西方石油 (OXY) 2006 Q4 法說會逐字稿

Good morning.

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

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

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

After the speakers' remarks, there will be a question and answer period. [OPERATOR INSTRUCTIONS]

Thank you.

It is now my pleasure to turn the floor over to your host, Mr. Christopher Stavros, Vice President of Investor Relations.

Sir, you may begin your conference.

Thank you, Sharita, and good morning, everyone.

I'd like to welcome you today to Occidental's fourth quarter 2006 earnings conference call.

Joining us on the call from Los Angeles are Dr. Ray Irani, Oxy's Chairman, President and CEO, Steve Chazen, Senior Executive Vice President and CFO, 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 Dr. Irani who will provide some comments on our recent performance and our strategy.

Steve Chazen will then review in detail our fourth quarter and full year 2006 financial results to be followed by a question and answer session.

Conference call presentation slides which refer to Steve's remarks can be downloaded off of our website.

I'll now turn the call over to Dr. Irani.

Dr. Irani, please go ahead.

Thank you.

Good morning everybody, and thank you for joining us.

As Steve Chazen will tell you in some detail shortly, our fourth quarter results helped drive our current income for the year to a record high level of $4.3 billion.

Our financial performance continues to reflect the successful implementation of our long-term strategy that is focussed on long-lived oil and gas assets, a disciplined investment philosophy and maintaining a strong balance sheet.

We took a number of the steps last year to further strengthen the foundation of our core operation.

Our acquisition of oil and gas producing assets from Vintage Petroleum and Plains Exploration Company has strengthened operations in our core areas of Texas, California and Latin America.

These acquisitions helped increase our average 2006 annual production volume to an all-time high of more than 600,000 equivalent barrels per day.

We also increased the annual dividend rate by 24%, which was the fifth straight increase since 2002.

We also continued to strengthen our balance sheet.

In addition, we implemented and expanded a share repurchase program that resulted in our repurchase of more than 30 million shares of our common stock out of the 40 million shares that the board of directors has authorized for repurchase.

The share repurchase program is continuing this year.

We ended the year 2006 with $1.6 billion in cash on hand.

And even at current oil prices, we expect to continue generating a significant amount of free cash flow in 2007 to support our growth initiatives.

With the strides we made last year, we believe 2007 has the potential to be another strong year for both our oil and gas and chemical businesses.

As we look ahead in 2007, we plan to aggressively pursue the exploitation of the properties we acquired from Vintage and Plains in California and Argentina.

We also expect to continue with our consolidation initiatives in the Permian Basin and California.

In addition, we expect the Dolphin Project to be fully operational around mid-year with plans to ramp up production to 2 billion cubic feet per day by year-end which was the planned volume.

We expect to drill between 14 and 16 exploration wells in Libya this year with 10 to 12 wells onshore and the remaining 4 wells offshore.

This focussed effort is the most extensive exploration initiative in Oxy's history and we're excited about the quality of the prospects.

As we have discussed before, we continue to work on a number of new high potential projects in the middle east and north Africa.

These are enhanced for recovery projects.

We expect to announce success in winning at least two of these projects this year.

I'll now turn the call over to Steve Chazen.

Thank you, Ray.

Net income for the quarter was $928 million or $1.09 per diluted share compared to $1.152 billion or $1.40 per diluted share in the fourth quarter of last year.

Core income from the quarter was $835 million or $0.98 per diluted share.

The fourth quarter of this past year core income excludes $57 million after-tax gains from the sale of our investment in Lyondell, $89 million after-tax gain for litigation settlements, $20 million after-tax charge through purchase of debt in the open market, and a $40 million non-cash tax charge resulting from changes in the compensation programs.

Fourth quarter actual results were different than the third quarter conference call guidance that I gave you last quarter because of lower chemical earnings, higher income tax rate, and environmental remediation charges.

Chemical segment earnings were about $40 million lower than my prior guidance due to weaker demand than expected.

There was a 2 percentage point increase in worldwide effective income tax rate due to a change in the mix with more income coming from higher tax foreign sources than from U.S. income.

Charges for environmental reserves increased by $15 million to $23 million in the fourth quarter.

Here's a segment breakdown for the fourth quarter.

Oil and gas fourth quarter earnings were $1.499 billion compared to $1.796 billion for the fourth quarter of 2005.

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

Lower worldwide oil and gas price realizations on growing production decreased earnings by $188 million compared to last year.

