洛茲集團 (L) 2012 Q4 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 fourth-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 Private Relations. Please go ahead.

Thank you, Jackie. Good morning, everyone. This is Mary Skafidas. Thank you for joining us all on our fourth-quarter and year-end 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 our 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 statement 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 of those comparable GAAP measures.

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

Thank you, Mary. Good morning and thank you for joining us today to discuss Loews' fourth-quarter and year-end results.

As you know by now, Loews reported earnings for 2012 of $568 million or $1.43 per share as compared to $1.1 billion or $2.62 per share in 2011. Net income included catastrophe losses at CNA and impairment charges at HighMount, which Pete will discuss in more detail later in the call. Absent these charges, our net income for the year would have been $1.2 billion or $3.14 per share.

We ended the year with 391.8 million shares outstanding. We purchased 2.1 million shares during the quarter for $83 million and 5.6 million shares during the year for $222 million.

Now let's take a closer look at the results of each of our subsidiaries. They have spent the prior-year moving their growth strategies forward and strengthening their businesses.

Turning first to CNA, although fourth-quarter earnings declined due to higher catastrophe losses primarily due to Superstorm Sandy, CNA has continued to make progress towards improving its underwriting performance through risk selection and pricing discipline while generating premium growth. CNA's underlying P&C loss ratio excluding catastrophes in prior-year development continues to improve with a year-over-year decrease of about 1 point.

To improve its underwriting performance, CNA is focusing on select customer segments where it has specialized underwriting expertise. Submissions, new business, and retention continued to be strong in these segments. As of the end of the fourth quarter, more than half of CNA's new business comes from these focused segments which grew 7% year-over-year and 7% quarter-over-quarter.

Rates continued to rise increasing approximately 6% during the quarter in CNA's P&C operations. For CNA Commercial, rates increased 8% for the quarter and for CNA Specialty, they increased 6%. CNA's book value per share increased to $45.71, up 7% from year-end 2011.

And finally, CNA announced earlier today that it is increasing its quarterly dividend from $0.15 per share to $0.20 per share. At that dividend rate, those will receive annual dividends from CNA totaling almost $200 million.

Turning to Diamond, demand for offshore, deepwater and ultra-deepwater drilling rigs remains strong while the market for mid-water rigs remains stable. Diamond's earnings for the quarter were down year-over-year, however, partially due to an impairment charge related to the carrying value of four drilling rigs. Nonetheless, it was a strong quarter and a good year and Diamond is moving forward with the same core strategy which we believe creates value for all shareholders.

Diamond's fleet renewal program is ongoing with four new drill ships on order and two victory class hulls, the Ocean Apex and the Ocean Onyx, being fully reconstructed. These six rigs will be delivered in the next two years and three of them have already been committed to contracts with attractive dayrates.

In addition, last week Diamond announced a three-year contract with Shell Oil in the North Sea for the Ocean Patriot at a rate of $400,000 per day compared to its current day rate of $275,000 per day. Prior to mobilizing for this contract in the second quarter of 2014, the Ocean Patriot will undergo a six-month upgrade in anticipation of this job.

Now let's turn to Boardwalk. Boardwalk had another good quarter. Cash distributions to Loews from Boardwalk during the quarter were $73 million and totaled $286 million for the year. Since 2011, Boardwalk's management team has developed growth projects in excess of $1.9 billion. These growth projects focus on three key strategies.

Number one, leveraging Boardwalk's core pipeline and storage assets. Two, diversifying Boardwalk's services. And three, expanding Boardwalk's geographic footprint. Boardwalk's diversification effort will continue to be the Company's focus for the coming year. This strategy is aimed at making the Company less reliant on its base gas transportation business where a number of factors including compressed basis differentials are negatively impacting Boardwalk's future revenues.

Boardwalk's two most recent acquisitions, HP Storage and Louisiana Midstream have both helped to move this strategy forward. In addition, both of these acquisitions contributed favorably to Boardwalk's 2012 earnings.

When Boardwalk was considering purchasing HP Storage and Louisiana Midstream, it was not possible to obtain attractive funding through the capital markets. Loews stepped in and provided bridge financing for both acquisitions because we considered the long-term growth prospects so promising. HP Storage and Louisiana Midstream have since successfully refinanced those bridge loans at very advantageous rates.

