西方石油 (OXY) 2006 Q3 法說會逐字稿

Good morning, Ladies and Gentlemen.

My name is Nelson and I will be your conference operator today.

At this time I would like to welcome everyone to the Third Quarter 2006 Earnings Release Conference Call. [OPERATOR INSTRUCTIONS] Thank you.

It is now my pleasure to turn the floor over to your host, Christopher Stavros.

Sir, you may begin your conference.

Thank you, Nelson and good morning, everyone.

I'd like to welcome you today to Occidental's Third Quarter earnings Conference Call.

Also here with me in New York is Ken Huffman.

Joining us on the call from Los Angeles are Dr. Ray Irani, Occidental's Chairman, President and Chief Executive Officer;

Steve Chazen, Senior Executive Vice President and Chief Financial Officer;

John Morgan, President of Occidental Oil and Gas/Western Hemisphere, and Casey Olson, President of Oxy Oil and Gas/ Eastern hemisphere.

In a moment I will turn the call over to Steve Chazen who will review our third quarter and nine-month results to be followed by a question and answer session.

But before I go ahead, I'd like to draw your attention to a new set of conference call presentation slides that we've created for today's call.

These slides can be downloaded off our Web site and will allow you to follow along during Steve's comments and hopefully also help to facilitate a better discussion during the Q & A. I'll now turn the call over to Steve.

Steve, please go ahead.

Thank you, Chris.

Core income for the third quarter was $1.159 billion or $1.35 per diluted share.

That represents an increase of 15% compared to last year's third quarter.

Last year's third quarter excludes $463 million after-tax gain from the sale of an equity investment, a $335 million tax benefit from the reversal of reserves no longer required and a $98 million after-tax charge for the write-off of certain chemical assets.

Net income for the third quarter was $1.168 billion, or $1.36 per diluted share compared to $1.747 billion or $2.12 per diluted share in last year's third quarter.

Our performance was driven by three items: higher oil prices, higher combined oil and gas volumes and improved chemical earnings.

Here is the break down for the third quarter: Oil and Gas segment earnings were $1.877 billion this is 15% higher than last year's third quarter segment earnings of $1.638 billion.

This year's Oil and Gas results were driven by higher oil prices and higher combined oil and gas volumes that were partially offset by higher operating costs, increased DD&A rates and higher exploration costs.

The average price of West Texas Intermediate for the quarter rose to $70.53 per barrel compared to $63.19 per barrel in last year's third quarter.

Oxy's average worldwide realized oil price for the quarter was $60.52 a barrel compared to $55.97 per barrel in last year's third quarter which represents an increase of 9%.

NYMEX Gas prices for the quarter average $6.33 per million cubic feet compared to $7.09 last year.

Our average domestic realized gas price declined to $5.88 for MMCF compared to last year 's $6.33.

Oil and Gas production for the quarter was 587,000 equivalent barrels a day which was 71,000 barrels higher than it was a year ago, which is a 14% increase.

During our last conference call we said we expected third quarter worldwide oil and gas production to be about the same as the 609,000 equivalent barrels a day we averaged during the second quarter.

The lower than projected production was caused primarily than one less lifting than anticipated in Libya which reduced production by 12,000 barrels a day and maintenance in Horn Mountain, Qatar and Argentine operations which lowered production by about 6,000 barrels per day.

Exploration costs for the quarter were $74 million which is in line with our guidance of last quarter which was $70 million.

Chemical segment core earnings were $247 million compared to third quarter 2005 earnings of $167 million.

Last year's core earnings excluded $164 million of pretax charges including $159 million for plant write-offs and $5 million for hurricane-related increases in insurance costs.

Our net interest expense declined to $18 million for the quarter, this compares to net interest expense of the third quarter of $40 million excluding $30 million related to buying back debt.

Now let's look at the first nine months.

Our core income was a record $3.514 billion or $4.07 per diluted shares.

This represents an increase of 34% from the $2.616 billion or $3.20 per diluted shares of core income for the first nine months last year.

