西方石油 (OXY) 2007 Q3 法說會逐字稿

Good morning, ladies and gentlemen.

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

At this time, I would like to welcome everyone to the Occidental Petroleum Third 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 session.

(OPERATOR INSTRUCTIONS)

Thank you.

It is now my pleasure to turn it over to your host, Chris Stavros.

Sir, you may begin your conference.

Thank you, Markita, and good morning, everyone.

I would like to welcome you to Occidental's Third Quarter 2007 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, Casey Olson, President of OXY's Oil and Gas Business in the Eastern Hemisphere, and John Morgan, President of OXY Oil and Gas Western Hemisphere.

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

Irani, who will update you on the progress we're making on the Dolphin Project, as well as our pursuit of other potential growth opportunities.

Steve Chazen will then review in detail our third quarter and nine months 2007 financial results to be followed by 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, Chris.

Good morning and thank you for joining us.

This has been a good quarter for OXY.

Increase in our production volume including initial production from the Dolphin Project and increases in worldwide crude oil prices contributed to OXY's record third quarter core income result of $1.21 billion.

This reflects the continued successful implementation of our long-term strategy that is focused on current and new long-lived oil and gas assets in our core regions that produce strong financial returns.

The Dolphin Project continues to go very well.

The first two trains of the gas plant are in operation and performing at levels 5% to 10% above their nameplate capacity.

The remaining two trains are expected to come on between now and year-end, and we expect to reach full capacity in early 2008.

On the past several calls, I expressed confidence that future additional growth at OXY will be driven primarily by new opportunities in the Middle East, north Africa region, and that we expect to announce two new agreements before year-end.

I know you are all anxious to hear details.

However, while it remains premature to give you any specifics today, I want to emphasize that I continue to be optimistic about our ability to deliver on our promises.

As you are aware, we're a finalist in the Abu Dhabi National Oil Company selection of a partner to develop the giant Shah gas field, and we look forward to the decision in coming weeks.

We're also making progress in developing additional projects in the United Arab Emirates.

In Libya, we are in commercial negotiation for enhanced oil recovery projects.

These are from existing oil reserves.

Earlier this month, we closed on the acquisition of blocks 12 and 13 in Qatar that we acquired from Anadarco and expect to immediately add 5,000 BOE per day to our net production.

Of additional interest and importance, we were recently awarded two offshore exploration areas in Bahrain.

These areas are technically quite interesting and adjacent to major producing oil fields in Qatar.

We are also submitting a proposal to work with Bahrain to increase oil production from existing onshore areas.

We are confident in our prospects for continued strong financial performance and growth in our volume.

I will now turn the call over to Steve Chazen.

Thank you, Ray.

Net income for the quarter was $1.324 billion or $1.58 per diluted share, compared to $1.17 billion or $1.36 per diluted share in the third quarter of 2006.

The current quarter diluted earnings per share increase of 16.2% compared to last year was greater than 13.2% net income increase as a result of the share repurchase program.

Core results were $1.21 billion or $1.45 per diluted share in the third quarter of 2007, compared to $1.103 billion or $1.28 per diluted share the third quarter of last year.

2007 third quarter net income includes $106 million of after-tax gain from the sale of noncore assets comprised of the following--the $72 million gain from the sale of west African exploration properties net of oil and gas asset impairments, a $27 million gain from the sale of remaining $2.4 million Lyondell shares, a $7 million gain from the sale of domestic oil and gas interests.

The third quarter of 2007 includes $8 million of income from discontinued operations, compared to $67 million in the third quarter of last year.

Here is a segment breakdown for the third quarter--Oil and gas third quarter 2007 segment earnings were $2.029 billion.

After excluding the gains I just described, third quarter results were $1.988 billion compared to $1.79 billion in the third quarter of last year.

Following [account for] the increase in oil and gas earnings between these quarters.

Higher worldwide oil and gas price realizations resulting in an increase of $249 million over the comparable period last year.

Occidental's average realized crude price in 2007 third quarter was $5.98 higher than the comparable period in 2006.

OXY's domestic realized gas price for the quarter was $5.90, essentially flat with the $5.88 from last year.

Worldwide oil and gas production continuing operation in the quarter averaged 570,000 barrels a day, an increase of 7% compared to 533,000 barrels equivalent a day last year.

Significant portion of the production improvement was a result of the Dolphin Project start-up, which contributed 15,000 BOE a day.

Additionally, production[volumes] increased in California, Columbia and Qatar.

