西方石油 (OXY) 2006 Q1 法說會逐字稿

Good morning, ladies and gentlemen.

My name is Tiara and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the Occidental first quarter earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speaker's remarks, there will be a question and answer period. [OPERATOR INSTRUCTIONS] It is now my pleasure to turn the floor over to your host, Mr. Ken Huffman.

Sir, you may begin your conference.

Thank you very much, Tiara.

Good morning, everyone.

I would like to welcome you also to our conference call.

Before I turn the program over to Steve Chazen, our Senior Executive VP and CFO, I want to indicate that Dr. Irani, our Chairman, President, and CEO, and Casey Olson, who is President of our Oil and Gas Eastern Hemisphere, will not be joining us on the conference call this morning as they are traveling outside the country.

Steve will have formal comments this morning and John Morgan, who is President of our Oil and Gas Western Hemisphere, will be available for any questions that you may have.

Now I'd like to turn the program over to Steve.

Steve?

Thank you, Ken.

Net income for the quarter was $1.23 billion, or $2.90 a share, compared to $846 million or $2.11 share in the first quarter 2005.

First quarter core income of 1.22 billion was the third quarter in a row of new core income records.

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

First quarter oil and gas production increased to a record of 636,000 barrels of oil equivalent per day.

Occidental closed on the purchase of Vintage Petroleum on January 30th, which contributed to the production increase.

On a segment basis, oil and gas first quarter earnings were $2 billion, compared to $1.35 billion for the first quarter of 2005, an increase of 48%.

Following factors account of the changes of oil and gas earnings between these quarters.

Higher worldwide oil and gas price realizations added $700 million of earnings over the comparable period last year.

The average price of West Texas Intermediate crude for the first quarter was 63.48 per barrel, compare to Occidental's net realized price of 53.11.

The average first quarter price for WTI was 13.64 per barrel, higher in 2006 than in the first quarter of 2005, while Occidental's average realized oil price in the first quarter was $11.40 per barrel higher than the comparable period in 2005.

Oil and gas production for the quarter averaged 636,000 barrels of oil equivalent per day, which was 13% higher than the first quarter of 2005.

Proven was a result of Vintage acquisitions, a series of Permian acquisitions completed last year, the resumption of producing operations in Libya.

Our guidance for the first quarter was in the range of 620,000 to 630,000 BOE per day.

We exceeded this amount due to higher than expected Vintage and middle east production in the first quarter.

Exploration expense of $71 million in the quarter was in line with our previous guidance.

The first quarter 2006 expense was $24 million higher the first quarter of 2005, the increase coming in the middle east, north Africa.

Oil and gas operating costs were $10.22 a barrel, which compares to $8.71 for all of last year.

Approximately 60% of the increase was the result of higher energy prices pushing up utility, gas plant, and export taxes, CO2 costs, the impact of higher energy prices on our production sharing contract.

Argentina export taxes represent $0.26 of this increase.

Remaining cost changes were a result of work overruns, maintenance and other costs.

Chemical segment earnings for the first quarter of 2006 were $248 million compared to $214 million in the first quarter of 2005 .

The primary factors accounted for the improvement of our first quarter 2006 earnings compared to the 2005 first quarter were stronger prices and higher margins in our chlor-alkali businesses, particularly for caustic soda and PVC.

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

Cash flow from operations for the quarter was approximately $2 billion compared with 1.2 billion for the first quarter of 2005.

Interest expense was $29 million during the first quarter of 2006 compared to $61 million in the 2005 first quarter.

Last year's first quarter interest expense included debt repayment fees of $10 million.

Turning now to the first quarter 2006 balance sheet.

We increased shareholder's equity 17.9 billion, or 2.9 billion higher than the year end 2005 level.

Even with this increase, Oxy's annualized return on equity was 30%, an annualized return on capital employed of 25%.

Total debt increased 609 million to 3.628 billion during the first quarter as a result of Vintage acquisition.

We have reclassified 209 million of Vintage debt as current which will be redeemed on May 15th.

We ended the quarter with approximately $2 billion in cash in hand having begun the quarter at $2.4 billion.

During the first quarter, Occidental repurchased 2.4 million shares of its common stock at an average price of $91.79 per share. 2.3 million of these shares were purchased after the February 23rd investor's meeting.

We issued 28 million shares of Oxy stock for the purchase of Vintage.

The weighted average basic shares outstanding for the quarter were 424.2 million and the weighted average diluted shares outstanding were 430.5 million.

At March 31st, there were 432 million basic shares outstanding and the fully diluted share amount was approximately 438.2 million.

Capital spending for the quarter was $605 million.

Oil and gas accounted for 94% of the total.