Over the nine months Oxy's annualized return on equity was 26% and our annualized return on capital employed was 22%.

Oil and Gas segment earnings were a record $5.74 billion which is 38% higher than the $4.172 billion earned the first nine months of 2005.

Oil and Gas production for the nine months averaged 596,000 equivalent barrels a day.

That's 15% higher than the 519,000 equivalent barrels a day from continuing operations that we average during the comparable period last year.

The increase included 59,000 equivalent barrels for day for the eight months we've owned the former Vintage properties.

The Vintage production averaged out to 53,000 equivalent barrels a day for nine months.

Libya production added an average barrels per day for nine months.

Libya production averaged 18,000 barrels a day for the nine months compared to one month of Libya production during the first nine months of last year.

West Texas Intermediate averaged $68.24 a barrel compared to $55.40 for the comparable period last year which represents an increase of 23%.

Oxy's realized Oil price is $58.41 per barrel compared to $48.24 in 2005 which represents an increase of 21%.

Our Oil and Gas production costs have increased approximately $2.32 a barrel to $11.13 compared to the average cost of $8.81 for last year.

Approximately 45% of the increase was a result of higher energy prices pushing up utility, gas plant, ad valorem, export taxes and CO2 costs.

Higher oil prices also impacted the costs related to production under our production sharing contracts.

Gross under the production sharing contracts were spread over fewer net barrels.

The remaining cost changes were the results of increased workover, maintenance and other costs.

In Chemicals, core earnings were $745 million, that's an improvement of 23% compared to the $606 million we earned in the first nine months last year.

The improvement is due to higher chlor-alkali volumes and higher margins in all chlorovinyl products.

Our net interest expense for the first nine months declined to $80 million compared to $137 million for the same period last year.

These numbers exclude debt retirement costs.

Capital spending was $750 million for the quarter and nearly $2 billion for the first nine months.

Cash flow from operations were $4.8 billion for the nine months.

We have proceeds of a $1 billion from the sale of Vintage properties and cash flow from these discontinued operations of $55 million.

We expect to receive additional proceeds of $60 million from the sale of the remaining assets held for sale.

This will bring the total proceeds to $1.12 billion.

We used $2 billion of the Company's cash flow to fund capital expenditures and $2.4 billion for acquisitions, the largest of which were Vintage and Plains acquisitions.

We also repaid $610 million of debt and paid dividends totaling $460 million.

Additionally we spent a total of $1.3 billion to repurchase 26.7 million common shares at an average price of $48.22.

In the third quarter we repurchased 6.6 million shares with 67% of those purchases occurring in the month of September.

These cash outlies reduced our $2.4 billion cash balance at the end of last year to $1.4 billion at the end of September.

The weighted average basic shares outstanding for the first nine months totaled 854.2 million, and the weighted average diluted shares outstanding totaled 863 million.

At September 30, there were 849.2 million shares outstanding , and the diluted shares numbered 858.3 million.

As we look ahead to the current quarter, we expect oil and gas production to be between 610,000 and 620,000 equivalent barrels a day.

We expect to get 9,000 barrels a day from the recently acquired Plains properties, however due to gas sales lag reporting we will report about 7,000 in the fourth quarter and 9,000 would pick up in the first quarter.

We have two Libyan lifting scheduled for the quarter that are expected to exceed a total of 2 million barrels reflecting average production from Libya in the fourth quarter of approximately 24,000 barrels a day.

With regard to prices each dollar per barrel change in oil prices impacts Oil and Gas segment fourth quarter earnings by about $38 million before taxes.

Therefore, a $10 reduction in price would reduce Oil and Gas segment earnings by $380 million and the after-tax reduction would be about about $220 million.

A swing of about $0.25 per million BTUs in gas prices has a $12 million impact on the quarterly segment earnings.

Our realized domestic gas price in the fourth quarter is expected to be $5.20 per million cubic feet compared to $5.88 in the third quarter.