Our guidance for the third quarter was in the range of $585,000 to $590,000--590,000 barrels a day.

We are under this range as the delayed (inaudible) asset acquisition from Anadarco, which took place in the fourth quarter of 2007, representing 4,000 BOE a day, and the impact of product prices that reduced volumes for production sharing contract by another 4,000 barrels a day.

We also had a labor strike in Argentina.

Dolphin contributed $13 million to after-tax income during the third quarter start-up, which is greater than our guidance of $10 million.

Sales volumes were 15,000 BOE a day, compared to our guidance of 17,000 barrels a day due to one less lifting during the quarter.

Exploration expense of $68 million in the quarter was lower than our previous guidance of $95 million.

Oil and gas production costs for the first nine months of 2007 were $12.56 a barrel, compared to last year's cost of $11.70 a barrel.

The increases were a result of higher field operating and maintenance costs, mainly in the United States and Latin America.

Chemical segment earnings for the third quarter of 2007 were $212 million, which is higher than our second quarter guidance of $160 to $175 million.

Improvement earnings from our guidance [was due] to higher prices across the core vinyls product chain.

Despite weakness in domestic demand, chlorine derivative exports were particularly strong in the third quarter.

Chemicals earned $248 million in last year's third quarter, the primary factor (inaudible) for the quarter-to-quarter difference was lower PVC margins.

The worldwide effective tax rate excluding the impact of asset sales and other items was 42% for the third quarter of 2007, five points lower than guidance.

The lower quarterly rate reflects a positive effect on the income tax rate, resulting in substantial increases in crude oil price in the second half of 2007 and lower foreign exploration expense due to the delay of certain drilling activities.

In addition, the quarter was favorably impacted by the change in the mix of a larger portion of income coming from the United States rather than from foreign sources.

Let me now turn to our performance for the first nine months.

Net income was $3.948 billion or $4.69 per diluted share for the first nine months of this year, compared to $3.261 billion or $3.78 per diluted share for the same period last year.

Core results were $2.941 billion or $3.50 a share for the first nine months of 2007, compared to $3.32 billion or $3.86 per diluted share for the same period last year.

Worldwide oil and gas production for the nine months averaged $563,000 barrels of oil equivalent per day, an increase of 4% compared to 539 BOE a day for the first nine months of last year.

Capital spending was $880 million for the quarter and $2.51 billion for the first nine months.

We expect total capital spending for the year to be about $3.5 billion.

Cash flow from operations for the nine months was approximately $4.3 billion.

Additionally, we received total proceeds of $670 million from our sale of Lyondell, $485 million from the sale of our interest in the Russian joint venture, $230 million from the sale of our Pakistan properties, $120 million from the sale of exploration properties, and $75 million from the sale of domestic oil and gas interests.

We used $2.5 billion of the company's cash flow to fund capital expenditures, $1 billion for acquisitions, $1 billion to repurchase debt, and $560 million to pay dividends.

We also spent $910 million to repurchase 17.4 million common shares at an average price of $52.27.

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

Debt was $2 billion at the end of September, with long-term debt of $1.7 billion.

The weighted average basic shares outstanding for the nine months were 837 million shares.

Weighted average diluted shares outstanding were 840.9 million shares.

At September 30th, there were 829.7 million basic shares outstanding and dilutive share amount was approximately 833.7 million shares.

Our debt-to-capitalization ratio was 8%, down from 13% year-end 2006.

Over the first nine months of the year, OXY's annualized return on equity was 26%, with an annualized return on capital employed of 24%.

As we look ahead in the current quarter, we expect oil and gas production to be in the range of 600,000 to 650,000 BOE during the quarter.

The increase includes 21,000 BOE from Dolphin, 5,000 BOE from the acquisition of Qatar assets from Anadarco, which closed in early October.

Dolphin's third quarter income was $13 million after foreign taxes, and we expect the fourth quarter after-tax income to be in the $50 to $60 million range.

Dolphin expect to run at 55% of capacity during the fourth quarter, and contributions will continue to improve as it becomes fully operational.

We expect the oil and gas production at year-end exit rate to be in the range of 615,000 to 635,000 barrels a day.

The increase includes 45,000 to 50,000 barrels a day from Dolphin, 5,000 barrels a day from the Qatar assets, and higher Latin American production.

Dolphin exit rate could be higher as noted in our previous guidance, depending on how quickly the final train of the gas plant ramps up to full capacity.

In any case, we expect it to be running at full capacity during January.

