洛茲集團 (L) 2011 Q3 法說會逐字稿

Good morning, my name is Melissa and I will be your conference operator today. At this time, I would like to welcome everyone to the Loews third quarter 2011 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 session. (Operator instructions). Thank you, I will now turn the conference over to Darren Daugherty, Director of Investor Relations. Please go ahead.

Thank you, Melissa, good morning, everyone. Welcome to Loews Corporation's third quarter 2011 earnings conference call. A copy of the earnings release may be found on our website, Loews.com.

On the call this morning are Chief Executive Officer Jim Tisch and Chief Financial Officer, Peter Keegan.

Following our prepared remarks this morning, we will have a question and answer session. Before we begin, however, I will remind you that this conference call might include 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, which is included in the Company's filings with the SEC.

During the call today, we might also discuss non-GAAP financial measures. Please refer to our securities filings for reconciliations to most comparable GAAP measures. I will now turn the call over to Loews' Chief Executive Officer, Jim Tisch.

Thank you, Darren, and good morning and thanks for joining us on the call today.

Loews reported net income of $162 million for this year's third quarter compared to $36 million for the third quarter of 2010. Results for the prior-year quarter included a $328 million after-tax charge related to CNA's agreement to cede its legacy asbestos and pollution liabilities to a subsidiary of Berkshire Hathaway. Excluding that charge, net income for the quarter decreased by $202 million versus the prior-year quarter, primarily from three factors -- one, decreased limited partnership investment results at CNA; two, lower performance of equity-based investments in the Loews Holding Company's portfolio; and, three, higher natural catastrophe losses at CNA.

Setting aside these factors, our subsidiaries delivered solid performance in their operations. At CNA, the growth strategies that have been put in place are resulting in continued improvements in the fundamentals of its core property and casualty operations. Increased net written premiums marked the third consecutive quarter of top-line growth, which was driven by strong new business and high retention. Along with this growth trend, CNA continued to achieve great improvement, particularly in its commercial segment.

Third quarter combined ratios before catastrophes and development improved for both specialty and commercial, while the property and casualty business segment benefited from its 19th consecutive quarter of favorable loss reserve development. CNA remains confident in the overall adequacy of its reserves and will continue to maintain its disciplined reserving processes.

Despite to the good operating performance in its property and casualty operations, CNA's results were negatively impacted by the performance of its limited partnership investments. LP lawsuits were driven by negative equity market returns during the quarter combined with widening credit spreads and overall capital market volatility. Although CNA's portfolio of limited partnership investments can create earnings volatility, it continues to be an attractive investment strategy for CNA. These holdings have yielded equity-like returns over the years with less volatility and higher absolute returns than an equity portfolio.

Given the LP results for the quarter, it might be helpful to review how these LP investments have performed over a longer time frame by repeating some performance figures that CNA disclosed on its call earlier today. CNA's LP portfolio produced a third quarter return of negative 3.7%, while the S&P 500 total return was negative 13.9%. Over the last 10 years, CNA's LP investments produced an annualized return of approximately 8% compared to a 3% total return for the S&P 500. So, as you can see, over the longer term the hedge fund portfolio has provided good returns, especially in light of the prevailing low yields in other asset classes.

Turning now to Boardwalk, with Stan Horton on board as CEO for about two quarters now, Boardwalk is in full growth mode. Last quarter, Boardwalk enumerated a growth strategy that included expanding its existing pipeline assets to connect to new supplies and markets. To reach the Gulf, Boardwalk announced that it has formed a joint venture with an affiliate of its general partner which is owned by Loews. The new JV has entered into a definitive agreement to acquire Petal Gas Storage and Hattiesburg Gas Storage from Enterprise Product Partners for $550 million. Petal and Hattiesburg operate 7 high deliverability salt dome natural gas storage caverns located in Mississippi. These assets are a great addition to Boardwalk's pipeline footprint. The facilities are anchored by a long-term firm agreement with approximately 80% of the existing customer base in either electric or natural gas utilities. The location and type of storage assets are very desirable, and when combined with existing assets, Boardwalk expects numerous opportunities for synergies and growth.

Loews will contribute $280 million of the joint venture's equity for an 80% ownership interest, and Boardwalk will contribute $70 million for 20% ownership. An additional $200 million will be raised by the JV through a 5-year bank loan. At a later date, if it makes economic sense, Loews's 80% ownership interest can be dropped down to Boardwalk in one or more transaction.

Within its field services business, Boardwalk has also announced a new gathering pipeline in the Marcellus Shale. This new project is expected to cost approximately $90 million and will be built out over several years. It is anchored by a 15-year fee-based contract with Southwestern Energy. Marcellus is likely to become a very significant supply basin for the United States, and Boardwalk hopes to identify and execute on the additional opportunities in the Marcellus area in the future.

