洛茲集團 (L) 2012 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Loews first-quarter 2012 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 Mary Skafidas, Vice President of Investor Relations. You may begin your conference.

Thank you, Paula. Good morning, everyone. I would like to welcome you to Loews Corporation's first-quarter 2012 earnings conference call. A copy of our earnings release may be found on our website, Loews.com. In the call this morning, we have our Chief Executive Officer, Jim Tisch, and our Chief Financial Officer, Peter Keegan.

Following 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. Action results received by the Company may differ materially from those projections made in any forward-looking statements.

Forward-looking statements reflect circumstances at the time they were 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 Corporation'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 reconciliation to the most comparable GAAP measures.

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

Thank you, Mary. Good morning and thank you all for joining us today to discuss Loews's first-quarter results. Overall, our first-quarter financial results were solid.

As you know by now, we reported earnings per share of $0.92 for the quarter, which matched the $0.92 per share that Loews earned in the first quarter of 2011. Our book value per share at quarter-end was $48.96 a share, a 3.4% increase over our book value per share at year-end.

Underlying these financial results are the actions being taken by each of our subsidiaries to set value-creating strategies and to achieve operational excellence. Let's take a closer look at each of our subsidiaries beginning with CNA.

Under Tom Motamed, CNA continues to improve its core P&C operations, which included specialty insurance and commercial insurance businesses. The CNA team is executing strategies to achieve the dual goals of growth and underwriting profitability.

Adjusting for the sale of its 50% stake in First Insurance Company of Hawaii during the fourth quarter of 2011, CNA achieved growth in net premiums written in its P&C operations of 5%. This strong growth came from three main factors -- strong retention of existing business, healthy rate increases on retained business, and attractive new business in targeted areas.

By way of example, during the first quarter CNA specialty and CNA commercial increased rates by 3% and 5%, respectively, with certain sub-lines of business showing much stronger rate achievement. Additionally, the ratio of new-to-lost business is 1.4-to-1. What this means is that CNA's underwriting and marketing efforts are gaining traction.

CNA's 68.8% first-quarter loss ratio, before the impact of catastrophes and prior-year development, was essentially in line with the prior-year quarter. The company's objective is to reduce its loss ratio materially from here. Rate increases, combined with improved underwriting discipline, are the keys to achieving this objective.

Finally, CNA took a major step in March when it reached agreement to acquire Hardy Underwriting for $227 million. Hardy is a specialized Lloyd's underwriter with a respected market reputation and a long history of disciplined underwriting.

The proposed acquisition will provide CNA with a key platform for international growth. Hardy's shareholders approved this transaction last Thursday and it is expected to close by the end of the second quarter.

Turning to Diamond Offshore and the offshore drilling market, Diamond had a good first quarter despite net income being down 26% year-over-year. Diamond's quarterly earnings can vary meaningfully as a result of such factors as survey downtime, rigs coming off contract, and the costs associate with moving rigs from one locale to another.

As we have discussed previously, Diamond continues its program of fleet renewal and has three ultra-deepwater drillships and one moored semi-submersible rig under construction. Two of the drillships are already contracted to begin working for Anadarko Petroleum at attractive day rates.

The other two units are currently being marketed and should be able to benefit from the prevailing robust dayrate environment.

These four units are in addition to the two ultra-deepwater semis that Diamond purchased out of bankruptcy in '09 and the four semis that were upgraded to ultra-deepwater status since '02. We're enthused about Diamond's market position and the future of the offshore drilling business.

Turning to Boardwalk Pipeline, during this past quarter Boardwalk purchased from Loews for $285 million the 80% equity interest in Boardwalk HP Storage that Loews had acquired to support Boardwalk's purchase of those storage assets in December. As we previously said, our intention was always to drop down our 80% stake when it made financial sense for Boardwalk to purchase it. This transaction worked just as planned and ultimately benefited both Boardwalk and Loews' shareholders.

Boardwalk continues to pursue projects like Boardwalk HP Storage that leverage Boardwalk's core assets, diversify its services and geographic footprint, and generate growth. HP Storage is a great example of that strategy in action.

Another example is the Eagle Ford expansion project. Boardwalk announced in February that it had executed a long-term fee-based gathering and processing agreement with Statoil and Talisman for approximately half of the processing plant's capacity. Boardwalk's construction of the gathering lines and processing plant are continuing on schedule.

We don't typically spend much time on these calls discussing Loews Hotels, but hopefully that will change in the quarters and years ahead. Paul Whetsell, who joined Loews Hotels as President and CEO in January, has hit the ground running. Paul and the Loews Hotels team are sharpening their focus on growing in key urban and resort markets while at the same time improving the performance and profitability of our existing properties.

Renovations are either underway or imminent at several of our current hotels, and growth opportunities are being continually reviewed. As with all of our subsidiaries, our goal at Loews Hotels is to create long-term value for all Loews shareholders.

