd also like to remind you that during this call today, we may discuss certain non-GAAP financial measures. Please refer to our security filings for reconciliation to the most comparable GAAP measures.

After Jim and Peter have discussed our results, we will have a question-and-answer session. If you would like to ask questions and are listening via the webcast, please use the dial in number to participate, 877-692-2592. I would now like to turn the call over to Loews' Chief Executive Officer, Jim Tisch.

Thank you, Darren. Good morning, everyone. Thank you for joining us on the call today.

During the second quarter, we successfully completed the split off of our tobacco subsidiary of Lorillard, creating significant value for the holders of Loews common stock and the former holdings of Carolina Group stock. As part of the transaction, Loews completed an exchange offer that resulted in the retirement of 93.5 million shares of Loews common stock, representing 17.6% of our outstanding shares. In each of the last three decades in the 70s, in the 80s and in the 90s, we repurchased more than 25% of our common shares that were outstanding at the decade's start. Owing to the successful outcome of the exchange offer, which was oversubscribed by a factor of nearly two times, we have continued this trend by buying in more than 25% of our stock since 2001. With an exchange ratio of 0.7, Lorillard's shares per share of Loews common stock, the exchange offer resulted in earnings accretion for the remaining shares of Loews common stock while still offering a premium for those low shares than were tendered. We wish much success for our Lorillard colleagues as they move forward as an independent publicly traded company. As I have said before, Lorillard is in very capable hands with Marty Orlowsky at the helm. He is an extraordinary executive and should continue to create value for his shareholders just as he did in the past for Loews and Carolina Group shareholders. For the second quarter, Loews reported income from continuing operations of $511million compared to $422 million for the prior year's second quarter. This increase reflects the solid performance at each of our subsidiaries and in particular, our energy companies: Diamond Offshore, Boardwalk Pipelines and HighMount Exploration and Production.

CNA continued to perform well in a very tough insurance market, posting solid operating income that was somewhat dampened by the reduced net investment income. The company continues to maintain its focus quarter after quarter on underwriting discipline, portfolio optimization and expense management. This discipline has given rise to the company's tenth consecutive quarter of delivering a sub-100% combined ratio for its property and casualty operations. We have a strong balance sheet, positive operating cash flow, and a relatively low level of financial leverage and a high degree of liquidity in the investment portfolio. CNA is in solid financial position. A sign of this strength and improved financial flexibility is during the first six months of '08, CNA moved approximately $700 million from its insurance subsidiaries through dividends and other capital transactions up to the parent company, leaving the CNA parent company with more than $750 million in cash and short term investments at the end of the second quarter. During the quarter, CNA announced that Steve Lilienthal will retire in June of '09. He will be succeeded by Tom Motamed, who brings his 31 years of experience at Chubb where he most recently served as Chief Operating Officer. Though the scheduled transition is a bit less than a year away, I will take the opportunity to acknowledge these ongoing accomplishments as well as the very successful turn around CNA that has taken place under his leadership. We are very pleased to have a proven insurance executive with Tom's experience and leadership qualities taking over at CNA and we expect a very smooth transition.

Loews finished the quarter with $4 billion in cash and investments at the Loews parent company level even after making a $700 million investment in Boardwalk Pipeline. Over the past several years, Loews has been working diligently and successfully to diversify its sources of cash flow. We now receive meaningful dividends from Diamond Offshore and from CNA. We receive cash distributions from Boardwalk as well as investment income from our $4 billion investment portfolio. Our net cash position begs the question of how we plan to deploy our capital, especially in light of the commonly held perception that opportunities abound to buy cheap assets today. As has always been the hallmark of Loews' investment philosophy, we are in no hurry to spend our cash. My position has not changed. We will only enter into a transaction that is not only attractive now, but will also be so in the future as well. So while there are many potentially interesting investment opportunities, we continue to be very selective and deliberate in our analyses. We do not make the assumption that the credit markets will always be open and available and we sleep well at night having a strong and liquid cash position at Loews. And with that, I'd now like to hand things over to Loews' CFO, Pete Keegan. Pete?

Thanks Jim, and good morning, everyone.

