洛茲集團 (L) 2010 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Loews first quarter 2010 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator instructions). Thank you. I would now like to turn the conference over to Mr. Darren Daugherty, Director of Investor Relations. Sir, you may begin your conference.

Thank you, Paula. Good morning, everyone. Welcome to Loews Corporation's first quarter 2010 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 and Peter Keegan, the Chief Financial Officer of Loews.

Before we begin, I'd 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 differ 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 we have discussed our results, we will have a question-and-answer session. And now, I'll turn the call over to Loews' Chief Executive Officer, Jim Tisch.

Thank you, Don. Good morning and thank you for joining us on our call today. Loews started the year with a very solid first quarter, reporting earnings of $0.99 per share compared to a loss of $1.49 per share in the first quarter of '09. CNA saw substantial improvement in its net operating income, primarily from higher investment income from limited partnership investments. The specialty segment at CNA is performing well in a very competitive environment.

CNA continues to exercise underwriting discipline in both its specialty and in commercial segments. In the commercial segment, CNA maintains its focus on improving profitability with more selective underwriting and improved pricing. The competitive P&C insurance market and weak economy have put pressure on the top line, but CNA's progress toward an adequately priced more profitable commercial book of business is evident in its improving rate trend. Results in CNA's core property and casualty operation included higher catastrophe losses and decreased favorable net prior-year development versus the first quarter of '09.

Diamond Offshore posted strong results for the first quarter. While day rates have decreased from their all time high, current rates remain attractive and profitable. During the quarter, Diamond fined a number of contracts bringing our revenue backlog to approximately $9.1 billion or 78.5 rig years of work. Diamond's recently declared special quarterly dividends, along with its regularly quarterly dividend, was reduced from the previous level of $2 per share to $1.50 per share. This new level of dividends represents over $100 million of cash to be received by Loews this quarter. The tragic events on the Deepwater Horizon and the ensuing oil spill are of great concern to all of us.

Larry Dickerson, the CEO of Diamond Offshore, is on the call this morning and after Pete Keegan and I have finished our prepared remarks, Larry will give us an update on the situation. Turning back to our results, Boardwalk had a strong first quarter benefiting from increased pipeline capacity and throughput on its major pipeline expansion project. The growth in natural gas supply continues to create new opportunities such as the previously announced Haynesville and Clarence Compression Projects, which will boost capacity on Boardwalk's East Texas pipeline system to accommodate demand from the Haynesville shale production area. During the quarter, Boardwalk placed into service three new compressor stations on the Gulf Crossing Pipeline in the Fayetteville and Greenville laterals, increasing the delivery capacities of these pipelines. These compression projects demonstrate the attractiveness and flexibility of Boardwalk's footprint. Boardwalk has increased the cash distribution paid to unit holders each quarter since its IPO in '05. The most recently declared distribution was $0.505 per unit which, when combined with distributions to the Boardwalk general partner, represents $65 million of cash load to Loews during the second quarter.

In the E&P sector, natural gas pricing weakness has resulted in a challenging operating environment. To better position itself to succeed in this environment, HighMount is disposing of its non-core assets in Alabama and Michigan. On April 28, HighMount entered into an agreement to sell its assets in the Black Warrior Basin in Alabama to Walter Energy for $210 million. This sale is expected to close during the second quarter of 2010. Additionally, on April 30, HighMount completed the sale of its exploration and production assets in the Antrim Shale in Michigan for $330 million, subject to adjustments. Net proceeds from both transactions total approximately $500 million, and will go towards repayment of HighMount's outstanding $1.6 billion term loan. As of year-end '09, approximately 83% of HighMount's proved reserves were located in the Permian Basin in Texas.

In comparison, the Antrim Shale and the Black Warrior Basin assets were geographically distant and relatively small; together representing only about 17% of HighMount's proved reserves. As a result of these transactions, HighMount will be able to concentrate on its prolific Permian Basin assets, which have more favorable production economics . In management news, HighMount's Chief Executive Officer, Kim Parker, has elected to pursue other opportunities in the E&P sector and therefore the changes at HighMount will also include the appointment of a new CEO. Given the depth of experience of HighMount's management team, led by Jason Garner, a long time HighMount employee and current Chief Operating Officer, we anticipate that this time of transition will proceed smoothly. We have a long-standing policy of not commenting on the potential sale or divesture of subsidiary companies, but in this case I'd like to make an exception.

