馬拉松石油 (MRO) 2005 Q1 法說會逐字稿

Good day, ladies and gentlemen. Thank you for your patience in holding and welcome to this Marathon Oil Corporation first quarter 2005 earnings conference call. Today's call is being recorded. For opening remarks and introductions I would like to the call over to Mr. Ken Matheny. Please go ahead sir.

Okay, April, thank you very much, and I also would like to welcome everybody to the first quarter 2005 earnings teleconference for Marathon Oil Corporation. With me on the call today from Marathon are Clarence Cazalot, our President and CEO, Janet Clark, Senior Vice President and Chief Financial Officer, and Steve Hinchman, Senior Vice President of World Wide Production, Phil Berhman, Senior Vice President World Wide Exploration, and Steve Lowden, Senior Vice President of Business Development and Integrated Gas. Also with me from Marathon Ashland Petroleum are Gary Hemminger (ph), President, and Gary Peiffer (ph), Senior Vice President of Finance and Information Technology.

I will spend 15, 20 minutes reviewing the first quarter results and then Clarence Cazalot will comment on our modified transaction to acquire Ashland's 38% interest in MAP, which we announced earlier today. We will then open the call to questions. There seems to be some background on the line. Can we find out what that is? April, can you see if there's -- we have some real background on the call. Okay. Approximately two hours after this call ends, these remarks will be placed on the investor relations portion of our web site, and they will remain on site for one year.

My remarks today will contain certain forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. In accordance with the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, the Marathon Oil Corporation has included in it's annual report on form 10K, for the year ended December 31, 2004, and in subsequent forms 8K, cautionary language identifying important factors but not necessarily all factors that could cause future outcomes to differ materially from those set forth in forward-looking statements.

A reconciliation of net income adjusted for special items to net income including an explanation of the reason for using this non-GAAP measure is included in our fourth quarter 2004, and first quarter 2005 earnings press releases. These press releases are posted on our website under the press releases tab which is located under the news center tab. Unless otherwise indicated comparisons made in this conference call are to results from the fourth quarter 2005. Net income for first quarter was $324 million, or $0.93 per share. Net income included in after-tax special item of $33 million related to the mark-to-market loss on our two UK long-term gas contracts.

Net income adjusted for special items was $357 million, or $1.02 per share, and that was $58 million lower than the fourth quarter 2004 adjusted net income of $415 million, primarily because of lower refining marketing transportation segment income, somewhat offset by higher upstream segment income. Looking at the upstream segment, total worldwide production available for sale for the quarter averaged 347,000 barrels of oil equivalent per day exceeding our guidance of 330 to 340,000 barrels of oil equivalent per day, primarily due to the start-up of Petronius (ph) and our acquisition of an additional 16.7% interest in Troika (ph).

Total sales volumes for the quarter were 334,000 barrels of oil equivalent per day, which differs from production available for sale as a result of the timing of liftings in the United Kingdom and Gabon. First quarter operating income of $550 million was $112 million higher than fourth quarter 2004. Mainly a result of lower derivative losses, higher liquids and natural gas price realizations, lower exploration expense, and increased business interruptions and insurance recovers related to Petronius in the Gulf of Mexico, partly offset by higher DD&A.

Focusing on domestic upstream operations, first quarter operating income was $305 million, at $67 million higher than the fourth quarter of 2004, primarily a result of higher liquids volumes and prices, lower derivative losses, lower exploration expense and a previously mentioned business interruption insurance related to Petronius. This was partially offset by lower gas volumes and prices and higher DD&A. Our average domestic realized liquids price excluding derivative activity was $38.47 per barrel. That was $3.63 more than the fourth quarter level, better than the increase in spot WTI, of $1.76, primarily because light/heavy differentials narrowed in the current quarter.

Our first quarter domestic gas price of $4.95 per MCF, excluding derivative activity, was down $0.14 from the fourth quarter. And our lower 48 gas sales our realized price of $5.81 was $0.54 below fourth quarter prices, as bid week prices where we sell anywhere from 80 to 90% of our gas decreased $0.80 over the fourth quarter of 2004. DD&A was $6.67 per barrel. That was $1.18 higher than the fourth quarter, primarily as a result of the reserve adjustment made in the Powder River Basin last year.

Domestic liquids sold in the first quarter were 71.6 thousand barrels of liquids per day. That was up 6.2 -- 6200 barrels of liquids per day from the fourth quarter, primarily due to the resumption of production of Petronius on March 11 and additional 16.7% interest in acquired at Troika in the Gulf of Mexico. Domestic gas sales averaged 570 million cubic feet per day, down 15 million cubic feet per day from the fourth quarter because of lower volumes in Alaska and Camden Hills which was shut in for hurricane Ivan repairs, partially offset by production from Petronius and Troika.

