西方石油 (OXY) 2005 Q4 法說會逐字稿

Good morning ladies and gentlemen.

At this time, I would like to welcome everyone to the Occidental Petroleum Corporation fourth quarter earnings conference call. [OPERATORS INSTRUCTIONS] It is now my pleasure to turn the call over to your host, Mr. Ken Huffman.

Sir, you may begin your conference.

Good morning everyone, and thank you for joining us.

We will have formal comments this morning from our Chairman, President and Chief Executive Officer Dr. Ray Irani, and from Steve Chazen, Senior Executive Vice President and CFO.

Following their comments we will open the floor to your questions.

Dr. Irani?

Thank you.

Good morning, and thank you for joining us.

As Mr. Chazen will tell you in some detail shortly, our fourth quarter results helped push our net income for the year to the record high level of nearly $5.3 billion, which was more than double our 2004 results.

Our core income for the year was just under $4 billion, or nearly $1.5 billion higher than 2004.

Our financial performance, which was driven largely by record oil and gas earnings speaks above all to the effectiveness of our long-term strategy that is focused on long-lived oil and gas assets, a disciplined investment philosophy, and maintaining a strong balance sheet.

High commodity prices have helped propel earnings throughout the oil and gas industry, but we have been most successful within our peers of capturing the value on an equivalent barrel basis of high oil prices and delivering it to the bottom line.

In addition, our chemicals business achieved its highest earnings since 1996 and produced approximately $855 million of free cash flow during the past year.

Our oil and gas production for the fourth quarter averaged a quarterly record high of 500,089 barrels of oil per day, up 4.8% from the third quarter and 5.6% from the fourth quarter of 2004.

We exited the year with production averaging 596,000 equivalent barrels per day, which was in line with our guidance earlier in the year.

Our success in increasing production has allowed us to reap the benefits of a strong energy environment which saw oil prices rise to an all time high.

Notwithstanding our success in 2005 and the preceding five years, I truly believe the best is yet to come.

We expect to keep our production base growing at a healthy rate.

We have scheduled a meeting with the financial community for February 23 in New York, where we will discuss our production outlook for 2006 through 2010.

We took a number of important steps last year to further strengthen the foundation of our core operations and keep growing it.

We enhanced our industry-leading position in the Permian Basin through a series of asset acquisitions.

We were awarded a contract to develop the giant Mukhaizna field in Oman in the Middle East.

We returned to Libya to operate our historic producing assets and as a result of our success and Libya's January 2005 bid round, we are now the largest holder of exploration acreage in Libya.

We continue to also strengthen our balance sheet, which gives us the necessary financial leverage to compete successfully for large international projects.

Last week we completed the acquisition of Vintage Petroleum, which will strengthen operations in our core areas of California, Latin America, and the Middle East.

We also strengthened our core chemical business with the acquisition we acquired from Vulcan.

Because of the measures we took to improve our balance sheet, along with the Company's favorable, operational, and financial standing, the four major rating agencies raised our credit rating to the Single A level.

In addition, we increased our annual dividend pay out by 16% to $1.44 per share.

We ended the year with $2.4 billion cash on hand and we expect to continue generating a significant amount of free cash flow in 2006 to support our growth initiatives.

With the strides we made last year together with continuing strong energy prices and a good economy, we believe 2006 has the potential to be another outstanding year for both our oil and gas and chemical businesses.

I will now turn the call over to Steve Chazen.

Thank you, Ray.

Net income for the quarter was 1 billion 152 million, or $2.84 per share, compared to 742 million, or $1.86 per share in the fourth quarter of last year.

Improvement of our performance was driven by higher energy prices, higher oil and gas volumes, and improved chemical earnings.

Fourth quarter results also included a $33 million environmental charge, our equity earnings for the quarter from our 30.3 million shares of Lyondell that recorded in corporate other were 17 million; this amount is about $10 million below the so called street estimates of Lyondell's earnings.

