洛茲集團 (L) 2011 Q4 法說會逐字稿

Good morning. My name is Kelly and I will be your operator for today. At this time I would like to welcome everyone to Loews' fourth-quarter 2011 and year-end 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 will now turn the conference over to Mary Skafidas, Vice President, Investor Relations. Please go ahead.

Thank you, Kelly. Good morning, everyone. I Mary Skafidas, new head of Investor Relations for Loews, and I would like to welcome you all to the Loews Corporation fourth-quarter and year-end 2011 earnings call. A copy of our earnings release may be found on our website, Loews.com.

On the call this morning we have our Chief Executive Officer Jim Tisch, and our Chief Financial Officer Pete 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 may 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 disclaimers, 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 security filings for reconciliation to the most comparable GAAP measures.

I will now turn the call over to Loews' Chief Executive Officer, Jim Tisch. Jim?

Thank you, Mary, and welcome to the Loews Corporation. And good morning, everyone, and thank you for joining us today to discuss Loews' fourth-quarter and year-end results. I'll cover a few key highlights for the year and then turn the call over to Pete Keegan, our CFO, to review our results in more detail.

As you know by now, net income for the full-year 2011 was $2.63 per share, as compared to $3.07 in the prior year. While net income was down year-over-year, it masked positive developments at several of our key subsidiaries.

But before I discuss our individual businesses, let's take a moment to focus on the strategic management of Loews. As I have said before, we focus on three basic strategic principles, all with the goal of building long-term shareholder value.

First, we constantly focus on making opportune investments in acquisitions that position us for future growth. This past year, Loews did not make any acquisitions at the Holding Company level. However, we did facilitate significant investments for two of our subsidiaries, Boardwalk and HighMount, that should serve to greatly enhance long-term value of those companies and ultimately Loews.

Our second basic principle to create long-term value is to effectively manage and allocate Loews' capital. In that regard, in 2011 we spent $718 million buying back 18.2 million shares of Loews common stock, an investment which we think significantly enhances value for all Loews shareholders.

And third, we constantly work to enhance our subsidiaries' operating performance and capital structure. In 2011, Loews and our subsidiaries continued to weather the economic storm while positioning ourselves for the future. Our subsidiaries made great progress in meeting the strategic imperatives they set to make their business and operations stronger and better able to compete in any economic climate. I am very pleased with the progress that each of our subsidiaries is making.

With respect to our subsidiaries, let's first take a look at CNA. The company continues to work towards its main strategic goal of improving the market position and profitability of its core P&C operations.

CNA is focusing on underwriting and pricing discipline, seeking growth while continuing to build its balance sheet. Let me share four points that underscore CNA's success.

First, CNA's positive rate increases, solid business retention, and strong new business have all resulted in premium growth across the P&C businesses. Second, 2011 was the fifth consecutive year of favorable prior-year P&C loss development for CNA.

Third, CNA's book value per common share increased to $42.92 at year-end 2011, which reflects continued improvement in CNA's capital position. And lastly, CNA continued its efforts to simplify, strengthen, and focus its organization. In that regard, CNA sold its 50% ownership interest in First Insurance Company of Hawaii in August, and acquired in June the minority shares of CNA Surety that it did not previously known.

Turning to Diamond Offshore, Diamond continues to improve the capabilities of its fleet while maintaining its focus on prudent capital allocation. Diamond recently announced its plans to construct a deepwater semi-submersible rig, named the Ocean Onyx, that is scheduled to be delivered in the third quarter of 2013.

Diamond anticipates that there is significant demand from operators for new deepwater units, and this rig should be ideally suited to meet that demand. Diamond will construct the Ocean Onyx utilizing an existing hull of a cold-stacked unit, which should allow the rig to be built and placed into service in approximately half the time and at half the cost of current newbuilds.

Longtime Diamond watchers may be saying that they have seen this movie before. I say I like the ending.

