洛茲集團 (L) 2012 Q2 法說會逐字稿

Good morning. My name is Jackie and I will be your conference operator today. At this time, I would like to welcome everyone to the Loews second-quarter 2012 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 would now like to turn the call over to Mary Skafidas, Vice President of Investor and Public Relations. Please go ahead.

Thank you, Jackie. Good morning, everyone. I would like to welcome you to Loews Corporation's second-quarter 2012 earnings conference 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, 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 security filings for reconciliation to the most comparable GAAP measures.

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

Thank you, Mary. Good morning and thank you for joining us today to discuss Loews' second-quarter results. As you know by now, we have reported earnings of $56 million for the quarter as compared to $250 million that Loews earned in the second quarter of 2011.

Net income for the quarter includes after-tax non-cash ceiling test impairment charges of $142 million at HighMount related to the carrying value of the financial gas properties. These charges were the result of declines in natural gas and natural gas liquids prices.

Loews ended the second quarter with $3.7 billion in cash and investments at the holding company level. This quarter we spent approximately $51 million buying back about 1.3 million shares of Loews stock.

During the second quarter, Moody's Investor Service upgraded by one notch the senior unsecured ratings of Loews, CNA Financial, and Diamond Offshore. According to Moody's, Loews's upgrade to A2 reflects the strengthening credit profile of our primary operating subsidiaries and our stand-alone financial strength and conservative financial policies.

Moody's also affirmed the CNA Insurance Company's financial strength ratings and revised the outlook on these ratings to positive from stable. So now both Moody's and S&P have CNA's financial strength on positive outlook, which is a real credit to the progress that's being made by the management team at CNA.

In addition to the good news from the rating agencies, CNA had a solid quarter which was favorably impacted by lower catastrophe losses and improved non-catastrophe current accident year underwriting results. Lower net investment income from CNA's Limited partnership investments created a drag on an otherwise strong improvement in net operating income. The LP investments produced a second quarter pretax loss of $35 million in 2012 as compared to pretax income of $11 million in 2011.

The combined ratio for the P&C operations excluding catastrophe losses and prior year development improved by nearly 3 points versus last year's second quarter. Also the reported combined ratio improved by 4.3 points to 101.7 during the second quarter. CNA continues to close the underwriting performance gap with its best-in-class competitors. There is more work to be done and we look forward to CNA continuing its steady progress towards becoming a top-tier industry performer.

In July, CNA closed its acquisition of Hardy Underwriting, a specialized Lloyd's underwriter with a solid market reputation and a long history of disciplined underwriting. This acquisition will provide CNA with a key platform for international growth. Hardy's results will be included in CNA's and Loews's third-quarter results.

Turning to Diamond Offshore and the offshore drilling market, Diamond had a solid quarter despite its net income being down by about $60 million versus last year's second quarter. The biggest driver of the decline was that Diamond had five rigs in the shipyard this quarter for the five-year special surveys compared to none during the same period last year. It is worth mentioning that despite the drop in oil prices, the offshore drilling market continues to show real strength and we believe that Diamond is well positioned to take advantage of these market conditions, given its rig availability over the coming two to three years.

Recent contracts signed by Diamond and other drillers from midwater, deepwater and ultra deepwater rigs indicate that demand is strong. Diamond continues to focus on modernizing its fleet. As a reminder, Diamond has four ultra deepwater drill ships under construction in Korea. Earlier in '09, Diamond purchased two ultra deepwater semisubmersibles in bankruptcy auctions. And most recently, Diamond is reconstructing an older semisubmersible into a high spec drilling unit to be named the Ocean Onyx. The rig was recently awarded a one-year contract at a rate of $490,000 per day to work in the US Gulf of Mexico upon delivery from the shipyard in the third quarter of 2013.

Diamond is actively considering another project similar to the Ocean Onyx that should provide the Company with very attractive returns. The cost of this fleet renewal since 2009 amounts to almost $4 billion.

Now let's turn to Boardwalk. While Boardwalk had a good quarter, the market fundamentals of the base business remain challenging. Sustaining low natural gas prices, compressed basis spreads, and narrowing seasonal spreads are making it difficult for Boardwalk to grow its base business. In light of this, Boardwalk has prudently decided to hold distributions steady in this quarter rather than raise the pay out. This action will help Boardwalk strengthen its balance sheet as it continues to focus on long-term growth prospects.