The average price for WTI in the fourth quarter was essentially flat with the fourth quarter of 2005 while Occidental's average realized oil price for the fourth quarter was $0.69 per barrel lower than the comparable period in 2005.

Oxy's domestic realized gas price of $5.64 per MCF in the fourth quarter was 43% lower in the fourth quarter of 2005, which had a price of $9.81.

Oil and gas production for the fourth quarter averaged 616,000 barrels of oil equivalent per day, which is 13% higher than in the fourth quarter of 2005.

The increase in production was the result of the acquisition of Vintage Petroleum and producing assets from Plains that accounted for 62,000 barrel equivalents per day.

Exploration expense of $100 million in the quarter was $18 million lower in the fourth quarter of 2005.

Chemical segment earnings for the fourth quarter of 2006 were $156 million compared to $165 million in the fourth quarter of 2005 due to lower volumes.

October results were consistent with prior quarters.

However, November and December volumes dropped much more sharply than anticipated because of softening demand.

Net interest expense, excluding debt retirement charges, was $20 million during the fourth quarter of 2006 compared to $22 million in the 2005 fourth quarter.

Our worldwide effective tax rate for the fourth quarter of 46% was 2% higher than our guidance.

The higher rate reflects a change in the mix with more income coming from higher tax foreign sources than from U.S. income.

Now let's turn to the quick overview of our 2006 annual results.

Our consolidated net income was $4.182 billion compared with $5.281 billion for 2005.

On a diluted per share basis, we earned $4.86 in 2006 compared to $6.45 per share in 2005. 2006 results included net non-core charges of $167 million and the 2005 results included net non-core gains of $1.549 billion.

The 2006 non-core charges included discontinued operations for the write-off of Ecuador and deferred tax reversals which resulted from the changes in compensation programs.

The 2006 charges were partially offset by gains on litigation settlements and the sale of Lyondell shares.

The 2005 non-core gains including the results of tax settlements and reserve reversals, the sale of Premcor and Lyondell shares and income from discontinued operations in Ecuador.

These 2006 gains were partially offset by chemical plant write-offs.

Our core earnings of $4.349 billion in 2006 were 17% higher than our 2005 core earnings of $3.732 billion.

Oil and gas segment earnings for the year of $7.239 billion were 21% higher than the $5.968 billion that this segment earned in 2005.

Oil and gas production averaged 601,000 barrels per day for the year.

That's 14% higher than the 2005 average of 526,000 BOE a day.

The increase included 11 months of Vintage production, 58,000 barrels a day, which added an average of 53,000 a day for the total year.

Libya accounted for 15,000 barrels a day of the increase, which reflects 12 months of production 2006 compared to 4 months in 2005.

The average West Texas Intermediate for the year averaged $66.23 compared to 2005's average price of $56.56 per barrel.

Oxy's average realized price for the year was $56.57 per barrel compared to $49.18 in 2005, an increase of 15%.

Exploration costs were $295 million compared to $314 million in 2005.

Oil and gas operating costs were approximately $11.23 a barrel, which compares at $8.81 in 2005.

At least 41% of the increase was a result of higher energy prices pushing up utility gas plant costs, [addtheloram] taxes and export taxes and the impact of higher energy prices on our production sharing contracts.

The cash operating cost increases included $0.57 a barrel for taxes and $0.33 a barrel for higher energy costs.

The remaining increase of $1.52 per barrel was a result of higher workover maintenance and lifting costs.

Maintenance costs increased by $116 million while workover, addtheloram tax and utilities each accounted for approximately $55 million in higher costs last year.

Core chemical segment earnings were $901 million compared to the 2005 level of $777 million.

The 16% increase in earnings was a result of higher margins.

Excluding debt retirement expenses, net annual interest expense declined to $100 million in 2006 from $159 million in 2005.

Cash flow from operations was about $6.3 billion last year.

We received total proceeds of about $1 billion from the sale of Vintage Properties and $250 million from the sale of 10 million shares of our Lyondell investment.

We used $3 billion of the Company's cash flow to fund capital expenditures and $2.5 billion for acquisitions.

We also repaid $895 million of debt and paid dividends totaling $645 million.

In addition, we spent a total of $1.5 billion to repurchase 30.6 million common shares at an average price of $48.20.

In the fourth quarter, we repurchased 3.9 million shares.