The new rig, along with the three ultra-deepwater drillships under construction in Korea, will be another step in accomplishing Diamond's goals of renewing and upgrading its fleet. Over the last five years, Diamond has ordered, built, or purchased eight units capable of operating in deep or ultra-deep water.

Shifting our focus to Boardwalk, the company is in full growth mode. It is pursuing its strategy to look for projects that leverage Boardwalk's core assets and diversifies its services and geographic footprint.

In the past few months, the Boardwalk management team has made significant progress on these fronts. Just today, the company announced some outstanding news, a major project in the liquids-rich Eagle Ford Shale.

Boardwalk will be building 55 miles of a gathering pipeline and a natural gas liquids processing plant. Long-term fee-based agreements are already in place with anchor tenants Statoil and Talisman for half of the processing plant's capacity. Boardwalk is in discussions with other producers for the remaining capacity.

As Stan Horton reviewed on the Boardwalk call earlier today, Boardwalk has approximately $875 million of growth and acquisition opportunities, which include the Eagle Ford Shale project, the Marcellus gas-gathering project, and the recent acquisition of the Petal and Hattiesburg storage and pipeline assets, now called HP Storage. As you may recall, HP Storage was acquired through a joint venture with an affiliate of the Loews-owned general partner. Boardwalk owns 20% to the joint venture and may acquire the remaining 80% from Loews.

Let's now shift to HighMount and the natural gas market. We remain optimistic about natural gas prices over the long term, but for the past six months HighMount has taken steps to diversify its business. HighMount has acquired acreage believed to be rich in oil and natural gas liquids, which currently offer dramatically better economics for drilling and natural gas.

Consistent with this strategy, in the third quarter HighMount purchased a working interest in approximately 70,000 net acres of land in Oklahoma that we believe to contain oil-rich liquids. HighMount plans to begin drilling this month. In addition, HighMount is pursuing drilling programs in its Sonara field directed at geologic zones that the company anticipates will produce a higher mix of oil and liquids.

Finally, let's turn to Loews Hotels. I would like to welcome Paul Whetsell, who has recently joined us as the new President and CEO of Loews Hotels. With more than 35 years of experience in the hotel industry, Paul's understanding of the hospitality business is a great asset to Loews Hotels. In 1987 he founded the CapStar Hotel Company, which became one of the industry's largest hotel owners with over 110 hotels and $3 billion in assets. Most recently, he served as a member of the board of directors of Virgin Hotels, providing strategic guidance for its operations and property acquisition activities. Paul will look to grow Loews Hotels in an asset-light manner while building on our successful formula of operating unique properties with exceptional service.

And now, I would like to turn the call over to Pete Keegan.

Thanks, Jim, and good morning, everyone. Loews today reported net income of $268 million or $0.67 per share for the fourth quarter of 2011 as compared to $466 million or $1.12 per share in the fourth quarter of 2010. The decrease in the fourth quarter was primarily due to lower investment income from the Limited Partnership results of CNA and an increase to insurance reserves for CNA's payout annuity business. The fourth quarter also reflects lower earnings with Diamond Offshore.

Loews net income for the full year was $1.1 billion or $2.63 per share compared to $1.3 billion or $3.07 per share in 2010. Book value per share for Loews increased to $47.49 at December 31, 2011, as compared to $44.51 at December 31, 2010, approximately a 7% increase.

CNA's contribution to Loews' net income for the fourth quarter was $192 million as compared to $297 million in 2010; and $569 million for the full year of 2011 compared to $609 million for the prior year. The decrease was due to lower investment income from Limited Partnership results of $57 million and a $104 million increase in insurance reserves for its payout annuity business. As discussed on the CNA call, the underlying core P&C business continued to show improvement in underwriting profitability and growth.

CNA also continues its disciplined reserving practices. In the fourth quarter, the P&C business benefited from $250 million of pretax favorable prior-year loss development. CNA has had 20 consecutive quarters of favorable prior-year reserve development.

