埃克森美孚 (XOM) 2005 Q2 法說會逐字稿

Thank you for standing by and welcome to this ExxonMobil Corporation second-quarter 2005 earnings conference call. Today's conference is being recorded. Now at this time, I would like to turn the conference over to the Vice President of Investor Relations, Henry Hubble. Mr. Hubble, please go ahead.

Welcome to ExxonMobil's teleconference and webcast on our second-quarter 2005 financial and operating results. Please note that estimates, plans and projections are forward-looking statements. Actual results, including resource recoveries, volume growth and project outcomes, could differ materially due to factors I discussed and factors noted in our SEC filings.

Please See Factors Affecting Future Results in Item 1 of our latest 10-K and the form 8-K we furnished in this morning, which are available through our website. Please also see our Frequently Used Terms, the supplemental materials included in this morning's 8-K and our 2004 financial and operating review, all of which are available through the investor information section of our website.

This material defines certain financial and operating terms I will use today, shows ExxonMobil's net interest and specific projects and includes information required by SEC Regulation G.

ExxonMobil's second-quarter net income of $7.6 billion was our best-ever second-quarter result and our second-highest quarterly net income. Excluding a $200 million after-tax charge related to a class-action lawsuit filed by service station dealers in Florida, normalized earnings were $7.8 billion, or $1.23 per share. This was an increase of $2 billion versus the second quarter of last year.

Industry conditions remain robust in our three core businesses. Record crude prices and strong gas market contributed to a record cash flow of over $25 billion year-to-date. In addition, while light heavy and sweet sour differentials narrowed over the quarter, refining margins improved. Retail marketing margins also recovered in the U.S. and Europe from the lows earlier in the year.

In Chemical, general softness in demand from inventory destocking plus higher feedstock costs resulted in lower margins. However, the Chemical business remains underpinned by continued global economic growth.

Our performance continues to demonstrate the strength of our project management expertise, the effectiveness of our global functional organization and our technical technology advantage. We've made progress on a diverse set of projects designed to improve and profitably grow each of our businesses. I will highlight just a few of the major milestones.

In the upstream, all of our operated funded development projects continued to progress on schedule and on budget. In the deepwater, we started production at Kizomba B on Angola (ph) Block 15 in July, more than five months ahead of schedule and below budget, employing a similar design to the one used for Kizomba A. Both developments are benchmarks and have set cycle time records with the lowest development cost for projects of this scope. Gross production from Block 15 is expected to rise 550,000 barrels of oil today by year end.

In Oil Sands, Imperial Oil filed regulatory applications for the development of Pearl (ph) Oil Sands Project in Alberta, Canada. The current plan is a multiphased development with an initial mine train capable of producing about 100,000 barrels per day.

In LNG, we continued to advance several projects. We received FERC approvals for the Golden Pass and Vista Del Sol LNG regasification terminals in the United States. On the liquefaction end of the supply chain, front-end engineering and design has commenced for the Greater Gorgon (ph) LNG venture in Australia.

In Conventional Liquids, we agreed a memorandum of understanding on the key terms and conditions that well enable us to progress towards definitive agreements for the development of the 250-million-barrel (indiscernible) Europe discovery in Indonesia's Chapu (ph) contract area.

In Gas, we secured an additional long-term sales agreement for the PNG Gas Pipeline Project. We are also finding attractive opportunities to capture value from our mature assets in this environment. In Europe, we completed the restructuring of our Dutch Gas business, which includes the transfer of our 25% interest in the Dutch transportation business, adding $1.6 billion to next quarter's earnings. Cash proceeds of $1.9 billion were received in the second quarter from asset sales and farmouts in the upstream and downstream.

In the downstream, we celebrated a major milestones with the groundbreaking of Fujian Refining and Ethylene Joint Venture project in China. This complex, integrated project will benefit from ExxonMobil's technology, operating know-how, management systems and financial discipline. Front-end design work is currently underway. Adding to our long-standing leadership in cogeneration, we recently started up the last two trains of our Beaumont Co-gen facility. Energy efficiency projects are a significant piece of our downstream CapEx and they remain a core focus of our initiatives to lower operating cost and add environmental benefits -- with added environmental benefits.