As we look ahead to the current quarter, we expect our combined worldwide tax rate in the second quarter to remain about 44%.

We expect second quarter production to be approximately 650,000 barrels a day, including a full quarter of Vintage production.

About 19,000 barrels a day are being held for sale and will continue not to show up as production revenues or costs.

This net income after tax will still be reported as discontinued operations.

Cash generated from the asset sales will be used to reduce the purchase price of the remaining Vintage assets.

Oxy has seen significant interest in the Vintage assets held for sale.

We will announce the results of these sales once the deals are closed.

We expect gross proceeds of about $1.1 billion with approximately 72 million BOE of assets held for sale.

We expect exploration expense for the quarter to be about $90 million.

The increase from the first quarter is for seismic exploration drilling resulting from our middle east north Africa exploration programs.

We expect chemical segment earnings to be about $225 million, compared to $248 million in the first quarter of 2006.

This outlook is based on current conditions which provides for both planned and unplanned outages at the Houston plants.

We expect interest expense to be about $28 million in the second quarter.

A $1 per barrel change in oil prices impacts oil and gas quarterly earnings by about $40 million before the impact of income taxes.

The West Texas Intermediate price in the first quarter was 63.48 per barrel and our realized prize was 53.11.

The March WTI increased $1.04 per barrel compared to February.

However, Occidental's realized domestic price decreased by $0.98 per barrel.

This change is primarily the result of higher differentials from sour domestic crude in March.

However, these differentials have begun to improve in April.

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

Our realized first quarter domestic gas price averaged $8.36 per thousand cubic feet.

We expect our realized domestic price in the second quarter to be $5.83 per thousand cubic feet, which will reduce segment income by approximately $120 million.

Ray Irani is not planning to stand for re-election to the Liondell board of directors at their May 4th annual meeting.

As a result of this change, Occidental will discontinue accruing its share of Liondell's earnings or losses under equity method accounting.

Therefore, Occidental will recognize equity income through May 4th and thereafter will switch to the cost method to account for this investment.

Under the cost method, only dividends received after May 4th will be treated as income.

Therefore starting the third quarter, if Liondell earns and declares a dividend of $0.225 per share, Occidental will record quarterly dividend income of $6 million after tax on the 30.3 million shares we currently own.

Copies of the press release are available on our website and I think, Ken, we're ready to take questions.

[OPERATOR INSTRUCTIONS] We'll pause for just a moment to compile the Q&A roster.

Our first question is coming from Nicky Decker.

Hey, Steve and Ken.

How are you?

Good, how are you?

I'm doing well, thank you.

Second quarter production guidance is a little bit ahead of our expectations.

I wonder if you could just give a little color as to what is going well, maybe some volumes out of Argentina, for instance?

I think it's fairly easy to get to the 650.

If you take the 630 -- if you take the Vintage volumes, which are only two months, and increase them basically by 50% to go to three months, you pretty much get to the 650 number.

So it's pretty much Argentina volumes and we're doing a little better, generally, everywhere.

Really nothing went wrong in the first quarter, which is always interesting.

So, but I think we're doing -- we're a little ahead of ourselves in Argentina and a little ahead of ourselves probably in Yemen.

Okay.

And just a follow-up on the Vintage asset sales.

Did you give a timeframe for completion of those sales?

We didn't, but we would expect to complete it this quarter.

Okay, great.

Thank you very much.

Thank you.

Our next question is coming from Jennifer Rowland.

Good morning.

Good morning.

I was wondering, at your analyst meeting, you had indicated there were two to four significant new projects in the middle east and north Africa.

And I know that Casey Olson isn't on the line, but I was wondering if you could give us an update as to the status of those projects, maybe one of them was recently announced Block 54 in Oman.

No, it wasn't.

Okay.

Those are spread over a multi-year period since we're unable to predict timing very well.

So we don't really have any update when they'll come along.

It's very hard to predict timing.

We're still in the same situation, it's only been a month, two months.

Okay.

Thanks very much.

Thank you.

Our next question is coming from John Herrlin.

Yes.

Hi, Steve.

Hi.

With your chem operations, you had $100 million in operations improvement.

Could you give us the split between feedstock and energy costs?

Yes, I could, actually, if I could find it.

It'll take us a minute to find that one.

Okay.

Since you have time, then, how about the buybacks?

Should we expect you to be more aggressive with that since you're going to have more cash coming in the door?

Don't forget, the buyback we told you about only happened over a month, because legally we couldn't buy back before the, we would give them the analyst meeting.

You're looking at just a month's work there and we've bought some since then.

You should expect that the buyback will accelerate.

Energy costs, feedstocks were about $40 million.

Okay.

