西方石油 (OXY) 2007 Q1 法說會逐字稿

At this time, I'd like to welcome everyone to the Occidental Petroleum first quarter 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, and good morning, everyone.

I'd like to welcome you today to Occidental first quarter 2007 earnings conference call.

Also with me here in New York is our new Director of Investor Relations Jim Sicardi.

Joining us on the call from Los Angeles are Dr.

Ray Irani, Oxy's Chairman, President, CEO; Steve Chazen, Senior Executive Vice President, CFO; and John Morgan, President of Occidental Oil & Gas Western Hemisphere.

In a moment I will turn the call over to Dr.

Irani who will provide some comments on our recently announced transactions as well as the Company's growth initiatives.

Steve Chazen will then review in detail our first quarter 2007 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, and thank you for joining us.

Consistent with our strategy of focusing on our core areas, we just announced two separate transactions with BP.

First, Oxy will acquire for cash BPs West Texas pipeline system in the Permian basin.

Second, BP will acquire for cash Oxy's interest in Pakistan.

When this transaction closes in the third quarter, it will further strengthen Oxy's industry leading position in the Permian.

It will add to our current Permian pipeline assets and will give us a total of 3844 miles of pipeline in the region with a capacity to transport approximately 190,000 barrels per day from the Permian basin to the market hub at Pershing, Oklahoma.

The exiting of Pakistan which follows our departure from Russia in January will further focus our efforts into our major core areas where we also are operators.

As you may have read in the press we have recently submitted proposal for the development of two major sour gas fields to Abu Dhabi official in the United Arab Emirate.

Abu Dhabi has the fifth largest gas reserves in the world and this project has been reported to require an estimated total future capital investment of $10 billion with production estimates at well over a billion cubic feet per day for 25 to 30 years.

In addition, we're in various stages of negotiations, some advanced stages of negotiations on other large oil and gas development projects in our core Middle East, North Africa region.

Before I turn the call over to Steve Chazen, I'd like to update you on the Dolphin Project in which we have a 24.5% interest.

The 230 mile long natural gas pipeline has been fully tested.

Currently, about 300 million cubic feet per day of gas supplied by third party is moving through the pipeline system to markets in Dubai.

We expect Dolphin Gas to begin flowing to the market in July with full scale production building to an initial 2 billion cubic feet per day around year-end.

I'd like to remind everyone that this project is structured to generate a steady stream of cash and earnings for the next 25 years.

I'll now turn the call over to Steve.

Thank you, Ray.

Net income for the quarter was $1.212 billion or $1.43 per diluted share compared to $1.231 billion or $1.43 per diluted share in the first quarter of last year.

First quarter 2007 core results were $831 million or $0.98 per diluted share compared to $1.153 billion, or $1.34 per diluted share in the first quarter of 2006.

2007 first quarter core results exclude net of tax a $412 million gain from the sale of our interest in Russia, a $109 million gain from litigation settlements, a $110 million charge for the completion of the cash tender offer for various debt issues and the $30 million provision for a plant closure.

On a segment basis oil and gas first quarter 2007 core results exclude the gain from the Russian sale and litigation settlements, $1.549 billion, compared to $1.910 billion, for the first quarter of 2006.

The following factors accounted for the change in oil and gas earnings between these quarters--Lower worldwide oil and gas realizations resulted in decrease of $233 million in earnings over the comparable period of 2006, of which $96 million was from gas price reductions.

The average price at West Texas Intermediate grew for the first quarter of 2007 was $58.24 per barrel which was $5.24 per barrel lower than the first quarter of 2006 price of $63.48.

Occidental's average realized price in the 2007 first quarter was $3.60 lower than the comparable period in 2006.

The NYMEX gas price for the quarter was $7.17 compared to $ $11.42 in the first quarter of 2006.

Our domestic realized average gas price was $6.38 down from $8.36 the first quarter of last year.

Worldwide oil and gas production for the quarter averaged 587,000 barrels of oil equivalent a day an increase of 4% compared to the 563,000 barrels of oil a day equivalent the first quarter of last year.