With regards to prices, $1 per barrel change in oil prices impacts oil and gas quarterly earnings by about $35 million before the impact of income taxes and Dolphin.

A swing of $0.50 per million BTUs in domestic gas prices has a $24 million impact on quarterly earnings before income taxes.

The NYMEX gas price for the third quarter was $6.69 per thousand cubic feet.

Additionally, we expect exploration expense to be $80 to $100 million for seismic and drilling in our Libyan and South American exploration programs.

We expect chemical segment earnings to be in the range of $100 to $140 million, compared to the $212 million in the third quarter.

The decline in the third quarter reflects normal seasonal downturn, continued weakening demand [at] a lower housing starts, and higher energy and ethylene costs.

This results in lower volumes and margins across the core vinyl chain.

Prices and volumes for key chemical products for the fourth quarter are expected to behave as follows--We expect fourth quarter chlorine prices to be about 10% lower and caustic soda price to be about 20% higher than last year, and volumes to be comparable.

We expect PVC prices for the fourth quarter to be slightly higher than last year, and volumes to be about similar.

We expect ethylene costs to be at least 30% higher than last year.

As previously discussed, tax rates are difficult to predict for the interim periods, as they are based on projected total year's income and taxes.

Occidental's rate [has sense] of the changes in oil and gas prices and foreign expense exploration.

Changes in oil prices have an inverse effect on income tax rates.

Increasing oil prices increased per portion of U.S.

income, which has a lower income tax rate than international operations.

Occidental generally records no tax benefits on foreign expensed exploration until a project is completely abandoned.

We expect fourth quarter foreign exploration expense, which is not currently tax-deductible, to be approximately $70 million.

The worldwide tax rate before this exploration expense is expected to be approximately 45%.

Expect our combined worldwide tax rate in the fourth quarter, including exploration expense, to increase to 46%.

Our third quarter and nine month U.S.

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

Copies of the press release and the supplemental schedules are on our website.

Now, we're ready to take your questions.

Operator, please poll for the questions.

(OPERATOR INSTRUCTIONS)

We'll pause for a moment to compile the Q&A roster.

Our first question comes from Michael LaMotte of J.P.

Morgan.

Thank you.

Good morning.

Dr.

Irani, I was hoping you could speak a little bit about activities in Libya.

We've heard on several conference calls this earnings season that activity is starting out a little slower there.

Some equipment providers have even said that there's too much equipment on the ground but not enough rigs.

So I was wondering if, perhaps, you could talk about the constraints there, whether it is rig bottlenecks, or whether it's just sort of more operator-driven than NOC-related.

This is Casey Olson.

I think I'll address that, if I might.

I can only speak for OXY.

We're not really having any significant problems there.

Our exploration and production activities are going just fine.

Other companies may or may not be having those same difficulties.

But we have rigs, our wells are going down well, and the operations are going well.

Maybe they're talking about slowness in commercial negotiation.

Yes, I think maybe that's the angle.

Could you maybe elaborate on that?

Nothing.

I mean basically, Libya is a very attractive place.

As I said in my remarks, we are in commercial negotiations for a number of opportunities.

However--I mean, they have rounds and rounds of exploration.

Every company around the universe interested in oil wants to come and explore, or develop, or help repair refinery, or build a gas pipeline, or whatever.

And so with all that activity, there's [only a] limited number of resources available at NOC, and so negotiations by definition tend to be slower than people would like.

We continue to proceed on our program, and so we are in a commercial negotiation and had a meetings recently.

When those discussions would be completed is difficult to predict.

Okay.

That is helpful.

I hadn't thought about it from an NOC standpoint.

On Bahrain quickly, perhaps timing on getting started on the exploration activity and timing on the EOR project?

We hope that all those activities--of course, we have won the exploration blocks and we are submitting--and we say we are submitting, it's, like, today--submitted a proposal to develop the onshore oil fields, and we hope to be getting started early in 2008 if we're awarded a contract.

We're competing with others, of course.

So, we wait but we're optimistic.

But it could turn that quickly along 2008?

Well, yes.

I mean, you never can predict how long it takes for government entities to reach decisions, or you have to go to Washington.

Right.

And we forget that other countries have complex regimes, and they have other priorities including defense and what's their big neighbors going to do or not do.

And so--but we're optimistic that we'll have a good opportunity in Bahrain.

Okay.

Thank you very much.

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

Good morning, gentlemen.

Wanted to see if you could provide an update on Argentina.

We've got another quarter where production ticked along at about 30,000, 31,000 barrels a day.