These net cash outlays reduced our $2.4 billion cash balance at the end of last year to $1.6 billion at year end.

That was $2.9 billion at the end of the year.

The weighted average basic shares outstanding for the year totalled 852.6 million.

The weighted average diluted shares outstanding totalled 860.4 million.

At year end, there was 843.8 million shares outstanding and the diluted shares numbered 852.1 million.

We've repurchased 30.6 million common shares with 40 million shares currently authorized by the board.

Our return on equity for 2006 was 24%.

The three-year average was 30%.

During that same 3-year period, our equity grew by 141% from $7.9 billion to $19.1 billion.

Our return on capital employed for 2006 was 21%.

The 3-year average was 25%.

As we look ahead to the current quarter, we closed the sale of our 50% interest in western Siberia to TNK-BP on January 18th.

We received $485 million in cash.

We expect to record a gain of approximately $400 million in the first quarter.

We will remove the production volumes from continuing operations schedules for comparability.

The exit rate for the fourth quarter was 616,000 barrels per day and we expect that this Russia sale will reduce the production in the first quarter by 26,000 barrels a day as noted in the attached schedule.

We expect our first quarter production continuing operation to be in the range of 590,000 to 600,000 equivalent barrels per day.

We currently expect this rate to continue until the Dolphin Project comes onstream at mid-year.

We expect exploration expense in the quarter to be about $100 million.

These costs will be driven largely by our drilling and seismic activities in Libya.

We expect capital expenditures for the year to be about $3.3 to $3.4 billion with over 90% allocated to the oil and gas segment.

The increase in 2007 spending over 2006 spending is due to the Oman Mukhaizna project , development of the Vintage acquisition properties in Argentina and California, the exploration activities in Libya, and a Permian gas plant and CO2 expansion.

These projected expenditures will be partially offset by lower expenditures for the Dolphin Project.

We expect current quarter chemical segment earnings to be similar to the fourth quarter of 2006.

Volume in January is expected to remain weak with continuing improvement in February and March.

We expect improvement from these levels in subsequent quarters.

Interest expense should be about $15 million in the first quarter, excluding charges for the recently announced debt tender.

A $1.00 per barrel change in oil prices impacts oil and gas quarterly earnings by about $38 million before income taxes.

The West Texas Intermediate price in the fourth quarter was $60.20 per barrel compared with the current price of approximately $53 per barrel.

The $7.00 change is expected to reduce earnings in this segment by about $265 million.

The swing of $0.25 for million BTUs in gas has a $12 million pretax impact.

NYMEX gas price for the fourth quarter was $6.27 per thousand.

Our realized fourth quarter price was $5.64 per thousand.

We expect DD&A for the Company to be about $2.4 billion for the total year.

In 2007, we expect our effective worldwide tax rate in the first quarter to be about 49%.

Higher taxes are due to an increased proportion of income outside the United States.

Both our fourth quarter and annual U.S. and foreign tax rates are included in the investor supplemental schedule.

Copies of the press release and the schedules are available on our website or through the SEC's EDGAR system.

We're now ready to take your questions.

[OPERATOR INSTRUCTIONS] Our first question is coming from Doug Leggate with Citigroup.

Thanks.

Good morning Steve, Ray and Chris.

Couple of things if I may.

First of all, do you have a reserve replacement number for the year?

We're going to put out the results in early February.

Our preliminary, sort of unaudited, is about 230%, maybe a little more.

Can you split it out between the acquisitions and organic?

We're not quite ready to do that yet because, again, the details aren't there.

I think our F&D costs, excluding the tax gross-up on the Vintage, will be around $15 a barrel.

Great.

Thanks.

I guess the heavy hint here is that share buyback program is going to go beyond the current authorization.

Would you be prepared to comment on whether or not you would go below a light, take the share count below the pre-Vintage levels of about 800 million, I guess,post-split?

I think we would, we expect to take it below that level.

Okay.

This year?

It's hard to say because it depends on a lot of things.

I think we're clearly, based on current environment and current conditions, I think we'll buy back at least 25 million shares this year.

And my final one is actually on production.

Clearly there's a lot of things going on in the background that we're not hearing about right now but one which is, seems to be getting better every time you report, is Colombia,.

I'm curious as to progress on [inaudible] and I know you recall that Echo Petrol's original guidance on the outlook for the production there was significantly higher, like about four times higher, than the guidance you gave us last February.