We remain bullish on Boardwalk over the long-term. Stan Horton and his team are not standing still. They have a number of projects in the works that should enhance the Company's prospects.

At HighMount E&P, low natural gas prices continue to impact the Company's results since it is primarily a producer of natural gas. Given the difficult environment for natural gas, HighMount is scaling up its effort to produce more oil.

In the Permian Basin, HighMount has put dry gas development activity on hiatus and is focusing on drilling Wolfcamp Shale wells that have high oil potential. Additionally, HighMount is now starting to drill for oil on the land they acquired last year in the Mississippian Lime in Oklahoma and we are hopeful about seeing significant oil production from this property.

Overall, we are encouraged by HighMount's efforts to pursue projects that have the potential to diversify its product mix and generate high returns in the current environment.

As you know, for the second quarter, HighMount recorded a non-cash ceiling test impairment charge. As I said last quarter, but it bears repeating, ceiling test impairment charges are mandated by Generally Accepted Accounting Principles and not because the gas is no longer in the ground.

I continue to be a firm believer that we will see a continuing increase in gas consumption in the US and we remain optimistic about natural gas usage and pricing over the long term.

Finally turning to Loews Hotels and Resorts, Paul Whetsell continues to make progress on his growth program. Let me point to three recent examples. Number one, during the second quarter, Loews Hotels acquired Loews Hollywood in Los Angeles, which has 632 guest rooms and 48,000 square feet of meeting space. This should be a great property for Loews Hotels and its customers.

Number two. Loews Hotels announced earlier this month that the Regency Hotel in New York will undergo an extensive renovation during 2013. The renovation is designed to ensure that the Regency will continue to offer unmatched contemporary comfort while maintaining its renowned standard of hospitality and service.

Number three, Loews Hotels and Universal announced the Cabana Bay Beach Resort, a new hotel development at Universal Orlando with 1800 rooms offering both moderate and value-priced accommodations. This resort will be operated by Loews Hotels and is scheduled to open in 2014.

At the holding company level, Loews's investment income declined in the second quarter as compared to the same period in 2011. This decrease was due to lower performance of limited partnerships and equity investments for the three and six months ended June 30, 2012.

Finally before I turn the call over to Pete, while you haven't seen us make any acquisitions at the holding company level recently, you may have noticed that there has been no shortage of activity at our subsidiaries, whether it is Diamond Offshore seizing an opportunity to upgrade its fleet, the Loews Hotels adding and upgrading assets in profitable Florida, California, and New York City markets, or CNA expanding its global footprint with its acquisition of Hardy, Loews's subsidiaries have been making attractive, strategic acquisitions. We at the holding company level have been helping to facilitate some of these transactions.

We continue to be pleased with and involved in each of our subsidiaries' future prospects and we will continue to focus on creating value over the long term for all Loews shareholders.

Now let me turn the call over to Pete.

Thank you, Jim, and good morning, everyone. Loews Corporation today reported net income of $56 million or $0.14 per share for the second quarter of 2012 as compared to $250 million or $0.61 per share in the second quarter of 2011. As Jim mentioned, net income for the quarter includes a non-cash ceiling test impairment charge of $142 million after-tax at HighMount Exploration & Production as a result of declines in natural gas and natural gas liquid prices. Excluding the ceiling test impairment charge, Loews's net income for 2012 would have been $198 million as compared to $250 million in the second quarter of 2011. The change is due primarily to lower earnings at Diamond Offshore Drilling and decreased performance of equity limited partnership investments at the parent company. These decreases were partially offset by higher earnings at CNA Financial and Boardwalk Pipeline Partners.

CNA's contribution to Loews's net income for the second quarter was $138 million as compared to $101 million in 2012 -- in 2011. Period-over-period comparisons were favorable due to lower catastrophe losses, improved underwriting results, and premium rate increases in CNA's core P&C operations as well as lower losses in its runoff businesses. Results were partially offset by lower net investment income due to decreased limited partnership results.

CNA continues to sustain positive rate momentum across its P&C portfolio. A 6% rate increase in the quarter, which was up 2 points from the 4% CNA reported in the first quarter and up 5 points from the second quarter last year.