In addition we recorded a $19 million mark-to-market loss on the Lyondell warrants that we own.

On a segment basis, oil and gas fourth quarter earnings were 1 billion 859 million, compared to 1 billion 179 million for the fourth quarter of 2004, an increase of about 58%.

The following factors accounted for the variation in oil and gas earnings between these quarters -- higher worldwide oil and gas price realizations added $759 million compared to last year.

The average price of West Texas intermediate for the quarter was $60.02, compared to Occidental's net realized price of $50.50.

The average fourth quarter price for WTI was 11.74 per barrel higher in 2005, than the fourth quarter of 2004, while Occidental's average realized price in the fourth quarter was $11.39 higher than the comparable period last year.

Exploration expense of $124 million in the quarter was $36 million more than the fourth quarter of 2004.

This amount was higher than our guidance last quarter, due to a higher dry hole and impairment cost.

Insurance charges related to the hurricanes in the quarter totaled $9 million.

Oil and gas segment earnings for the year were a record 6 billion 293 million, compared to 4.29 billion last year.

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

Oil and gas production for the quarter averaged 589,000 barrels of oil equivalent per day, which is 5.6% higher than the fourth quarter last year.

Improvement was a result of a series of Permian acquisitions completed last year and resumption of producing operations in Libya.

Oil and gas operating costs were approximately $8.71 per barrel, which compares to $6.95 last year.

At least 62% of the increase was a result of higher energy prices pushing up utility, gas plant, ad valorem taxes and Co2 costs, as well as the impact of higher energy prices on our production sharing contract.

The remaining cost changes were a result of work over maintenance and other costs.

Chemical segment earnings for the fourth quarter were $165 million compared to 125 million in the fourth quarter last year.

The primary factors accounting for the improvement in our fourth quarter 2005 earnings compared to last year's fourth quarter, were stronger prices resulting in higher margins for our core chlor-alkali business, particularly for caustic soda and PVC.

This is better than our prior outlook for the quarter due to lower than expected feedstock costs, primarily ethylene, and lower than expected natural gas costs.

PVC volumes were lower but the volumes for chlorine, caustic soda and ethylene dichloride were higher.

The chemical business also incurred a $6 million charge for insurance related to the hurricanes.

For the entire year, core earnings of 777 million for the chemical segment were 88% higher than 2004 level of 414 million.

Improvement was due to higher prices for chlorine, caustic soda and PVC , which were partially offset by higher energy and feedstock costs.

The year 2005, our consolidated net income of approximately $5.3 billion was more than double the 2.6 billion for last year.

On a per share basis we earned $13.09 in 2005, compared to $6.49 in 2004.

Our core earnings of nearly $4 billion in 2005 were 59% higher than 2005 core earnings of 2.5 billion.

Cash flow from operations for the year was approximately $5.3 billion, compared with $3.9 billion in 2004.

Plus the cash from operations at this year's WTI price, $56.56 per barrel, was $440 million per month.

Interest expense was $23 million during the fourth quarter of 2005 compared to $53 million last year.

Our annual interest expense including the $42 million debt repayment charges is $201 million.

By comparison, our 2004 interest expense included debt repayment fees of 17 million was $240 million.

Our equity earnings from Lyondell shares for the year were $98 million compared to 14 million in 2004.

Turning to our year-end balance sheet we increased shareholders equity to $15 billion, or $4.5 billion higher than year-end 2004.

At the same time we reduced total debt to $3 billion from $3.9 billion at the end of last year.

As Ray said earlier, we ended the year with approximately $2.4 billion in cash on hand.

Capital spending for the quarter was 762 million, and $2.4 billion for the year.

Oil and gas accounted for 92% of the total.

As we look ahead to the current quarter 2006, we expect our combined worldwide tax rate for the first quarter to increase to about 44%.

The increase is due large to the higher foreign income taxes primarily resulting from the effects of full-year production from Libya.

We exited 2005 with about 596,000 barrels per day;

Vintage exited 2005 at more than 75,000 barrels per day.

