西方石油 (OXY) 2004 Q4 法說會逐字稿

Thank you for joining us this morning to discuss our fourth quarter earnings release.

Our speakers this morning are Dr. Ray Irani, our Chairman and Chief Executive Officer, and Steve Chazen, our Senior Executive Vice President and CFO.

Also joining us for the Q&A session will be John Morgan, who is President of our oil and gas Western Hemisphere operation.

With that, I would like to turn the program over to Dr. Irani.

Good morning, ladies and gentlemen.

As Steve Chazen will tell you in some detail shortly, our fourth quarter results helped push our net income for the year to a record high level of $2.5 billion.

Our results were driven by record oil and gas earnings and the strongest performance of our chemical business in the last 7 years.

Our average oil and gas production for the year increased to 566,000 barrels of oil equivalent per day, up 3.5 percent from 2003.

Over the last 5 years our production has increased by 23 percent for an average annual growth rate of 4.6 percent in volume.

Our success in increasing production has allowed us to reap the benefits of last year's strong energy price environment which saw oil prices rise to an all-time high.

As we look ahead in 2005, we have a number of projects underway which we believe will allow us to achieve a year-end 2005 exit rate for oil and gas production in the range 600,000 barrels of oil equivalent per day.

The average production rate for the year 2005 will depend on the timing and impact of various events, including U.S. asset acquisitions currently under evaluation, our potential return to Libya, the results of our development program, and the price of oil.

As we jump ahead to 2006, we see the Belson (ph) project moving forward on schedule with first gas expected late that year.

We expect to have long-term contracts in place for the 2 billion cubic feet per day to be consummated this year.

And we're optimistic about expanding that volume in the future.

In the chemicals business continuing improvement in margins for our core chlorine-caustic soda and vinyl chloride monomer businesses, along with higher volumes, contributed to 2004 being the strongest year since 1997.

We expect 2005 and 6 to be excellent years for our chemicals business.

Barring a downturn in the general economy, we believe this business has the potential to produce free cash flow in both 2005 and 2006 in excess of the almost 500 million that was generated in 2004.

Lastly, our balance sheet is the strongest it has been in the modern history of the Company.

Our debt-to-capitalization ratio at the end of the year was 27 percent, 10 percent lower than at the end of 2003.

Stockholders equity is at a record high of $10.5 billion.

We ended the year with $1.4 billion in cash on hand.

And we expect to continue generating a significant amount of free cash flow 2005 to support our growth initiatives.

Overall, we believe 2005 has the potential to be another outstanding year.

I will now turn the call over to Steve Chazen who will discuss the details of OXY's record performance.

Net income for the quarter was 665 million, or $1.67 per share, compared to 382 million or 99 cents a share in the fourth quarter of last year.

Earlier this month we issued a press release estimating several items that would affect the comparability of fourth quarter earnings with prior quarters.

The actual after-tax charges totaled 69 million or 17 cents a share.

Without these items our fourth quarter earnings would have been $734 million $1.84 a share.

I won't repeat the list of items we noted in the press release, but will answer any questions you have at the end of this presentation.

On a segment basis oil and gas fourth quarter earnings were 977 million, compared to 640 million in the fourth quarter of 2003.

The following factors counted for the variation in oil and gas earnings between these quarters.

Higher worldwide oil and gas realizations added 496 million of earnings over the comparable period last year.

The average price of West Texas intermediate crude for the fourth quarter was 48.28 per barrel compared with OXY's net realized price of 39.11.

The average fourth quarter price per WTI was 17.10 per barrel higher in 2004 than the fourth quarter of 2003.

All Occidental's average realized oil price in the fourth quarter of 2004 was $11.71 per barrel higher than in the comparable period in 2003.

The change in the differential between the average price of WTI and Occidental's realized price is primarily due to significant increase in the volume of sour crude oil in global markets.

Approximately 70 percent of Occidental's crude will be classified as sour.

Exploration expense of $88 billion in the quarter was 43 million more than the quarter of 2003, which was in line with our guidance.

Oil and gas segment earnings for the year were a record of $3.5 billion compared to 2.7 billion in 2003.

The improvement was mainly the result of higher combined oil and gas prices.

Oil and gas production for the year averaged 566,000 barrels of oil equivalent per day, which is 3.5 percent higher than 2003.

We lost an average of approximately 21,000 BOE a day production for a period of 46 days due to the down time in Horn Mountain caused by hurricane Ivan.

This reduced our annual worldwide production by an average of 2,600 barrels of oil equivalent per day.