International upstream segment income for the first quarter was $250 million, that's an increase of $45 million over the fourth quarter, primarily attributable to higher gas prices and volumes, decreased derivative-related losses and lower exploration expense, partially offset by lower liquid sales due to the timing of liftings. Our foreign average liquid price of $39.10 per barrel was up $0.38 sequentially and that's less than the $3.77 increase in (inaudible). Primarily the result of timing of liftings and domestic sales of Russian production, which does not track rent. Our average international gas price of $4.70 per MCF was up $0.38 on the strengthening of seasonal European gas prices.

And DD&A of $7.12 per barrel of oil equivalent in the quarter was essentially flat for the last quarter, the fourth quarter of last year. International liquids production available for sale in the first quarter were 104,000 barrels of liquids a day, up 6,200 barrels of liquids a day from the previous quarter, primarily due to production performance in Russia and EG Phase IIA startup. International sales in the first quarter were 91.5 thousand barrels of liquids per day. And that's down five -- 5.4 thousand barrels of liquids per day from the fourth quarter, again as a result of timings of liftings in the UK and Gabon.

Gas production of 455 million cubic feet per day was 44 million cubic feet per day higher than the fourth quarter due to higher seasonal gas sales in Europe. Now turning to downstream results, refining marketing and transportation segment income for the first quarter 2005, totals $210 million, $161 million higher than the first quarter 2004 as MAP had the second best first quarter in it's seven-year history. Because of the seasonality of the downstream business, I will compare the first quarter 2005 results against the same quarter in 2004. Crude oil prices increased from $43.45 at the end of December, to $55.40 at the end of March, for an increase of almost 30%.

Even more significant was the increase in U.S. Gulf Coast spot gasoline prices, which increased from $1.09 per gallon at the end of December to $1.62 at the end of March and that's an increase of almost 50%. Most significant factor that contributed to MAP's quarter-to-quarter improvement was a steep sweet/sour crude oil discount experienced during the quarter. Average sweet/sour differentials widen to $12.09 per barrel in the first quarter 2005 versus $5.87 in 2004 quarter. Consequentially, MAP's crude oil and other feed stock acquisition costs were significantly lower, relative to the change in WTI this quarter, compared to the same quarter last year.

In addition, primarily due to the relatively light plan maintenance activity in the quarter, MAP ran 8.8 million barrels more crude in other feed stocks than we did in the same quarter last year. And finally the futures market structure was in contango an averaged $0.33 per barrel last quarter versus backwardation of $0.64 in the first quarter last year, improving our crude oil acquisition costs relative to the WTI price that's used in the traditional 3-2-1 crack spread calculation.

Partially offsetting these positive factors were the following major items: even though we had relatively large crack spreads at then of the current quarter, the Chicago 3-2-1 crack spread average was only slightly higher than the average for the same quarter last year and on a two-thirds Chicago, one-third U.S. Gulf Coast basis the 3-2-1 crack spread was essentially flat quarter to quarter. However, the other products we produce and sell, such as asphalt, heavy fuel oils were priced at a significantly greater discount to WTI in the current quarter than during the 2004 quarter.

For example, the difference between 3% residual fuel oil prices in WTI continued to widen last quarter to $21.65 per barrel compared to $12.45 in 2004 quarter. Also due to the steep increase in refined product prices this quarter, we can not pass along price increases at the wholesale level as quickly as they occurred in the spot market. Both of these factors negatively affected overall product realizations last quarter compared to the change in spot gasoline and distilled prices used in the WTI 3-2-1 crack spread quarter-over-quarter.

Additionally the significant increase in crude oil prices in the current quarter resulted in a negative crude oil in transit effect of $73 million compared to essentially zero in the same quarter last year. Also during the quarter MAP recorded a loss on the crack spread sold forward of $73 million versus a loss of about $41 million in the same quarter last year. Approximately $61 million of this $73 million charge is related to the sale of crack spreads that will expire over the remainder of 2005, primarily number two fuel oil crack spreads. MAP marks-to-market all of its derivative activity and the actual gain/loss MAP will recorded on these contracts will not be determinable until the contracts expire or are otherwise closed out.