In Chemical, our joint venture with Sabek (ph) in Saudi Arabia completed the debottleneck of a Siampet (ph) steam cracker in polyethylene plants. In Chemical Product Development, we continued our focus on tailoring products to meet specific customer needs, a group of products we call premium products since they generate higher value. We recently launched a new polypropylene that broadens our line of products and allows our customers to make softer nonwoven fabrics. This new product illustrates our solution-based approach that integrates technology with the business and enables ExxonMobil to further differentiate itself from competition.

Turning to the business line results, please refer to the earnings reconciliation provided in the IR supplement. Upstream earnings of $4.9 billion were up $1.1 billion, or nearly 28% versus the second quarter of 2004. Higher realizations of $1.7 billion were partially offset by $440 million due to lower volumes. The net effect of our other earnings events, such as asset sales, tax law changes and the mark-to-market adjustment for UK gas contracts was on balance negative.

We continued to capture the benefit of strong industry conditions with record upstream after-tax unit earnings of $13.78 per barrel for the quarter. Worldwide crude realizations were $47.16 per barrel, up $13.45 per barrel, but below the increase in the Brent market crude due to higher heavy crude discounts versus last year. Average gas sales realizations increased 25% with Europe stronger, but North America and Asia below the average. With our remaining major 2005 startups progressing as forecast and slated for the second half of the year, production for the second quarter was lower as expected. Natural field decline and maintenance on our operated properties were consistent with our plans. However, some other production was impacted by unplanned downtime, primarily in the United States and Europe.

Oil equivalent volumes declined about 4% versus the same quarter last year. Entitlement impacts and asset sales were responsible for 2% of the production. We would expect a similar impact from those factors on future near-term volumes should crude prices continue at these unexpectedly high levels. We continually optimize between volumes and earnings and our focus remains on maximizing returns.

Liquids production decreased 115,000 barrels per day, or 4.5% versus the same quarter last year. Excluding entitlements and asset sales, liquids production was down about 2%. Work program and project additions, primarily in Africa, the North Sea and the U.S., were more than offset by mature field declines and downtime. In the near-term we have stepped-up development drilling programs in Africa and the recent startup of Kizomba B along with other planned major 2005 startups, such as Sakhalin 1's Chibo (ph) Field and Bonga in Nigeria will favorably impact volumes in the second half and beyond.

Gas volumes decreased 375 million cubic feet per day, or about 4% versus the second quarter of 2004. European volumes, which total about 45% of our production, were up 1% as improved demand and work program volumes more than offset field decline and unplanned maintenance at Shearwater.

North America gas production was down as work program volumes only partially mitigated field decline. The Bessman (ph) effects, along with field decline, reduced Asia-Pacific volumes. Middle East gas volumes continued to grow and the upcoming startups of Alcolese (ph) and Ross Gas Train Corp. (ph) should continue this positive shine.

Turning to the sequential comparison versus the first quarter of 2005, upstream earnings decreased about $150 million. Realizations improved by $430 million but were more than offset by a $520 million impact of lower volumes, primarily lower seasonal gas sales. Foreign exchange losses and higher exploration expenses make up the balance.

Liquids production declined 3% sequentially. About half of the decline was due to entitlement affects and asset sales. Seasonally higher levels of planned maintenance and operational downtime in Nigeria accounted for the remainder. Gas production was down 19%, primarily due to normal seasonal gas sales fluctuations in Europe which were more moderate than historical trends due in part to a cooler stream.

For further data on regional volumes, please refer to the press release and IR supplement.