For the second quarter, Loews' income from continuing operations increased to $511 million or $1 per share from $422 million or $0.78 per share in the prior year. As part of the recently completed separation of Lorillard from Loews, we acquired 93.5 million shares of Loews common stock in exchange for 65.4 million shares of Lorillard common stock. That transaction resulted in a non-cash gain of $4.287 billion which is recorded in discontinued operations and after the exchange of shares, at essentially no net impact on total common equity. Discontinued operations for the first half of the year also include an after tax gain of $75 million from the sale of Bulova in January. Net income from discontinued operations attributable to Carolina Group stock totalled $104 million for the quarter through June 9, after which shares of Carolina Group stock were redeemed for Lorillard common stock. Net investment losses for the quarter were $64 million versus losses of $58 million in the prior year second quarter. CNA's contribution to Loews' net income decreased to $227 million from $285 million in the prior year's second quarter. Loews' interest in CNA's net realized investment losses was $65 million versus losses of $81 million in the prior year second quarter. Diamond Offshore's contribution to net income increased to $194 million from $118 million in the second quarter of 2007 and was driven by ongoing demand for mid-water and deep water semi submersible rigs. Diamond's revenue backlog currently stands approximately at $11.1 billion.

Last week, Diamond's board of directors declared another special quarterly dividend of $1.25 per share in addition to the regular quarterly dividend of $0.125 per share. Together, these dividends represent a cash payment to Loews of over $96 million. In the second quarter, HighMount reported net income of $48 million on revenues of $201 million. HighMount reported the following production volumes: Natural gas production was 19.9 billion cubic feet at an average realized price of $7.90 per thousand cubic feet. Natural gas liquids production was 938.8 thousand barrels at an average realized price of $46.15 per barrel, and oil production was 88.7 thousand barrels at an average price of $117.21 per barrel. During the quarter, HighMount completed 131 gas wells at a success rate of 98% and for an aggregate drilling cost of $108 million. Boardwalk Pipeline's contribution to net income was $28 million versus $16 million the prior second quarter. Results for the quarter benefited from revenues generated by Boardwalk's recently commissioned east Texas to Mississippi expansion and southeast expansion projects, as well as from higher transportation rates on existing pipeline capacity. During June, Boardwalk raised approximately $1 billion of equity for its capital expansion program. Loews invested $700 million in newly created class B limited partnership units and an additional $250 million was raised through the sale of 10 million common units. Boardwalk has declared a quarterly cash distribution per common and subordinated unit of $0.47.

During the quarter, net investment income totalled $77 million, up from $62 million in the prior year's second quarter. Loews' hotels net income increased to $19 million from $14 million in the second quarter of last year. The increase is primarily from a non-recurring $7 million after tax gain related to a joint venture investment. Revenue per available room increased to $200.77 from $195.44 in the prior year's second quarter. As of June 30, 2008, holding company cash and investments totalled $4 billion. During the quarter, we received 375 million of dividends from our subsidiaries including $200 million from Lorillard, and we paid $83 million of dividends to shareholders. Other uses of holding company cash include the previously mentioned investment in Boardwalk. Holding company debt of $867 million remains essentially unchanged from the prior quarter. And now, I'll turn the call back over to Darren.

Thanks, Pete. Operator, at this time we will open it up for questions.

Thank you. The floor is know open for questions. (OPERATOR INSTRUCTIONS) Our first question is coming from Bob Glasspeigel with Langen McAlenney.

Very impressive on the name. Jim, you gave David Broder a run for his money as Washington Post columnist last weekend talking --

Glad you noticed.

Very impressive. Very well written. And it seemed to be --

My English teacher would be proud.

Yes. Seemed to be talking about alternative energy and there was a quote, if I read it right, that oil may be pricing itself out of business. I was wondering the extent to which that article was written as a citizen, which I'm sure it was one phase or as a signal to -- as a Loews' CEO, where you might be looking at attractive investment opportunities on the margin?

It was written by a private citizen and I was identified as the CEO of Loews. For those that may not have read the op-ed piece, let me just tell you what the thesis was. The thesis was that there is nothing that the politicians have to do now with respect to greenhouse gases. That they will begin to come down on their own because of what has happened in the market. And specifically, I was referring to the price of oil and the price of gas and made the point that with wind energy costing $0.07 a kilowatt hour to be viable economically compared to a gas-fired power plant requiring $0.13 a kilowatt hour, that we were going to see a lot more wind energy. And in fact, in Texas, they have 5 gigawatts of wind power already in place which represents just under 10% of their capacity. Combined with that, I talked about photo voltaics and made the point that here in New York, we are likely to see in the coming months a 30% increase -- up to a 30% increase in our cost of electricity, which could get as high as $0.30 per kilowatt hour. And that at those types of rates for buying electricity from the grid, that an investment of photo voltaic cells on your rooftop will have a rate of return of about 10%, which is twice what you can earn on New York state municipal bonds. And then finally, I went on to talk about automobiles and the fact that electric powered automobiles will be introduced in a major way starting next year.