Combining all of these factors MAP's refining and wholesale marketing margin increased from 3.44 cents a gallon in the March 2004 quarter to 6.85 cents per gallon last quarter. Turning to a few operating statistics MAP's overall consolidated refined product sales excluding buy/sell volumes total 4.9 billion gallons, up about 3.9% from the same quarter last year. Speedway SuperAmerica's same store gasoline sales were up about 1.2% quarter to quarter, inspite of the fact that the gas -- retail gasoline price averaged $1.89 per gallon in the current quarter to $1.61 in the 2004 quarter. This increase in same-store gasoline volume is even more impressive as we are comparing it against a very robust first quarter of 2004.

SSA's total gasoline and distilled sales were down about 18 million gallons quarter-to-quarter, at 2.4%, primarily because Speedway operated only 1659 stores at the end of the current quarter, down from 1773 stores at the end of the 2004 first quarter. Speedway SuperAmerica merchandise sales on a same store basis increased about 11.5% last quarter and desperate operating a fewer number of stores, total merchandise sales increased by $39 million or 7.5% quarter over quarter to $560 million.

Speedway SuperAmerica's gasoline and desolate gross margins decreased from 11.45 cents per gallon in the first quarter of 2004 to $10 -- 10.58 cents per gallon in the current quarter reflecting the impact of the significant increase in wholesale prices during the quarter which rose more than Speedway SuperAmerica's average retail refined product price. MAP's refineries ran very well this quarter due to a continued emphasis on reliability. The investments made over the last few years and a relatively low plan maintenance schedule in the quarter.

The result was a first quarter crude oil throughput record average of 922,000 barrels per day compared to 789,000 barrels per day in last year's first quarter. Other charge, and blend stock throughputs from 196,000-barrels per day in the 2004 quarter to 171,000-barrels per day in the last quarter, primarily because lower than planned maintenance allowed MAP to process more crude oil. Total throughput of 1,094,000 barrels per day was a record for the first quarter and assuming refining margins remain strong in 2005, we expect to exceed the crude oil throughput record we set in 2004 in to -- during 2005.

Turning to the integrated gas business segment, operating income was $7 million in the first quarter, versus $23 million in the fourth quarter. The difference is primarily attributable to mark-to-market changes in derivatives used to support gas marketing activities plus the impact of recognizing a deferred tax benefit for the Ampco methanol plant in the fourth quarter of 2004. The Ampco methanol plant operated at a 94% onstream factor for the quarter and methanol prices remain strong, resulting in operating income for the quarter to Marathon of $16 million.

Moving back to financial results, our total segment income in the first quarter of 2005 was $772 million, down $83 million from the fourth quarter of 2004, as upstream was up 25%, and downstream was down 46 cent -- percent -- pardon me, 46% sequentially. The unallocated category, administrative expense was $91 million in the first quarter. The increase over the fourth quarter total of $69 million was due primarily to a non-cash charge of $43 million related to equity-based compensation, compared to a benefit of $9 million in the fourth quarter. Net interest and other financial course costs were $32 million in the first quarter, flat for the fourth quarter of 2004.

Marathon's pretax income for the first quarter was $523 million and tax provision was 199 million giving us an effective tax rate of 38%. Cash adjusted debt went up by $154 million during the first quarter to $858 million. The cash adjusted debt-to-capital ratio at March 31, 2005 was approximately 9%, that's up from 8% at December 31. I will note that the cash adjusted debt balance benefits from approximately $560 million of cash, that would have been distributed to Ashland, except for the transaction underway to acquire their interest in MAP. It also includes approximately $592 million of debt, which U.S. Steel continues to serve -- service.

I should remind everybody that these are preliminary numbers. First quarter preliminary cash flow from operations was $355 million and preliminary cash flow from operations before working capital changes was $767 million. I want to make a few observations about the second quarter of 2005. The second quarter production available for sale is expected to range from 332 to 347,000 barrels of oil equivalent per day. On the domestic side we expect first quarter liquids production to increase to approximately 80 to 83,000 barrels of liquid per day. Gas production should increase to about 570 to 590 million cubic feet per day. The increases are primarily associated with a full quarters worth of production from Petronius and Camden Hills, and domestic exploration expense is anticipated to be between 20 and $30 million.

On the international sides liquid production available for sale in the second quarter should increase to approximately 110 to 115,000 barrels of liquid per day. The increase is primarily due to higher volumes resulting from a full quarter of production in equatorial Guinea from the liquids expansion project. We expect international gas production to range from 280 to 305 million cubic feet per day, down compared to the first quarter due to commencement of gas injection for Kinsale Head (ph) storage in Ireland and seasonal sales declines in Europe. International exploration expense is anticipated to be between 15 and $25 million.