I know you cited some equipment issues there in the past.

But can you provide an update as to what an exit rate might be for the year, and then looking forward to 2008, maybe average production for the year there?

Yes.

We expect to exit over 40,000 a day.

We've had some production problems, and we think we're well on our way to fixing them.

So we expect to exit over 40,000 a day and into the mid-40s for next year's rate.

(inaudible) One other question for me.

On Dolphin, do you have an oil and gas split for 4Q, and then expectations for next year there?

Dolphin is in the process of building up, so we'd just assume--we provide you with an earnings number for the fourth quarter.

And once we get some more stable production, we'll give you better guidance.

Right now, we're getting more condensate out of it than we initially anticipated, so we want to see if that continues into next year.

So, we're a little reluctant to give a will lot more detail, except to say what the earnings level will be in the fourth quarter.

How is the realization on the condensate you're producing?

In the quarter, it generally was right at rent.

Ok.

Good.

Thank you.

Our next question comes from Bernie Picchi of Wall Street Access.

Steve, could you give us some guidance on your CapEx for next year, kind of on an ongoing project basis, and talk maybe about what kind of CapEx you might expect if some of these opportunities do pan out?

In other words, what would be sort of the base level of CapEx given the current configuration of operating activities for the company?

The base would be very similar to what we're running now.

So, whether it is $3.4 or $3.5 or $3.6 million, I can't tell you, but it is somewhere in that range.

But similar to what we're doing now.

Even with the completion of Dolphin?

Yes.

Dolphin may take it to $3.4or $3.3 million.

But within my ability to estimate, that's probably all I could do.

Whether it is $3.3 or $3.4 or $3.5 or $3.6 million, I can't tell at this point.

If we were to go ahead and say what would the other stuff add, I have to go to a risk-adjusted basis, and with only four or five balls to risk-adjust, you'd probably get a weird answer, which might be mathematically correct but inaccurate.

Okay.

And could you also--

Don't worry about the capital.

I mean, we--

No, no.

The capital is fine.

We're not going to have to scramble for it.

No.

I know you got the dough.

But we would guess that it'd be in the low 4s.

Right.

And just amplify your answer to the previous question about Argentina, could you or John talk a bit about what exactly is going on, or what did go on in the third quarter that caused that--

There are elections going on in Argentina and--

What does that have to do with production?

Well, there was a strike.

I mean, we can go on and go into all kind of details.

A number of things--There was a strike, which was not handled properly by government officials.

That's been straightened out.

But we expect the elections to be over in November, and we know who the winner is going to be.

And so we believe firmly that production in Argentina in the fourth quarter will be in excess of 40,000, as Steve said.

And we still believe that we'll achieve 70,000 barrels a day in a few years.

We mentioned earlier--as we have said before, we are behind schedule, but we believe we can catch up.

Okay.

Thank you.

Our next question comes from Pavel Molchanov of Raymond James.

Hi.

Good afternoon.

I know you've discussed your opposition to MLP structures previously, but with the proliferation of MLPs particularly with Permian assets, have you maybe taken any step toward reassessing your view on it?

No.

Any other assets that you think maybe midstream or otherwise that you would ever consider putting into an MLP?

We own midstream assets to enhance the value of our production.

We don't own them to just to own midstream assets.

So, we wouldn't necessarily want an arm's length relationship between our midstream assets and our production as a practical matter.

THat they make money for the asset.

They don't make money as a regulated body.

You can achieve the MLP result in theory.

If you want to sell some properties, you can sell the properties to an MLP and you get 90% of the MLP value.

Our core competence would not be running a small ENP company, which is what an MLP is.

Got it.

Thank you very much.

Once again, if you would like to pose a question, please press star then the number 1 on your telephone keypad.

Our next question comes from Doug Leggate of Citi.

Well, thank you.

Good morning, gentlemen.

My apologies.

I was a little late getting on the call.

So, hopefully--

How was Conoco's call?

Not too fun, thanks.

But hopefully these questions haven't been asked already.

Steve, I'm afraid the old adage of share buybacks on the cash position, can you just bring us up-to-date as to what you're thinking there because it looks like you're very close to going net cash in this oil price environment.

Our cash will be down sharply by the end of the year.

So, we--between share buybacks and--we bought the Anadarco properties as the quarter began, so we will continue to buyback shares as we go.

Where exactly we'll wind up for the quarter-- or the year, I don't know.