Diamond Offshore's contribution to net income for the second quarter of 2012 was $94 million compared to $125 million in the prior year's quarter. Diamond Offshore's earnings decrease resulted primarily from lower rig utilization as more rigs were undergoing special surveys, a decrease in average day rate, and an increase in contract drilling expenses reflecting the cost of the special surveys. These decreases were partially offset by a $23 million gain after tax and non-controlling interest from the sale of five jackup rigs in the second quarter of 2012.

Boardwalk Pipeline's contribution to net income for the second quarter increased to $25 million from $5 million in the prior year quarter. The increase in net income was due to the absence of a $28 million materials and supplies impairment charge from the 2011 period as well as higher transportation and storage-related revenues and the contribution of HP Storage operating results, which was acquired in December 2011.

HighMount recorded a net loss of $139 million for the second quarter of 2012 compared to net income of $15 million in the second quarter of 2011. The lower results were due to the non-cash cost center ceiling test impairment charge of $142 million after-tax 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 and NGL prices. Excluding the ceiling test impairment charge, net income for the quarter would have been $3 million.

For the three and six months ended June 30, 2012, HighMount recorded non-cash ceiling test impairment charges of $142 million and $170 million after-tax. The ceiling test calculation was based on average 12-month prices of $3.15 per MMBTU for natural gas and $51.59 per barrel of natural gas liquids and $95.67 per barrel of oil.

If price and reserve levels remain unchanged through 2012 it is likely that HighMount will incur non-cash and after-tax ceiling test impairments ranging from approximately $230 million to $280 million for the remainder of 2012, amounting to $400 million to $450 million for the full year of 2012.

HighMount's second-quarter production volumes and realized prices which include the benefit of hedges are as follows. Natural gas production was 10.1 billion cubic feet at an average realized price of $3.89 per thousand cubic feet. Natural gas liquid production was 582,000 barrels at an average realized price of $38.38 per barrel. And oil production was 101,000 barrels at an average realized price of $89.01 per barrel.

HighMount has hedges in place as of June 30, 2012 that cover approximately 66% of the remaining projected equivalent 2012 production at $5.49 per Mcfe.

At Loews Hotels, net incomes remained flat at $6 million for the second quarter of 2012 compared to the same quarter the previous year. Revenue per available room increased $6.49 to $182.08 for the second quarter of 2012 as compared to the 2011 period. The increase in revenue per available room reflects improving occupancy in average room rates.

Holding company cash investments as of June 30, 2012 totaled $3.7 billion, the same amount held at March 31, 2012. We received $173 million in interest and dividends from our subsidiaries and paid $25 million in cash dividends to our shareholders during the second quarter of 2012. We also provided $43 million to Loews Hotels for the acquisition of its Hollywood property and bought back 1.3 million shares of Loews common stock for $51 million.

And now I will turn the call back over to Mary.

Thank you, Peter. Jackie, at this time we would like to open up for questions.

(Operator Instructions). Bob Glasspiegel, Langen McAlenney.

Good morning, everyone. You guys have spoiled me over the years with a very good long-term record and how your partnerships have generated excess returns. So I'm not questioning that but just looking at the year to date, your investment income at the parent is negative $6 million and that is in a stock market that is up 8% through the first six months and a bond market that was very strong. Is it fair to say that maybe you are positioned for rates to go higher or was there something else that generated subpar returns year to date?

I would just say it was more about not being in the strong sectors of the stock market. We didn't really have any significant debts in fixed income and part of the problem is that cash earns you pretty close to zero, so you don't get any benefit from -- to your income statement from having cash. So this was all about just being in the wrong sector in the stock market.

I think you've made some public comments about the relative lack of attractiveness of bonds and bonds have rallied. So I'm just surmising that maybe you have more of a negative bent towards fixed income than you have traditionally had or does that not factor into partnership or parent income at all?

First of all, we are not short the bond market but the partnerships that we have invested in in the quarter as you saw at CNA were down and you know, the market for an -- first of all, I think as of June, the market was not up very much at the end of June, as of July 1. And I think that the problem is the market is pretty directionless and so it's been difficult I think for all participants in the equity markets to generate returns.

Okay, any, any -- it seems like the subsidiaries here are doing a lot which suggests that you are not so bearish about the macro environment in total but the parent is not doing much either on your own stock or elsewhere. So where are you on the global economy? Things are fine or are you concerned?