In light of the many M&A transactions that have taken place in the E&P sector, as well as the actions taken at HighMount, I want to say very clearly that we do not have any plans to divest of our HighMount E&P subsidiary. We continue to like the economics of these long-life natural gas assets over the long term. We are making changes at HighMount to make the company more competitive in a difficult operating environment, and we will continue to look for the right opportunities to grow in the E&P industry.

On the launching front, I am pleased to report some upbeat news from our Loews Hotels subsidiary. Last month, Loews Hotels celebrated the opening of its 19th property, the Loews Atlanta Hotel, located in the heart of Midtown Atlanta. It is a beautiful 414-room property, and we hope that you will visit us when traveling to Atlanta. And finally, Loews Corp. finished the quarter with $3.4 billion of cash and investments, up from $3 billion at the beginning of 2010. During the quarter plus the month of April, we repurchased over 6.8 million shares of our common stock to slightly more than $250 million. This brings the total shares repurchased, since the beginning of the quarter -- beginning of the second quarter of '09, to just under 17.4 million shares and represents a whisker less than 4% of our shares outstanding at that time.

As many of you know, share repurchases at opportune times and prices have been an integral part of our effort over the years to build long-term value for all Loews common stockholders. And with that, I will now turn the call over to Pete Keegan, our Chief Financial

Thanks, Jim and good morning, everyone. Loews reported first quarter net income of $420 million versus a net loss of $647 million in the prior year first quarter. Last year's first quarter results include the non-cash after-tax impairment charge of $660 million at HighMount E&P. In the first quarter of 2010, realized investment gains at CNA totaled $19 million after tax and noncontrolling interest versus realized net investment losses in the prior year quarter of $310 million after tax and noncontrolling interest. CNA's contribution to Loews' net income, before investment gains and losses, was $206 million for the quarter versus $140 million in the prior year quarter. CNA's core property and casualty operations and its non-core segments both saw improvement, primarily from higher investment income in limited partnership investments. During the quarter, CNA's unrealized position improved by $348 million net of tax. Loews' book value per share increased to $41.80 as of March 31, 2010, compared to $39.76 at the beginning of the year, mainly as a result of increased book value at CNA.

Diamond Offshore's contribution to net income for the quarter declined to $136 million from $163 million in the first quarter of 2009. Diamond's first quarter net income reflects a 2.7% decrease in revenues stemming from an overall declined rig utilization, although average day rates for Diamond Offshore's floater fleet increased. Revenues from jackup rates decreased $47 million versus the prior year quarter, primarily due to decreased day rates and utilization. HighMount reported first quarter net income of $24 million. Its revenues decreased to $135 million in the first quarter 2010 from $175 million in the first quarter of 2009, mainly due to reduced average realized prices and sales volume. The decline in production reflects some curtailment of HighMount's drilling program, as well as delayed well completions in response to lower natural gas prices. HighMount's expenses for the first quarter decreased to $91 million from $145 million in the first quarter of 2009, excluding the impairment of natural gas and oil properties.

Expenses in the first quarter of 2009 included a $23 million fee to terminate contracts on five drilling rigs at HighMount's Permian Basin properties. DD&A expenses for the quarter decreased $14 million versus the prior year's first quarter, primarily as a result of the impairment of the carrying value of HighMount's natural gas and oil properties. HighMount's first quarter results include an $8 million loss after tax from discontinuing hedge accounting on derivative positions, primarily related to the sale of Michigan assets. HighMount's production volumes are as follows. Natural gas production of 17.6 billion cubic feet at an average realized price of $7.16 per thousand cubic feet. Natural gas liquids production of 734,000 barrels at an average realized price of $34.43 per barrel and oil production of 61,000 barrels at an average price of $74.19 per barrel. As of March 31, HighMount had hedges in place for approximately 75% of its estimated 2010 natural gas equivalent production at an equivalent price of $6.07 per Mcfe and 49% of estimated 2011 production at an equivalent price of $6.41 per Mcfe.