Diamond Offshore's contribution to net income for the fourth quarter of 2011 was $88 million compared to $113 million in the prior-year quarter; and $451 million for the full year 2011 as compared to $446 million from the year before. Results for the fourth quarter were impacted by a higher number of planned downtime days for scheduled maintenance, survey, mobilization, and upgrades, while the full-year results benefited from historically low unanticipated equipment downtime.

Boardwalk Pipeline's net income for the fourth quarter decreased to $21 million from $34 million in the prior year quarter; and $77 million for the full year in 2011 compared to $114 million from the prior year. The decrease is primarily attributable to one-time items in both 2011 and 2010. Absent those items, the quarter was basically flat year-over-year.

Boardwalk recently raised $217 million in an equity offering.

HighMount's net income for the fourth quarter decreased to $12 million from $21 million in the prior year quarter, and $62 million for the full year in 2011 compared to $77 million from the prior year. Results are primarily due to decreased sales volumes stemming from a reduction in HighMount's drilling activities and declines in natural gas prices.

HighMount's production volumes and realized prices in the fourth quarter are as follows. Natural gas production was 10.7 billion cubic feet at an average realized price of $5.71 per 1,000 cubic feet. Natural gas liquids production was 656,000 barrels at an average realized price of $39.36 per barrel. And oil production was 72,000 barrels at an average price of $88.74 per barrel.

HighMount has hedges in place for about 52% of its total production for 2012 at an average price of $5.79, and has hedges in place for about 16% of its total production for 2013 at an average price of $5.44. During the fourth quarter, HighMount refinanced its outstanding debt, which included a $400 million capital contribution from Loews.

Loews Hotels had improved results for the quarter and year. Net income increased to $5 million for the fourth quarter in 2011 from break-even in the prior year. For the full year in 2011, net income rose to $13 million, as compared to $1 million for 2010. The improved results were due to the improvement of business and leisure travel, with particularly strong results for Loews at the Miami Beach and Orlando hotels.

Holding Company cash and investments as of December 31, 2011, totaled $3.3 billion as compared to $4 billion at September 30, 2011. In the fourth quarter, we made capital contributions of $400 million to HighMount for the refinancing of its term loans and $106 million to fund the acquisition of working interests in oil and gas properties. In addition, we invested $285 million for an 80% equity ownership in a joint venture with Boardwalk Pipeline.

We received $159 million in interest and dividends from our subsidiaries, and paid $25 million in cash dividends to our shareholders during the fourth quarter of 2011. We also repurchased 800,000 shares of our common stock for $28 million. As of December 31, 2011, there were 396.6 million shares of Loews' common stock outstanding.

That concludes my remarks and I will now turn the call back over to Mary.

Thanks, Pete. Kelly, we're ready for our question-and-answer session now.

(Operator Instructions) Ron Bobman, Capital Returns.

Thanks a lot and good morning. I had a CNA-related question. CNA management regularly comments in the context of capital management and potential capital management activities that an important factor in their sort of menu of choices is the float of CNA stock. What I would like to know is from Loews' perspective, obviously as the dominant shareholder, does Loews care about the float of CNA?

You know, if CNA weren't public, I think that Loews shareholders would demand that it be public. Being public offers a lot of benefits to CNA, so we actually like the fact that it is public. It gives us a barometer on how CNA is doing, and it helps all Loews shareholders to value CNA as well.

Beyond that, whether the float is 10% or 5% or 20%, I don't think it is worthwhile for me to comment.

Thanks a lot. Best of luck.

David Adelman, Morgan Stanley.

Good morning, Jim and Pete. First, were there any dynamics that limited at all the window of opportunity for Loews to buy back its common stock during the fourth quarter?

I'm not going to answer that question.

Okay.

Because -- I don't want to -- first of all, if there were, then maybe there was some corporate activity. And if there weren't -- it just doesn't make sense for us to go down that road and talk about the things that may or may not have prevented us from buying in shares.

Okay. Can you comment in general about what you see in terms of the opportunity for the Holding Company to make acquisitions in the present environment?

