Q3 2004 ChevronTexaco Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Good morning, ladies and gentlemen, and welcome to the ChevronTexaco third quarter Investor Relations conference call. At this time all participants have been placed on a listen-only mode and the floor will be open for your questions following today's presentation. It is now my pleasure to turn the floor over to Mr. John Watson, VP and CFO of ChevronTexaco Corporation. Sir, you may begin.

JOHN WATSON, VP AND CFO, CHEVRONTEXACO CORPORATION: Thank you. Welcome to ChevronTexaco's third quarter earnings conference call. As indicated I'm John Watson, the CFO of ChevronTexaco. Today on the call I am joined by Randy Richards, our Manager of IR. I'll refer to the slides that were emailed to you this morning and that are also available on the web. Before we get started I'll remind you that our presentation today contains estimates, projections, other forward-looking statements. Please review the safe harbor statement that you have with you on slide 2.

Turning to slide 3 I'll start with an update on our strategic progress. Our portfolio high grading activity has move forward rapidly in the last two quarters. Proceeds from asset sales were 1.6 billion in the third quarter, and over 3 billion for nine months. Upstream sales closed in the third quarter included U.S. producing properties, Canadian mid-stream business, and offshore producing properties in the Democratic Republic of Congo. In the downstream, sales of service stations under a program announced last year reached 1100 sites out of a targeted 1500. Most sold stations keep a ChevronTexaco brand so we are reducing invested capital, while maintaining our branded market share. And after regaining the right to the Texaco brand on July 1st we added over 800 new Texaco sites in the southeastern United States in the third quarter building our share in that part of the country.

Our exploration program has had a number of recent successes. In the Gulf of Mexico we announced an oil discovery at the Jack prospect which tested the same trend as the earlier Saint Malo discovery. In Australia we discovered gas with the Wheatstone well located in shallow water in an area between North West Shelf fields and Barrow Island. In Nigeria Usan 5 was the fourth successful appraisal on OPL 222 and encountered oil in previously untested reservoirs. In the deep water area shared between Angola and Congo, high quality oil flowed from two reservoirs discovered with Lianzi-1 well which is on a trend of previous ChevronTexaco discoveries in Landana and Tombua in Angola's block 14. In our first exploratory well at Platforma Deltana block 2, offshore of Venezuela was with significant gas discovery. We're following up with two more wells before the end of the year.

Recent milestones included completing construction and start up of the Hamaca upgrader in Venezuela. At capacity the upgrader can process 190,000 barrels per day of heavy crude and send out about 180,000 barrels per day of 26 degree oil. We've recently seen first oil in projects from China's Bohai Bay and the U.K. North Sea. And finally, last quarter we noted the phase start-up of LNG train 4 at the North West Shelf project in Australia. And the first two cargos from that project were loaded for sale in September.

Moving on to financial performance on slide 4, the company had another strong quarter with earnings totaling $3.2 billion. Nine months earnings reached almost $10 billion. And while our performance was good our relative competitive performance was adversely impacted by our portfolio weighting this quarter. U.S. West coast refining and marketing margins declined between quarters. And U.S. Gulf of Mexico Shelf oil and gas production was impacted by the hurricanes that swept through the region. Thesis are proportionately large businesses for us. Nonetheless our preliminary analysis shows our nine month annualized return on capital employed on either a reported or operational basis was number one amongst our large peers. We continue to strengthen the balance sheet and our debt to capital ratio ended the quarter at 22%, with a net debt to capital down to 2% as our cash balances including marketable securities of about 11 billion is approaching our debt level. We also increased funding to our primary U.S. pension plan adding $600 million this brought the nine month total of funding to all ChevronTexaco pension plans to nearly $1.2 billion on top of the $1.4 billion contributed in 2003.

Now, going forward we expect contributions to be more modest on the order of $250 million per year. With a strong balance sheet and cash flow we've taken action to return cash to our stockholders through both dividends and stock repurchases. We increased the quarterly dividend 10% in the third quarter and we bought back $750 million of our stock in the third quarter compared to $600 million in the second quarter. You'll recall that our stock buyback program was launched back in April.

Now Randy will take us through the quarterly comparisons. Randy.

RANDY RICHARDS, MANAGER OF IR, CHEVRONTEXACO: Thanks, John. Slide 5 shows third quarter net income per diluted share was $1.51. During the quarter the company recorded special items for gains related to asset sales in the U.S., Canada, and the Democratic Republic of Congo. These gains totaled $486 million or 23 cents per share. Foreign currency effects were a small negative, a penny per share. Now my remarks on the variance slides will be comparing the third quarter of 2004 to the second quarter. Keep in mind that the earnings release compared third quarter 2004 to the same quarter a year ago.

Slide 6 shows that net income dropped more than $900 million compared to the record level recorded in the previous quarter. Despite higher oil prices a number of factors caused the earnings decline. The special item gain on sale of Canadian upstream assets recorded in the second quarter was $585 million, nearly $100 million higher than the total special item gains in the third quarter. Foreign exchange bookings swung from a modest positive in the second quarter to a modest negative in the third quarter. The profit impact of higher upstream realizations was $325 million, reflecting higher crude oil prices. However, this was more than offset by lower downstream margins including a particularly sharp drop in refining and marketing margins on the U.S. West coast. Lower volumes caused a $300 million earnings reduction. Upstream volumes were affected by asset sales, Gulf of Mexico storms, and a negative swing in cargo liftings at a number of international locations.

Now looking at the other bar on the right-hand side of the chart you may recall that last quarter this was a positive variance of nearly $300 million, mainly due to a $255 million benefit in the second quarter due to certain changes in international tax laws. This quarter we see the reverse. A negative variance of over $400 million. In addition to the absence of the foreign tax item, third quarter additions to environmental reserves, lower Dynegy results, and several litigation related bookings contributed to the negative variance in 'other.'

Slide 7 shows U.S. upstream earnings which increased more than $200 million to nearly $1.2 billion. Higher earnings were driven by third quarter gains on asset sales which we've identified as special items. These gains totaled $279 million in the third quarter with over $230 million related to the mid-August closing on the sale of a large onshore package. Excluding the special items earnings were down about $70 million. Higher liquids realizations boosted earnings about $100 million. Quarterly average prices per WTI increased $5.60 per barrel while San Juan (technical difficulties) Valley heavy rose about $3.40 per barrel. Our realizations rose about $3.60 per barrel which was less than WTI, reflecting pricing lags in the Gulf of Mexico and the heavy California crudes in our production portfolio. Our natural gas realizations averaged about 30 cents per 1,000 cubic feet lower reflecting the movement in bid week and spot price. Lower volumes reduced earnings $100 million, with about 40% the result of shut-ins due to hurricane Ivan in September. The remainder reflected the impact of asset sales and natural declines.

Exploration expense was modestly lower after being above trend in the second quarter. The variance in the 'other' bar primarily reflects FAS 133 mark-to-market accounting for several long-term gas contracts and bookings related to litigation issues. Before leaving this …