I think within the next five or ten years, they will be omnipresent and my guess is within one or two decades, you won't be able to buy a new car with an internal combustion engine. And that will be driven in large measure by economics, because today, $4 gasoline that costs you between $0.20 and $0.25 to move your car one mile, whereas an electric car, it will cost about $0.02 a mile. So all of this added up to me to be a major price umbrella that we are getting from oil and gas prices that's allowing alternative energy sources and alternative means of powering cars to get a strong foothold in our marketplace and as a result, I see greenhouse gases -- I see a lack of need for more legislation with respect to greenhouse gases because I can see in several decades the only thing that will be using oil will be planes, off road vehicles, and maybe ships. So, Bob, that is just -- that's my overall view of the energy markets.

It just didn't seem like your portfolio of business is right now positioned to benefit from those long-term trends. That's sort of the question.

Listen. That is two, three, four-decade view. Having said that, we are still going to be using natural gas, we are still going to be using oil. The only way we can use natural gas is to move it from one place to another. Decline curves are very real and significant. So I am not saying in that article that I see the imminent demise of offshore drilling or people no longer -- people shutting off their natural gas to keep their homes in the winter. But it is just, as I said, a very long-term trend and in the meantime, our energy subsidiaries are open for business to drill wells for anybody that wants to drill them, to produce natural gas and to move natural gas throughout the country.

You move to where Boone Pickings has moved to put your money where your mouth is as far as trends.

I think it is a little different. I think what Boone did is, he stated his position based on where his money is.

Right. I agree, certainly.

So this was just a few data points came together for me and I decided that it was important for people that be thinking about it.

Okay.

Let me just say. With respect to our businesses, while it may sound inconsistent, it isn't, because I was talking about very, very long-term trends. And I'm not talking about what's going to happen tomorrow or the next day.

Understood. Getting to the short term trend, your investment income was super charged with some trading gains possibly. Was there something else behind it? What position sort of worked this quarter?

I'm not 100% sure. It may have been -- okay, I have some numbers here. What it was, was that our equities did reasonably well, which was a good contribution. And that was basically the long and short of it.

Well, I wonder if it was long or short, given the market was down. Maybe it was the short of it.

We do not maintain an enormous equity exposure. Our equity exposure is on the order now of, I'd say $400 million.

Okay.

We have positions that are larger than that, but we manage our exposure by being short some S&P futures in order to minimize the impact of our equities.

Just to be clear. Management did not tender and doesn't own Lorillard now. I mean the Loews family, the management.

That applies to the three Tieschs in management. I don't know about the senior managers of Loews. I would assume not, but I don't know for sure and I don't know if filings were required for them.

Okay. I've got some more but I'll go back in the queue. Thank you.

Okay.

Thank you. Our next question is coming from Andy Baker with Jefferies & Co. Please go ahead.

Thank you very much. One for Jim, one for Peter. Jim, I was wondering if you could talk to us about your recent investment in DWT. How you see the -- that business playing out with its capital needs and whatnot over the next 16 to 18 months. And Peter, could you take us through the gross corporate cash to the net corporate cash now including the receivables, payables and debt? Thank you.

Let me talk about Boardwalk Pipelines first. Listen, I like that investment a lot. As you know, we made a $700 million investment in it. We stand ready to make additional investments in it, should we feel that the opportunity is there. Boardwalk has $4.5 billion of projects that it embarked on starting about a year and a half ago. We are just about halfway through that construction process and should be pretty much done by the first quarter of next year. Those projects in total will yield -- should yield very good returns for Boardwalk that should be accretive for it, so I am positive on the company. The company also announced either Friday or today, that it is expanding its capacity on its biggest line, its gulf crossing line that goes east from Texas, bringing out Barnett shale gas. We were able to get a very significant increase in revenues as a result of that contract that we signed. So that really proved to me that the demand is there for the pipes that we are building.

The other good news is that there is a very, very significant increase in the cost of building new pipelines. So that means that the lines that we have should be all the more valuable because they are new lines and they can compete with anything that anybody else can build, and if they bill a line today my guess is the rate that they will have to charge to carry gas would be -- has to be anywhere between 50% to 100% higher than what we were charging for just a year and a half or two years ago. So all in all, that makes me very bullish about Boardwalk and its future.

Do you think they will be able to accelerate their cash distribution once the investment cycle cramps down a little bit and those yields you were talking about start to flow through?