Yes. I think -- and I have felt this way for a few years now -- that acquisitions in this environment are very difficult for a few reasons. Number one, because the future is really not clear. I don't have a clear view of whether the economy is going to grow at 2%, 4% or 0%, and there still are an enormous number of uncertainties that those of us that manage businesses have to deal with day in and day out. That is number one.

Number two, there really aren't a lot of properties or assets that are for sale at prices that I think would be attractive for Loews shareholders.

So, we are happy to continue to own our businesses. We are happy to repurchase shares. And we are happy to have significant amounts of cash on our balance sheet. So we don't feel any strong urge or itch to go out and do a big deal.

Okay. Then if I could, Pete, two specific financial questions if you have it handy. I was curious if you had what the General Partner dividend payments were at the Boardwalk General Partner for the full year.

And then also with the refinancing and capital contribution you mentioned at HighMount what the year-end debt level was at that division. Thanks.

HighMount re-did basically its term debt and brought it down from $1.1 billion to $700 million. The total term debt available was $850 million. So, the term debt at HighMount is $700 million. I don't have the exact GP dividends, but we can get back to you with that.

Okay. Thank you.

Bob Glasspiegel, Langen McAlenney.

Good morning, everyone; a couple quick questions. Numbers questions on HighMount and then some more substantive questions about the fundamentals there. What are your carrying values at year-end for it with the increased investments? And were there any writedowns at all?

There were no writedowns in the fourth quarter of either ceiling test impairments or goodwill.

Okay, so the carrying value just goes up by the two new investments in?

Effectively, yes.

Which -- and they total -- give me the numbers again. You were going quickly; I didn't get them down. Sorry.

Well, for HighMount?

Right.

Yes, we put in $106 million. We contributed $106 million for acquisitions; and we put in $400 million in capital that was the offset to the debt going from $1.1 billion to $700 million.

So $506 million is what the carrying value goes up by?

That is the amount we put in. That's correct.

Okay. Jim, you seemed pretty excited -- more excited about that business in commenting about trends. And with the gas prices having come down quite a bit, you and I debated in the last few years -- over the last few years what has to happen to have infrastructure in this country change, and whether it requires the government or the free market to work. But there doesn't seem to be much progress over this time.

What has to happen beyond obviously the prices going up? What has to happen to move demand up in this country for gas?

First, back to Economics 101. The thing that is going to move demand up is price going down, not price going up. Price going up is really appreciated by us; but in order for demand to increase, price needs to be down.

Spot gas prices now are about $2.50 an Mcf. That is the equivalent to about $15 per barrel of oil. Oil is currently trading -- West Texas Intermediate is trading at $97 a barrel; and Brent crude, which has really become the international marker, is at $115 a barrel. So, gas is very, very cheap.

And what we have seen is that we have had a number of years now where gas has traded under 30% of the price of oil. What that is doing, I believe, is that it is getting people to think about changing from oil to natural gas.

I spoke to somebody just this weekend who told me that he spent a few hundred thousand dollars in his commercial building in New York City switching from heating oil to natural gas. There are all manner of projects to put natural gas, either compressed or LNG, into service stations so that trucks and livery vehicles and private passenger automobiles can consume natural gas.

We are going to have closure of a relatively large number of coal-fired power plants that will then be replaced by natural gas. So there is no doubt in my mind that natural gas consumption will increase rather significantly over the next four or five years.

Combined with that, there will also be in the next several years some LNG export facilities that will be able to -- each facility will be able to handle about 1.5% of daily natural gas production. And that will be read by the market as additional demand for natural gas.

So in my mind, there is a lot of things that will increase natural gas demand. The only problem is that, since virtually all of these things require significant capital expenditures, it will take some time in order for that to be realized.

But my belief is it will come online; and in the past several years we have seen natural gas consumption grow dramatically faster than oil consumption in the United States. And I think that is going to continue.

So am I right in -- we have your actions of putting $500 million into this business; and we have your words in your opening remarks, which seem to suggest that you are pumped up about this segment and what the potential returns can be over the next three to five years. Is that a fair characterization?