Finally, let me turn to HighMount E&P. Quite simply, low natural gas prices make life difficult for HighMount as the company is predominantly a producer of natural gas. Last Friday, the Henry Hub spot price for natural gas settled at $2.06 per Mcf, the equivalent of oil selling for less than $12.50 a barrel.

The good news is that HighMount is not standing still. Instead, it is responding to this unprecedented environment by taking a number of steps, including materially scaling back dry gas development activity in the Permian Basin; focusing development in the Permian Basin on gas-rich wells with high liquid yield and oil potential, specifically in the Wolfcamp strata; and also, acquiring and developing a core position in the Mississippian Lime that we believe will be a profitable oil development opportunity for HighMount.

HighMount is in the early stages of scaling up its efforts to produce more oil and liquids, so current production is still dominated by dry gas. But we are encouraged by management's efforts to pursue projects that have the prospects of generating higher returns in the current environment.

HighMount recorded a noncash ceiling test impairment charge of $28 million after taxes in the first quarter related to its carrying value of natural gas and oil properties. This noncash accounting charge was the result of declines in natural gas prices.

If prices remain unchanged through 2012 and holding all other assumptions constant, HighMount will incur noncash after-tax ceiling test impairments that could range from approximately $400 million to $450 million for the full year of 2012, inclusive of the first-quarter impairment. As you know, ceiling test impairment charges are mandated by GAAP, not because gas is no longer in the ground but simply because the accounting rules require us to value all of our reserves at current prices.

Before I turn the call over to Pete I want to take a few moments to comment on natural gas in the face of today's historically low prices. When putting today's natural gas price environment into context, I like to remind myself of what I call the second rule of economics, which is -- what has to happen happens.

Currently, gas prices are unsustainably low due to the combination of an extraordinarily warm winter and the overproduction of shale gas. It is simply not economically viable today to drill a well for dry gas at a $2.00 per Mcf price.

But fear not. With natural gas prices this low, gas production will slow down and demand will increase. Eventually, we will arrive at an equilibrium price of natural gas which I estimate to be at about $4.50 per Mcf, which is the BTU equivalent of $27.00 per barrel of oil, still a veritable bargain.

At that $4.50 price, the United States can and will dramatically increase its production of natural gas. And at that price there will still be an enormous incentive for consumption of natural gas to increase significantly.

In fact, this is already happening. Diesel fuel consumers are currently making the capital investments necessary to switch to natural gas, often with a two-year payback on their investment. Not only will truckers and railroads convert to natural gas, but HighMount too is seriously analyzing the option of converting its drilling operation in the oil patch to natural gas from diesel.

Due to improvements in fracking technology which have on unlocked enormous amounts of gas shale hydrocarbons, the United States has a virtually unlimited supply of natural gas. This new, abundant source of energy can and will in the next decade transform our economy. With supply assured and prices low, natural gas consumption will certainly continue to increase.

Power generation, transportation, industrial production, and LNG exports from the US should all combine to materially enhance gas demand. So while the US may be in for a few more years of unnaturally low gas prices, I'm of the belief that over the medium to long term the most fundamental precept of economics -- which is, that relative prices drive demand -- will result in higher natural gas prices and a more favorable pricing environment for HighMount.

Now, back to the business at hand. Let me turn the call over to Pete for more details on the first quarter.

Thanks, Jim, and good morning, everyone. Loews Corporation today reported net income of $367 million or $0.92 per share for the first quarter of 2012, as compared to $379 million or $0.92 per share in the first quarter of 2011. The slight decrease in the first quarter was due to lower earnings at HighMount and Diamond Offshore. These decreases were offset partially by higher earnings at CNN and increased investment income at the Holding Company.

CNA's contribution to Loews's net income for the first quarter was $226 million as compared to $199 million in 2011. The increase was due to lower catastrophe losses and increased investment income, especially in Limited Partnership results.

Diamond Offshore's contribution to net income for the first quarter of 2012 was $87 million compared to $117 million in the prior-year quarter. Results for the first quarter were impacted by lower utilization, including planned downtime, the impact of lower dayrates from contract rollovers on five rigs, and higher rig downtime for mobilization, prepping, and stacking. Additionally, there were higher contract drilling expenses, reflecting the higher cost of operating rigs internationally rather than domestically.

Boardwalk Pipeline's contribution to net income for the first quarter increased to $35 million from $33 million in the prior-year quarter. The increase in net income was partially the result of the acquisition of HP Storage and lower interest expense, which was modestly offset by the continuing decline in natural gas prices and lower throughput, primarily from mild winter weather.