Turning to the downstream, second quarter normalized earnings of $2.2 billion were up approximately 700 million over the second quarter of 2004. Year-on-year, higher refining margins contributed an additional $480 million due to improved industry conditions and our ongoing efforts to benefit from running lower cost raw materials. Our industry-leading reliability allowed us to maintain high refinery utilization rates and capture the benefits of favorable market conditions. Earnings improved approximately $130 million as a result of increased refinery throughput and sustained improvements in refinery operations. Marketing margins improved modestly year-on-year.

Downstream earnings increased about $1.1 billion versus the first quarter of 2005. Higher refining and marketing margins provided approximately $770 million of the sequential increase to earnings. Increased volumes and excellent refinery operations contributed about $150 million. The tax law change in Italy and asset sales further benefited downstream earnings.

Turning to the Chemical results. Second quarter normalized earnings of $814 million were up approximately $210 million versus the second quarter of 2004. Higher margins contributed an additional $220 million but were partially offset by lower volumes due to customer destocking during the quarter. These typical buying patterns will impact short-term results, but the fundamentals continue to be driven by global economic growth.

Second quarter normalized earnings were down approximately 470 million versus the first quarter mainly due to lower margins.

Turning now to the Corporate and Financing segment. Corporate and Financing expenses of $103 million were down about $70 million from the second quarter of 2004, primarily due to higher interest income. Our cash balance was $30 billion and debt was 9 billion at the end of the second quarter. During the second quarter, ExxonMobil purchased $3.5 billion of shares to reduce shares outstanding, a $1 billion increase from the first quarter. Overall during the quarter, we purchased 64 million shares of our common stock for the Treasury at a gross cost of $3.7 billion. As a consequence of the continued strengthening of our financial position, purchases of shares to reduce shares outstanding will be increased to $5 billion in the third quarter.

CapEx in the second quarter was $4.5 billion, up approximately 920 million from the second quarter of 2004 primarily due to planned upstream activity. At the end of the second quarter, year-to-date CapEx spending totaled $7.9 billion. The stepped-up drilling activity in Africa that I mentioned previously, along with the completion of the purchase of additional participating interest in the offshore Kazakhstan consortium and additional marine ship investments will result in anticipated full year CapEx for around $17 billion. The effective tax rate for the second quarter was 41%.

In summary, we had a very strong quarter in all segments of our business. Our continued focus on operational and execution excellence underpins these results. Our leading-edge proprietary technology allows us to achieve and sustain our competitive advantages. Our disciplined project management and operating practices deliver the benefits of strong industry conditions to our shareholders. We remain focused on superior execution in all that we do. We are pursuing and capturing quality opportunities while retaining our capital discipline and seal (ph) activity. We maintain a strong financial position while returning industry-leading levels of cash to shareholders.

That concludes my prepared remarks and I would now be happy to take your questions.

(Operator Instructions). Neil McMahon, Bernstein.

Just a number of questions. I wonder if you could just go through the CapEx in a bit more detail. It looks like the increase from what you stated in March from 15 billion to 17 billion largely looks like it's acquisitions associated with the expanding your interest in cash again and the shifts to talked about. Everybody else pretty much has been coming out with inflation rates, increased CapEx numbers this year and going forward associated either with increased activity or with inflation associated with rigs, et cetera, but you don't seem to be. Maybe you could go in a bit more detail and maybe let us know why you're not seeing these inflationary pressures?

Thanks, Neil. I guess first off, I would start with the bagging set (ph) we had out there and if you look at the F&O and the analyst guidance that we've given, was for 16 billion and with some range around that, both above and below. And so the increase is from 16 to 17. And that is, as I mentioned in the remarks; the biggest piece of that is increased activity associated with additional Nigerian drilling in the joint venture area.

We also have, as you also mentioned, the BG equity purchase, which was about $400 million. So those two factors represent the bulk of the increase.