About 19,000 barrels per day in Vintage are being held for sale will not show as production revenues or costs this quarter.

Cash generated from this production and the assets sales will be used to reduce the purchase price the remaining Vintage assets.

Therefore the net reported vintage production for two-thirds of the first quarter should be about 35,000 barrels per day.

Adding the Vintage production to our December exit rate and adjusting downward for the PSC effects of higher prices, we expect first quarter production to be in the range of 620 to 630,000 equivalent barrels a day.

We will have a lot more to say about our annual product rates at our February 23 meeting.

Our fourth quarter DD&A expense totaled $409 million including approximately 340 million for oil and gas.

During the current quarter we expect the DD&A for oil and gas to be approximately $400 million, which is an increase of $60 million of the fourth quarter due to higher volumes and increase in the rate.

The DD&A amount for the chemical business should be about the same as the fourth quarter.

We expect exploration expense for the quarter to be about $70 million.

We expect chemical segments earning to be about $150 million this quarter, compared to $165 million in the fourth quarter, this knowledge is based on current conditions.

We expect interest expense to be about $30 million in the first quarter.

A $1.00 per barrel changed oil prices impacts oil and gas quarterly earning by about $40 million before the impact of income tax.

WTI price in the fourth quarter was $60.02 per barrel.

The swing of $0.25 per million BTUs in gas prices has a $12 million impact on quarterly earnings before income taxes.

NYMEX gas prices for the fourth quarter was $11.66 per thousand.

Our realized fourth quarter domestic gas price averaged $9.81 per thousand.

We expect our realized price the first quarter to be approximately $8.30 per thousand cubic feet.

We are continuing to focus on generating tough quartile returns on equity and capital deployed and we are meeting those objectives.

In 2005 our return on equity, was 41%, the three-year average from 2003 through five was 31%.

During that same three-year period our equity grew by 138% from 6.3 billion to 15 billion.

Return on capital employed for 2005 was 33% for the three-year average of 23%.

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

We are now ready to take your questions.

Thank you. [OPERATOR INSTRUCTIONS] Our first question is coming from Nicole Decker with Bear Stearns.

Good morning.

I think I could ask you several questions.

I think I'll just start with what reserve replacement might look like for 2005.

Do you have any preliminary estimates there, please?

As we have said earlier in the year, we expect replacement to be over 100% and we will be reporting the exact amount at the February 23 meeting.

Thank you Dr. Irani.

Does that include any acquisitions that you completed in 2005?

We really don't want to get into any details about what it is but we will provide more than enough detail at the end of the month.

Sure, fair enough.

Thank you.

On -- just secondly and finally could you just tell us what the effect of PSE was on [2000] fourth quarter production, please?

For the fourth quarter I believe it was approximately 10,000 barrels per day.

Great.

Thank you.

Next question is coming from Doug Leggate with Citigroup.

A couple of thing from me.

First of all, any guidance of operating costs ending the year, U.S. and international, and I have a follow up.

I think the average for the year is probably a reasonable way to look at it.

As you know, the variance between quarters is largely caused by noise from quarter to quarter.

Whenever you have to do a work over, you have to change your operating costs.

We are probably close to the number we gave you for the year.

Okay, I will have another look at those.

The only other one I had was looking at your exploration charge in the quarter, I'm noting that at least according to the news wires your activities in Peru turn out to be more successful than you were expecting.

Can you talk about first of all why the exploration charge jumped up so much from Q3?

And secondly what your plans might be for Peru, are you planning to stay there or are you going to sell it and move on?

This is Casey Olson.

With respect to the activities in Peru, it's been reported that there's been a discovery of light sweet crude oil.

That of course would be a positive thing, as much of the oil in Peru is heavy and this discovery could prove to be a valuable bundling source in the overall scheme of things.

I think at this stage, the only thing we can really say is that in conjunction with our partners we are currently evaluating the results and the next steps and where we go from there.