Additionally, Boardwalk has received regulatory approval to turn some of its assets in South Texas into a rich gas system in order to transport liquids-rich natural gas out of the Eagle Ford region. The project is expected to be completed by year end. And, while Boardwalk does not have any firm commitments, it receives interest from the producer community. Boardwalk's goal over the next several years is to strengthen its traditional pipeline business while diversifying its products and services. Boardwalk is working hard to identify organic growth opportunities and other acquisition opportunities that are accretive and that do not significantly increase its overall risk profile.

Turning now to HighMount, I would like to give an update on its most recent acquisition. As of today, HighMount has completed the purchase of working interest in oil and gas properties located on approximately 70,000 net acres in Oklahoma. These properties are mostly undeveloped, and HighMount believes that they contain primarily oil and liquids reserves that can be produced through horizontal drilling. The purchase price of $106 million was funded with a capital contribution from Loews.

There are a few key points to the investment rationale. First, we believe there is a large upside potential in this oil resources play. HighMount will be able to drill nearly 600 wells, which should have favorable single-well economics.

Second, the resource opportunity will focus on the Mississippian Lime and the Woodford Shale. The Mississippi Lime has been recently de-risked by development on and surrounding properties.

Third, while we remain bullish on natural gas over the longer-term, these properties should help to diversify unannounced reserves, which consist almost entirely of natural gas and liquids.

And fourth, HighMount will control operations over 82% of the leasehold, and the continuous makeup of the acreage creates operational efficiencies. The resource opportunity fits well with HighMount's core technical competencies. Although this acquisition is not a game changer in terms of its magnitude, it is a significant step in HighMount's overall growth strategy. HighMount will continue to look for other value-creating opportunities.

And with that I will now turn the call over to Pete Keegan, our Chief Financial Officer.

Thanks, Jim, and good morning, everyone. Loews Corp. reported earnings of $0.40 per share for the third quarter of 2011. Adjusting for the charge associated with CNA's loss portfolio transfer transaction in 2010, earnings for the prior-year third quarter would have been $0.87 per share rather than the reported $0.09 per share. This decline in the results versus the adjusted number was primarily due to lower results from CNA and lower investment income in the holding company portfolio but was partially offset by higher earnings from Diamond Offshore.

CNA's contribution to Loews net operating income was $84 million in the third quarter. In the prior-year quarter, CNA contributed an operating loss of $140 million, or when adjusted for the Loews portfolio transfer, CNA contributed operating income of $169 million in the prior-year quarter. Net operating income in CNA's core property and casualty operations declined primarily because of lower net investment income and higher catastrophe losses. Net investment income for the three months ended September 20, 2011 decreased by $187 million pre-tax as compared to the same period in 2010, primarily driven by the previously discussed decrease in limited partnership results as well as lower fixed maturity security income. In the third quarter, CNA reported catastrophe losses of $29 million after tax in noncontrolling interest as compared to $7 million for the same period in 2010.

P&C operations produced a third quarter combined ratio of 99.1% versus 98% in the third quarter of 2010. Excluding the impact of prior-year development and catastrophe losses, combined ratios were 101% and 103.7% for the comparable periods. For the quarter, CNA reported realized investment losses of $15 million after-tax in noncontrolling interest versus realized investment gains of $37 million in the prior-year quarter.

Diamond Offshore's contribution to net income for the quarter increased to $121 million from $93 million in the prior-year quarter, primarily as a result of increase in contract drilling revenues. Results for the third quarter of 2011 reflect the return to service of three of Diamond Offshore's high-specification floaters that were idle during the second quarter of 2010, following the Macondo incident in the Gulf of Mexico. Also, the newest addition to Diamond Offshore's floater fleet, the Ocean Valor, began generating revenue in the fourth quarter of 2010, when it commenced operating under contract in Brazil.

Contract drilling expense increased by $41 million and included normal operating costs for the Ocean Valor as well as the increased amortization mobilization costs and higher costs associated with rigs operating internationally rather than domestically. Additionally, Diamond Offshore recognized a pre-tax gain of $31 million in the third quarter of 2010 related to the sale of the Ocean Shield. Also benefiting Diamond's results for the quarter was a lower effective tax rate as compared with the 2010 period.

HighMount's operating income for the quarter decreased to $16 million from $19 million in the prior-year quarter due to decreased sales volumes stemming from a reduction in HighMount's drilling activity. Average prices realized per MCF were $6.22 in the third quarter of 2011 compared to $5.80 in the 2010 period.