The acquisition of HP Storage made possible Boardwalk's Southeast market expansion project, which has benefited from HP's high turnover [self-owned] storage service. Additionally, HP Storage continued -- contributed an existing pipeline that significantly reduces the amount of new pipeline required to reach this growing market. The project is supported by 10-year firm agreements primarily with electric generation and industrial customers and has a targeted in service date of late 2014.

In order to help offset potential reductions in revenue associated with contracts that will be expiring, Boardwalk will continue its efforts to access new power loads. Today's announcement of a long-term contract with Kentucky Utilities is just one example of this strategy in action.

At HighMount E&P, low natural gas and natural gas liquids 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 such as its acreage in the Eastern portion of the Oklahoma Mississippian Lime region which it acquired in late 2011. So far, HighMount has drilled 30 wells on its Miss Lime acreage and it continues to increase knowledge of the play.

HighMount's drilling costs and time to drill are competitive with other operators in the region and HighMount intends to continue with its early phase of development for the next several quarters.

And finally at Loews Hotels and Resorts, 2012 has been a very busy year. Since Paul Whetsell joined the Company a year ago as President and CEO, he has added talent for the Loews Hotels bench by bringing in industry veterans to bolster all aspects of the business, operations, marketing, sales, and more.

The Loews Hotels team has been focused on growing in key urban and resort markets while at the same time improving the performance and profitability of existing properties. Renovations are either underway or imminent at several of our current hotels and growth opportunities are being continually reviewed.

In the past year, Loews Hotels and its partners have committed to projects worth more than $1 billion, including the Loews Hotel in North Los Angeles acquired in June of 2012; the Loews Madison Hotel in Washington, DC acquired at the end of last month; the Loews Back Bay Hotel in Boston, a transaction for which should be finalized this month; major renovations for several of our properties including a Loews Regency Hotel in New York; the Cabana Bay Beach Resort in Orlando, currently under construction and expected to open in 2014; and the Loews Chicago Hotel currently under construction and expected to open in 2015.

In December of 2012, Loews Hotels brought in an institutional investor as a joint venture partner for the Loews Hollywood Hotel. Going forward, we will continue to look for like-minded investors to partner with us in owning new properties. This strategy will allow Loews Hotels to maximize its return on capital and effectively grow its network of top quality properties.

Now I will turn the call over to Pete Keegan, our Chief Financial Officer. Pete?

Thanks, Jim, and good morning, everyone. Loews Corporation today reported a net loss of $32 million or $0.08 per share for the fourth quarter of 2012 as compared to net income of $271 million or $0.68 per share for the fourth quarter of 2011. Loews net income for the full year was $568 million or $1.43 per share compared to $1.1 billion or $2.62 per share in 2011.

The decrease for the quarter was due to lower net income at CNA and Diamond as well as decreased parent company investment income resulting from lower performance of equity investments. These decreases were partially offset by higher earnings at Boardwalk. These same factors also impacted annual results except for parent company investment income, which was higher year-over-year due to improved performance of equity investments.

Excluding catastrophe losses of $171 million after-tax and non-controlling interest at CNA relating primarily to Storm Sandy and the after-tax ceiling test impairment charge of $97 million at HighMount, net income in the 2012 fourth quarter was $236 million as compared to net income of $271 million for the same period in 2011.

Net income in 2012 includes catastrophe losses of $243 million after tax and non-controlling interest at CNA and after-tax ceiling test impairment charges of $433 million at HighMount related to the carrying value of its natural gas and oil properties. Excluding these charges, net income in 2012 was $$1.2 billion as compared to net income of $1.1 billion in 2011.

Book value per share increased to $49.67 at December 31, 2012 as compared to $47.33 at December 31, 2011. For the fourth quarter of 2012, CNA had a net loss attributable to Loews of $5 million as compared to income of $195 million in the fourth quarter of 2011. For the full year 2012, net income attributable to Loews was $535 million as compared to $567 million for the prior year.

CNA's earnings declined due to higher catastrophe losses primarily related to Storm Sandy and a lower level of favorable net prior-year development in 2012 than in 2011 partially offset by increased investment income. Increased investment income reflects improved performance of limited partnership investments.

Diamond Offshore's contribution to net income for the fourth quarter of 2012 was $73 million compared to $88 million in the prior year quarter. Net income attributable to Loews for the full year 2012 was $337 million as compared to $451 million for the full year 2011. Results for the fourth quarter decreased primarily due to lower average daily revenue partially offset by an overall increase in utilization and lower contract drilling expense.

