洛茲集團 (L) 2012 Q3 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 third-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, and good morning, everyone. I would like to welcome you to Loews' third-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 their 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 refer to 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. Jim.

Thank you, Mary, and good morning, everyone. I hope everybody is staying dry and staying safe. As you know by now, Loews reported earnings for the quarter of $177 million or $0.45 per share compared to $162 million or $0.40 per share that Loews earned in the third quarter of 2011.

Results for the third quarter of 2012 include impairment charges of $166 million after tax of HighMount related to the carrying value of its producing properties. These charges were the result of declines in natural gas and natural gas liquids prices. Absent the ceiling test impairment charges our quarterly net income would have been $343 million or $0.87 per share.

Loews ended the third quarter with $3.8 billion in cash and investments at the holding company level. In the third quarter we spent approximately $88 million buying back about 2.2 million shares of Loews common stock. Our book value per share increased to $50.41 at the end of the third quarter from $47.33 at year-end 2011. Now let's take a closer look at each of our subsidiaries.

CNA had another solid quarter. Results for the quarter were driven primarily by increased investment income especially from limited partnerships. CNA continues to execute its strategy of focusing on select customer segments. About half of CNA's new business is now coming from the seven focus segments including healthcare and construction, areas where CNA has specialized underwriting capabilities.

Rates continue to improve and increased approximately 6% during the quarter in CNA's P&C operations. For CNA commercial rates were up 8% for the quarter versus 7% in the second quarter and 2% during the third quarter of 2011. Rate increases combined with management's underwriting strategies are leading to improvements in CNA's underwriting results.

CNA's loss ratio before catastrophes and prior-year development continued to improve during the third quarter. In CNA commercial, for example, this ratio improved by almost 2.5 points versus last year's third quarter. Over the past few years, as management's actions have taken hold, CNA has narrowed the loss ratio gap with peers in its core commercial business.

This is the first-quarter CNA has included Hardy Underwriting in its results. Hardy is CNA's recently acquired Lloyd's syndicate and it's off to a strong start.

Turning to Diamond Offhsore and the offshore drilling market, Diamond had a good quarter, although its net income was down $79 million versus the same period last year. Two main factors drove the profit decline. First, a number of rigs rolled off of record high day rates from contracts that had been signed during the previous up cycle. The second main factor was unplanned down time which was slightly above average compared to better than average down time in the prior quarter.

Demand in the drilling market for midwater, deepwater and ultra deepwater rigs remains strong, as indicated by recent contracts signed by Diamond and other drillers. Diamond has entered into new contracts or extended existing contracts with attractive day rates and durations.

Also during the third quarter Diamond announced plans to rebuild the Ocean Apex, a Victory class semi-submersible rig that will be delivered from the shipyard in Singapore in 2014 at an all-in cost of about $300 million. The Ocean Apex is the last of Diamond's Victory class rebuilds. There are nine Victory class hulls in the world and Diamond owns all nine of them.

These Victory class hulls in have extremely long life spans and since the mid-1990s Diamond has used each of these hulls as the base upon which to build a new rig, including all-new drilling equipment. The end product is the equivalent of a newbuild rig.

These Victory class rebuilds, along with Diamond's other newbuild rig acquisitions, are just a few examples of the Company's strategy for enhancing its fleet at significantly reduced costs, a strategy that has returned tremendous value to Diamond and to Loews.

The Ocean Apex rebuild follows quickly after that of the Ocean Onyx, another Victory class hull being rebuilt and scheduled for delivery in 2013. Also, as I've previously discussed, Diamond will take delivery of four newbuild ultra deepwater drill ships in 2013 and 2014.

Now let's turn to boardwalk. Boardwalk had a good quarter; net income attributable to Loews was $20 million compared to $18 million for the third quarter last year. Due to the seasonality of the business, the third quarter is typically Boardwalk's weakest of the year. Cash distributions to Loews from Boardwalk during the quarter amounted to $72 million.

Boardwalk continues to execute its strategy of diversifying its services and geographic footprint in order to generate growth. The Company's recent acquisition of PL Midstream, renamed Boardwalk Louisiana Midstream, is an example of Boardwalk driving its diversification strategy forward. The acquisition enables Boardwalk to enter the natural gas liquids storage and distribution business with strategically located and well contracted assets and a strong experienced management team.