Production for both quarters exclude the volumes of the Russian non-operated assets sold on January 18.

The production improvement was relative to the Vintage and Plains acquisition and higher Middle East production in the first quarter.

Incident Elk Hills involving the natural gas gathering lines reduced our net production for the quarter by 14,000 BOE a day.

Our guidance for the first quarter was in the range offer 590 to 600,000 BOE.

We were slightly under this range due to the February incident at Elk Hills.

Exploration expense of $102 million in the quarter was in line with our previous guidance.

First quarter 2007 expense was $31 million higher than the first quarter last year.

With the increase coming from Columbia and the Middle East North Africa.

Operating costs were $11.71 a barrel compared to last year's $11.23 a barrel and increased about 2% from the fourth quarter.

Chemical segment earnings for the first quarter of 2007 of $137 million was lower than our fourth quarter conference call guidance.

January was a strong month, however industry demand weakened through February and March leading to lower margins.

Chemicals earned $250 million in last year's first quarter.

The primary factor that counted for the quarter to quarter differences were lower margins for chlor alkali and PVC.

Net interest expense excluding debt retirement charges was $9 million in the first quarter compared with $29 million last year.

Cash flow from operations for the quarter was approximately $1.6 billion.

We received $485 million from the sale of our interest in the Russian joint venture.

We used $785 million of the Company's cash flow to fund capital expenditures, $815 million to repurchase debt, and $185 million to pay dividends.

In addition, we spent $320 million to repurchase 7 million common shares at an average price of $45.89.

These net cash outlays reduced our $1.6 billion cash balance at the end of last year by $100 million, to $1.5 billion at the end of the quarter.

Debt was $2.24 billion at the end of the quarter with non-current debt of $1.7 billion.

The weighted average basic shares outstanding for the first quarter were 841 million and the weighted average diluted shares outstanding was 846.5.

At March 31, there were 838.1 million basic shares outstanding and the fully diluted share amount was approximately 843.6 million.

Our annualized return on equity was 25% with an annualized return on capital employed of 24% despite having increased shareholders equity at $20.2 billion, compared to $18 billion a year ago.

As we look ahead in the current quarter, we expect oil and gas production to be in the range of 585,000 to 600,000 BOE during the second quarter.

The second quarter spec includes some reduction from production sharing contracts and one less lifting compared to the first quarter.

The previously announced BP transaction will not affect production until our expected closing in the third quarter.

We expect this rate to continue until Dolphin comes on stream in the third quarter.

$1 per barrel change to oil prices impacts oil and gas quarterly earnings by about $40 million before income taxes.

A swing of $0.50 per million BTU's and gas prices had a $24 million impact on quarterly earnings.

The NYMEX Gas price for the first quarter was $7.17 per thousand cubic feet.

We expect exploration expense to be about $110 million for seismic and drilling in our Libyan South American exploration programs.

We expect chemical earnings in the range of 150 to $160 million compared to $137 million in the first quarter.

Chlorine demand especially in the vinyl was weaker in the first quarter but this has led to tightening market for its co-product caustic soda.

We expect caustic soda prices and margins to increase in the second quarter.

We expect interest expense to be about $10 million in the second quarter.

We will redeem all the outstanding $276 million of the 8.25% Vintage Petroleum notes on May 1, 2007.

We expect our worldwide tax rate in the second quarter to remain in the 48 to 49% range.

Our first quarter U.S.

and foreign tax rates are included in our Investor Relations supplemental schedules.

Copies of our press release announcing our first quarter earnings and our supplemental schedules are available on our website or through the Edgar system.

We're now ready to take your questions.

(OPERATOR INSTRUCTIONS) Your first question comes from Doug Leggate of Citigroup.

Thank you.

Good morning, Steve, Irani.

A couple of questions.

There seems to be some consistency with the partner that you have in terms of selling assets, so I'm just wondering where you stand on Horn Mountain, and I have a follow-up.

Well, it takes awhile, and so we're -- there may or may not be an announcement on Horn Mountain.

We'll see in the next couple weeks.

So it is still classified as a non-core asset, I guess?

Its status hasn't changed.