As Jim mentioned, HighMount recorded a net loss of $22 million for the first quarter of 2012 compared to net income of $19 million in the first quarter of 2011. The lower results were due to a noncash cost center ceiling test impairment charge of $28 million after taxes related to the carrying value of its natural gas and oil properties as well as decreased sales volumes stemming from a reduction in drilling activity and declines in natural gas prices.

HighMount's production volumes and realized prices in the first quarter are as follows. Natural gas production was 10.3 billion cubic feet at an average realized price of $4.22 per 1,000 cubic feet. Natural gas liquids production was 633,000 barrels at an average realized price of $39.79 per barrel. Oil production was 81,000 barrels at an average price of $95.00 per barrel.

HighMount has hedges in place as of March 31, 2012, that cover approximately 51% of projected equivalent production. Natural gas hedges totaled 22.9 billion cubic feet at $5.30 per MMBtu. Natural gas liquid hedges total [1,848,000] barrels at $37.33 per barrel. Crude oil hedges include total 198,000 barrels at $102.59 per barrel.

At Loews Hotels, net income increased $2 million for the first quarter of 2012, primarily due to equity earnings in Joint Venture properties as compared to the 2011 period. Revenues per available room increased $3.24 to $155.31 for the first quarter of 2012 as compared to the 2011 period. The increase in revenue per available room reflects improving occupancy and average room rates.

Holding Company cash and investments as of March 31, 2012, totaled $3.7 billion as compared to $3.3 billion at December 31, 2011. We received $170 million in interest and dividends from our subsidiaries and paid $25 million in cash dividends to our shareholders during the first quarter of 2012. Additionally, we received $285 million from Boardwalk Pipeline from the sale of our 80% interest in HP Storage.

We also bought back 2,500 shares of Loews common stock for $96,000. I will now turn the call back over to Mary.

Thank you, Pete, and thank you, Jim. Paula, we are ready for our Q&A session of the call. Could you please give participants instructions for asking questions?

(Operator Instructions) Bob Glasspiegel, Langen McAlenney.

Good morning, everyone. Is the carrying value for HighMount $2 billion now, after the writedown?

Pete is looking that up.

Okay. Second book-keeping question, how do we get from what Boardwalk reports to what you report? The $285 million, which I guess was -- assumed that they had it for all three months on their books, was there any implied interest that goes to Loews? Or is this just a -- it never happened for the quarter? I am just wondering how that sidecar earnings went through the numbers.

We did not pick up any interest from that expense. We just picked up earnings during the period in which we held it.

But on their books, they owned it for the whole quarter. I think it's --

Right, they use purchase accounting, which pushed it back to January 1. And obviously whatever duplication there is, is eliminated in consolidation.

So how do we get from what they -- just roughly, how do we get from the earnings they reported?

It's very -- you're talking about a very minor adjustment, Bob.

Right.

I mean, just take their numbers. It is not a big deal.

Okay. When the hedges run out for HighMount, is it roughly a breakeven operation to you on a reported basis? Or what is the rough earnings power?

I am not exactly sure. We will have to get back to you on that.

I guess the question is, does it make money or lose money is the question?

Let me put it to you this way. It does not make sense for us to drill for natural gas at $2.00 an Mcf. In fact, we are not drilling in the Permian Basin for dry gas, nor are we drilling anywhere for dry gas. The only drilling that is going on now is looking for wet gas and also oil.

Got you on that. Just for modeling purpose I just want to know how we think about this unit looking out to next year.

To answer your question, at the end of the first quarter, HighMount's total assets were $2.8 billion.

I was actually looking for carrying value, which I think is around $2 billion.

Well, our equity is $2 billion.

Right.

The equity is $2 billion.

Yes, that is what I was looking for. Thank you, sir.

David Adelman, Morgan Stanley.

Good morning. Jim, are you -- will you make any comment about the pacing of share repurchases? Looking backwards over say the last six months they have been pretty modest.

Yes, as you know, I am not going to comment on that.

Okay. Then secondly, at HighMount, will these noncash impairments be reversed if natural gas prices were substantially higher?

No, but what will happen is the amortization that we will have going forward on gas that is produced will be lower. So in essence it will come back invisibly into earnings over time as the gas is produced.

Okay, thank you.

Andy Baker, Barclays.

Good morning, gentlemen. A couple of questions, Jim. You were talking about the increase in demand and decrease in supply of natural gas hitting equilibrium. Is that a 2013 event, do you think? Is that earlier, later? How should we think about when that should kick in?

It's a process that will occur over a number of years. And it's a process, first of all, because in terms of demand for natural gas it will take time for people to make the capital equipment changes that they need to make in order to be able to consume natural gas in trucks and trains and even in the oil patch.

Likewise, for supply of natural gas, my guess is that there is still some small amount of drilling that is going on for dry gas. There are a lot of reasons for that, such as people trying to hold property by production and the like.