Now when you think about cost escalation, and there are a number of things. You know, we're all dealing with the same industry environment and market forces and really the keys in differentiating performance is how you manage those costs. The things that have differentiated our performance in the past are even more important in this kind of environment, and that comes back to project management excellence, and I mean minimizing schedule changes, minimizing other changes that you have to make with the project, being able to plant those well in advance, the contracting strategies that we employ, the application of technology to improve development efficiency, understanding of the sub-surface to make those developments more cost effective. We are employing all of these kind of techniques to manage and to keep a cap on those. And what you see is the results that we're able to, through those kinds of efforts, have been able to maintain our base projects on budget from what we had outlined earlier. So we're not seeing these at this point in time.

Just a few follow-up questions on different parts of the business. The first one is on demand. It looks like from what you were saying on chemicals, the decrease in volumes -- what was not really related to any decrease in demand. What about (indiscernible) petroleum products -- are you seeing anything there? And also, could you walk us through the proportions of your production decline from second quarter 2004 in terms of disposals, field declined and PSA effects?

Alright, maybe we will start with the downstream piece. In terms of the volume impacts that we have seen there, as you saw in or you see in the petroleum product sales, they were up about 3% year-on-year, and that -- a big piece of that work continues in the U.S. and Asia-Pacific. And you see also our refinery throughputs being up, and that's basically where that is coming from. We're up a couple of percent there.

So we are really -- and the growth in product mix has been basically in the distillates area year-on-year. That's where we're seeing a good bit of the growth. Then maybe just turning to the question on -- does that handle what you're looking for on the downstream?

Sure. Basically, you're obviously not seeing any demand destruction there?

No, we are seeing good strength, and of course, we had some very good refining operations which contributed to our performance here. And then if we look at the upstream side of things and the volumes, again, just going back through the major factors, and I'm doing quarter, year-on-year second quarter comparisons. We were down about 4% on an OEB basis. Half of that or 1% of that is in asset sales, 1% of that is due to entitlements and there's another little over 1% due to downtime. And that downtime was basically -- the two big factors there were Shearwater and Alaska.

Okay. That is great. Thank you very much.

Mark Flannery, Credit Suisse First Boston.

I'm going to follow-on on growth. You mentioned in your prepared remarks that volumes are expected to get to better in the second half, particularly under the influence of Kizomba B. And I know that you're not really in the habit of giving specific numbers or guidance on growth, but can you give us some idea of the magnitude of the net increases that you're expecting under whatever set of circumstances you choose to pick? In other words, what kind of second half volumes, range, anything like that, should we be looking for?

As we've laid out in our guidance, and we're not really seeing that all that different at this point, is we're expecting to be flat overall for the year. Now with that said, and as I was mentioning, the impacts we're seeing from the very high prices in entitlements -- if the price is maintained at this level, we're going to continue to see that, and that has been running about a percent.

1%?

About 1%, yes. And the asset sales, of course, the things that have been sold, they're not there. So the impact associated with that has a been about a percent as well. Now stepping back for a second when you think about that, the entitlement impacts is basically a good thing. The prices are higher, it reflects positively right through in our earnings and it is just good for projects too and we're getting the money back faster and improving the returns associate with them.

The asset sales, of course we're very pleased and these mature assets, we're constantly in a program to look at mature assets and we value those or assess those, what the market is willing to pay for them versus what we have seen internally. We will test that against the forward strip to make sure we're capturing full value for those. We will look at what we can do to enhance the development associated with those fields, we will do things to, if we're not adequately compensated for the upside, we will maintain that. So there are a number of things that we will do to make sure that we're getting full value for those assets. And that is basically where we are from our year outlook.

Just of very quick follow-up. Is the asset sale program for the mature assets -- is that continuing? Should we expect to see some more in the second half, or are se driving that down a little bit?

We have a continuous program of looking at mature assets. And in fact, we will constantly evaluate. If the market is willing to pay us more than we see value internally, we will sell those. So I would not say -- I cannot speculate on where that may be, but we're going to continue our efforts in that regard. And of course, the other thing we do is we do post audit success on the sales that we do and our record has been very good. So our focus really here is on returns, not volumes, and that's really what we're focusing on.

Great, thank you very much.

Robert Kessler, Simmons Company.