In the fourth quarter we lost an average of 6,000 barrels of oil per day.

Oil and gas operating costs were approximately the same for the year, as we told you last time at 9 months, about $1.50 a barrel.

Approximately 30 percent of the increase was a result of higher energy prices pushing up utility, gas plant, ad valorem taxes and CO2 costs.

Higher DD&A rate represented about 28 percent of the increase.

The remaining cost changes were a result of increased workover, maintenance and other costs.

Chemical segment earnings for the fourth quarter of 2004 were $130 million compared to $72 million the fourth quarter of 2003.

The primary factors accounted for the improvement in our fourth quarter 2004 chemical earnings compared with the 2003 fourth quarter were stronger prices resulting in higher margins in our core chlor-alkali businesses, particularly for caustic soda.

Typical seasonal slowdown in this business in the fourth quarter did not occur until December.

Seasonal factors typically result in demand weakness in the fourth and first quarters.

For the entire year core earnings at 412 million for the chemicals segment were $192 million higher than the 2003 level of 220 million.

The year 2004 consolidated net income of $2.5 billion was 63 percent higher than the 1.5 billion for 2003.

On a per-share basis, we earned $6.30 in 2004 compared to 3.98 per share in 2003.

Our core earnings of $2.5 billion in 2004 were 52 percent higher than our 2003 core earnings of 1.6 billion.

Cash flow from operations for the year was approximately $3.9 billion.

This figure was lowered by the 360 million in reduction of debt-like obligations during the second quarter by discontinuing the sale of interest in our accounts receivables.

Excluding this item, our total cash flow from operations in 2004 was 4.2 billion compared with approximately 3.1 billion in 2003.

Interest expense was $53 million in the fourth quarter of 2004 compared to $63 million in last year.

Annual interest expense was $240 million, including debt repayment charges of 17 million.

By comparison our 2003 base interest expense, excluding debt repayment fees, was 272 million.

Turning to the year-end balance sheet, we increased shareholders equities to 10.5 billion, or 2.5 billion higher than the end of last year.

At the same time we reduced total debt to 3.9 billion from 4.6 billion at the end of 2003.

Additionally we reduced other debt items by 565 million, including the $360 million of receivables.

At the end of 2004 our debt-to-total capitalization was down to 27 percent compared with 37 percent at the end of 2003.

As Ray said earlier, we ended the year with approximately $1.4 billion in cash.

Capital spending for the quarter was $573 million and 1.8 billion for the year.

Oil and gas accounted for 89 percent of the annual total.

We expect 2005 capital expenditures to increase to approximately 2.1 billion in 2005, including expenditures for the Dolphin project.

Capital expenditures for U.S. oil and gas development will increase about 10 percent to about $650 million.

In the Middle East our capital expenditures, excluding Dolphin, are expected to decline by about 11 percent 550 million.

Of that 550 million approximately 400 million will be invested in Qatar, mainly for the completion of the redevelopment program in the North Dome fields.

Last year we invested about $450 million in Qatar.

We expect our net investment in Dolphin to increase from 153 million in 2004 to approximately $540 million this year.

With the completion of our major development project in Ecuador our capital expenditures in Latin America are expected to decline from $180 million in 2004 to about $80 million this year.

We expect exploration capital expenditures for 2005 to increase by about $20 million to $120 million.

This is in addition to approximately $100 million of seismic G&G and other costs that we will expense as it is incurred.

This is in line with 2004.

Our 2005 capital expenditures for our chemical business are expected to remain at about $150 million.

As we look ahead to the current quarter, in 2005 we intend to change the way we report our segment results.

Two operating segments will be shown before the effect of U.S. and foreign income taxes.

All income taxes will be shown under the category of corporate other expense.

We have been providing a supplemental schedule in 2004 that show the effects of this change, but we will be changing our segment reporting in 2005.

Prior results will be shown on a comparable basis.

Our combined worldwide tax rate in the first quarter should be in the range of 40 to 42 percent.

Oil prices remain in the $40 per barrel range.

We expect first quarter oil and gas production to be somewhat higher than the fourth quarter.

As we discussed before, high oil prices do impact the volume of our production sharing contracts in Oman, Qatar, Yemen and Long Beach.

In this product price range for this quarter each dollar change in the price of oil per barrel changes production by about 1,000 barrels a day.

Our 2004 fourth quarter DD&A expense totaled $333 million, of which 267 million was for oil and gas.

During the current quarter we expect DD&A expense for oil and gas to increase by $35 million, and chemicals to be about the same.

We expect exploration expenses for the quarter to be about $50 million.