The acquisition in early October of Boardwalk Louisiana Midstream, together with the organic growth projects such as the Southeast market expansion and the Eagle Ford expansion projects, once completed will result in approximately $1.2 billion of new assets for Boardwalk.

Loews initially acquired 65% Boardwalk Louisiana Midstream in early October to assist Boardwalk in the acquisition of the company. In mid-October, just two weeks after the closing of that acquisition and subsequent to an equity sale by Boardwalk, Boardwalk then purchased from Loews, Loews' 65% stake in Boardwalk Louisiana Midstream.

This transaction worked better than planned as the drop-down occurred sooner than anticipated, which ultimately benefited both Boardwalk and Loews shareholders. This is the second time that Loews has been able to use its balance sheet to help Boardwalk take advantage of a great opportunity, the first being the purchase of HP Storage, which is another recent acquisition for Boardwalk. Loews is ready to help with future transactions that we think will add value to Boardwalk and to Loews.

At HighMount E&P low natural gas prices continue to impact the Company's results. Given the difficult pricing environment HighMount is currently directing its drilling efforts to locations that should result in higher oil production. These areas include the Mississippian Lime in Oklahoma and the Wolfcamp strata in Sonora, Texas.

Specifically HighMount has been drilling on the acreage position it acquired last year in the Mississippian Lime, which is an oil play. HighMount has drilled and completed 12 wells and initial production rates are comparable to those of other operators in the area. HighMount will continue with this exploratory phase for the next several quarters and we look forward to sharing additional information about their results as we receive it.

Finally, turning to Lowes Hotels and Resorts, we continue to make real progress in our strategy of growing in key urban and resort markets such as the new Lowes Hollywood. Additionally, through 2012 and into 2013, Loews will be renovating hotels in six key locations. One of these properties will be the Loews Regency in New York where extensive renovations will begin in early 2013.

Going back to Loews at the holding company level, Loews' investment income increased to $79 million in the third quarter due to improved performance in equity and equity like investments. This is a $143 million improvement from the $64 million loss that we experienced in the same period in 2011.

As a final point, and before handing the call over to Pete, while you haven't seen us make a large acquisition at the holding company level recently, Loews and its subsidiaries have not been standing still. From 2010 to 2012 Loews and its subsidiaries have committed to projects in excess of $6 billion.

These projects include Diamond's four new drill ships and to rebuilt semi-submersibles; Boardwalk's recent acquisitions of Boardwalk Louisiana Midstream and HP Storage; CNA's acquisitions of Hardy and the remainder of CNA Surety; HighMount's addition of acreage in the Mississippian Lime; and the expansion and renovation activities within Loews Hotels.

Here at the holding company level we have been helping to facilitate some of these transactions. In addition, during that same time period, the holding company has spent about $1.2 billion in share repurchases. As always, all of these actions are part of our effort to create value over the long term for all Loews shareholders. Now let me turn the call over to Pete Keegan.

Thanks, Jim, and good morning, everyone. Loews Corporation today reported net income of $177 million or $0.45 per share for the third quarter of 2012 as compared to $162 million or $0.40 per share in the third quarter of 2011.

As Jim mentioned, net income for the quarter includes a non-cash ceiling test impairment charge of $166 million after-tax at HighMount Exploration & Production as a result of declines in natural gas and natural gas liquid prices. Income excluding the ceiling test impairment charge would have been $343 million as compared to $162 million in the third quarter of 2011.

The increase is due primarily to higher earnings at CNA Financial and higher holding company investment income due primarily to increased performance of equity and limited partnership investments. These increases were partially offset by lower earnings at Diamond Offhsore.

Income excluding the ceiling test impairment charge for the first nine months of 2012 was $936 million as compared to $791 million in the 2011 period. The increase is due primarily to the reasons I just mentioned as well as improved earnings from Boardwalk pipeline primarily due to the contribution from Boardwalk HP Storage company which was acquired in December 2011 as well as the prior year impact of an impairment charge related to steel pipe materials. These increases were partially offset by lower earnings at Diamond Offhsore.

CNA's a contribution to Loews' net income for the third quarter was $195 million as compared to $84 million in 2011. CNA's earnings increased due to higher net investment income driven by favorable limited partnership income, improved current accident year underwriting results and lower catastrophe losses, partially offset by decreased favorable net prior year development.

Book value per common share for CNA was $46.99 at the end of the third quarter, an increase of 4% from the end of the second quarter. The increase reflects earnings and improvement in CNA's investment portfolio net unrealized gain position.