It's like the other ones.

It's a relatively mature asset where we don't have a lot of control over the operation so its status remains the same.

My follow-up is clearly Dr.

Irani has gone through again and given us some grains for optimism that there's a lot of things going on in the portfolio.

I guess my question would go back to the strategy presentation last year and you gave 2 ranges for production guidance, the base case which I guess was ex-disposals, but that 5 to 8% range and a stretch goal which was somewhat higher than that.

Given that a year has gone past and obviously you've progressed some of what you thought might happen, can you just give a feel for how comfortable do you feel that that upper range is still achievable?

I feel more comfortable than I did a year ago.

And might a time frame for useful in that, Dr.

Irani?

Well, I mean, we have more projects under consideration than we had when we thought a year ago.

And as I said, and in various stages of discussion, negotiations, what have you.

Okay.

I'll leave it there.

Thanks very much.

Thank you.

Your next question comes from Paul Sankey of Deutsche Bank.

On the buyback, was the rate that you saw in Q1 about right for the rest of the year would you say?

What are the dynamics there against what you're saying about the project?

Thanks.

I still think the 25 million shares of which we talked about for the year.

We don't see any reason at this point to change that number.

The first quarter had some excellent buying opportunities, but we think the 25 million right now for the year is a pretty good number.

And just relative to Doug's question, does that mean that we should be thinking more of the higher end of the range that you've talked about for production growth going forward?

I think so.

Right.

So we should kind of factor in more growth.

Finally for me, the pipeline acquisition from BP, can you just talk a little bit more about that?

I'm going to throw the dread letters MLP in there, but at random, and any other comments you got about the contribution of the lake and so on would be interesting.

Thank you.

Sure.

We're buying the West Texas pipeline system from BP.

As currently run, it generates about 30 to $40 million of EBITDA.

We also are acquiring about 2.5 million barrels of storage.

We ship currently about 50,000 barrels a day on the pipeline.

We expect to be able to raise that some.

I think there's three reasons why we were interested in the line.

One is that of course there's -- maybe the least important is there's other people ship on it we can make some tariff money.

The second reason is that we ship on the line and therefore, we'll be relieved of the tariff so it gives us, the posted tariff is $0.90 a barrel, relieve some of the costs.

And finally, maybe most important, there's a lot more flexibility in selling our crude, a lot more optionality in where we ship our crude so we expect our realizations to improve.

So I think there's some cost element but our realizations over time should get better.

We're going to have to invest some capital in integrating the line into our system, but I think over the next couple years, this optionality and the lower costs will accrue to our advantage.

Great thanks.

Is the MLP idea just a distraction?

Yes.

Fair enough.

Okay, thanks a lot.

I'll let it go there.

Thank you.

Your next question comes from Ron Oster of A.G.

Edwards.

Good morning.

Just wonder if you guys could expand a little bit on or give us anymore details on the other Middle East development opportunities you've progressed on?

Well, they're exciting, but as has been our policy, we don't like to announce things until they are really well inked out, and I did tell you that we have a number of projects which are rather interesting, some in the advanced stages of negotiations and some in the earlier stages, and a very interesting pipeline and I'm certain they will start coming through.

Okay.

Just one more follow-up too in terms of your exploration program.

I believe the offshore drilling in Libya was expected to begin in March.

I was just wondering if you could give us an update there as well as any other wells and the timing on those.

First of all it wad spudded offshore on April 12.

And the rest of the drilling continues in Libya, where I think we're drilling about three wells onshore now.

If we have any major, if we have any discoveries you'll be the first to know.

And then has any of the recent industry successes enhanced some of your prospects or had an impact on those?

Yes.

A couple of them are right next to our blocks and so maybe shifted our focus a little bit to closer to these other discoveries.

Great.

Thank you.

Thank you.

Your next question comes from Robert Morris of Banc of America.

Good morning.

Dr.

Irani, you talked pretty confidently about Starboard Gas development project the last few quarters.

The bids were due April 15, and there were about seven other companies that bid in here too.

Right.

Any reason for the optimism or the thinking that you've got the upper hand here or just handicapping that?