From the perspective of your first question and the higher amounts in the exploration charges, that's a combination of some higher impairment charges than predicted potentially and also some additional dry hole costs.

It was not associated with any particular activity in any particular area?

Not really, no.

Thank you.

Our next question is coming from Steve Enger with Petrie Parkman.

Please go ahead.

Hi, guys.

I will take one more shot at that.

On the exploration expense, it was well up in the fourth quarter.

Can you give us any additional detail on the impairment and on the dry hole cost geographically, where they were?

Well, I don't think so.

I mean we really don't want to get into specific accounting items on a specific well or a specific impairment.

I mean there's no particular area or number that is a dramatic increase.

It's just a combination of things.

And we were also ramping up spending in Libya.

As we do seismic, we write it off as you know.

(multiple speakers) – is that some part of it?

Yes, some part of it's there.

There's some minor impairments in California and there's higher costs, higher around.

I don't think there is any trend here.

There is no real negative news to worry about.

There is no trend that's in these numbers.

Okay.

Can you give us an update on your view of the situation in Ecuador as it relates to your interests?

This is John Morgan.

We are continuing a dialogue with the government of Ecuador.

We have in their administrative process an answer that we are filing to the charges that have been made against us, and that will be filed by the deadline of February 8.

So it will be a thorough and responsive filing and we think that when they've had a chance to study it carefully, we are hopeful that it will come to a sensible resolution.

Any sense for the timeline there John?

Do you think you will have that wrapped up by mid year, anyway?

I've been wrong consistently on speculating about when things will be wrapped up in Ecuador.

I think it's really hard to tell.

We are just hopeful that we will get it done, and certainly if it was done by mid year I am sure we would all be very happy.

Fair enough.

Last one from me on the LNG terminal plants?

Can you give any update on your plans and how you see that market at this point relative to six months ago when you got approvals?

We continue to gain potential contract volumes and we expect to break ground probably in the third quarter.

Any additional detail on the potential contract volumes, Steve, who they're – where they're --.

Well, there was an announcement from Algeria that we had signed an MOU with them.

There's some others that we were fairly close to, but I think we will have most of the plant supplied by the time we are ready to break ground.

But I think it's moving along nicely.

Great.

Thanks.

Our next question is coming from [Katherine Lucas] with JP Morgan.

Good morning.

Good morning.

I was wondering if you had any outlook in terms of the timing and essential proceeds of the Vintage assets being held for sale.

We expect to close in the second quarter.

We have, as you can imagine, a huge amount of interest in the assets.

We really haven't given a number yet.

It's still probably a little premature but I think we will make some guesses toward the end of the month when we get some more indications in.

But clearly this is a good time to be selling properties.

And along with the Vintage assets do you have any updated guidance on a tax rate for Latin America given the redistribution of Latin American assets when you bring in Vintage's assets?

You want a tax rate for Latin America?

If you have it.

We have given a worldwide tax rate of I think we are talking about 44% for this year.

We don't normally break it down between countries.

I don't think there's any useful information.

Okay, thanks.

Our next question is coming from [Havel Multema] Raymond James.

A question about your price realizations.

In the U.S. you reported $52.93 realized in the fourth quarter which is actually down from Q3.

I was wondering if you can explain why realized prices were down.

Our differential has widened a little bit in the quarter.

A lot of our crude is West Texas sour.

There was some widening of our differentials and a small amount was hedged in the Exxon transaction.

Our next question is coming from Paul Sankey with Deutsche Bank.

Could you update from the (indiscernible) of your buy back that you announced at the time of the Vintage deal?

And any other comments you can make about it going forward would be helpful as well.

Thanks.

We were precluded from doing the buy back until Vintage closed by SEC rules.

And obviously you are not allowed to trade inside information since we had new earnings, so the buy back hasn't started yet.

But we will provide a lot more information about the buy back at the end of the month.

So you haven't bought any shares since the --

We haven't been allowed to yet.

I thought the deal had closed.