I am very concerned, and in fact I find it actually quite extraordinary that we find ourselves with attractive investment opportunities at the subsidiary level in view of just how poorly I think the US economy and the global economy is doing. I think that's driven by the fact that each one of our individual businesses has been able to find attractive bolt-on acquisitions that we hope will generate very attractive returns for us.

But in the United States, we have got 1.5% economic growth. The Eurozone is not growing. The emerging markets are not emerging as fast as they had been before. And nobody -- you don't see anybody really expressing optimism about what's going on in the economy either here in the United States or overseas.

So for a whole host of reasons, I don't see growth picking up anytime soon but having said that, I'm very pleased with the opportunities that we are seeing in our individual businesses.

I am with you on your macro view. Thanks a lot.

David Adelman, Morgan Stanley.

Good morning, Jim. A couple of things. First, do you think that the moderate pace of parent company share repurchases over the last several quarters played a part in or contributed to the credit rating upgrade of Loews?

No, I don't think so. I think this is a long time coming. They have rated us A2 just for a little perspective. We have $700 million of debt and we have $3.7 billion of cash and investments. So our cash and investments covers our debt by a factor of 5 times.

I do not know what we need to do to get an upgrade from here. But it just seems that the metrics for an upgrade on Loews debt is crazy and this one was long overdue but again, I think of Loews as a AA rated Company.

Okay, secondly can you give us a sense of the status of the drilling program on the newly acquired HighMount properties? How much? How long has it but going on? What are the early learning and how do they -- are they relative to the expectations by this point?

Well, we have just started in the past several months in the Mississippian Lime. It took some time because permitting work and disposal well drilling that we had to do and I'm hopeful that in the next quarter we will be able to report some preliminary results that we are seeing there as well as profit we report on how we are doing in the Wolfcamp zones that we are drilling in the Permian Basin in our Sonora properties.

Okay, and then just a quick question on the hotels maybe for Pete. Was that a large or a material one-off cost associated with the acquisition during the quarter because I'm just curious, revenues up $5 million, operating income is basically flat?

No, there were not material costs related with that. There were some but they weren't material.

So why isn't that --? Again, it's obviously not -- it is your biggest business but why isn't that division overall demonstrating operating leverage?

They are showing some improvement but the rounding you lose it at the moment, but going forward, I hope to see some more improvement.

Okay. Thank you.

Andy Baker, Barclays.

Thanks for taking the question. Good morning, guys. Jim, just a question. You mentioned earlier again talking about your confidence in the rebound of natural gas prices over time as we go to increased utilization there. Obviously the forward curve always speculates this and has been consistently wrong in the short term obviously. In the long-term, things have yet to play out.

I was just wondering are there ways you can position yourself or investments you can make now based on valuations in the market with gas down where it is such that you would be positioned not just to sort of have HighMount to return to the levels that we were looking at when it was first acquired, but also to benefit from getting in at the low levels as well?

First of all, gas has actually been staging a pretty significant rally. The 12-month strip in the past four or five months is up about I think $0.90. Hold on one second. The strip is up to $3.56, whereas in April it was about $1 lower, so there has been a significant rally in gas prices already.

Spot gas prices are less -- I looked about just under $3.20 in Mcf. Just as a reminder, that is going to be equivalent to about $19 a barrel of oil so even though gas has had a significant rally, it is still very, very cheap relative to oil. And at the $3.20 level, it's still at a price where for most people drilling for natural gas or dry gas, it is generally uneconomic to drill at these prices.

So we have seen the rig count, the natural gas rig count in the past year or so virtually cut in half as people are laying down natural gas rigs. I think that the rally in natural gas has already started but it still has a ways to go and I think as I have said before on these calls, I think that the steady state equilibrium price for natural gas in the United States is probably somewhere between $4 and $4.50 in Mcf.

We have at HighMount, we have been looking to diversify our portfolio. We have plenty of gas in the ground that can be produced at higher natural gas prices. And so we have been -- we have acquired last year properties that we think are rich in oil and our drilling programs have been focused on drilling for oil and natural gas liquid.

So we are moving to diversify HighMount away from just being focused on natural gas.

Thank you. That was our final question. I would now like to turn the floor back over to Mary for any closing remarks.

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

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