Operating expenses increased by $2 million in the third quarter of 2011 as compared to the 2010 period, primarily due to increased DD&A expenses related to negative reserve provisions in December 2010 and projected future development cost.

HighMount's production volumes and realized prices in the third quarter are as follows. Natural gas production was 11.3 billion cubic feet at an average realized price of $5.73 per 1000 cubic feet. Natural gas liquids production was 664,000 barrels at an average realized price of $40.57 per barrel. Oil production was 68,000 barrels at an average price of $82.67 per barrel.

As of September 30, HighMount had hedges in place that cover approximately 77% and 54% of total estimated 2011 and 2012 natural gas equivalent production at a weighted average price of $6.28 and $5.51 per Mcfe, respectively.

Boardwalk Pipelines' contribution to net income for the quarter decreased $18 million from $21 million in the prior-year quarter. The decrease in net income versus the prior-year quarter was primarily due to higher interest expense from a loss on the early extinguishment of debt. Additionally, Boardwalk reported higher operation and maintenance expense related to integrity management and reliability spending.

These negative impacts were partially offset by higher gas transportation revenues resulting from increased capacities from the completion of several compression projects in 2010 and operating the Fayetteville Lateral at its design capacity.

Loews Hotels reported breakeven results for the third quarter versus a loss of $2 million in the prior-year quarter. Revenue per available room increased to $161.76 in the third quarter from $143.89 in the prior-year quarter, reflecting improved occupancy and average room rates.

Holding company cash and investments as of September 30 totaled $4 billion. During the quarter we repurchased 7.5 million shares of common stock for $275 million. We received $154 million of dividends and interest from our subsidiaries and we paid $25 million of dividends to our shareholders. In the fourth quarter we have made a capital contribution to HighMount of $106 million and we also anticipate making an equity contribution of approximately $280 million for an equity ownership interest in the joint venture discussed on the call today.

Now I will turn the call back over to Darren.

Thank you, Pete. Operator, at this time we will open up for questions.

(Operator instructions) Bob Glasspiegel, Langen McAlenney.

Good morning, everyone. I want to wish Darren good luck. You're leaving big shoes to fill. I'm glad to know that you're going to be staying in the family.

On the Boardwalk transaction, we won't be able to figure out what Loews's earnings are from Boardwalk's earnings, given that we are going to have this sort of side venture working through the numbers. What sort of transparency are you expecting to provide, and any sense of what the sort of core earnings rate of what this business might be?

Well, we haven't decided whether we will split any of that out. As you indicated, it will be included in our overall Boardwalk results unless we disclose it separately, Bob.

Any sense for just the rough earnings run rate of what this business is? Is it a GAAP earnings contributor? Is this a cash flow business where the GAAP earnings don't have any correlation, necessarily, to operations?

(multiple speakers) our internal projections show that it has both. It has a reasonably good cash flow for the joint venture or whoever the ultimate owner is and, as well, it should have reasonably similar GAAP results.

The other thing that it does is that it provides a very strong anchor for one end of our system, where -- one end of the Boardwalk system, where electric and gas utilities will find it very advantageous to use that storage, which is high-release storage, so that they can get the gas that they need for, in the case of utilities, hot days and -- in the case of electric utilities hot days, and in the case of gas utilities, very cold days.

Does the fact that you're letting your cash position work after a long period of sort of letting it build suggest that you are feeling better about the world, or is this just sort of one-off transactions that popped up?

You know, over the years we have said that we would support our subsidiaries. And right now, what we're finding is that we are able to support them with -- by helping them to finance transactions that should be very accretive to shareholder value, not only at the subsidiaries but also at Loews. So we are very pleased with the Petal and Hattiesburg acquisition. At Boardwalk and likewise, we are very pleased with the $106 million land acquisition that HighMount is making just today in Oklahoma.

Okay. So it really doesn't have any change in your macro view of the world, it sounds like?

No. But, you know, I think what's happening, though, is that we are finally able to do these transactions. We are finding that there may be somewhat less competition and we are finding that the prices are more reasonable. So that's why we are willing to step in.

Okay, helpful, thank you.

David Adelman, Morgan Stanley.

Jim, how much of a consideration was it on the Boardwalk transaction that, because of where Boardwalk's unit price is, that they had to, in effect, rely on Loews? And how might that color your interest going forward in doing subsequent transactions with Boardwalk? Is that a major consideration? Is it irrelevant to you? Is it a concern of yours?

It was a significant consideration. Based on the price of Boardwalk's shares when we agreed to the acquisition, the deal did not make a lot of economic sense for Boardwalk. And Loews was willing to bridge that acquisition and wait for the Boardwalk price to go higher, which in fact has occurred.