Boardwalk Pipeline's contribution to net income for the quarter was $38 million versus $22 million in the prior year's first quarter. Revenues increased to $301 million from $224 million in the first quarter of 2009, primarily as a result of increased gas transportation capacities and throughput from pipeline expansion projects. Expenses rose to $213 million from $173 million in the prior year first quarter. Expenses during the quarter included a $14 million increase in fuel consumed, due to higher throughput from the pipeline expansion projects and a $10 million increase in interest expense due to higher debt levels. In the first quarter, Loews Hotels reported a net loss of $1 million versus a net loss of $18 million in the prior year first quarter, which included a non-cash impairment charge related to Loews Hotels' minority interest in a joint venture. In the first quarter of 2010, revenue per available room increased to $144.65 from $137.56 in the prior year first quarter. Occupancy for the quarter also increased to 65.3% from 62.4%.

As of March 31, holding company cash and investments totaled $3.4 billion. During the quarter, we received net proceeds of approximately $333 million from the sale of 11.5 million Boardwalk Pipeline common units, representing a portion of the common units we purchased from Boardwalk in late 2008 and mid-2009. Also during the quarter, we received $237 million in dividends and interest from our subsidiaries, we repurchased 5.4 million shares of our common stock for $197 million and we paid $26 million of dividends to our shareholders. From April 1 through April 28, 2010, we repurchased an additional 1.25 million shares of common stock for $47 million. And now, I'll turn the call back to Jim.

Thank you, Pete. And before we get to questions and answers, I'd like to turn the call over to Larry Dickerson, the CEO of Diamond Offshore, to give a brief update on the offshore drilling industry and Diamond Offshore. Larry?

Thank you very much, Jim. I'm going to talk about the Deepwater Horizon event, which is an unfolding tragedy. But first, we need to focus on, it was a tragedy for 11 of our fellow offshore workers who lost their lives apparently in this event, and certainly the Company extends its condolences to those families and to those companies. I would point out that the industry has a 41-year track record of operating safely in the US Gulf, or in all US waters, without any significant oil spills. So therefore, the scope and size of this particular tragedy of the sinking of the Horizon and the uncontrolled flow of oil into the sea surprised us very much that this would happen and be of this magnitude. We don't have a full set of facts to be able to comment as to what particularly happened, but the first thing we did was we did understand from reports what -- that they were in the final processes of testing their well and securing that well. So the first thing that Diamond Offshore did was begin a review of its own procedures governing these particular types of operations with emphasis and questions of what could go wrong so that we could make sure that there wasn't any changes that we need to make to our procedures. The Ocean Endeavor was the closest offshore rig to the Horizon, and even before the Horizon sank, we began taking on -- transferring from boats some of the survivors that were evacuated from the rig and they were initially staged there. We were requested for a couple of tools to be utilized in efforts to close the BOP stacks and we quickly provided those to the companies undergoing those particular efforts.

Again, we are ready, as needed, to provide any further assistance, but I think most of those efforts are in hand by BP and the other subcontractors that are working there. We are confident that our procedures and our personnel are adequate in scope and sufficiently trained so that if those procedures are followed, that we will prevent this type of occurrence in the future on our rigs. The only thing I can provide as an update is that the MMS, the regulatory authorities, which is a part of the Department of Interior, announced that they would make and have made for Diamond Offshore, a visit to our deepwater operations to review what we are doing, with emphasis on our stacks and our procedures there. And we did not receive, as a result of those visits, any incidents of non-compliance which would be the regulatory method of recognizing deficiency or something that needed to be corrected. So, again, we standby with the rest of the industry. I do know that the men and women of this industry are working very, very hard, are trying all sorts of things, have a number of plans in the works to begin to get control of the oil flow, and that's obviously everybody's highest priority before we move on to determining what may have happened and should there be additional safeguards or changes in our procedures in the future. So, with that, I think Jim, I'll let you continue on with your Q&A portion.