Our current estimate is that the chemicals segment will earn about $150 million compared to $130 million in the fourth quarter of 2004.

This outlook is based on current conditions with high energy prices and continuing strengthening of caustic realizations. 2004 saw the CMAI contract average price for diaphram great (ph) caustic soda rise from $115 a ton in the first quarter to approximately $300 per ton in the fourth quarter.

The first quarter of 2005 the estimated CMIA average price is $310 per ton.

Our current annual production of caustic soda is just over 3 million tons.

These results should remain about the same as in the first quarter throughout the year if business conditions remain unchanged and energy prices don't spike.

We expect interest expense to be about $51 million the first quarter, and about 204 million for the year.

Our equity earnings from our 41 million shares of Lyondell recorded in corporate other are primary.

Lyondell has not yet reported its results and no one should rely on these numbers to be -- as to being precise.

The $1.00 per barrel change in oil prices impacts oil and gas quarterly earnings by about $29 million before the impact of income tax.

The WTI price in the fourth quarter was $48.28 per barrel.

Over the last year there has been a change in differential between WTI and the crude produced under our production sharing agreement.

For example, and the case of one of our production sharing contracts, differential historically had been around $4.00 a barrel.

In the fourth quarter our realized price fell by $1.30 per barrel compared to the third quarter, while the WTI price increased by $4.41.

This change in the historical pattern differentials makes forecasting realized prices difficult.

A swing of 25 cents per million BTU in gas prices and a $10 million impact in the quarterly earnings before income taxes.

The NYNEX gas price for the fourth quarter was 5.79 per thousand cubic feet.

Our realized price for domestic gas averaged 5.65 per thousand cubic feet.

We expect our realized price in the first quarter to be about $5.70 per thousand cubic feet.

We are continuing to focus on generating top quartile returns on equity and capital employed, and we're meeting those objectives.

The year 2004 our return on equity exceeded 27 percent.

The three-year average in 2002 through 2004 was about 20 percent.

In the same three-year period our equity grew by 66 percent from 6.3 billion to 10.5 billion.

Our return on capital employed for 2004 was nearly 20 percent, with the three-year average being about 15 percent.

Copies of the press release announcing our fourth quarter earnings and the Investor Relations supplemental schedules are available on our website, www.oxy.com or through the SEC's EDGAR system.

We will now -- we're now ready to take your questions.

(OPERATOR INSTRUCTIONS).

Bruce Lanni with A.G. Edwards.

Great quarter.

Just a couple of questions, Steve and Ray, if you could give us a little more color or update on what is going on with Libya, both the re-entry into your old contract areas, as well as the exploration round?

And also if you have anything on Ecuador that differs from last quarter that you can report on?

First, let's address Libya.

We have had discussions with the Libyans going on.

As a matter of fact, our top negotiating team is currently in Libya, and will be having further discussions this week.

As my remarks earlier indicated, we believe we will be back in Libya in 2005.

Back to where we were before -- you know, a long time ago, and looking at some other projects for possible development.

With regards to the delay in the exploration round, a lot of interest came into that round and the Libyans decided to delay their awarding of those contracts a few weeks.

So again I expect the exploration round decisions to take place in early 2005.

With regards to Ecuador, John, would you like to comment?

Yes, of course.

Thank you Dr. Irani.

In Ecuador discussions are continuing with the government, and we continue to be hopeful that we will work out a solution there that is satisfactory for all of us.

But at the moment we continue to operate as we did in the past, no problems with our operations or anything else.

Okay, great.

Just a little further clarification if you could on the Libya situation.

When you say 2005 do you expect to be in the first half or second half type event?

As you noticed in my remarks, I didn't want to get pinned down to which week or month.

Negotiations are going on a positive way.

I personally saw some officials of Libya 2 weeks ago, and they were encouraging in their remarks.

I think it is a matter of when, not if.

So that is where we are.

Fred Leuffer of Bear Stearns.

Just to follow up on Libya.

Dr. Irani, you mentioned that the exit rate on production this year should be on the order of about 600,000 barrels of oil equivalent.

Are you including any production from Libya in that estimate, and if so how much?

I think we said all we want to say.

The exit rate we expect to be 600,000 barrels a day.

And as you noticed, Fred, our previous estimates we met.

So we expect to be back in Libya, but frankly whether we're back in Libya or not I expect to meet the 600,000 exit rate.

Any thoughts on share repurchases and share repurchases versus dividend increases, what sort of preference you may have?

As we have said in our strategy many times earlier, our preference is, one, to increase dividends, two, to invest in our own business.