As Jim mentioned, the fourth quarter was also impacted by an impairment charge related to the carrying value of three semi-submersible rigs and one jackup. For the year, results decreased due to lower rig utilization and a decline in average day rate.

Boardwalk Pipeline's contribution to net income for the fourth quarter 2012 increased to $31 million from the $21 million in the prior year quarter. For the year, net income attributable to Loews was $111 million as compared to $77 million the year before.

Earnings for the quarter and the year increased because of HP Storage, which was acquired in December of 2011 as well as due to lower general and administrative expenses. Comparisons for the full year benefited from lower impairment charges in 2012 compared to 2011.

At HighMount excluding the ceiling test impairment charge, net income from the quarter was $9 million compared to net income of $12 million in the fourth quarter of 2011. For the year, net income was $26 million as compared to $62 million excluding the ceiling test impairment charge.

Results were impacted by low natural gas and natural gas liquid prices and a reduction in sales volume because of the continued decrease in natural gas drilling and production.

For the year ended December 31, 2012, HighMount recorded non-cash ceiling test impairment charges of $680 million or $433 million after tax related to the carrying value of its natural gas and oil properties. The write-downs were the result of declines in natural gas and gas liquid prices.

The December 31, 2012 ceiling test calculation was based on average 2012 prices of $2.76 per MMBTU for natural gas and $41.11 per barrel for NGLs and $94.71 per barrel for oil.

HighMount's fourth-quarter production volumes and realized prices which include the benefit of hedges are as follows. Natural gas production was 9.2 billion cubic feet at an average realized price of $4.60 per thousand cubic feet. Natural gas liquids production was about 552,500 barrels at an average realized price of $37.63 per barrel and oil production was about 187,300 barrels at an average realized price of $88.82 per barrel.

HighMount had hedges in place as of December 31, 2012. It covered approximately 59.5% in 26.6% of its estimated 2013 and 2014 natural gas equivalent production at a weighted average price of $6.27 and $5.39 per Mcfe.

Loews Hotels and Resorts recorded a net loss of $2 million for the fourth quarter of 2012 as compared to net income of $5 million for the same period in 2011. For the full year 2012, net income was $7 million as compared to $13 million for the full year 2011. The decrease is primarily due to increased expenses including acquisition and transition-related costs from the Loews Hollywood Hotel and costs related to the closure of the Loews Regency Hotel while it's undergoing extensive renovation.

Holding Company cash and investments as of December 31, 2012 totaled $3.9 billion compared to $3.3 billion held at December 31, 2011. We received $173 million in interest and dividends from our subsidiaries for the quarter, substantially all of which was dividends, $36 million from CNA, $61 million from Diamond, and $76 million from Boardwalk.

For the full year, we received $683 million in interest and dividends from our subsidiaries, again substantially all of which was dividends, $145 million from CNA, $245 million from Diamond, and $293 million from Boardwalk. We paid $25 million in cash dividends to our shareholders during the fourth quarter of 2012 and pad $99 million in cash dividends for the year. We also bought back 2.1 million shares of Loews common stock for $83 million for the quarter and 5.6 million shares for $222 million for the year.

Now I will turn the call back over to Jim.

Before we open up the call to questions, I would just like to close with some observations. Economic conditions in the US for 2012 remain challenging with the pace of recovery sluggish and intermittent. We expect more of the same for 2013.

Our consolidated results were impacted by a few large unusual items such as the impact of Superstorm Sandy on CNA and the impact of continued low natural gas prices at HighMount. Absent these items, we are pleased with the progress that all five of our subsidiaries are making toward meeting their strategic objectives.

Now I will turn to call back over to Mary.

Thanks, Jim. Jackie, at this time we would like to open up the call for questions.

(Operator Instructions). Bob Glasspiegel, Langen McAlenney.

Pete, you didn't have your normal pipes today. I hope you get better from whatever is ailing you, but it sounds like you are playing a little sick today. Is that right?

It sounded that bad?

We thought he actually sounded pretty good.

Let's see. I would like to go after hotels with my first question. I think I know how to go about trying to value most of your other subsidiaries, but this segment which is smaller, has been more challenging for me. And once every couple of years maybe at an investor day or on a call you give us a little bit of help thinking about valuing the operations, but as this business is getting more emphasis with growth dynamics, maybe you can give us a little help with either what the EBITDA is or how we should think about what the value is with this operation?