(Operator instructions) . We will pause for just a moment to compile the Q&A roster. Your first question comes from Bob Glasspiegel of

Thank you very much for Larry's comments. I was wondering if I could direct a question to him on what he expects the result of this is going to do to pricing for your insurance costs?

Larry, you want to take a stab at that?

Yes. Obviously, it will have an impact on the market. Fortunately, our renewal date was May 1 and we already had our programs, both on physical damage and liability insurance renewed, so we're good for a year, which I'm -- I think that's a good place to be, because the market will have plenty of time to sort itself out. Certainly, we've been through these type of events before with the hurricanes that have occurred in the Gulf, and that has had impact on insurance pricing.

Okay. Thank you. Jim, on the gas property sales, totally understand the strategic merits of the decision. The only thing that I would just wonder is the timing. This seems like an inopportune time to be selling gas properties with prices depressed. What made you decide you wanted to be more liquid there?

Well, first of all, remember these are long-life reserves so they're not as affected by the short-term pricing as -- by short term prices of natural gas as shorter-lived reserves might be. And when we sold these properties, we received approximately the same price per Mcf in the ground as when we bought these properties. So, we felt that in view of what the pricing was for the assets that it made sense to sell at this point in time.

Just to be clear, you took a lot of write-downs since you made the original $4 billion purchase and the press release said there would be no gain or loss. So just on your last point, you're selling it for the same price as the markdown assets imply or --

We're selling it -- we bought all our -- when we bought HighMount we paid I think $1.63 per Mcf and when we sold, we're selling it at about $1.59 per Mcf. I think we're selling fewer Mcfs, we have fewer Mcfs in the ground, so that may account for a bit of it. But otherwise, on that benchmark it's about the same.

Okay. I understand your point. I guess just following my point, there's no material gain or loss even though you've written off $1 billion of carrying value?

That was against all the assets, Bob, not against --

Right. I understand that but if you've taken all the assets down by $1 billion and there's no gain or loss --

Well, it's a more complex answer than just that. Other things have happened. We have had earnings, we have had tax depreciation, a lot of movement in these assets since we acquired them. So it's not -- there's not a simple answer to that question, but what Jim said is correct, the --

Got you.

The price per Mcfe is essentially the same and the units sold is somewhat less, and we perceive benefits for the period of time we owned it.

Okay. Thank you.

Your next question comes from David Adelman of Morgan Stanley.

Good morning.

Good morning.

Jim, on HighMount, is the biggest surprise since you bought it simply domestic production of natural gas as shale technology has evolved?

Yes, the shale boom I think has surprised everybody. We bought HighMount in '07, gas prices proceeded to go up for a year. When we bought HighMount, gas prices were about $7.50 in Mcf. They almost doubled in the next year, going to $14.50 in Mcf in July of '08, and then they went down steadily. At one point, it hit the $1 handle about a year ago, and that's all due to the shale boom, I believe. The shale boom really became recognized as a permanent phenomenon in those sum -- beginning in the summer of '08, and people now have a pretty good understanding of just how significant it is and it is rather significant. Having said that, I would say that natural gas prices at $4 an Mcf are below the cost of production, even for many of the shale players. So I think that two things will happen in the world of natural gas. Number one, I think that slowly but surely production will come down because the industry is operating -- many people in the industry are operating at negative cash flow. And the other thing that will happen is that natural gas consumption, I believe, over the next several years will increase significantly.

Right now, natural gas trades for about 30% of the per BTU that oil trades for, and I think that that spread is just too big to last for a long time. And I think what we're going to see is increased consumption of natural gas to the detriment of oil consumption. But as I said, that's not going to happen in a month or two. That will take a few years for that to happen, but it could add a few percentage points of consumption every year to natural gas.

Okay. And then on a different topic, what can you say, Jim, about your -- what percent of the common units of Boardwalk you want to own long term? I know you made a series of incremental investments, you sold a bit. More or less is this where you want to be? Or do you envision that coming down over time further?