But over time, if gas prices stay down here, my guess is that a lot of that gas -- a lot of that drilling will stop. Which seems, for example, over the past few weeks a number of producers in the Haynesville say that they are laying down their rigs and they are not going to start to drill for dry gas there again until prices get to somewhere between $4.00 and $4.50 per Mcf.

The Haynesville, going back a year or two, was one of the most prolific and the most profitable areas to produce natural gas. So we are seeing in terms of producer plans to drill for dry gas that they are no longer drilling or they are planning not to drill and that they are going to wait a good, long time until prices get back to reasonable levels so they can earn a rate of return on their investment.

Now, that is different than drilling for wet gas. With wet gas, not only do you get dry natural gas, but you also get natural gas liquids. And natural gas liquids to a large extent are priced off of oil. So oftentimes people can drill for wet gas, which can represent 30% or 40% of the BTUs produced; but since the wet gas, propane -- since the wet gas constituents, the liquids, of propane, butane, isobutane, natural gasoline, and a few others, since those are priced off of oil, then in essence the producer doesn't really care so much about the price of natural gas, because the price of liquids so dramatically outweighs the value of the natural gas that is being produced.

So given your long-term view in general and your tremendous pool of capital, does it make sense for you to go out there and take dry gas reserves off people's hands with a five-year time horizon? From those people who may only have a one-year time horizon.

You know, we are always looking, but the problem is that they are not stupid in the market. If you look at the forward price for natural gas in the futures market, that anticipates that the recovery is going to come back to natural gas prices over the next two or three years.

So my prediction of $4.50 natural gas prices is not substantially different from the futures market. And the people that are actually selling properties today are able to sell on the basis of the forward price for natural gas, not the spot price. So date we haven't found any veritable bargains.

Even though the forward has proven incorrect so far?

That's right.

And then --

This year is going to be a little different, though, I think. Because come the end of October or even before the end of October, the storage facilities in the United States may be full. And so production will have to decline to meet that end of storage season, and prices will have to decline.

But after that, it is unclear what will happen to prices. It's possible that production will have gone down enough that prices could start to accelerate meaningfully.

Then one last question. Given the S&P is back to 1400 and the interest rates are still low, can you give us your thoughts on how you think about investing the $3.7 billion of Corporate cash?

Yes, we really haven't changed too much. We have like $500 million or $600 million of equities and a slightly greater amount of Limited Partnership investments. Then beyond that, we are fixed income and treasury bills.

Great. Thanks a lot.

My pleasure.

Sam Yake, BGB Securities.

Yes, good morning. I was wondering. You made some comments about your Hotels segment, which is kind of small and you haven't talked much about it in recent years. I am just wondering; what are your thoughts on potentially creating a REIT structure, kind of like what you did with Boardwalk, and then creating a vehicle for the Hotel business.

Right now we don't have any plans for that. Right now we are interested in growing our Hotel business in what we would call an asset-light manner. We understand that to do that may require bridge financing from Loews, similar to the bridge financing that we provided to Boardwalk for their acquisition earlier this year.

But we are looking at a number of different opportunities, and we are hopeful that over the coming years that our Hotel business can grow.

Okay. Then you mentioned you have $3.7 billion of Holding Company cash. What is the minimum amount you would want to have?

Well, first, we have $3.7 billion of Holding Company cash and investments. And historically that cash balance has not gone below $1.5 billion or $2 billion.

Okay. Okay, thanks so much. You're doing a heck of a job.

Hey, thank you.

(Operator Instructions) Michael Millman, Millman Research Associates.

Thank you. On the Hotel business, are you talking about or looking into doing management and/or franchising out the brand?

We're not looking to franchise the brand. We have historically done hotel management. We have a number of hotels under management, and we are looking to continue doing that, as well as take equity investments in hotels.

Okay. Regarding gas, what is the breakeven for drilling for shale-related gas?

You mean dry gas?

For dry gas. Is that --?

I mentioned, for example, the Haynesville, that producers are saying that they are not going to start drilling again till they get to $4.00 to $4.50 natural gas prices. That is just one particular area; but some shales are a bit higher, some shales are a bit lower.

I see.

That is approximately where a producer can earn a reasonable rate of return on his investment. Now, a lot will be driven by the cost of drilling services and fracking services, and that can move dramatically over time. So when I say $4.00 to $4.50, we are really talking about a moving target.

So that is what I was trying to get to a little bit more. And regarding the share repurchase, can you mention whether you had any blackout periods during the last couple quarters?

No.

You didn't?

No, I am not going to mention whether we had any blackout periods.

Okay, thank you.

At this time there are no further questions. I would now like to turn the floor back over to Mary Skafidas for any closing remarks.

Great. Thank you, Paula, and thank you all for your continued interest. A replay will be available on our website, Loews.com, in approximately two hours. That concludes the call for today.

Thank you for your participation in today's call. You may now disconnect.