Diamond Offhsore's contribution to net income for the third quarter of 2012 was $83 million compared to $121 million in the prior year quarter. Diamond Offshore's earnings decrease resulted primarily from lower rig utilization and a decrease in average day rate which was partially offset by lower interest expense. Diamond also had lower rig operating costs this quarter.

Boardwalk Pipeline's contribution to net income for the third quarter increased slightly to $20 million from $18 million in the prior year quarter. The increase is primarily due to storage and transportation revenues earned from HP Storage. In addition, parking and lending revenues increased due to improved market conditions. The increase was partially offset by a decrease in transportation revenue due to lower interruptible service.

At HighMount, excluding the ceiling test impairment charge, net income for the quarter would have been $8 million compared to net income of $16 million in the third quarter of 2011. For the nine months ended September 2012 HighMount recorded non-cash ceiling test impairment charges of $336 million after tax. The ceiling test calculation was based on average 12-month prices of $2.83 per MMBtu financial gas, $46.02 per barrel for natural gas liquids and $94.97 per barrel for oil.

If prices and reserve levels remain unchanged through 2012 it is likely that HighMount will incur non-cash after-tax ceiling test impairments ranging from approximately $50 million to $100 million in the fourth quarter of 2012 amounting to $386 million to $436 million for the full year.

HighMount's third-quarter production volumes and realized prices which include the benefit of hedges are as follows. Natural gas production was 9.5 billion cubic feet at an average realized price of $4.28 per 1,000 cubic feet. Natural gas liquids production was about 590,000 barrels at an average realized price of $37.48 per barrel and oil production was about 132,000 barrels at an average realized price of $94.71 per barrel.

HighMount has hedges in place as of September 30, 2012 that cover approximately 75% of the remaining projected equivalent 2012 production at $5.70 per Mcfe.

Loews Hotels and Resorts recorded a net loss of $1 million as compared to breaking even for the same period in 2011. The decrease is primarily due to increased expenses including acquisition and transition-related costs from the Lowes Hollywood hotel.

Revenue per available room increased $7.53 to $169.31 for the three months ended September 30, 2012 as compared to the 2011 period. Occupancy rates increased 82% in the three months ended September 30, 2012 from 79.8% in the 2011 period. Average room rates increased $3.70 or 1.8% in the three months ended September 30, 2012 as compared to the 2011 period.

Holding company cash and investments as of September 30, 2012 totaled $3.8 billion compared to the $3.7 billion held at June 30, 2012. We received $169 million in interest and dividends from our subsidiaries and paid $24 million in cash to our shareholders during the third quarter of 2012. We also bought back 2.2 million shares of Loews common stock for $88 million. And now I will turn the call back over to Mary.

Thanks, Pete. Jackie, at this time we would like to open up the discussion for questions. Would you mind repeating the instructions to the participants?

(Operator Instructions). Michael Millman, Millman Research.

Could you talk about what you are seeing in pricing for transmission lines and what kind of ROIC you're currently seeing and what do you see kind of long-term for returns or what you are looking for long-term for returns on transmission pipelines?

It all depends, Michael -- it all depends on which pipes you are looking at. It is really a total mixed bag. For LDCs, local distribution companies and municipalities, there might be one rate; for people that are looking to go on the pipeline superhighway, there might be another rate. And it all depends on -- a lot on location where the gas is coming from and where it is going to.

As a general rule, as you might expect, for lines coming out of Texas and going up to the Marcellus, subject to whether other lines service -- provide service for where someone specifically wants to go, but the pricing is somewhat weaker than previously because of the increased production in the Marcellus shale that is being consumed in the Northeast.

Maybe I wasn't clear. I was looking for not the cost to transmit, but the cost to purchase lines and the return on investment from your standpoint of purchasing lines or maybe building new lines.

Well, Boardwalk only builds lines when it has commitments that allow it to earn an attractive return on its capital. And if you noticed in fact the last two acquisitions that Boardwalk has made have been in the area of storage, specifically for salt domes to store natural gas and also to store natural gas liquids.

And what do you calculate or figure what's going to be your or their return on that storage investment?

I don't think that Boardwalk has disclosed a specific anticipated return on investment. But let me just say we think that it is very attractive. And those acquisitions also can lead to very attractive organic growth projects that can have yet even higher returns than the acquisition itself.