Good morning. Some questions relating to your Sakhalin 1 Project in that your competitor recently announced a fairly staggering increase in their cost estimates for a nearby project and citing overall environment conditions in the area as part of the factor there. Can you just update us on three factors with regard to that project specifically? I guess costs of course based on any recent bottoms-up analysis to timing? And then thirdly, any discussions you might have had recently with the Russian authorities with regard to recoverability of costs under your PSE?

Thanks. I'm not going to talk specifically about discussions we have with the government, but let me get into what's going on with our project. The Sakalin environment is a tough environment and we are facing the same kind of issues in terms of environmental challenges that everybody is up there. It's one of the most challenging areas, harsh conditions, lack of infrastructure, arctic climate -- there are a lot of tough. But we have taken an approach to our development, a phased approach, that we believe, one, allows us to learn lessons and to learn as we go in a new environment light like this, operating environment like this. The initial phases have greater challenges due to the lack of infrastructure. And of course as we build up expertise in the area, we're optimizing that initial development.

What we see, we've been able to optimize that, to bring on additional resources and we are seeing development costs in Sakalin that are basically in-line with our initial estimates for this first phase. And as you know, we are bringing on our initial oil, early oil, later this year and we expect to get to full field by year-end 2006 and are on schedule to do that.

Okay. So if I look at your published project CapEx guidance of 12-plus billion in your F&OI (ph), that is still accurate? Has the plus gotten any larger I guess?

That is over a long period of time. Those are -- basically that was a 2002 number, so we -- what we're saying is, the Phase I is basically on-target for the development that we're doing. We're learning lessons from that and basically, it's coming in in-line with the unit development costs that we had for the original project. And I really can't speculate where things are going to be on future phases at this point. I think it's premature.

Can you tell us how much Phase I cost you?

I'm not going to get into specific piece. I can tell you that the unit costs are basically in-line.

Okay, thank you.

Paul Cheng, Lehman Brothers.

A couple of quick questions, if I could. Henry, I think you mentioned that Nigeria had some outage. Can you -- what is the production impact on that?

When we look at -- you are talking in the sequential comparison, I believe.

That's correct.

That was associated with OSA (ph) and I'm just looking at the impact here. There was about 25 kbd.

25? And is it not back up, or do we still have something going back into the third quarter?

I don't know -- I'll have to get back to you on that.

That would be great. And also, I think Alaska is having some problem because Conoco was mentioning and they think there's about 6000 barrels per day on their heat exchange, I believe. I can assume that you guys see a similar problem, right?

Yes, that's right. That is a big piece of that impact.

Also, Henry, you are kind enough to give us say the impact on the year-over-year on the entitlement and divestment. Where was this the first quarter? DO you have a similar number you can share with us?

For entitlements?

And also divestment.

Yes. The entitlement piece in the first quarter was about 35 kbd, and it's about a percent, about 1%.

And is that primarily in Indonesia on the gas line?

The gas is Indonesia, but the bulk of that volume is actually liquids in Africa.

I see.

And then on the asset management side, it was relatively small on a sequential basis. I mean, it's 15 a day or something in that vicinity.

Okay. And in North Sea, I presume you already have done some of the maintenance work that typically you did it in the third quarter. Have you already done some in the second quarter? So in other words, if we look at the regular planned maintenance sequentially from second to third, should we assume it's not going to have as steep of a drop?

To be honest with you, I don't know. The maintenance there is seasonal. Second quarter is typically a bigger but about a half and half in the second quarter, third quarter.

I see. And, Henry, I think you have mentioned that the tax change in the international downstream for Italy (ph), that benefit that we saw (ph), and you also mentioned that another factor (indiscernible) I apologize I did not catch that one.

Are you talking.

Versus the first quarter.

Versus the first quarter -- yes. There was some asset sales associated with that. We had a northeast pipeline sale, and then there were some favorable tax changes, and that's Italy.

I think you mentioned the total is of 160 million.

Yes.