But we bought obviously more shares in the third quarter than we did in the second, and so we're--we bought-- Essentially we spent--since we started the program, we've done about 48 million shares at about $50 a share, which is I think pretty good value add for the shareholders.

Ok, thanks.

A couple of quick follow-ups.

The CapEx numbers you mentioned earlier on an ongoing basis, I think historically you said that if you're successful with the projects, you're looking at probably another $1 billion is about the appetite.

Is that number still good?

It is still good unless we're wildly successful.

Okay.

And I guess the last one then is on--I know that Dr.

Irani had mentioned briefly Libya.

But could you give us an update on where things stand on UAE?

And my apologies again if that's already been discussed.

I'm thinking specifically about where--I believe that the bids were due by October 17th.

[Now, my understanding is that there are now] two parties basically involved including yourself.

Just give us an update.

We'd appreciate it.

I read your report, Doug.

Officially, there are four finalists.

But we believe we have a good proposal and, as I said, we're expecting decisions within the next few weeks.

Ok.

I'll leave it there.

Thank you.

Our next question comes from Amanda [Gold] of Bear Stearns.

Hi, guys.

Can you provide some more color on the large step-up in DDNA per barrel that you guys had this quarter?

I think that's--DDNA per barrel?

Is the Dolphin coming through?

The Dolphin wouldn't increase the DDNA per barrel because Dolphin DDNA is low.

It could be that the--part of the impairment would go through DDNA.

Oh, okay.

Some of the--

When we wrote off--these were California properties--part of that goes through DDNA rather than as an impairment line.

That's probably what you're looking at.

Okay.

Thanks.

our next question question is a follow-up from Michael LaMotte of J.P.

Morgan.

Thank you.

I just wanted that--Steve, maybe if I could ask you about the returns now on the acquisition market particularly in your core Permian in California regions.

As I think about the commercial opportunities in the capital commitments that they might impose in terms of a call on cash, I guess two questions--One, what are the returns?

And two, sort of what is your appetite sizewise for deals in those spaces?

We expect the returns to meet our base hurdle rate, which is around 15% after tax.

As far as--and if they don't, they won't be done.

Our appetite is I think very strong.

So, I--in the two areas.

So, California probably a little better because prices are a little less in California than they are in the Permian.

Permian, it's hard to say.

There hasn't been much on the market recently.

So, it is hard to predict.

But there is some activity in the Permian now and some in California, and we'll take properties that make sense for us, pass by those that don't.

But our current--our future cash needs--for the right properties, we wouldn't have any issue with borrowing some money.

Okay.

Maybe a better way to ask the returns question is to say--is to ask if there have been changes in prices and values--

It's hard to say right now.

There hasn't been enough activity to--we've only been in this lofty level here for a month or so.

So, it is hard to say whether there's really going to be any change.

I'm sure the sellers will want more change.

Thanks.

Our final question comes from Nikki Decker of Bear Stearns.

Good morning.

I also joined the call late, so I apologize if this has been talked about.

I know that you've spoken in the past about possibility that some additional upstream projects will be announced by year-end.

Is it still reasonable to expect that?

I said in my remarks, yes.

Okay.

And did you comment on the status at Abu Dhabi?

Yes.

I did say that we are a finalist, and we expect a decision within the next few weeks.

Okay.

My apologies.

I apologize that you--

No problem.

Also, we've been seeing some headlines on Ecuador.

Maybe you could comment on progress on that case and how the timeline looks going forward?

As you know, we exited Ecuador a while back.

Now, it is in the hands of the lawyers and, as we have said on numerous occasions, we are in arbitration.

We think we have a very strong case, and we expect to win a judgment.

And I don't know how long from now, but sometime within one to two years.

And then the question, how do you collect?

So, this is an IOU which is going to take a few years to come through.

How does that--how does it work, Dr.

Irani?

Do you have--is there a trial date that gets set?

And has that date been set?

Yes, I mean it is a normal process of arbitration like in a court.

Judges and lawyers take their time.

So, what I'm telling you is this is nothing that I count on to happen tomorrow or the year after or very soon.

So, it is going to take us few years to collect actual money, in my opinion, for the expropriation that took place in Ecuador.

But we're going to collect money definitely.

When?

It is not in the next couple of years.

Ok.

Thank you.

At this time, there appear to be no further questions.

I'll turn the floor back to Chris Stavros for closing remarks.

Thank you, everyone, very much for joining us today.

And if you have any further questions, please don't hesitate to call us in New York.

Thanks again.

Thank you.

Thank you.

This concludes this teleconference.

You may now disconnect.