And we do have a number of projects going on which I mentioned earlier.

Negotiations are under way for caustic (ph) acquisitions, returns to Libya, other development projects in our core areas.

And we think those will take the priority over share repurchase, at least during 2005.

Paul Ting of UBS.

I hate to beat the Libya dead horse one more time, but let me give it a try anyway.

Your $2.1 billion of capital expenditure, does that include Libya?

And also can you delineate the amount dedicated for acquisitions?

It is no Libya and no acquisition.

Okay.

Basically what that is is this year's program, down a little bit plus a big increase in Dolphin.

So basically we're down a little for other projects.

Dolphin is up materially, and that is where you get the 2.1 from.

I think to continue on Libya, so that we don't -- I repeat, we believe OXY is in the best position of any U.S. company in the oil business to get back into Libya and grow the business.

Now, that potential -- what is going to happen precisely I can't tell you.

It takes two to negotiate, but we think we're in a very solid position.

Our discussions continue, always on a positive note.

But it is a give and take, and we're patient.

And we can still assume about 90 percent of that 2.1 is dedicated to up stream?

Yes.

All but 150 million.

Secondarily you were kindly enough to give us some sensitivity on the PSC (ph) effect.

I am just wondering if you can give us the exact impact on your production due to PSC in the fourth quarter?

And if you expect any kind of a reserve impact due to PSC?

If so, how much, can you quantify that?

Between the third and fourth there is almost no impact, because you use realized price in the price, not the WTI.

And the realized price was pretty flat quarter over quarter.

Steve, I'm thinking about year-over-year.

Year-over-year it is say 1,000 barrels a day times about $10.

So about 10,000 barrels a day for the fourth quarter, year-over-year.

Okay.

But the answer to your reserve question is no.

Subash Chandra with Morgan Keegan.

This question is probably for John.

Some exploration updates, if you can comment on some of the work you have done there, and I believe in the Peance (ph) Basin for some basin centers sort of gas.

And also what the update is for Peru?

In the Peance we're continuing to do some drilling on an appraisal of our fee position, and we are encouraged, but we are probably not prepared to say any more at this time about that.

In Ecuador we have completed 6 wells, and we're still evaluating a 7th. 5 of the 6 resulted in discovery of commercial hydrocarbons, and we will just await the development in due course of that.

And the Peru wildcat?

The first well in Peru we have deemed a dry hole, and we will are moving over to drill a a second structure.

The exploration charge in the fourth quarter in the U.S., it was I guess within guidance, but any particular project responsible for the spike?

Not really.

It was a bunch of different lease reviews and impairment as we went through the fourth quarter, looking at what we had accomplished and what the prospects were on some things.

So there was no single item that stood out.

It was just a variety of things all across the country we were looking at.

And Horn Mountain, where does production stand there, and is what kind of the outlook?

Horn Mountain went back online on the 30th of October, 2004.

It was back up to pre-shutdown rates the first week of November, and is currently running approximately 60,000 barrels of oil per day gross, and we're one-third of that.

And gases in line, again, with the 12 or so -- our share out of that.

So we are pretty optimistic about how the reservoir has come back online.

We do expect some decline over the year, but we will see how that turns out, because this reservoir has been good to us so far.

And the LNG terminal, any update there?

We are getting our permit from the FERC, and we expect to do that within the next -- get our permit in the next 6 months.

And we will announce our construction plans after that.

And one final one, and I will hop here.

What was the working capital position in the fourth quarter?

The end of the year?

Yes.

The Company had current assets of 4.4 billion, and current liabilities of 2.9 billion.

Robert Morris of Banc of America.

I just wanted to ask a little bit about funding development cost for 2004.

I know the SEC has imposed some restrictions on exactly what you can say.

And I know you mentioned you would be in the top quartile in return on investment capital, and no reserve changes just on the price (ph) PSCs year-over-year.

But what can you comment on with regard to funding development cost for '04?

How is that looking to come out?

I expect we will still be in the top quartile.

Obviously, there has been some inflation.

But as you correctly described, these SEC pronouncements make it almost impossible to give you a clean answer, but they are reasonably good, but a little higher than they have been historically.

Reasonably higher just because of service cost inflation?

Inflation and we're drilling more rate wells.

Obviously we want to take advantage of what we would view as extraordinary prices.

So when you drill rate wells you accelerate your production, but you don't find reserves -- you don't find as much reserves.

Right, so that is an influence also.

That is probably more than just oil field service inflation.

Doug Leggate of Smith Barney.