This will reduce Oil and Gas segment earnings by $32 million compared to the third quarter.

Exploration expense for the quarter is expected to be about about $100 million.

The reason for the increase in the third quarter is the higher drilling and seismic activity largely related to Libya.

In the chemical business, the fourth quarter is typically the weakest quarter due to seasonal factors.

While we currently see no downturn, we expect the normal factors to take over in late December and in December.

We there for expect to earn about about $200 million for the fourth quarter.

We therefore, expect chemical segment earnings to be about $945 million for the first full year of 2006 which would be their best year in over a decade.

We expect total capital spending for the year to be $3 billion with Oil and Gas accounting for more than 90% of the expenditures.

Fourth quarter interest expense is expected to be about $25 million.

We also expect the worldwide effective tax rate for the fourth quarter to be 44%.

Both our third quarter and nine months U. S. and foreign tax rates are included in the Investor Relations Supplemental Schedule.

Copies of the press release announcing our third quarter earnings and Investor Relations supplemental schedules are available on our Web site or through the SEC's Edgar program.

I think we're now ready to take your questions.

Operator?

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from John Herrlin of Merrill Lynch.

Yes.

Hi Steve.

Hi John.

It looked like your buyback showed down a little bit.

After you pay off Plains should we expect a reacceleration?

The capital you mean?

Yes.

Maybe.

Fourth quarter is usually a little heavier in capital spending than the third, so we're estimating, we only spent $2 billion in the nine months and we're estimating $1 billion -- the remaining $1 billion --in the fourth quarter.

We'll see exactly where we come in.

It's hard to tell.

Okay, next up for me is your grade or geographic sales basis differential on oil has been running a little bit wider than last year.

Do you think it's going to stay at that level or is that what you're seeing in terms of your net realized pricing?

Yes.

Currently, Yemen is a little wider, Qatar is a little narrower, Oman a little narrower, Columbia wider, Argentina wider and the U.S. a little wider, so I think net we're just a little wider right now but this is probably the most volatile number we have.

Right.

Argentina has been having a lot of news about pricing of things like natural gas and there's also rumors of YPF possibly selling assets.

Are you looking to have more exposure to Argentina, Steve?

Not materially.

I mean, there might be some small acquisition but nothing that would be -- we might look to add a little bit to what we have but we aren't looking for a big increase.

Last one for me is on the cost side.

It looks sequentially that you didn't have much of an increase versus the second quarter.

What are you seeing in terms of your overall operating cost?

Obviously energy costs are down, you already cited that but how about on the services side?

Well, sequentially between second and third our costs are down.

I wouldn't make much of that.

I think that's sort of noise in the system.

So we don't see any great increases, but right now, we don't see any decreases either.

Okay, thank you.

Thank you.

Our next question comes from Robert Kessler of Simmons & Company.

Good morning, gentlemen.

I was wondering if you might update us on the status of Dolphin.

It sounds last time as though the gas plant was an issue there on the timing.

Just wanted to see what that looked like now and what you expect the ramp up to be in 2007.

This is Casey Olson.

Thank you, as we said previously, we have not planned for nor do we expect any notable production from Dolphin in 2006.

A number of the key segments of the project including the export pipeline, the field platforms, the wells, the receiving facilities, remain on, or in fact, ahead of schedule for year-end.

As you mentioned, the gas plant may or may not be fully operational in that same timeframe but at the end of the day in any event, we do expect substantial production from the project in 2007.

It's still difficult to pinpoint an exact timeframe, but we expect substantial production in 2007.

Okay, thank you for that.

As another issue on Dolphin, can you give us any indication on the pricing discussions as it relates to Phase II?

It sounded for awhile as though the Qataris were holding out for a high price there, maybe even to the point where they are looking to renegotiate the price on Phase I in exchange for getting more volumes to the UAE--

There will be no negotiations on the first phase.

Discussions continue on the second phase.

Okay, thank you, Ray.

Thank you.

Our next question comes from Ben Dell of Sanford Bernstein.

Hi guys.