For all of 2005, we continue to expect production available for sale to range between 325 to 350,000 barrels of oil equivalent per day and that, of course excludes any acquisitions or dispositions and does not include any volume for our potential re-entry into Libya. I also want to add that we have no oil or gas hedges in place in the upstream segment. On the downstream side, [inaudible] crack spreads especially for high sulfur number two fuel oil, were exceptionally strong during the 2005 quarter but have dropped back somewhat. The major unknown at the present time is what crude oil prices will be the rest of this year and the impact these will have on refined products demand.

While we are currently in unchartered waters, we don't expect crack spreads and sweet/sour differentials to be as strong during the rest of 2005 as they were in the first quarter, but we do expect because of the relative tightness of refining capacity in the U.S., and still strong worldwide demand that we will continue to enjoy above cycle crack spreads through the remainder of 2005. Integrated gas, the second quarter segment income is forecast at a similar level to the first quarter and we project break even for the full year due to increased spending on L&G activities and gas-to-liquids technology which offsets the Ampco and Alaska L&G income.

Net interest expense will be approximately $32 million for the second quarter. Administrative costs for the second quarter should be about $65 million. And we continue to forecast our effective tax rate to be 37 to 38%. Now, Clarence Cazalot will provide an update on our announcement early today to acquire Ashland's 38% interest in MAP. In addition to the cautionary language discussed earlier the second slide in the presentation on the webcast addresses cautionary language and other information required to be disclosed with respect to our acquisition of Ashland's minority interest in MAP. Now I would like to introduce Clarence Cazalot, President and CEO of Marathon.

Thank you, Ken and if everyone would turn to the slide right behind the cautionary language, it's entitled "Modified Transaction Summary", I'm just going to go through a few summary slides on the transaction itself, the consideration ranges, as you know, from 3.7 to $3.9 billion. The major changes are a firm consideration increase of $700 million, of which $100 million is in cash and accounts receivable and an additional $600 million in Marathon common stock. There is also a provision for reimbursement of a portion of Ashland's IRS section 355e tax liability, if any, up to approximately $200 million under reasonable stock pricing assumptions.

And as you know, this transaction not only includes the 38% minority interest in MAP, it includes two other complimentary businesses, maleic anhydride plant in Neal, West Virginia, and 60 Valvoline Instant Oil Change stores. MAP, as a result of this transaction, will be wholly owned by Marathon. It is a two-stepped structured transaction that we described in great detail to you before with the closing expected June 30 of 2005. If you'll turn to the next slide, you will see a comparison of the total consideration from the original transaction announced last March to the modified transaction announced today.

You'll see an increase in the MAP cash and accounts receivable of 100 million, update 194 million. The Marathon stock to Ashland shareholders up 600 million to $915 million, the assumed debt and the present value of the environmental liabilities assumed remains unchanged. The minimum consideration goes from 3024, to 3724 and then we've illustrated below, again, if any section 355 tax liability is incurred by Ashland, the sharing under which that will be handled, and up to $68 a share for Ashland's stock. The tax liability is zero from 69 to $75, Marathon will pay the first $200 million of that tax, from 76 to 79, Ashland will pay the next $175 million of tax and should the price go beyond $79 a share that is shared equally by both parties. So the potential total consideration will be upwards of 3924 indeed if the Ashland share price so warrants.

Turning to the next slide, we have the major conditions to closing. Again, a favorable IRS closing agreement and/or ruling, opinions of outside tax counsel, the consents from the Ashland public debt holders, Ashland's shareholder approval, HSR clearance and updated Ashland solvency opinions and, again, as indicated before, closing expected June 30 of 2005. We have, in a number of forums, I think to all of you before and certainly last year when we first announced this transaction, outlined Marathon's strategic rationale for this transaction, the importance to us and our strategies and our business plans going forward of owning 100% of MAP. So I'm not going to spend the time going through that. I would simply say this is a transaction that has been a long time coming.

There has been very intense, but I think goodwill, negotiations between all the parties involved, and the result is a very fair transaction, to both Ashland and Marathon and their respective shareholders and I know with our partner Ashland, we look forward to closing this transaction, so we can, indeed, both get on with our respective business plans for the future. So with that, I think Ken, we will open it up to questions.

Go ahead and open it -- open the call to questions. Thank you, April.

Thank you, gentlemen. If anyone would like to ask a question, they may do so by pressing the star key followed by digit one. For those of you joining us by speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that is star one for questions. And the first question comes from Neil McMahon with Bernstein.