If I could come back to the cash management issue for a second.

I know you talked about your strategy regarding dividends and so on.

What was the cash position at the end of the year?

I'm not sure you gave us that number?

1.4 billion.

1.4.

And if you take that together do you have any kind of a ceiling or any kind of a level at which your -- all your optionality is included and you are still starting to see very strong cash generation?

What do you do then in terms of how you manage the balance sheet?

Are special dividends an option, for example?

No, as we said earlier, the end of the year 2004 we had $1.4 billion in cash.

We expect in 2005 substantial additional free cash flow.

But we believe that the portfolio of investments that we have on hand will take advantage of all that cash.

So stay tuned.

Okay.

I guess just one follow on then in a similar kind of vein.

The equity holdings, and I guess while the funding markets are still fairly robust, maybe (indiscernible) question, but what about Lyondell?

Can you give us your latest thoughts on where you stand?

I think they really haven't changed since last quarter.

We have pledged that we're not going to ride the cycle down.

And so -- but I think it looks to us like the ethylene cycle continues to improve.

And while we're not going to look for the peak, it is reasonable to expect that sometime in the next -- not far distance we would probably look at a way to monetized the Lyondell shares.

That's not specifically operating cash flow without the -- would you think any differently about the proceeds from that perhaps?

Perhaps.

Dennis Rowland of JP Morgan.

I have a question on the Oman gas production.

It looks it like dropped pretty significantly in the fourth quarter.

I'm assuming that is faster pad (ph) on the cost recovery?

Just wondering what we should expect for the production volumes there looking out to '05?

As you know, we did bring on additional production in Oman.

And it started at a lower level, and so it came up closer to the actual production that is needed.

And we expect that this year, John, to what?

There are two things going on here.

We expect the gross gas that we're selling there to be in the range of 120 to 150 million a day.

But as you did mention, we will be approaching pay out on some of the investment, and it is little uncertain to predict exactly how that is going to be.

But I think gas in Oman will continue to be reasonably robust through '05, and that is to us.

And than just a clarification question on the '06 exit rate.

Is that just from current --?

'05 exit rate.

I'm sorry. '05 exit rate.

Is that just from current developments or was there an assumption in there for acquisitions?

It is again -- it is what we believe we can achieve, including all the comments I mentioned.

You view it as a risk adjusted number.

Irene Haas with Sanders Morris Harris.

In terms of growth rates going forward you mentioned that third quarter -- fourth quarter you have about 3.5 percent for up stream, and the last 5 years you averaged about 4.6.

Looking out the next 5 years do you think that sort of growth rates is sustainable for a Company your size?

Yes.

(OPERATOR INSTRUCTIONS).

Phil Pace of Credit Suisse First Boston.

Nice quarter guys.

I guess most of my questions have been answered, but this last reserve -- environmental reserve, where are the total reserves now, and how much was actually paid out versus reserves in 2004?

Actually, I think our reserve year-over-year is roughly flat.

So that would imply that about the same amount as a reserve was paid out.

And the California gas production seems to be holding in pretty well.

I guess that is the third year we have said that.

Yes, but more than 3, I think.

Are they doing different things or more of the same?

And what is the outlook for that component this year?

Well, we did a de-bottlenecking the came online in the fourth quarter at Elk Hills which was very helpful to us.

It is a little early to tell whether that is going to have an all year effect, but we have been pleasantly surprised with that asset as we continue to work it.

And I think you just need to kind of stay tuned with us there.

Subash Chandra with Morgan Keegan.

A follow up on some of the M&A stuff you're looking into.

Any of that timing imminent or maybe some further color on when you expect some of these deals to consummate?

I think eminent is a hard word to describe, but certainly in the first half of year.

Some of the Permian stuff I assume is what you're also referring to?

Can you be specific about what may be the outlook there?

I mean in the United States we only buy really in two places, California and the Permian.

So you won't see us going to the Rockies or something.

So it is pretty narrow -- a pretty narrow group.

And in the Permian are there bids due -- are there bids being reviewed right now, some sort of timing?

I would just as soon not comment on where we are in the process.

It is in the risk-adjusted number that Ray provided.

John Harlen (ph) of Merrill Lynch.

My question was answered.

Thank you.

Fidel Hite (ph) of Oppenheimer.

My question has been answered.

There appeared to be no further questions at this time.

Very good.

Thank you very much for joining us.

If you have any other questions, please give us a call.

Dr. Irani?

Thank you.

Thank you very much.

Thank you.

This does conclude this afternoon's teleconference.

You may disconnect your lines and enjoy your day.