And I think that the market is now starting to understand that there are very significant things that are taking place at Boardwalk under Stan Horton. There is the recent gathering system that we announced that we are financing in the Marcellus Shale. There is this Petal and Hattiesburg acquisition, and likewise there is the permission that we got from regulatory authorities to convert some of our pipeline near the Eagle Ford Shale into wet gas pipelines from dry gas pipeline.

So there is a lot of activity, and my sense is that at some point in time the market is going to understand that Boardwalk's price had been very cheap relative to what its prospects were.

And the debt that the JV takes on -- I assume that that's going to be non-recourse to Loews, the holding company?

Is correct.

Okay, and then on --

And ideally, what will happen is drop-downs are very common in the MLP space. We would hope and expect that over the coming years, as Boardwalk is able to finance it, we will -- Loews or the JV will sell interest in Petal and Hattiesburg to Boardwalk, so that the ultimate goal is that this will be 100% owned by Boardwalk.

And then on the HighMount acquisition that was announced today, Jim, can you help us understand the return profile in a general sense that you find attractive in looking at these kinds of properties? What's the base case? How much very ability is there around that when you bid?

We foresee very attractive -- very, very attractive double-digit IRRs from investments in this property. This property cost us $106 million. We think there could be more than 600 drilling sites, and that would mean drilling expenditures over the life of the property in excess of $1.5 billion. And we see very attractive IRRs on that drilling investment.

Okay. And then, lastly, it's not a large operation, but the hotel business -- you've had good increases in average daily rates, yet the business more or less appears to be operating at a breakeven level. What needs to occur for that operation in aggregate to become materially more profitable than it is today? Does it need more scale? Do you need more properties? Is it simply a function of average daily rate continuing to go up, or is there something else?

I think it's all of the above. We need to fill out our portfolio in a number of key gateway cities, and we are looking at that. We're looking to do that both through owned properties, through joint venture properties and also through management deals. So we are and have been for the past few quarters and will be for the next several quarters reevaluating our growth strategy and then actually implementing it.

Okay, thank you.

(Operator instructions) Sam Yake, BGB Securities.

I just had two today. One was, I listened to the CNA conference call and read the results. It seems, like you said, they're really improving their performance. And I'm just wondering -- it must be frustrating for you to have, oh, 90% of it and you have this 10% trading in the public market at what looks to me like an extraordinary discount. And yet, when I try to value Loews, everybody seems to value Loews off the public price of CNA.

Is there anything you can do to close that gap between the publicly quoted value and what the true value is? I know there's not many levers you can pull, but what are your thoughts on that?

I've tried to, in these calls, check the transcripts over the past several years. I've tried to talk about how CNA is doing, the strategies that they have been putting in place. And now I think we are seeing, after the past three quarters, that those strategies are actually starting to gain traction.

Beyond that, I'm not going to stand out in front of the office with a sandwich board saying buy CNA stock. Instead, instead, as you can see, Loews has been buying its own stock. And the price of Loews stock, I think, reflects the low valuation that CNA is receiving. So that's one of the reasons that gives us so much confidence buying in our own shares.

Okay, thank you. And then one other question -- when I look at the value of Loews, it seems to me that the tax issue is a pretty important one. And I'm just wondering -- you have kind of disclosed tax basis in your major assets in a general way. But can you disclose anywhere like the specific numbers? And if you don't, is there a reason why you don't do that?

We don't do that, and historically we don't do that. Tax basis is a very simple item when it comes to your own portfolio. When it comes to subsidiaries and other corporate assets, it is phenomenally complicated and takes an enormous amount of effort. And we do not typically adjust the basis -- we do not calculate the basis on either a quarterly or annual basis. And I would say, likewise, I don't think there are any S&P 500 companies that actually do that.

Okay, that explains it. Thanks so much.

At this time, there are no further questions. I will turn the call back to Mr. Daugherty for closing remarks.

Let me just say something before Darren gets on. Bob Glasspiegel referred to it at the beginning of the call. We think this is Darren's last call on the Loews call. Darren has been here for a number of years and done an admirable service. And so, as a reward for all the fine work that he's done, he is moving to Houston and has become the head of IR for Diamond Offshore, where there are a lot more callers into the quarterly calls, there are a lot more analysts that follow the company and he's staying dramatically more busy than he has been here at Loews. Take it away, Darren. You will be among the missed here.

Thank you, Jim. It's been a wonderful opportunity to be at Loews, and thank you all for joining us on the call today. That concludes today's call.

Thank you for participating in today's conference call. You may now disconnect.