Hi, guys, just have a few questions. The first one is really on the MAP transaction. How did you end up with the valuation of 3.7? And there's been a lot of activity in the downstream sectors so far this year and I just wanted to -- for you walk me through the, the changes that went on from March of last year to the current time. And also what is your refining outlook that's behind that valuation? And I just got a second question then. Really on MAP as well, just in terms of what diesel demand you guys are seeing for the last quarter, and indeed this current quarter and gasoline demand?

Neil, this is Clarence, I'm going to let Janet tackle the first question you have and maybe Garry Hemminger tacked the second part. But let me say that it's not our intention on this call try to fully lay out and justify the price. Again, as I say, we have taken into account, I think, all of the market conditions both current and projected into our are valuation. It has been a long, intense negotiation, and again, we think it's a fair price. But I don't want to spend a good deal of the call today going through a lot of margin assumptions, but having said that Janet does have some comments.

Yeah, I think that's right. I knew it would probably be pointless for us to take you all that's happened in the last year since you're well aware of what's been happening in the market. Plus, in the terms of fundamentals and how it's reflected in stock market valuations as well as transactions that have occurred but, you know, I think, suffice it to say that we feel that this is a very fair value for both us and for share -- and for Ashland's shareholders. You know, there's plenty of publicly available data as to what EBITDA was last year. If you want to look at that, this is less than six times EBITDA. you want to think [audio difficulty] are pretty comparable to last year. It's in that range. The precise valuation, of course, you can appreciate was a result of negotiation with Ashland.

Okay.

Gasoline and diesel demand, Gary, do you want to answer that.

Yeah and for your question on our outlook on refining, Neil, I'll just review the fundamentals. The gasoline demand -- our demand was up 1.2% on a same store basis, which our 1600 plus stores in the Midwest give us a very good proxy of how gasoline demand has gone. So 1.2% for the first quarter, however, we have seen it decelerate at the end of the first quarter, to only up about 6%. To answer your question, on distillate demand. On the retail side, which again, through Pilot Travel Centers, we have a very good view of the -- of the retail distillate demand. We noticed that it was up a little bit more than 5% in the first quarter but we have seen over-the-road truck tonnage soften here at the end of the quarter and we're only seeing the truck tonnage numbers now off 2 to 3%. So we are expecting distillate demand to to soften as we go into the second quarter. So those are the two key [inaudible], and then lastly on refining, it would be the sweet/sour spread. We still continue to see very strong sweet/sour spreads and expect that to go into the second and the third quarter.

Great. Thanks a lot.

Moving on, we'll hear from Jennifer Rowland with JP Morgan.

Thanks. I've got two questions on the MAP transaction as well. Will you write up the PP&E on your balance sheet to fair market value and also will that result in a step up in your taxable depreciation amount?

I was going to answer that before I forget. Yes, we will write up the P.P & E to the full market value but we will not get the benefit of a tax basis write-up.

And then just to clarify on the tax split of the section 355, is it, for instance if the bill was 500 million, does that mean would you pay 250 and Ashland pays 250, or does it mean you pay 200 and then 50% of the amount above 375?

We pay 50% of the amount above 375.

Okay. And then just one other operational one. With of the news on Qatar GTL projects if -- if you can give us a little color as far as what you are thinking, any particular -- other areas you might be looking at to employ your GTL technology or is this something now that's kind of well beyond the 2010 time frame?

Yes, Jennifer, as you, I'm sure, read from our notes that Qatar has recognized the need to look very hard at the north field and its ability to meet both near term and very long term off take, so we are -- have been notified of a delay in our discussions but we remain interested in Qatar as a potential location. There are also, as you know, a significant volume of gas already discovered in various places including in north and West Africa in the Middle East and in Russia and many other places that also are of potential interest to us, and the work we're doing on our GTL technology suggests that it will be applicable to projects that are of a smaller scale than we looked at in Qatar.

Okay. Great. Thank you.

Your next question today will come from Doug Terreson with Morgan Stanley.

Congratulations on today's news, guys. My question regards the MAP transaction, again I apologize if I missed this, and specifically clarification on the cash position at the end of the quarter and also how that cash position's expected to be applied to the increased amount of debt and equity? I think you might have mentioned that you expected to reduce the entire amount of additional debt, in a, in a pro forma scenario but can you just cover that again, please if you already have.

Sure, Doug. I'll start from the top.

Okay.

We concluded the first quarter with about $3.2 billion in cash.

Okay.