Then one other one for me, Steve.

What about hedging?

I know you're not a fan, but prices have been awfully volatile.

Any consideration?

We're not a fan of hedging, and every time we've hedged, I've been sorry the next day.

It's a large volume to try and hedge.

We could probably move the market with us.

So I've not really -- we've not really considered it at this point.

Okay.

Last one for me.

Op cost inflation, any real changes or have you seen a reduction in escalation?

What are you seeing?

No, I think we're sort of -- I don't see anymore, the escalation seems to have stopped for now.

I think the lower gas prices have affected some of the expectations of some of the contractors.

But you'll see some quarter over quarter, because the -- whatever you want to call it, the severance tax out of Argentina will built into that as part of operating cost.

That's it for me.

Thanks.

Thank you.

As a reminder, if you would like to ask a question, please press star one.

Our next question is coming from Ross Payne.

How you doing, guys?

Good.

We haven't talked about Ecuador yet.

Could you kind of give us an update based on the news that's kind of come out in the last couple of days?

Your thoughts on the new proposals, I guess, from the government and what kind of impact that will have on the Company going forward.

John will be glad to answer that.

Well, as you know, last week, the government of Ecuador enacted legislation that unilaterally alters fiscal terms of the participation contacts with international oil companies.

This legislation requires companies pay the government about, at least 50% of revenue from oil production above a benchmark price, and based on our preliminary understanding of this legislation, we believe that the discounted value of future net cash flows from our Block 15 operations will be reduced by approximately half.

We're quite disappointed by this latest development in a country where we think there is significant oil potential and has potential under the right circumstances to benefit from additional investments from international companies like Oxy.

Our view at the moment is this law violates the U.S.

Ecuadorial Bilateral Investment Treaty and the terms of our participation contract.

Some of the local experts we've consulted suggests this law also violates Ecuador's Constitution and Oxy has continued to evaluate potential legal recourse with respect to this legislation.

I think you've seen our previously disclosed, disclosures on the other issues we have in Ecuador relating to potential termination of the participation contract, and those proceedings are continuing.

We currently are unable to determine the outcome of the proceedings and the potential of a negotiated settlement.

Those disputes is unclear in light of this new legislation.

I think it's a matter of staying tuned.

We are continuing to produce and operate and we're just going to have to watch it and see where we go.

Okay.

You guys have probably commented on this in the past, but obviously the sale of properties to Encana has been noted as being in violation of the original agreement.

How do you guys perceive that comment by the Ecuadorian government?

Well, we didn't sell any properties to Encana.

We sold an economic interest, and the transfer of any working interest was subject to government approval, which we asked for in 2004, and we're still awaiting approval of that.

And that's part of the crux of our other disputes with the Ecuadorians is we believe we didn't violate the law or our participation contract.

So we're continuing to have that dispute.

What was the rush, now, behind their having a concern about change of ownership there, or change of interest?

I don't think they had it.

I think it's best viewed as a lever to prove terms.

All right.

Thanks.

That's all I've got.

Thank you.

Our next question is coming from Benjamin Dell.

Hi, Steve.

Hi, Ben, how are you?

Good.

I just have two questions, really.

One was on the capital spending.

Obviously you've got some projects coming your way and you'd expect that to make your CapEx flat enough to drop down, but obviously we're in a sort of inflationary environment.

Do you have a feeling for where that's going to go in DD&A trends will continue to go, because obviously holding your F&D has been a core strength over the last few years?

We expect a reasonably good year this year in F&D costs, I think, at this point.

DD&A, we're spending more money, we're going to spend almost $3 billion this year.

So there'll be some increase in the absolute amount of DD&A.

Maybe a little creep in the DD&A per barrel, but not much.

We're in pretty good shape.

And once the Dolphin project comes on next year, there'll be more DD&A and obviously more profits.

Yes.

Just following up on Dolphin and Libya, it seems that you're in an environment where your net income a barrel will be going down on a blended basis because of those middle eastern and African projects, but at the same time obviously, the caps will employ less.

On a return on capital employed basis, are they accretive or dilutive to say Permian operations?

Dolphin accretive.

Libya, it really depends on future outcomes.

During this exploration period, it's clearly going to be dilutive, because you have to expense the seismic as you go.

So for a while, that will be dilutive until we find something.

But Dolphin will be accretive to our returns compared to the Permian.

Okay.

Great.

That's all I have.

Thank you.

Thank you.

Thank you.

There are no further questions at this time.

Thank you very much.

Thank you.

Steve?

That was it.

Thank you.

Thanks.

Bye.

Thank you.

This does conclude today's Occidental first quarter earnings conference call.

You may now disconnect and have a wonderful day.