I'm hopeful.

Me too.

On your second question, I had mentioned holding company cash, which was slightly above $4 billion on June 30. Long-term holding company debt was $867 million. That would leave net cash subtracting long-term debt from cash at about $3.150 billion, $3 billion, $150 million. The only payables and receivables at note at the holding level tend to be securities, payables, receivables. Normally, that doesn't materially move the number.

Okay, thank you very much.

Thank you. Our next question is coming from David Adelman with Morgan Stanley. Please go ahead.

Good morning.

Good morning.

Jim, firstly, were there any material changes in the makeup of the holding company's investment portfolio during the quarter?

No. No. It is by and large pretty boring, which is the way we like to keep it.

Okay. And secondly, how do you think about share repurchases now going forward, given both the magnitude of the impact of the split-off transaction, coupled with the fact, obviously, that you no longer have tobacco-related cash flows.

Listen, I think about share repurchases, the way we have been thinking about it for the past 40 years or so. And that is, when we repurchase shares, we think about, number one, how much cash we have. We also think about where the stock is trading, what the prospects for our business is, and whether the stock is trading at a discount or premium to the values and what are the outlooks for each one of our subsidiaries going forward. There is no one formula, but we take all those factors and more into account. You're right, we no longer have the cash flow from Lorillard, but number one, we have fewer shares outstanding. And number two, as I said in my opening remarks, we have dramatically increased the cash flow that we receive from our other subsidiaries. And so this year we will receive, I think, based on the last special dividend that was paid by Diamond Offshore, we'll receive $400 million from Diamond. We received more than $100 million from CNA. We've got good cash flow from Boardwalk and also from our investment portfolio, such that if you would annualize the quarterly cash flow that we had this quarter, it can come to more than $1 billion a year. So we still have very good cash flow and we also have a big treasury with $4 billion of cash which is just under $10 a share with our new share count. So we do not feel cash constrained and the way we think about our share repurchase has not changed over the -- as a result of the split-off of Lorillard.

Am I right, Jim, there were no open market share repurchases during the second quarter?

That is correct.

Okay.

That is correct. Yes.

Okay. Then two other things. You mentioned there is a common perception in the capital markets that there are a lot of chief assets available for sale, but I'm more interested in your assessment of that perception. Do you think that there are? I mean, conventional wisdom would be that there are, but what's your view?

I think there are -- what we are seeing is two things. Number one, equities trading at significant discounts to where they had previously been trading. And we are also seeing projects for our subsidiaries that offer what seems to be very enticing returns. So while we haven't done anything, we are looking carefully at capital programs and at other opportunities.

Okay. And then lastly, Jim, now that you have owned it for several quarters, can you reflect on HighMount's overall performance. Obviously, the cash flow and the profitability to some extent is a reflection of where commodity costs are, but sort of overall, the operational performance, the drilling success. Those types of dynamics if you would.

Yes, we are very pleased with it. It has delivered exactly what the management had said they would and could deliver a year and a half ago when we first met them. We like the nature of their drilling which is, as we described it, factory drilling. I think they had a 98% or 99% success rate ratio in drilling this past quarter. Reserves have gone up. We are very pleased with what we've got. We feel that we have now a significant base in this business that, if other opportunities come along, we have the management and the knowhow to take advantage of it. So, yes, we are very pleased and are happy to have HighMount as a subsidiary of ours.

Okay, great. Thank you.

Thank you. Our next question is coming from Michael Millman with Soleil Securities.

Thank you. Now that you've spun Lorillard, does this totally remove any tobacco risk? In other words, is there any residual risk? And how does this, if indeed you've reduced risk, changed your thinking about how you might invest compared to pretobacco days?

In terms of residual risk that we may have, I would instruct you to read our offering circulars where the lawyers go to great lengths to explain whatever risks that we have, that we may have going forward. In terms of investments. No, I don't think that splitting off Lorillard has changed the way we think about investments and how we are going to move forward on them. They say you can't teach an old dog new tricks. While I think of myself as a young person, when when it comes to investing, I consider myself an old dog and there are just certain principles that I have learned over the past 35 years of investing and those principles apply whether or not Loews owns an interest in a tobacco company. So, no, what we are looking to do, which is to create value, and how we are looking to do it hasn't changed at all.

So moving on to CNA, do you expect CNA to outperform the P&C sector either in the near term or long-term?