You can't do it while you are between or ahead of your earnings.

So does that mean it will kick in as of this report?

It will kick in when -- shortly.

Are you sticking with the 9 million share number that you talked about back then or where are we at with that?

We will talk about that at the end of the month, I think, and give you better guidance.

I guess you also will be talking about the way you will manage the balance sheet?

I was just wondering if you could update us on if you like a target level of debt that you are going to think about going forward?

We will talk about that in detail at the end of the month.

Okay, Steve.

I'll leave it there.

Our next question is coming from John Herrlin with Merrill Lynch.

You will probably talk about this at the end of the month too, Steve, but any sense on CapEx escalation for this year?

Yes, I think we will be up about 25% to about 3 billion is what I would guess at this point.

How much of that is cost inflation versus activity increase?

It's hard to tell exactly because the activity changes.

I think we are talking about a 10% increase from inflation.

But it varies a lot.

Some things, for example, the Dolphin project is pretty much fixed so there wouldn't be any there.

It's hard to sort of come up and say of the total, 200 million is inflation.

But I think our activity obviously would grow also in Argentina this year and the Mukhaizna project is ramping up and we are not yet turned down at Dolphin, so this would be a pretty peak year for capital.

With the Vintage asset sales would you swap properties or just outright sale or --?

It depends on what's the best deal.

If we can get just the swaps we would be of course happy to do that.

If somebody wants to pay us a whole load of money we will probably take that.

Last two for me.

Horn Mountain, where are you now on that one, volume wise?

Horn Mountain is back on line and running at about 15,000 barrels per day net to us in December.

We don't really have any additional work there.

We are hopeful that we'll have a discovery extension to think about tying into by 2007 but we are not prepared to talk about that as BP is the operator.

But they have drilled an off-block success it looks like.

Last one for me.

Argentina, have your thoughts changed at all and also did you look at the Pioneer package when that was available?

I think we continue to be optimistic about Argentina, maybe more so than we were before.

The production coming out of Vintage at the end of the year was above what we had hoped.

I think they are doing well and we continue to be enthused about it.

We did look at the Pioneer asset.

We are not so enthused about Argentina gas as we are oil.

Our next question is coming from Ben Dell from Sanford Bernstein.

I had two questions, really.

The one was on asset concentration.

That's been sort of a key theme of yours over the last four, five years, in terms of controlling costs and running your business.

Now with Libya and Argentina you spread that out a bit more.

Should we be looking at that to narrow down into a few key geographic areas over the next few years?

And the second question was on the LNG.

Could you give us an indication what have returns you are expecting on that project in terms of the regassification part of the project?

And if they're below your upstream, which I believe they must be, can you give us some background as to why you are investing capital in that sort of business?

We will start with the first question.

I think we will probably give you some more detail about some of our plans on -- long-term plans on narrowing the focus a little bit.

So the answer your question is, yes, we are thinking about it.

Second one is, we are more or less convinced obviously than you are, that -- you think the returns must be lousy, and when we look at them we think they look pretty good.

I think it's useful to remember that we are putting it next to the chemical plant and it's a significant amount of costs are basically, we will recycle the heat out of the chemical plant.

So our operating costs there will be significantly lower than other people.

That's really the attraction.

We can probably save a significant amount of money and that really boosts our return considerably.

So we don't think it's -- a standalone one in the middle of Mars somewhere might be a different deal but the one right next to the chemical plant, that's really what's driving it more than some long-term view about LNG.

Sure.

Are the returns comparable to the upstream?

If you looked at the --

It's comparable to the domestic upstream.

Okay.

All right.

Great.

Thank you.

Thanks.

At this time I would like to turn the floor back to you for any further or closing remarks.

Thank you very much for joining us.

We look forward to seeing you on the 23rd of February here in New York.

Dr. Irani?

Thank you so much.

Have a good day.

Thank you.

Good-bye.

Thank you.

This does conclude today's teleconference.

You may disconnect your lines at this time, and have a wonderful day.