Will you be able to break it down for us between historical (indiscernible)?

Yes, it's close to 50-50, within rounding.

Okay, fair enough. And on Kizomba B, what is the current production? You saw that in July, early July. I presume that you're already (indiscernible)?

It is ramping up very rapidly. Basically, the total is like the 200 kbd, net.

Already?

72 -- no, 72 is our gross, but that's why it was 200 total, 72 gross -- I mean, net.

So at this point it's already, because the peak is 250 (MULTIPLE SPEAKERS)

It has come up very, very rapidly and (multiple speakers) 12 wells basically that were ready to go when we brought it on.

The rest of the behavior, everything is good?

Yes. And the total Block 15, as I mentioned we are expecting it to be at 550 in gross by the end of the year, and we're real pleased.

Okay, perfect. Two final questions. One, in the past, Henry, you've been able to provide us some impact on the price finalization, those barrel underwater related to (indiscernible)?

Yes.

I'm wondering if you can share with us that on an absolute dollar term and also in -- versus 1Q '05, breakdown between U.S. and international?

If you go through -- if you look at the total and you're looking versus Q1 '05, or quarter-on-quarter?

Q1 '05.

In the variance, it's about $50 million.

(indiscernible)?

I beg your pardon?

It's a benefit, or just a loss?

It's a benefit. In the absolute numbers, it was negative 40 in the second quarter of '05 and about 90 in the prior quarter, negative.

And do you have a breakdown on the absolute between U.S. and international? Is that 50-50, or just more U.S.?

Well, there's actually more U.S. in -- yes I guess actually, it is about 50-50. Total.

Okay. Perfect. And in Sakalin 1, Henry, where are (indiscernible) in the Phase II gas project (indiscernible) I think at one point talking about or maybe you continued talking with the Chinese have a pipeline shipping the gas there. Is there any update you can share with us?

No, we'll continue those discussions and we're maintaining a variety of options, but we're in discussions with the Chinese.

And you're saying that you have a mark-to-market loss related to a UK gas contract in the second quarter versus the first quarter. How big is that?

The mark-to-market piece was a little over 100 million.

(indiscernible)?

Yes?

And finally your favorite -- maybe not -- Venezuela, any update or negotiation or discussions with (indiscernible) there?

No, we're continuing discussions. Obviously, we are insisting on (indiscernible) contracts and are working -- hoping to work this out and the discussions continue.

Okay. So there's nothing new and also they did not put that back tax on you guys or something like that, right?

No, the only issue we have is this one on the royalties.

Very good, thank you.

Doug Leggate, Smith Barney.

Good mining, Henry. A couple of points of clarification. First of all on the share buybacks, the $5 billion number, should we take that as a run rate on a go forward basis?

As you know, the buyback is a flexible way to help manage our cash position, and so we don't really make forward commitments on that. And we have been more consistent in our programs than many. But no, you cannot take that as a run rate going forward.

Is there any kind of guidance you could give us to maybe try and color what we should watch, what the moving parts should be that we might see that number come back down again, or is the direction going to continue to -- the trajectory going to continue to move higher?

Obviously, it's a reflection of our very strong cash generation and that's what you watch and that's what it's going to reflect and that will be -- that's what we have to look at.

On the CapEx, sorry to come back to that, I was wondering -- is there any of the capital increase that you would characterize as perhaps being short term in nature, maybe taking advantage of the environment? I'm thinking specifically about the downstream here. Is there any change in your view as to how sustainable this environment may be and perhaps investing accordingly?

When you to the downstream, the kinds of investments that we're making there -- capacity creep, minor, or expansions of existing facilities -- we continue to move those ahead. But those are -- we can do that at the investment levels that we have laid out.

Now from an opportunistic standpoint, of course we are, as I mentioned, we're moving ahead or planning to move ahead some of the activities in the Nigerian (ph) drilling, which is in response to opportunities that we have been able to progress them forward.