And just a bookkeeping question. What is the current HighMount book value?

Pete, do you have that?

Yes, I think -- well, we'll correct it, but I think it is [1.7] right now.

Great, thank you.

I don't have it in front of me, Mike, but I think that is approximately the number.

Thank you, Pete.

(Operator Instructions). David Adelman, Morgan Stanley.

Pete, one quick question. The number you provided for the implicit full-year forecast for the potential HighMount ceiling impairment was slightly less than the most recent update. Is that because natural gas prices in the most recent quarter were somewhat higher?

Yes. It is a function of all three prices, oil, natural gas and liquid prices, plus our estimated level of reserves to track those against. So it is a function of those four moving parts. But basically, yes, you are right.

Okay. And then, Jim, anything you can say about sort of the decision framework on the pacing of your share repurchases both in the third quarter and year to date?

All I can say is we spent $88 million to buy 2.2 million shares in the third quarter and, as you know, we do not talk about what our plans are for future repurchases.

Okay, thank you.

Michael Bunyaner, TLF Capital.

Just to clarify, Jim, you mentioned that you repurchased 1.2 billion shares -- I'm sorry, $1.2 billion worth of shares. I could not hear -- what period of time were you quoting?

That was from 2010 until the third quarter of 2012. So that was -- in addition to the $6 billion of commitments and capital spending that our subsidiaries have made and that we helped to finance in some cases, Loews has also spent $1.2 billion buying in its own shares.

Okay, thank you. And two questions on your operating businesses. In terms of CNA, clearly the environment has improved and the pricing is going in the right direction, but the Company is still significantly over capitalized, at least from the 64,000 feet. How are you thinking about what is the proper capitalization? And does the possible change in the tax laws -- would affect your decisions or thinking about what that capital should be?

We think CNA is very, very strong. Before we do anything we want to see the ratings of CNA increased. CNA currently has a claims paying rating from Moody's and Standard & Poor's of A-; we think it should be A. And we are hopeful that -- soon that the rating agencies will recognize everything that has been done at CNA and raise its ratings.

In terms of capital planning, as you have seen, or as you saw a year and a half ago, CNA started paying dividends. And that is basically the extent of what we have been thinking about in terms of capital planning at CNA.

One last one just to follow up. Because the Company is improving tremendously the ROE has increased, but it is still significantly below 10%. Now some of the business is being run off and the other business is being repriced. Is the longer-term view that under new management the Company can earn significantly more than the cost of capital or is there something else that we should be thinking about as it relates to their improvement in operating performance?

We don't -- as you know, we don't talk about specific numeric returns on capital that we are looking for or expecting. But there is no doubt that we are hoping to get to higher rates of return. And while we are pleased with the earnings that we've got, we are not pleased with the rates of return. And you can be sure that the management at CNA is working very, very hard to increase those rates.

Thank you. And one other as it relates to HighMount. You are very early in recognizing the fundamental changes in the business. Just share your view of the industry, specifically the glut on NGLs and where we are in terms of the gas business cycle?

Sure. Actually, I think gas prices, truth be told, have come back faster than I would have expected. I think that we as a nation -- well first of all, the natural gas picture has changed dramatically over the past five years. In the past five years gas has gone from a commodity that was seen to be in shortage where it traded in 2008 at $15 an Mcf and now it is a commodity that is seen to be in vast abundance.

The United States has about -- that we know of now, about 100 years supply of natural gas. As a country we produce about 65 billion cubic feet per day and we could increase that production by 50%, in my opinion, with a gas price in the $4 to $4.50 range.

So what is needed now for the gas market is just continued demand growth. But demand growth has come over the past several years from the power sector as gas has taken significant market share from coal. But I anticipate in the future that there will be increases in other sectors demand for gas as well as continued increases from the power sector.

I am also hopeful that over the intermediate term, three to five years, there will also be significant increases in natural gas coming from the exportation of natural gas. That will benefit -- exporting natural gas will benefit a lot of people.

First of all, for every additional 1 billion cubic feet of natural gas that we produce a day it should increase jobs -- my number is 7,000 to 10,000 jobs per billion cubic feet, permanent jobs; Daniel Yergin is using a number of about 40,000 additional jobs per 1 billion cubic feet.

So exporting gas will improve employment by some significant amount; it will also improve our trade deficit and our current account deficit. So those are all positives. And I believe that this all can be done in an environment where natural gas prices remain under -- remain at about $4.50 per Mcf.