I can't answer that question directly since we are not going to give you a value. However, Bob, when you see our 10-K this year, we are trying to change some of the metrics that we are going to be showing you going forward starting in 2013 and beginning with the K, which will be filed about the end of February. So hopefully we can start to answer your question with a little more clarity.

Obviously some hotel companies are valued on multiples of EBITDA. We will start presenting more of that data publicly starting about the end of this month and we will be providing some more overall chain metrics so that you can compare the broader performance of the Hotel group, including the non-owned hotels in terms of their revenue and their RevPAR.

So while I can't answer your question directly today, hopefully we will be giving you a little better metric going forward.

You don't have EBITDA numbers today that you can give us for rough guess-timates of how it's running?

We haven't made it public yet. We will be making it more public going forward.

Okay, do I read it right that this could be an area for a decent amount of cap spending prospectively or --?

Yes, we are helping the hotel's growth strategy and really providing some level of bridge financing on individual hotel purchases. As Jim mentioned, the goal here is to bring in some investment partners and some of those purchases as we already have done on the Hollywood Hotel.

Okay and just a clarification question. I always get a little bit nailed on my model. You had a decent amount of partnership income at CNA but the trading portfolio generated an outsized loss in the quarter. Is that bond marks or is there anything that you would characterize that hit the quarter and first quarter is off to a better start as far as partnership income I suspect.

I think it was just generally [facts] that were -- had a -- equities that we held at the Loews portfolio were down for the quarter.

Okay, so as I think about Q1, it's more how the equities might be doing than the bond marks that would drive trading?

We do not have too much in the bond market. We are generally bearish on bonds and we think that equities could do reasonably well. We also have a number of gold stocks that did not perform well in the quarter.

Okay, so I should look at gold and some of your other big equity holdings that are public as a guess-timate if I don't want to use the market for --?

Yes.

That's reported real-time, no lag?

The equities? Yes.

Okay, the partnerships I know do have a little bit of a lag at CNA and (multiple speakers)

Not all of them. Some of them do, but they are each consistent.

Okay. Thank you, guys.

David Adelman, Morgan Stanley.

Good morning, Jim and Peter. Jim, could you -- you mentioned the statistics about the new drilling program but you didn't really characterize the performance of those new wells. How are they doing? How are they performing versus what other companies are drilling in that region?

So you're talking about the wells in the Mississippian Lime?

Yes.

We have drilled 30 wells there and we've had -- when you average out all the wells that we have drilled, our performance is similar to the performance of wells drilled by people in our area.

What we are doing is we want to drill another set of wells so that we can begin to really delineate the area and understand what we have. Right now our belief is that this area is commercial and we just have to wait and see how the other wells come out to prove up whether that thought is accurate.

Okay, and then can you give us a rough indication of how much the annual depreciation in that division is going to come down because of the sizable ceiling test impairment you took this year?

I don't have that readily available. We'll have to get back to you on that.

Okay. And then lastly also a question on the hotel business, if you looked forward two or three years, could you characterize or define what success will be in that business unit from a strategic and financial perspective given the efforts underway? You will have evolved Loews Hotels into what?

We are looking to grow Loews Hotels. We are looking to do it in what I would call an asset-light manner in that we would like to own 25% to 50% of the properties that we acquire with investors owning the other 50% to 75%. We would like to build the hotel chain into one where hotel owners would want us to manage the hotel without actually owning it. In terms of earnings and EBITDA, we would be looking for that to grow and we are looking to take the hotel company from an enterprise that has been rather stable over the past decade or so to one that has got growth in its future.

Okay, great. Thank you very much.

Michael Millman, Millman Research.

Just following up with that last, most of the hotel companies seem to either be owners of many of the REITs or managers of fee-for-service. You seem to be somewhere in the middle. Is that correct? And is that very difficult to manage if that's the case? I also have a question on the gas.

It's really a benefit to us because we can invest the equity capital that's needed to build hotels and then once they have been built we can sell off a significant portion of it to investors. We can react to any situation that presents itself so that we can economically grow our business.

So at Loews Corporation, we are willing to continue using the cash that we have to help grow our hotel business and what we do for each project is we make sure that the economics to those transactions look promising and if they do, we are happy to invest in them.

Okay. Thank you for that. On the gas, in order for gas values to increase, does gas have to become liquefied and if that's the case, does that seem to be economically feasible?

Let me try to understand what you are saying. (multiple speakers) Go ahead.