Of that, of course, $560 million, at that point in time was attributable to Ashland. Leaving us $2.6 billion.

Okay.

The modified transaction includes an incremental $100 million of accounts receivable in cash, which as we look at it, essentially is the same as cash, plus assumed debt of a billion nine, so you add those two together and that's about a $2.8 billion call on cash to close the transaction. Versus the $2.6 billion that we had at the end of the first quarter.

Okay. Okay, thanks Janet that's all I needed.

Great.

Moving on to Fred Leuffer from Bear Stearns.

Congratulations.

Thank you, Fred. Thank you.

Just have three questions. The first is -- all regarding MAP. I'm just wondering if you will alter investment plans for MAP as the sole owner, if, secondly, if you see any cost reductions stemming from 100% ownership? And lastly, the June 30 closing seems ambitious given the long list of things that have to, have to be accomplished. I thought I saw September 30 number out of Ashland this morning. Can you just tell us, you know, a lit bit more about the timing of the closing something?

Yes, Fred. I will start with the last question first. We think June 30 is reasonable. Both parties have committed to all efforts to make that happen, but we think it is -- it is very reasonable and very do-able. The September time frame you saw was just an extension, if you will of sort of the agreement time frame that if, indeed, something did happen that delayed us, we would actually have out to September to get the transaction done. The prior termination date we had was June 30 and it simply wasn't reasonable to have the termination date of the overriding agreement and the closing date of the transaction all occurring at the same time. So that's why that was extended.

Okay.

As to the synergies, I think as we had said all along, this was not done for synergies. We see minimal synergies. We have estimated in the past 15 to $20 million a year, that's what we have talked about. And as to our investment plans, I think that the business plans that were reviewed by the MAP management team with Ashland and Marathon at the last business plan review we think are very solid plans that will maintain competitive refining and marketing business well into the future and we're very supportive of those. So we see no major, major changes. I think we have talked about opportunities to -- to capitalize, perhaps on some of the heavy oil potential out there and those are -- those are opportunities that we will evaluate going forward.

Okay.

Moving on. We will here from Doug Leggate with Smith Barney.

Hi, good afternoon, folks.

Hello, Doug.

The world play earlier this year was that the IRS was working with Ashland and Marathon in trying to put this deal together. I'm just wondering is it implicit to that. Can we -- are you not confident that the IRS is now going to give you the private letter ruling that was the precursor to getting the deal done? That's my first question, I have a follow-up.

We're very close to -- to wrapping that up. So we have a -- a pretty confident that we're there.

Thanks for that. The second thing is, I think Clarence, you made some comments in another venue about the coker investments you had planned on the refining business. Can you just give us -- clarify whether they are still under study or whether you've actually made some firm commitment now?

We have not made firm commitments, Doug. Those have been reviewed. I think publicly in our presentations, as conceptual projects that are under study that are under review, those are advancing and I will let Gary Hemminger comment specifically on where they are. But I would say that those were projects -- I referred earlier to the business plans reviewed by the MAP management team, earlier, those were part of that review. So these are not new starters. They are -- they are opportunities being evaluated by MAP. So, Garry, you just want to update quickly on that status?

Yes, sir. The -- and both of these projects that we're looking at are in conceptual design, and conceptual -- our definition of conceptual design is, before you get into front end engineering. This is to give us a , just a very strong look at the process design that we would have to go into in the plants that we have mentioned being Cattlesburg is first on our list and Detroit is about a year behind in the conceptual engineering. So by the end of the fourth quarter we expect to our conceptual engineering work done on Cattlesburg and by mid-year next year we would have the engineering do done on Detroit and then we would bring this to management and the Boards for further consideration.

Thank you for that final clarification. One final one if I may. Moving on to the upstream business. Russia once again seems to be going a little bit better than perhaps you might have alluded to in the last conference call. Could you maybe just give us an update as to your expectations on the production over there.

Yeah, Doug, our expectations remain pretty much the same. We're really performing as we had expected and outlined for you earlier in the year. Running around 23,500 barrels a day. If you recall our focus was on the East Kamennoye development. We're drilling on four pads. We'll drill around 70 wells there and so far everything's coming pretty much right on expectations. So we're happy with the progress there, and we'll, we'll expect pretty solid performance out of Russia this year and in line with the expectations that we have.

Thank you very much, indeed.

Mark Gillman from Benchmark has our next question.