So if you could maybe just give us an update, that would be great.

John Morgan?

Well, [inaudible] is going pretty well on our schedule.

And we still feel strongly that it's going to be in the 20,000 barrels a day net to Oxy in the 2011 time frame.

I'm not in a position to really comment on what Echo Petrol puts out.

The other thing about Colombia is we've had some continued success in near field with the Cano Limon field.

It itself is declining, but we've had some good success nearby, which is offsetting a bit of that and continuing to have us pretty encouraged about Colombia overall.

It's a good government and a good place for us to be investing right now.

And good return.

Great.

That was it for me.

Thank you.

Thank you.

Your next question is coming from Arjun Murti with Goldman Sachs.

I was wondering if you could provide any maybe additional color on how you're seeing the Vintage properties.

Sounds like you're forging ahead with the development there.

Any major positive or negative surprises relative to the time of acquisition?

Not really.

California, California this year will spend a fair amount in California to workovers, recompletions, simple wells.

As I told you yesterday, last week, we only do easy things.

And so we should see some pretty good progress in California this year.

Argentina, we -- I think we had some minor environmental health issues down there and we're bringing that up to our standards here in the near term.

There was a strike last quarter too.

But it looks at least as good as we said when we bought it, the property, Arjun.

That's terrific.

In terms of the Libya exploration program, second half weighted?

First half weighted?

Steady through the year?

Any timing color there?

Casey Olson will answer that.

Yes, we've, in fact, we've just finished the first of the new exploration wells there.

We've actually had some encouraging oil bearing zones and we're indeed, probably as we speak here this morning, beginning a testing program on that well.

We'll have a second rig that will spud in early February in the area 124 and then once we've completed the testing on the well in the 106 area, we have two others that we will move to promptly thereafter.

The onshore drilling program, I think you will find will be very active literally throughout the year.

The offshore drilling program is due to start around March 1st plus or minus, and then you will see four back-to-back wells starting basically in the beginning of March.

Any meaningful differences in prospect sizes?

Are they all plus or minus the same range or are one or two of them particularly large and the others more modest size?

Or any color on that would be helpful.

I think they're kind of all over the map depending.

We're still even completing the seismic that we've been shooting on some of the blocks.

With the acreage position we have in Libya, it takes some time to get all of the pre-technical work done, if you will, and we're excited about some prospects.

We're more excited about others, less excited about some, but we think they're all very viable and potentially commercial kinds of ideas.

That is terrific.

Thank you very much.

Thank you.

Your next question comes from Ron Oster with A.G. Edwards.

Good morning, thank you.

Couple of quick questions.

You mentioned potentially winning two additional development projects this year.

I was wondering if you could just provide some highlights and walk through some of the timing on some of those projects in terms of when the proposals need to be submitted or if they have been submitted.

And in particular, any details on the UAE natural gas development and I believe those proposals were going to be submitted by year-end if, indeed that was the case?

Well, no, we have so many proposals on some of these projects, which we expect to win this year.

As I said earlier, we expect to hopefully get at least two this year and we, we're confident of that.

With regards to the [seller] gas project, Casey, would you want to comment on this?

Sure.

I think you've seen in some of the press in the last few weeks that the process is now up and running full speed.

The small handful of companies that have been invited to look at these opportunities are in the process of now fine-tuning their ideas and their proposals and the intent in that project is for it to come to a head, if you will, probably in a two to three month time frame.

So that's really about all we can say there.

We're still very excited about it.

They're huge projects, and we think we're very well positioned on them.

One other one I might comment on, just because it's been a recent announcement by the Libyans.

They put out an indication, as you may have seen in the press, that they are working with us on the potential development of the Giant [Foraagila] field in Libya as well as some of our existing historical projects, which would be EOR/IOR kinds of opportunities and potentially quite big so those are two that are relatively public at the moment.

And as Dr. Irani has said, we're working on a number of others.

I in fact actually just returned yesterday from three weeks in the middle east and north Africa, and I think I can say with great confidence that we have a number of things as we've told you before that are working, and I'm confident we'll see a number of them come to conclusion this year.

Great.

Thanks.

And one more --

One thing I want to add here, which to me is encouraging, with regard to the solid gas project in Abu Dhabi, the Emirate, I was encouraged by the fact several of the national oil companies who had submitted proposals earlier are off the list now, which means that people who may be submitting bids in competition with us for the solid gas project will look at commercial numbers the same way we do, so we're not having to compete with some of the aggressive foreign national oil companies.