I guess one final one. If you can maybe help us again with the visibility on production over the next six months or so. So there's quite a few startups I guess scheduled. Can you just give us your latest thoughts on timing? I see that Bonga appears to moved back again, and just give us your perspective on how you see things developing?

On our own projects, and if you look at our key projects, they are all on schedule. We talked about Kizomba B which is coming well ahead of schedule, five months and under budget. We have the Sakalin project we also talked about, which is the early oil scheduled for the second half as we had planned. We have alkalis that will be coming on, which is in Qatar, and that's on schedule for the second half. And we also have our Ross Gas Train 4, which is on schedule for the second half. Bonga is also in the -- it's now in the fourth quarter basically and that's where we are.

Great, thanks for your help.

Mark Gilman, Benchmark Financial.

Just a couple of things. Was Kizomba A at plateau production levels in the second quarter?

Yes.

Yes?

Yes.

Secondly, are you seeing any declines in base zafero (ph) production in EG?

Why don't we get back to you on that. I don't know. It's as expected, but.

Okay, if you would, please. In terms of the property divestment impacts which you've cited, could you tell me what specific asset sales you're talking about with those, and also possibly quantify the impact of some of the recently announced U.S. property divestitures going forward?

The asset sales that we have in the second quarter was -- we had Canadian asset, also the -- in Iron River, we had some Permian assets that were in the U.S. and those where the two big pieces. Then we also as I mentioned earlier, had some of the pipeline sales in the Northeast, and those where the big impacts. It was about 2 billion total in terms of cash impact.

The production impact of that is not in the second quarter; that will be going forward? Or was it?

Yes. It will continue. But the bulk of it will be going on a forward basis.

So even though the transactions were announced sometime during the quarter, the full quarter or almost the full quarter?

There's pieces of it that have impacted (ph) -- I talked about the asset management impacts already. Those are included in that, whatever impacts there were. And they will be going forward in the coming quarters.

One more if I could. On your acceleration of the Nigerian development drilling, I assume that you're talking about shelf properties?

That's correct.

And I'm wondering whether this will be under existing fiscal terms?

Yes.

So it's not any change in fiscal terms that was responsible for the acceleration?

It's in the JV and just as a representative activity, it will take advantage of existing infrastructure.

Okay, thank you very much Henry.

Jennifer Rowland, J.P. Morgan.

I have a question on the cash flow from operations. It came in lower than we thought at 9 billion this quarter, down from 13 billion in the first quarter, yet the incremental wasn't all that different. I was wondering if you could help us reconcile that.

The big single impact is taxes. That's the payment of U.S. taxes and accrue them in the first quarter and we end up basically with a double payment in the second quarter; that's the cash impact.

Okay, and then I just have a follow-up to that. (indiscernible) first quarter in a while where your debt balance actually has gone up, and just a rough calculation. It looks like you would have been pre-cash flow positive based on the 11 billion of cash flow you gave, and then the CapEx buybacks and dividends included, that would have had at least a billion of free cash flow there. So, is there something else moving out?

We're always looking at the possible attractive debt, and this is just part of the structured arrangements.

Okay, so it's not an extra use of cash per se?

No.

Thank you.

Paul Sankey, Deutsche Bank.

Hi, Henry. Terribly sorry to go back on about this disposal thing, but just further to what Mark Gilman was asking -- are you saying that the disposals in the second quarter are included in the volume impacts that you named for the second quarter, or will they have more impact going forward?

A portion of them, depending on when they were concluded during the quarter, a portion of them will be, and the full ratable impact will be in subsequent quarters.

Okay, I'm with you. Is there any way of indicating to us with that will be?

No, I don't have that for you.

And you mentioned that there was $2 billion of sales -- was that for the half or the quarter?

That's for the quarter.

And do you have a first quarter number, Henry, and also?

1.8.

And the comp for last year?

Let me get back to you on that.

Sure. I think there's a pretty strong acceleration in the level of disposals. Is that a function of you putting more assets up for sale, or are you finding more buyers?