Folks, good afternoon. Just three quick ones, if I could. First, can we quantify the incremental DD&A that you'll be recording on the revised MAP transaction? Secondly, Ken in his review, mentioned an acquisition of an additional 16% in Troika. Can you tell me reserves, production, associated with it, what you paid for it and whether it was in the first quarter? Third and finally could Phil Berman talk about the Stones well discussed in the release? Who the operator is, Marathon's interest and what kind of pay you have seen if you have logged it yet? Thanks.

I guess I will take the first one. It's premature to discuss what the purchase price allocation will be and how that will affect DD&A going forward.

Yeah, Mark, on Troika we acquired a 16.7% working interest. We exercised a preferential right to purchase here. We acquired it for 6. -- $7.6 million in cash. And then that assumed about a $6.5 million net abandonment liability. It's produced -- in the first quarter we produced around 3600 barrels of oil equivalent net as a result of that acquisition. And basically we paid for the acquisition cost and the abandonment cost by early April.

The reserves, Steve?

I don't know that reserves right off the top of my head on Troika. I'd have to get back to you on that Mark.

Mark, I would just add it's still producing over 3,000 barrels a day and as Steve said, it's already paid out the investment. So pretty good move. Paul?

Mark, Phil Berhman. In terms of the Stones well that's in the lower tertiary trend, located roughly between some of the recent drilling, and St. Malo and Dust Bump (ph) drilling previously on the Chinook and the Cascade discovery. The operator is British Petroleum, another partnership is Shell, and Marathon has a 15% non-operating interest. We have encounters hydrocarbons. . At this point in time we're integrates all the log data with the core and the fluid samples, but we are not just prepared at this point, until we do that integration, to talk about pay and other sorts of attributes of the discovery.

Okay, folks, thank you.

Moving on to Jeff Dietert or with Simmons & Company.

Good afternoon. On capital spending, could you update us, Gary on tier 2 spending for gasoline and diesel, where you stand and what you lack?

Okay tier 2 spending this year, our total is $911 million. We have our total -- just a second here, Garry Peiffer's looking up for me our tier 2 spend this year.

By the end of the year we'll have everything that Gary just mentioned, 900, 910 million, all but 65 million will have been spent. So I don't have the exact figure for this year right handy but all about 65 will be spent by the end of this year.

And are you expecting any loss in diesel production or lower diesel yield to meet the 2006 specs? And if so, how significant would that be?

We think it's very minimal. Our plans are -- we are investing in the hydrocheating to be able to run our plants full out and not to be doing any undercutting.

Thank you.

Up next is Paul Sankey with Deutsche Bank.

Hi, good afternoon, everyone. Could I just reclarify the valuation methodology for the higher price. Were you saying that we should consider it on a 2004 EBITDA basis and that's the basis for the higher number against, I guess, the pier group?

I think what we said is we really didn't want to spend a lot of time talking about valuation on this call and I just threw that out as one metric that you might consider. I'm sure you'll looking at others.

Okay, right. So, that's fine. I understand. Can I ask a more technical question about the crude market at the moment from the refining point of view and the contango that we're seeing. I just wondered from your point of view as major refiners, how dislocated you found the market at the moment, if you want for crude and what the implications of that were?

Paul, we are not having any problems whatsoever finding crude. There are plenty of opportunities to find crude, whether they it's foreign cargos or spot cargos, so we have no implications whatsoever in buying crude. The are we surprised that the market is contango? Yes, we are. But we are not having any implications acquiring crude.

Okay. That's great. And one quick final one from me would be, you've mentioned that you expect refining margins to stay wide this year but you've also mentioned that you're seeing a slow down in demand. How do those two things put out? How do we work that one through?

Well, I -- as I said, the gasoline demand was -- and our numbers look like to be 1.2% up in the first quarter, we expect that to soften for the balance of the year, to be up about .6% on gasoline, and probably around now in between 2 and 3% on distillate. While those numbers in the first quarter seem to be, I won't call them robust but they seem to be fairly strong. The forward curve and the global demand is what continues to be strong. Distillate demand, globally, where we see European cargos going to the far east and some other cargos out of - out of South America, going over to over to China , that is really what's propping up high sulfur distillate, and low sulfur distillate here for the balance of the year. When you look at the forward strip for, for distillate for the balance of the year, it's much, much stronger, three to four times stronger than, you know, our ten-year average is for that time period and gasoline continues to be above this cycle. So there's no doubt about it that the demand side of the equation is really what is going to drive, we believe, the refining business for the balance of the year but with the sweet/sour spreads being so wide and the Canadian production, which goes into the asphalt markets, having such a wide spread as well, that is helping prop up the crack spreads even further.