When I look at CNA I'm not looking at it -- I do look at it relative to this sector but I don't look at it in terms of outperforming or not. I look at it in terms of I want CNA to provide good, solid returns for us in the context of what's available within the industry and I also wanted to do that without providing any surprises in the future. It is very easy in the insurance industry to "show good returns," All you have to do is short your reserves I want to make sure CNA is always well reserved. I think we've got great management at CNA now. I think we've got a good transition planned. So I'm just very positive about the performance of CNA going forward.

Is CNA a growth company? Or is the industry a growth industry?

No, not at all. Look, revenues are down. When revenues are down, you can't call that a growth industry. But it was never billed as a growth industry. It's cyclical industry. We've come off the peak of the cycle and now the cycle is headed down with price cutting. But nonetheless, CNA was able to earn more than $200 million this quarter. So I am not -- I'm always concerned about all our companies, but I'm not overly concerned about CNA.

Is there some possibility -- I guess -- is there likely possibility that you'd consider selling this in the next up cycle?

I'm going to state a firm and fast rule here. I'm not talking about the disposition of any of our companies. First of all, it it creates rumors, number one. Number two, it is phenomenally disrupting to the people that work at those subsidiaries that are working for all of our shareholders and it is the kind of question that I can't even answer anyway, because if we were considering disposing of it, do you think I would make and announcement on this call to do so? So chalk me up to a no comment to your question.

Okay. Thank you.

My pleasure.

Thank you. (OPERATOR INSTRUCTIONS) Our next question is coming from Justin Tugman with perkins Wolf. Go ahead.

I was wondering if you could give me your production numbers on HighMount for the first quarter and then also for the year ago period.

Hold on, we are just looking it up. We can give to you year-to-date. And then we could also give you -- we can give you year-to-date and also the second quarter. Production was, for the second quarter was 28.4 billion cubic feet equivalent and year to date was 44.9 billion cubic feet equivalent. Sorry -- year-to-date was 56.5 billion cubic feet equivalent.

Okay, alright. Just curious, second quarter, your realizations, I believe you said was 790 on natural gas?

Yes.

How much are you hedged?

We were pretty significantly hedged in the second quarter. One minute, we will finally the exact number. We were pretty significantly hedged. Generally, what we want to do is to be hedged about one year's production over the following two years.

Okay. Alright. And then, I guess obviously going forward you're going to see the hedge prices increase from the 790 realization?

Yes.

Okay. And then last question I had regarding HighMount. I think you didn't elude to that you are open to possibilities for acquisitions if they made sense. What are you seeing right now in the marketplace and obviously, certainly in some plays we have seen acreage values increase substantially. Kind of give me your sense on where you see the acquisition market right now for E&P properties?

I would guess that at this very minute the acquisition market is undergoing a big change. I think that with gas -- with spot gas moving up over $13 an Mcf from probably $5 or $6 in October of '07, that the expectations were very high for what properties could be worth. And then that all ended, I guess, about a month ago and prices have now dropped from over $13. They did get below $9 per spot gas. And the 12-month strip is now trading at about $9.60. So my guess is that the sellers haven't lowered their sites yet, but given another month or two with prices at these levels and we will start to see transactions transactions occur reflective of the economics today for natural gas.

Okay, and then I guess as a follow-up to that. When you do look at acquisitions, do you look at properties that are bolt-ons to what you already purchased or would you be open to going into new geographic areas?

The correct response is yes. We look for both.

Okay, thank you very much.

My pleasure.

Thank you. Our next question is coming from Adam Starr with Gulfside Asset Management. Please go ahead.

Hi, how are you? On the last quarter's call you mentioned, with the admonishment to don't try this at home, that you were starting to take some positions in subprime and related assets. Has that continued, and do you still see it as a worthwhile endeavor?

It still comes with a warning don't try this at home.

No intention of doing so.

But, yes, we did increase the amount of subprime mortgage-backed assets that we have in the CNA portfolio. I think we bought about 163 -- CNA bought about $163 million of Loews types of goods and we expect returns on those anywhere from 10% to 15% over the next few years.

And that's all at the CNA level.

Yes.

So it would sound like it was at a fairly senior level within the universe?

Yes. Yes, it is.

Okay. Thanks a lot.

My pleasure. One other thing I want to add back to the question about production volumes. The volumes I gave you were before consideration of the VPPs and the VPPs, which are volume production payments, the numbers after the VPPs would have been 26 billion cubic feet for the quarter and 51.7 billion cubic feet for the year-to-date.

There appears to be no further questions at this time. I will turn the floor back over to you.

Thank you for joining us on the call today. A replay will be available on our website at loews.com in approximately two hours. That concludes today's call.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.