Somewhat, yes. We're also -- the $100 million that we invested in land acquisitions in Oklahoma is primarily aimed at oil. We like very much the economics of that drilling program.

As I mentioned on the last call, we spent about $100 million for land. And if we find the oil that we anticipate that we will find there, and we are mobilizing to do that right now, if we find that oil there could be an excess of $1 billion of drilling activity to get that oil out. And we see attractive returns on that investment.

Okay. Thank you very much, Jim.

[Michael Bernard], PLL Capital.

Good morning. Would you be kind enough to comment on CNA? If one looks at premium-to-surplus, especially in light of the -- post agreement with National Indemnity, we are very much overcapitalized at CNA. Clearly they are beginning to increase their dividends, which is terrific. But nonetheless, the question is that why not to make -- why not to begin to address the overcapitalization a little bit more aggressively and/or use CNA to make investments on a more permanent basis in larger companies, rather than using Loews' balance sheet to do that? Have you ever thought or considered doing that?

Well, the premium-to-surplus ratio is a good, quick indicator of the capacity of an insurance company. But these days, you really have to look as much, if not more, to the rating agencies and their dicta concerning the level that insurance companies can operate at in terms of revenues that they can write.

In that regard, CNA is -- you're right -- very, very strong in terms of its capital ratings. Has ratings that would ordinarily make it, I think, a AA- rated insurance company.

CNA under Tom Motamed has very significant growth plans. We are anticipating price increases this year and we are also looking to expand our market share of writing. So hopefully over the next several years we will see that what looks like excess surplus at CNA will be used and in essence consumed, supporting increased written premiums.

Just one follow-up on CNA. So the investment that has been made over the last two years plus, in the infrastructure and the salesforce, that is really what we are betting on here. Is that correct?

That's correct.

The next question on HighMount. You clearly have addressed -- and again, congratulations for all the hard work -- to unlock shareholder value by having public entities in various of your businesses. HighMount has been a long-term investment, so I have two questions.

One, what should take place or what type of an environment should we experience for a period of time that HighMount becomes a public company? Have you thought of that?

You know, we really haven't. We have been focused on growing HighMount's business, expanding it and diversifying it into oil and natural gas liquids, and putting in place a steady stream of production of those liquids. And that is still going to take some more time for us to fully diversify HighMount's production.

So we are not thinking about what do we need to do in order to take this company public. That is just not on our radar screens.

And one last question on the fundamentals of gas. You remain to be very positive about long-term outlook, and we have finally started to see the gas rig count to decline. Is there anything in the marketplace that tells you that the covenants that various companies have there that have been very aggressive in drilling and have a lot of debt, that we may actually get to a place where there will be forced shutdown anytime soon? Or is it just not where we are at the moment?

I haven't seen anything specific, but my instinct and my bones tell me that there are a significant number of independent gas E&P companies that are going to have a lot of trouble. With gas trading at $3.50 or $4.00, the industry was going to operate at minus $25 billion cash flow. I mean they were going to have to raise $25 billion outside sources.

And now, with spot gas prices at $2.50 and with hedges running off for E&P companies, I think in some boardrooms there is concern that is moving to fear that is going to move to panic. And I think that the decline in rigs is just one symptom of that.

Now we will have to see how this all plays out over the next six months to a year. But it looks like we are going to end the heating season with record amounts of natural gas that is going to put some pressure on natural gas prices. We're also seeing the time spreads increasing, because people think that natural gas will go up in the future -- which is, to some extent, benefiting Boardwalk Pipeline.

I think, though, that it is going to take some time for the -- measured in a number of quarters -- for natural gas to really hit bottom and start to move up. I think that as that happens, there will be more discipline on the part of gas E&P companies so that they won't be so -- go out with such reckless abandon in terms of their drilling programs.

Thank you so much for your thoughts.

Michael Millman, Millman Research Associates.