Hi Ben.

I wonder, could you give us some thoughts if [indiscernible] do cut whether it will have any impact on your Libya, UAE, and Qatari volumes?

You might see some in Qatar, I think is the only place you might see it, probably not much in Libya, but from an earnings perspective, it could be a little bit in Qatar.

Okay.

And you talked about guidance in the fourth quarter.

Do you have a feel for where your CapEx is going to be in '07?

Do you got some continued inflation in CapEx from reg rates rolling through or do you expect it to be broadly flat year on year at least on a per barrel basis?

I think the dollar amount will be pretty flat.

If you remember the Dolphin project rolls off in next year, and the capital spending basically almost all of the money has been spent, all equipment has been bought and everything, so we've got a fair amount of room for other things so our current guess is that it would be roughly flat.

Okay, and just lastly on the fourth quarter you suggested a $10 drop in oil would sort of have a 380 million pretax there and you also suggested CapEx would be down in the quarter.

With CapEx up to $1 billion dollars in the fourth quarter, right now, and I know it's a little early, do you expect to be generating much free cash flow or do you think more or less all of it will go into CapEx in the fourth quarter?

No, there will be significant free cash flow generation.

Good size build putting aside share repurchases.

Okay, great.

Thank you very much.

Thank you.

Our next question comes from [Kate Lucas] of JP Morgan.

Good morning.

Good morning.

I was wondering if you could give us some insight into your exploration plans for Block 54 in Oman in the coming year?

We're currently developing the seismic acquisition plan.

We'll be starting seismic either later this year or early next year and obviously based on the results of that seismic , we'll plan our drilling thereafter, but it is a project that we do intend to move forward on a prompt basis.

All right and then you mentioned in previous conference calls or at your analyst meeting that you were looking at potential new development projects in the Middle East.

Do you have any update on those projects, the status of some of those larger projects?

I think the best answer to that is to say that they are still there.

We continue to work on them.

These things take time as you know and we're still very optimistic that we will have new projects coming out of the Middle East in the not too distant future.

Okay thanks very much.

Thank you--

Sorry, one other thing to add there, as you know, we are a participant in the big project in [Obidumbi] where they are looking to develop their sour gas.

We expect that to move forward over say the next two month to four month period of time.

So that is one that I can comment on that we're very actively participating in.

Thank you.

[OPERATOR INSTRUCTIONS] Our next question is coming from [Andrew Lies] of [Aim].

Good morning, gentlemen.

I am wondering about this rather crazy proposition 87 in California and what you think the prospects of it are.

Well, you never know until the votes are counted.

I think that it's clearly being perceived by the voting population as a tax increase so we'll see how that turns out.

We're hopeful that it will not pass and we're encouraged that based on the polling results we see at least that that's a possibility.

Great.

Thanks.

Thank you.

Our next question is coming from Nicky Decker of Bear Stearns.

Good morning.

I'm trying to reconcile your production guidance in Libya.

It looks to me like you will maintain an underlift position there.

Is that right?

Yeah.

That's probably right.

It varies from quarter to quarter, so you shouldn't -- it's just variable because you can't fill a whole boat.

Yes.

And then on the topic of Libya, maybe you could just expand on the drilling activity that will take place in the fourth quarter?

We're currently on the first location.

The spudding of that well is imminent and that should be certainly completed prior to year-end.

We expect to be drilling on a second well prior to year-end and possibly even be drilling on a third well prior to year-end although that wouldn't be completed.

Going into next year, we have a very significant drilling program with probably somewhere in the range of 12 wells to16 well s going one right after another.

Thank you.

Thank you.

I would now like to turn the floor back over to management for any closing remarks.

Thank you very much.

If there are no other questions, I'll turn it back over to Dr. Irani and Steve, otherwise, please call us in New York if you have any further questions.

Thank you.

Thank you.

Thank you.

Thank you.

This does conclude today's Third Quarter 2006 Earnings Release Conference Call.

You may now disconnect your lines and have a wonderful day.