Let me just say we are very comfortable with our current ownership position. I don't want to talk about what we're going to do in the future, not for Boardwalk, not for CNA, not for any of our subsidiaries. But I can just tell you right now, we are very happy with our ownership of Boardwalk, and the cash flow and tax benefits that it's providing to Loews.

Okay. Thank you.

Your next question comes from Steven McSorley of Instinet.

Hi. Good morning, guys. Peter, looking at the debt at HighMount, it looks like you're going to be paying down around 30% of the debt outstanding there after getting rid of about 17% of the reserves. So, I'm just looking here, is there a target level of leverage that you want to have on that business? Or are we overlevered, underlevered versus where you would want to be right now?

I think our view is that when the debt will be at $1.1 billion after it's fully paid down in about another month, then we consider that level to be appropriate.

And what's the time horizon on that debt to maturity?

It's two years from this summer, I think it's two years from July.

Okay. Thank you.

Your next question comes from Steve Velgot of SIG.

Yes. Just a couple of questions about the sales within HighMount. I want to make sure I'm thinking about this correctly. Around the $1.60 per Mcf equivalent that you sold these assets for, am I right to say that the amount of assets were somewhat more developed than the assets you purchased from Dominion back in 2007? I think if I remember correctly, they were about 77% proved developed and it looked like these assets were about 86%. But with natural gas prices lower these days, I guess that's the reason that the $1.60 is about equivalent from one period to the next. Is that fair?

Hold on one second. We're just looking up the answer.

I just had another one that I'll throw out there as well. Did I miss what the capex number was in the quarter for HighMount? Because -- and whether or not you can talk about whether it's a linear reduction going forward from these asset sales?

Well, to answer your first question, the proved developed at year-end for Michigan was a little under 83% and Alabama it was about 92%.

Okay. And I think just in total of that $4 billion asset purchase it was about 77% proved developed.

Yes, we don't have that number in front of us.

What you'd really have to do is look at it on a per-basin basis.

Right.

And we don't have those numbers right here.

Okay. And just in terms of capex --

Capex in the first quarter of 2010 was $27 million.

That was just drilling CapEx.

That's going to be drilling CapEx.

Okay. And should we expect, in general,CapEx for HighMount to be down about 20% going forward or -- ?

I don't want to give a forecast on that and the reason is that our CapEx program is driven, in large part, by the economics that we can achieve through purchasing drilling services and the strength that we can obtain by hedging the production for the first two or three years. So, a lot of our CapEx is driven, not just by the spot price for natural gas, but by the forward curve going out three years and it's difficult, at this point in time, to say exactly what our CapEx will be.

Okay. Thank you.

Your next question comes from Joe Liu of Mass. Capital.

Good morning, gentlemen. Just following up on the CapEx questions, I'm assuming the first quarter production numbers still include the Antrim Shale and the Black Warrior Basin contribution?

Yes.

Yes.

Okay. So what is the pro forma -- or what is the approximate production reduction from the sale of the Antrim and the Black Warrior?

Let's see. The production -- we can give you the '09 production. I can't give you the pro forma.

Okay.

For '09 Michigan was 12.5 Bcfe and Alabama was 9.1.

12.5 and 9.1. Okay. And then, what is the gas-oil breakdown for HighMount following this, following these sales?

Why don't we look at the '09 the gas-oil breakdown? Well, for the Permian Basin, natural -- where's the '09?

Right here.

For the Permian basin in '09, 55.5 Bcfe of natural gas, 3.314 Mbbls of liquids and 326 Mbbls of oil and condensates.

And then I'll -- sorry. Go ahead.

Sorry. Go ahead.

Just on -- maybe you can help me understand the comment on growth of the E&P asset a little bit more? Do you intend to grow the HighMount asset or the HighMount subsidiary as a stand alone, or with the help of the parent company?

The parent company would invest more money into HighMount if we find the right opportunities. Obviously, we'd prefer for HighMount to be able to finance it on its own, but given the right opportunity, Loews will be there to make the investment.

Thanks again.