Thank you, and I guess some more HighMount. Could you give us an idea of, when you first bought HighMount, what you thought it would be worth long-term? Long-term might have been as much as 20 years.

And to what extent that number might have changed, considering what is going now, considering that fracking is unleashing lots of reserves, although I guess they were just reduced.

A good question, Mike. When we bought HighMount, natural gas prices were about $7.50 to $7.75 an Mcf; and in the first year, it went -- it just about doubled to about $15.00 per Mcf. And now gas prices have declined I guess 80% or so, to under $3.00 an Mcf.

Nobody is making money at these levels. And my guess is that, even though HighMount is not public, obviously the value of our investment is lower today than it was when we made the investment.

We did not anticipate the tremendous impact that fracking would have on the supply of natural gas. And likewise, I don't think that anybody really fully understood what that impact would be.

Having said that, what has happened since then is that the cost of looking for natural gas, just the price of rigs and other services, has come down. But nonetheless, at $2.50 or $3.00 an Mcf, virtually nobody can look for natural gas or dry gas and be profitable doing it.

So, my fearless forecast is that natural gas prices will go up over the coming quarters and years, and reach an equilibrium price that will still probably be lower than when we originally got into HighMount. Having said that, I am optimistic about HighMount's future. I am optimistic about the investment opportunities that we have there and believe that we will be able to earn good rates of return on our investments in it.

Good. Switching to hotels, you mentioned asset-light. I think most of your hotels you currently own you are talking about doing franchising or managing hotels, or some combination.

No, we are not thinking of franchising per se. We are in the ownership and management business; and we think that we should be able to increase the number of hotels that we have by putting some equity money in, but having partners in ownership. And likewise, we are also going to be looking to increase the number of just hotels that we have under management.

Thank you.

(Operator Instructions) Sam Yake, BGB Securities.

Yes, good morning. Thanks for taking my questions. I am wondering, when you evaluate potential investments for Loews, do you apply a pretty strict test of measuring those potential investments against buying back more Loews stock?

Absolutely, positively. When we buy a business that we don't know, there is a lot of uncertainty to it. And the thing that we happen to know best is Loews; and because we three of our subsidiaries are public, we have a very good sense of what those businesses are worth.

So, when we buy back our shares, we don't have to pay a premium. We are able to buy it at market price.

And when you buy another company, typically you have to pay a premium to the market price. So all of that and more figures into the calculus that we go through when we think about buying a new business versus buying in our own shares.

Right. It just seems to me that where the stock has been trading recently there's very few potential investments that could come close to meeting that test.

I guess when you mentioned that you had to scale back your stock repurchase in the fourth quarter, I am wondering -- have you thought about -- could you possibly institute a 10b5-1 plan so you could get around any restrictions?

I didn't say we had to scale back our share repurchases. What I said is that I am not going to comment about our share repurchase is.

I will just say that our lawyers here are aware of the current state-of-the-art in technology and share repurchases, and we consider all of that when we do buy our shares.

Okay. Then I had one last big-picture question. That is, when I look back at the history of Loews and you have been so successful over a long period of time, and you had that creative transaction where you spun off Lorillard in that tax-efficient way that benefited shareholders, I am wondering. What kind of factors do you look at when you think about potentially doing that type of deal again with one of your subsidiaries?

The thing that we keep talking about is how we are focused on creating long-term value for all of our shareholders. That really is what drives us every day in what we do.

There are -- we try not to have any bias in our analysis of opportunities. We just try to look for the transactions that will create the most value for all our shareowners.

We find that as we start to explore and get knowledgeable about different transactions, we tend to figure out what really is the best way to execute them in order to create that value. So it is just a long process, a lot of hard work, study, and diligence.

Okay. Thank you very much.

Thank you. This concludes the Q&A portion of today's call. I will now turn the call back to Mary Skafidas for any closing remarks.

Thanks, Kelly, and thank you all for your continued interest. A replay of this call is going to be available in approximately two hours. This concludes our call for today.

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