As we talked earlier, we have a continuing program and what the reality is in this market, we are finding people willing to pay a very good value or give us very good value for these assets. And it's really not unexpected in a high-price environment that we would see more high-priced assets or mature assets that would move out of our portfolio.

So that means there's more buyers basically?

Yes.

Thanks for that. On the chemicals sales, forgive me if you covered this, but they are notably down, both U.S. and non-U.S. Could you talk a bit about more about that?

I'm sorry -- I missed the question.

You chemical product sales volumes are down quite noticeably year-on-year, and that is unusual for you guys. I wondered what was going on if you could give us a bit more (inaudible)?

As I mentioned, there's destocking activity that occurred during the quarter, and it's really not an unusual buying pattern. When customers have an expectation of declining prices, they will often pull back on their purchases, run off of inventory and then come back. So we see many cycles within the cycle and that's really from what we see what is going on at this point.

Could you specifically talk about China in that context? Has that been one of the areas where you've seen a slowdown?

Yes, in terms of this cyclical purchase pattern, I would say yes. In terms of overall growth rates, our observations are -- we're not seeing anything that would indicate a turndown.

Sure, I understand. A horribly specific one on your sales of products by region. I noticed that other non-U.S. is down sharply against trend, everywhere else it is up. What is the dynamic there?

Petroleum product sales other U.S.

Other non-U.S., just a sharp drop in two areas where everywhere else, it's rising.

I would have to get back to you on that one.

I understand. And the final one from me. Just to clarify the buyback, that is a net number going forward. Could you indicate what a gross number would be? Am I looking at that right?

No, I really can't. It depends on a lot of different factors, but we've averaged -- I really don't have it.

But the.

That 5 billion is the net.

Is the net number. Okay, thank you.

John Herrlin, Merrill Lynch.

A couple of quick ones. With the LNG that has been approved by FERC, are you just in a fee stage, or when do you start breaking ground for the U.S.?

We're basically working on plans toward construction. That's where we are.

And you discussed what was happening with chemicals kind of regionally. What about with refining right now, Henry, are you seeing any weakness in Asia of Europe?

Well I can talk to you about the quarter -- in terms of volumes, I would say no. What we have seen -- you saw on our throughputs, they were up 2%, our overall sales up about 3% year-on-year. And then when we look at -- our utilizations have been very high, over 90%. So things in general are strong. And the volumes, we had a positive sequential impact on volumes as well. You do see -- Japan has been kind of swinging between marketing margins and refining margins, but that has been the biggest one we've seen recently.

Not to beat a dead horse with the asset sales, but predominantly oil, not much gas effect?

Yes, the bigger impact is -- if you look at the asset sales, it was about two-thirds liquids and one-third gas, in that vicinity.

And where was the gas, predominantly North America or Europe?

The gas, we had some associated with Del-Hi (ph) and then that was a big piece, that's the biggest single piece.

Okay, thank you.

Mark Gilman, Benchmark Financial.

Henry, the U.S. refining inputs was the strongest that show in our quarterly series. Is that a reflection of debottlenecking capacity or merely 100% utilization rate on pre-existing capacity?

You have a combination of things that are going on. We have capacity creep, we have reliability improvement, we have very strong operations, we have good capacity utilization, we're up 98% in the U.S. So it was just a very strong operational performance. We're getting everything out that this market has to offer.

Could you possibly quantify the Sabek expansion volumetrically, both on the steam cracker, and I think your said polyethylene?

Yes. Ethylene was about a 78 or 80 K (indiscernible) per annum increase, and then we had about a 50 in polyethylene -- 50 K ton per annum.

Those gross numbers?

That's our share.

Thanks, Henry.

And with that, that does conclude today's question and answer session. I'd like to turn the conference back to Henry Hubble for any additional or closing remarks.

I'd just like to thank everybody for participating. If there are any follow-up questions, and we have a couple that we'll want to get back to you with, please give us a call. Thanks.

That does conclude today's conference call. We'd like to thank everyone for their participation.