Next question comes from Bob Glasspiegel of Langen McAlleney.

I have a follow-up for Larry. Do you have a sense of where President Obama's going on drilling? He's getting a lot of pressure from the Paul Krugmans of the world to slow down offshore drilling as opposed to accelerate. What's your crystal ball or indication of where his head is now?

Let me take a shot at that. I don't think anybody really knows and I think we are going to have to wait and see. What we've seen, to date, is that there is increased scrutiny on the part of regulators. My guess is that increased scrutiny will continue and probably increase. But I don't think that anybody, at this point in time, probably not even the President, knows exactly what is going to be the new regime in the Gulf of Mexico and waters offshore of the United States once the dust settles from this tragedy.

Okay. And for you, Jimmy, you raise that despite all this buyback, which is accelerating, you're becoming more deleveraged with your strength at the parent. And last call you highlighted you have a backdrop of very slow economic recovery for a while, then you're -- and your thought process. Any thoughts or comments just on recent investment moves at the parent and liquidity?

When you say recent investment moves, what are you talking about specifically?

Well, I'm saying what have you done at the parent investmentwise and you're continuing to deleverage?

And what do you mean by "deleverage"?

Raising cash at the holding company.

Okay. Listen, we have a long and glorious history of holding cash at the parent company. We like it. And we have the discipline to hold it even if it pays us precious little in interest. We have of the $3.4 billion of cash at the holding company level, about $500 million is invested in equities and equity-like partnerships. The rest of that money, close to $3 billion, is invested primarily in fixed-income instruments. We have -- our corporate philosophy is to have cash at the holding company level, because only by having cash at the holding company level can we take advantage of opportunities when they appear. So, the cash that we have by the standards of the past few years is high by the standards of a few years before that, I think the cash that we have is low. I would say to you that it's a level that we are very comfortable with that gives us the opportunity to buy back stock if we wanted to do that. Gives us the opportunity to make an acquisition if we see an attractive one come along, and is not so great that it's, as I like to say, it's not burning a hole in our pocket.

Thank you, Jimmy.

My pleasure.

(Operator Instructions) Your next question comes from [Michael Mann] of Millman Research.

Thank you. Maybe this is also a longer-term kind of past as the last one was, but can you talk about whether you see the financial bill affecting either your ability to invest or manage money and/or CNA's ability to manage their money?

You're talking about the financial regulation bill going through the senate right now?

Right.

Yes, I don't think that that is going to have a major impact on us, and certainly not as serious an impact as it will have for banks. I think the thing that's concerning me that -- and I may talk about next quarter, are the changes that the FASB has up its sleeves. That it will start to lay out over the next several months, which will relate to market value accounting. I know the banks are apoplectic about it, it will be, as they say in the world of economists, pro-cyclical so that when things are good, banks will be giddy to actually loan more and when things are bad in the economy, banks will be retrenching even more. My guess is -- and for Loews and CNA, because we would have to mark all of our investment assets to market, it will cause our earnings to swing wildly. Such that in '08, if we had reported under this regime, our earnings would have been at CNA a loss of $5 billion, and in '09 our earnings would have been income of $5 billion. And so the first thing I think that analysts will do, with respect to insurance companies, which don't have one on the bank lists the way that other financial institutions have it, the first thing analysts will do when we report our net income number is deduct out that change of -- in market value of our assets. I would encourage one and all, when these proposals come out, to make your feelings known to the FASB about what's going on. Because it seems to me to be accounting that will serve no good purpose, will be difficult to account for at the corporate level and will economically be dangerous for the country. For banks, they will have -- if they are taking loan loss reserves, they will have to mark their loans to market, whatever that means. And as I said, it just doesn't make sense. So, pay close, close attention to it and we'll see how it develops.

Where does this stand now? Is this a done deal?

It is not a done deal. There should be an exposure draft that comes out pretty soon and that's when the debate will officially begin. So, you could accuse me of gun dropping here.

Okay. Thank you.

At this time there are no further questions. I will now turn the conference back over to Darren Daugherty for any closing remarks.

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

This concludes today's conference. You may now disconnect.