So gas on a BTU value is selling way below oil or petroleum, and one way to get it up there is to liquefy it. I'm not sure --

Let me try to explain. Natural gas at Henry Hub trades for the equivalent of about $20 per barrel of oil. So it's trading at less than 25% on a BTU basis of WTI and it's trading at less than 20% of oil value for Brent, which is another major index for oil.

You talked about liquefying. Generally the only time -- there are only two times when you would liquefy natural gas. To liquefy natural gas, you have to cool it down to minus 250 degrees or so and you do that in order to ship natural gas to export markets. There is currently a debate going on in Washington and within the energy community about whether or not the United States should allow natural gas to be exported. And that debate will play out I believe over the coming year.

Currently I think one license has been granted and others are pending. That could increase the demand for natural gas by a few billion cubic feet of natural gas per day. Those contracts generally will not kick in until three or four years from now because there are developers that have to put in the substantial capital necessary in order to build the export facilities.

The other place where liquefied natural gas or LNG may be used is for over the road trucks and locomotives on railroads. That is something that is currently being tested and experimented with and it's my guess that similar to the export of LNG, that's something that will start to be more prevalent in the marketplace in the next two to three years.

My guess is that at first the LNG as a motor fuel will not make a significant difference in daily production of natural gas but over time -- say over the next five to 10 years, it could actually be a very significant factor for demand. We will only know that in the next five to 10 years when we see what the price of natural gas is compared to the price for oil, so we've got to stay tuned for that.

So I guess the way at least from a stock market standpoint, it seems very long-term and unclear that there will be a quote fair valuation for natural gas.

So the valuation of natural gas is determined by two things. Number one are demand and number two is supply. Demand has been actually growing very rapidly and my guess is it will continue to grow and natural gas has been taking market share away from oil.

But the issue is that the supply of natural gas has grown rapidly as well. My guess, and I've stated this before, is that the equilibrium price for natural gas is about somewhere between $4.00 and $4.50 per Mcf which is the equivalent of $25 to $30 per barrel of oil. So it still is as I like to call it, BTUs on the cheap.

And the thing that has happened is that we have gone from an era, a long era of where natural gas was seen as a commodity that's in short supply or very scarce to one that is in abundant supply. So I think as more and more people understand that and factor it into their capital spending, you will continue to see natural gas consumption increase without natural gas prices running away, because as I said, there is so much supply that's available at that price range of $4.00 to $4.50 per Mcf.

Okay, great. Thank you.

(Operator Instructions). Andy Baker, Barclays.

Thank you. Good morning, guys. Just a question, Jim. You were talking just a second ago about natural gas taking share from oil. Where do you see that happening? And I guess over the next five to 10 years as this pricing plays out, where do you think the -- which industries do you think are most likely to make the switch or can realize the best benefit from switching to the low-cost BTU?

So the only place generally where there has been is direct head-to-head competition of natural gas and oil is in transportation fuels. But when you look at the energy mix of the US economy, you see that oil has come down and natural gas has gone up. The place where natural gas has taken very significant market share over the past several years has been in power production and their natural gas has taken market share from coal.

The other thing that has happened is that oil consumption has declined -- steadily declined in the United States since about 2007 and the reason for that is either improved miles per gallon on cars or flat -- or miles driven not increasing so dramatically. But it hasn't really been so much gas on oil competition.

Thanks. Just one other question on hotels. I guess the question is why now? Why are we making -- is there such a big investment or why are there more opportunities coming to you now than there have in the past? I mean this is something we've been talked about for a number of years in hoping that you were well-poised with your liquidity to take advantage of opportunities during the fiscal crisis. Now as we emerge, are there just more opportunities coming your way now or is it that you're more comfortable with the outlook for the properties that are on the market? How do we think about the timing decisions here?

I would say it's two things. Number one, we do see opportunities. There are not many hotels that are being built now even though the hotel business is reasonably good. So that's an environment where we like to be developing hotels. Combined with the fact that we have a management team now that is very adept at acquiring hotels, they understand very well how to finance hotels, not only with debt but also with equity investors. And so we're making use of their expertise.

Thank you. And just one last for Pete. I missed what you said on the call what the year-end corporate cash and debt balances were?

It's about $3.9 billion? (multiple speakers)

And the debt load is about $700 million.

Thank you very much.

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

Great. Thank you, everyone. Thank you for your continued interest. A replay is going to be available on our website in the next two hours and this concludes our call for today.

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