Thanks, guys. That's really helpful. Could I just jump back to the contango. Do you think that's related to the turn around season being unusual this year? Or any -- could you speculate on some reasons why we would be seeing what we're seeing?

No, I don't believe it's due to the turn around season. What it appears to us, Paul, is the people who are investing in the energy commodities, they really were wanting the back end of the market.

Yeah.

So therefore, the back end of the market was being bid up and -- and that's -- that's really, in our opinion costing more -- is causing it more than -- than the fundamentals. So I think it's more where the money is flowing into the market place than what we've seen in the past.

Interesting. Okay. Thanks very much, everyone.

Before moving on to our next question, I would like to remind our audience that is it is star one for question. And we'll now hear from Chris Moore from Merrill Lynch.

Thank you. On the incremental purchase price for the MAP acquisition there, can you talk about the decision to use mostly equity to finance that additional 700 million to debt, and going forward, to the extent that you generate free cash flow, can you talk about preference of debt reduction versus share repurchase?

Sure. The form of the consideration was negotiated as well as the -- as the value. One of the merits of having an equity component was that that value went directly in the hands of the Ashland shareholders, which was attractive to them. And the second question was?

With free cash flow, you know, is there a preference to, perhaps reduce the share base somewhat or is debt reduction still a priority?

You know, I think that if you look at sort of the balance of this year, you're going to see that we've got a pretty heavy capital program. You know we'll just have to wait and see if commodity prices and crack spreads stay where they are whether or not we're generating substantial free cash flow.

If I could follow up with a question on the upstream. Given that you have first quarter behind us, Petronius is at full production, [inaudible] expansion is ramped up. I'm, I'm curious as to why you haven't tightened up the guidance range for the full year '05?

Go ahead, Steve.

Just one quarter in the year so it's still early. So we -- we want to stick within the 325 to 350.

Okay. Thanks

We now hear from James Muni (ph) from Carlson capital.

My question was answered. Thank you.

Thank you. We'll now take up a follow-up from Neil McMahon.

HI, just a follow-up on exploration. Just to get what is currently happening in the Powder River Basin and how are those assets developing and what's the forecast for this year from them? Are they still pretty much living up to what you presented at the investor presentation, and lastly on exploration in Angola, is there not guilty new to discuss there from the quarter or the current quarter? Thanks.

Yeah, this is Steve Hinchman. I'll take the first part of that. We're currently running strong in the powder. We are running around eight rigs. Drilled 109 wells. We're targeting for 500 for this year, and we've got around 396 permits in hand to execute on that. We're focusing our development in the Sheraton (ph) area and area. And the Sheraton area's responding quite well. In fact it's responding better than most of the other coal beds that we've seen in the Powder River. We have -- the Sheraton's producing around $20 million a day, by itself, which is -- you know, we had no production a year ago in the Sheraton area. So along those lines, the development side of this is going very well, and Sheraton coals are performing quite well. We have had a slow down in some of the permitting, primarily a result of ground water monitoring requirements that have slowed us down a little this year. We still expect to exit at around 85 million a day this year. And our current rate's running around 70 million a day. So, again, in line with expectations, maybe a little slower start than we hoped to, primarily because of some permitting issues for ground water monitoring.

Neil, this is Phil Berman. Just to give you an update on Angola, in terms of block 31 northeast area, we're moving in conceptual design, as you know at the present time. We'll start to feed roughly mid-year or the second half of the year on Angola block 31 northeast. In addition we've had the discoveries, the serious discovery and the palace discovery and so we are looking at opportunities for potentially second developed are -- area, in block 31, southeast area. Additionally we are drilling on the Juneau well and there'll be additional drilling in block 31. In addition to that on block 32 we're currently just mobilizing a rig to start drilling in block 32 also and we'll be drilling several wells this year in block 32.

Great. So you still expect in block 31 to potentially book some reserves by the end of the year if the feed progresses

The feed will progress through 2005, and into 2006. We do not expect to book reserves in 2005.

Okay. Thanks.

Mark Gillman has a follow-up question.

How much more business interruption insurance are you claiming or might you receive on the Petronius incident?

You know, I, that came back online, mid -- early mid-March. There may be small amount that we have not yet booked, but not -- not very much.

Okay, Janet. Thank you.

Ladies and gentlemen, it does appear we have no further questions at this time, Mr. Matheny, I'd like to turn the call back over to you for any additional or closing comments.

Okay, we thank you very much, April, we thank everybody for listening in today and we look forward to talking with you again.

That will conclude today's conference. We do thank you for joining us and have a great day.