Great.

Thank you.

That's helpful.

And one more, more of a modeling question.

On the EMP costs, understanding that there's been some cost pressures there.

Costs were up about 25% this year.

Is there any guidance in terms of a good run rate using for 2007 in terms of your cash operating costs?

If you would give us the oil price for the year, we could probably estimate that.

Well, if you assume near current levels or slightly above?

I would guess it would be maybe slightly ahead of the -- of last year's numbers.

Great.

Thank you.

Thank you.

Your next question is coming from Robert Morris with Banc of America.

Morning, gentlemen.

Steve, looking at the cost side of things on the oil and gas side, costs continue to rise throughout the year.

I know you accelerated your spending rate in the fourth quarter, but where we've seen costs flatten for the rest of the industry and your peers the last two quarters, yours seem to continue to rise here.

I know you mentioned some workovers and liftings but it seems to be -- did you continue to increase liftings and workovers every quarter this year or can you give us a little bit of color behind those -- ?

Workovers continue to rise through the back half of the year and will continue to rise this year.

A lot of the work on the Vintage properties are expense work rather than workovers rather than the capital costs, especially ones in California and the Plains properties also.

So I would expect that the workover section will continue to rise.

And you classify more of those as expenses versus capital costs?

That's right.

Those are expensed under our accounting.

Okay.

So those will continue to rise throughout this year then you said too?

I hope so because that means we're getting more production out of that stuff.

If we stop spending, it means we didn't find anything.

Okay.

So we should actually model continued rising costs throughout this year even in to current oil price or even at a higher oil price?

Yes.

I mean there's other costs in there.

There's electricity and severance tax and that stuff and that will come down, obviously.

So net, I don't think you'll see much increase, but there will be some.

Okay.

All right.

Thanks.

Thank you.

Your next question is coming from Kate Lucas with JP Morgan.

Hi, good morning.

Morning.

A quick question on Bolivia.

It keeps showing up in your production numbers and I was wondering if you could give us some color around your thoughts on Oxy's position in Bolivia, whether you see any sort of an opportunity or whether the assets are migrating away from the core of your portfolio?

Well, we have production in Bolivia and we've signed agreements with the government in accordance with the reformulations and we believe that we will increase sales in Bolivia in 2007 versus our 2006 sales, albeit at slightly less net revenue to us.

On a unit basis, we are going to see unit growth in Bolivia.

It's a very small volumetric amount as you can see from looking at our numbers, and we're basically in a maintain mode there.

We've got good reserves and we see some opportunities if the sales go ahead to do some very minor workovers and continue to increase production, but we don't see pushing at any particular amount.

Okay.

Thanks.

And then just one quick question on whether you see any impact on your overall production as, I guess especially in Libya, from, stemming from OPEC cuts.

Not yet, no.

We've got no indication that there'll be any negative impact on our production at all.

Okay.

Thanks very much.

Thank you. [OPERATOR INSTRUCTIONS] Your next question is coming from John Herrlin with Merrill Lynch.

Yes, thanks.

Three unrelated ones.

With the offshore wells in Libya, how long does it take to reach T-date?

How long will the wells be?

Generally they're in the kind of 45 day plus or minus range.

Okay.

With the litigation settlement, Steve, was that Yemen or something else?

Something else.

Okay.

So that's still outstanding?

Yes.

Okay.

Acquisition markets.

Did you look at the the Andarko Permian properties and what are you seeing out there?

I think we signed a confidentiality agreement, so I guess I can't comment on whether we looked at them or not.

So yes -- there are more opportunities, we think.

And again, we're trying to upgrade the overall quality of our portfolio rather than bring the average down.

Okay.

That's fine.

Lastly, on services, are you getting more availability of rigs or equipment pure problems or is it pretty much the same in the basins you're in?

More availability and hopefully lower prices.

Okay.

Thank you.

Thank you, and at this time, there appear to be no further questions.

I'd like to turn the floor back over to Mr. Christopher Stavros for any closing remarks.

Well, thank you for joining us today and please give us a call if we can provide you with any other information.

Thanks again, and have a good day.

Thank you.

Thank you.

This does conclude today's Occidental Petroleum Corporation conference call.

You may now disconnect and have a wonderful day.