It will also be -- one other thing, it also will be very transformative for our economy as we as a nation switch over time over the next several years, starting with heavy trucks and buses and inner city delivery vehicles, from oil and diesel to natural gas. It will be good for the environment, it will be good for our economy, it will bring costs down dramatically.

I can see railroads switching from diesel fuel to natural gas. In fact, there are railroads that are already beginning to experiment with that. And when one railroad or one trucker does that then others will have to follow very quickly because gas trades at such a significant discount to oil.

While West Texas Intermediate is at about $86 a barrel and international oil as measured by Brent is $20 higher, we have natural gas that is trading at under $4 an Mcf, which is the equivalent of less than $25 a barrel. So as I said before, natural gas in the United States is Btu's on the cheap and the invisible hand of the markets will drive oil consumables to switch to natural gas and we will all be better off as a result.

And in terms of the glut of natural gas liquids?

So, yes, we do have a lot of natural gas liquids, we have seen a tremendous change in the market for natural gas liquids. As ethylene crackers are being -- are on the drawing board and ready for construction, I have seen plans for some people to export LPG, there's just an awful lot that is going on in the natural gas liquids market in order -- number one, for consumers to make use of this very attractively priced byproduct or else for it to be exported.

Thank you very much.

There's a lot going on in it.

Thank you very much.

Bob Glasspiegel, Janney.

Your text was -- on natural gas was the same speech you would have given last quarter -- you [took electric] charges and you talked about you putting all your gas exploration into finance. And then your last talk was almost Boone Pickins in enthusiasm of how good the gas (inaudible) that you made could be from here on the market.

When did -- how much do gas prices have to go up for you to start exploring more and getting more out? And when does the sort of second half of your speech match the first part of the speech?

So, first of all, the comparison with Boone Pickins, I sort of accept that as a compliment. I want to say though that I am not calling for the government to fund anything with respect to getting to increased consumption of natural gas. I believe that the free market can do that on its own. With respect to --.

Understood. By the way, I was just referring your enthusiasm of what natural gas can be for this economy.

With respect to -- specifically with respect to HighMount, we have an awful lot of gas in the ground at -- in Sonora, Texas. I think right now it is at least 1 trillion feet and, if gas prices go higher, I think the amount that we have in the ground will go higher because it will become more economic to produce it.

There are two ways that we could push the button to restart drilling in Sonora. One is if natural gas prices go up. The other is if we can reduce the cost of drilling for natural gas there. And we are looking very, very carefully at how we can drill wells there to get natural gas production at prices that are lower than -- at cost that are lower than historically we have an able to drill for natural gas.

So if we are able to do that, if prices go up a bit then it is possible that we could restart drilling in Sonora, Texas.

I guess the question is, you didn't want to quantify, but how much do gas prices have to go up before we start seeing more positive contributions to the reported numbers at HighMount, a little or a lot or are we close here?

Listen, I don't want to give a specific number. But let me just say that right now we are not at a level where we are -- where it is economic for us to drill for natural gas. But as I said, we are working to see how we can drill for a cheaper price -- a cheaper cost so that the gas production will be economic.

And let me just give you some range. We are -- when I talk about we need higher prices, I'm not talking about $7 or $8 an Mcf, it is substantially lower than that, but it is also higher than where we are today.

Okay, that's good enough. Sandy -- CNA talked about pretty clearly how it might work its way through -- obviously there is a lot going on and my thoughts to all involved. But are there any other sort of elements of the Company we need to think about, hotels -- how do you staff and run your New York City hotels if the subways are down? Are there more people that stay there or don't stay there? It's probably not a big deal to drilling or any of the other segments, but how should we be thinking about the implications?

Well, they have been through this drill before through power failures and the like. There is -- especially in times of crisis or emergency there is an extraordinary esprit de corps. At times like this guests tend not to expect 4.5 star service, they are happy to have a clean bed in a clean bedroom and I am pleased to say that the hotels can provide that and more. And the management of a hotel goes far out of its way, the workers go far out of their way and they are all able to achieve a product that the guests truly appreciate.

Okay, no other Sandy implications to the other segments immediately, you've gone through the Florida problems without any issues I would assume and --?

That's right, yes.

Okay, thank you.

Ladies and gentlemen, we have reached our allotted time for questions. 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 at Lowes.com in approximately two hours. That concludes today's call.

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