I didn't particularly try to make you feel that we had a shoe in.

As I talked about a number of other projects, I didn't include that in my thinking.

I mean, we just submitted this, so this is in the early stages, but I believe that we have a good chance of being included in that project also.

Yes.

But--.

Could it end up being a joint project where several companies participate instead of just one?

This is up to the owners, Adnoc and the United Arab Emirate.

Yes.

Everybody submits on their own and the Adnoc Abu Dhabi National Oil Company Emirates will decide how to proceed.

When do you expect that decision from them?

I think it's going to take them two months to evaluate all the proposals before anything can really proceed.

And Steve, the last quarter you mentioned that you expected Oilfield service costs to moderate into 2007.

I know operating costs were up sequentially versus the fourth quarter which that's another issue besides just Oilfield services costs, but can you just update us on your thinking along that front at this point?

I'll let John answer that since it's his problem.

Okay.

Well, we're still seeing Oilfield service sector trying to improve margins, but what we're seeing is a lot less success at that.

Yes.

I think my view is looking at the current environment anyway is we're certainly flattening out on costs and we of course from our perspective are very interested in getting back some of the losses in productivity as well as the cost side we saw over the last couple of years but it's a little early to tell whether that's going to be realized.

It certainly is a focus.

Okay, so you said last quarter you expected them to drop, you see them flattening out, do you still expect them to drop or just sort of flatten out here?

In terms of the oil price, we also weren't expecting $65 oil right now.

Okay.

Good.

Thank you.

Thank you.

Your next question comes from Arjun Murti of Goldman Sachs.

Thanks.

Just two operational questions.

How is Elk Hills running right now and just an update on how Argentine Oil production is looking over the rest of this year and next year?

Elk Hills is back to full rates.

In fact we're just slightly ahead of the pre-incident operating rate.

With respect to Argentina, we've had a little more time and effort in dealing with some environmental and regulatory issues with some ejection wells so the first quarter growth wasn't there, but in the last month, we've started to see some improvements and I would expect our second quarter Argentina production growth to be noticeable.

That's terrific.

Any cash change hands in the BP transaction?

No.

Except for there may be some that for timing, effective date cash, but other than that, no.

It was viewed as a similar value on either side.

Similar values.

Thank you very much.

(OPERATOR INSTRUCTIONS) Your next question comes from Pavel Molchanov with Raymond James.

Hi.

With regard to the West Texas acquisition, are there any other midstream assets either domestically or internationally that you may be looking to perhaps pick up if you have the opportunity?

We're always looking to build our midstream in areas where we have a lot of strength.

So it would be California and the Permian.

We're not basically midstream operator.

Its objective is to improve our position as a producer, so if you have any for sale just give us a call.

Okay, thanks very much.

Your next question comes from David Wheeler of Neuberger.

Hi.

Can you give us an update on the [La Sira Infantos] project in Columbia?

Is that a -- have you definitively decided to go ahead with that and can you kind of give us some color on how big the project is and timing, et cetera?

We committed to going ahead with the commercial phase, in fact in December, and it's continuing to follow our projections or exceed them slightly.

We expect it to give us 20,000 barrels a day net by 2010, it's not without its challenges, but frankly it's coming on quite nicely and at least as good or better than we expected.

It's a steam flood.

When do you start to see oil production start up?

It's not a steam flood.

It's water flood at this stage.

Okay.

So we're seeing some response already.

I've also seen good success with the workovers we've been doing on the existing wells and we have a program of drilling, we're running one rig at the moment and we're adding a second rig this year, so we'll be drilling some new drills and we continue to be optimistic about it.

Okay.

And is the 20,000 an increment over current production or is that the ultimate production?

Well, that would be the ultimate net in 2010, '11.

Where are you now?

I don't think we break that out but it's less than 5,000 today.

Okay, great.

Thank you.

Thank you.

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

Well, thank you for joining us this morning, and we look forward to speaking to you all soon.

Please call us in New York if you have any further questions.

Thank you.

This concludes today's Occidental Petroleum conference call.

You may now disconnect.