Q1 2004 ChevronTexaco Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Good morning, and welcome to the ChevronTexaco first quarter conference call. At this time all parties have been placed on a listen-only mode and the floor will be open for your questions following the presentation. It is now my pleasure to introduce you host, Mr. John Watson, Chief Financial Officer of ChevronTexaco. Sir, the floor is yours.

JOHN WATSON, CFO, CHEVRONTEXACO: Thank you. Good morning. Welcome to ChevronTexaco's first quarter earnings conference call. As was indicated, I'm John Watson, the Chief Financial Officer of ChevronTexaco. I will be joined today on the call by Randy Richards, our Manager of Investor Relations.

Before I get started, let me apologize for the delay in the conference call. As you've gathered there were some technical difficulties. A fire at the vendor's offices. We hope there were no injuries or nothing serious at that event but obviously it's delayed us and we've scrambled a little bit to make alternate arrangements and I thank you for bearing with us. I'll refer to the slides that were e-mailed to you this morning and are available on the web.

Before we get started I'll remind you that our presentation today contains estimates, projections, and other forward-looking statements. Please review the Safe Harbor statement on slide 2. Turning to slide 3, I'll start with an update on our strategic progress. Our portfolio migrating continued.

Several U.S. upstream sales were concluded and progress continues on the previously announced program. We are proceeding with urgency but at the same time trying to stay true to our requirements to obtain good value. In the U.K. we reached agreement to sell three properties with about 20,000 barrels a day of production and two of these sales were closed in the quarter. In the downstream we announced our intention to increase ownership in the Singapore refinery from one-third to one-half, and I'll expand on that in a moment.

We are actively following up on recent exploration successes and prospects with drilling in the Gulf of Mexico at the Jack prospects near St. Malo, in the South Alaminos Canyon area, near Great White, and at Blind Faith where we've increased our interest to 50% and assumed operatorship. In Nigeria we're drilling in seco 2, a follow-up to last year's discovery on OPL block 249. Additionally, exploration rights have been awarded for block 1 in the joint development zone offshore Sao Tome and Principe in Nigeria and we'll be the operator with a 51% interest.

A notable recent gas development was the signing of an MLU between Qatar petroleum and Sasol Chevron to expand the existing ORYX GTO project from 34,000 barrels a day to 100,000 a barrels a day and examine base oil opportunities. Finally, Quay Petroleum -- excuse me, QP and Sasol Chevron agreed to pursue the opportunity to develop 130,000 barrel a day upstream/downstream integrated project. We've achieved several significant project milestones so far this year. In Chad, central water treatment facilities came on line in February allowing production to ramp up toward the peak rate of 225,000 barrels a day expected to be reached in the second quarter.

In the Gulf of Mexico, front end engineering and design contracts were awarded for the Tahiti project in Angola large offshore lifts of topside facilities were completed for the Sunjay Condensate project. The project remains on track for a phased startup beginning in October this year. Initially with crude production from the Bomboco field followed by start up of the Sunjay Condensate facilities early next year.

Turning to slide four many of you may recall in our analyst meeting last August Dave O'Reilly told you that we considered our Asia downstream assets to be core strategic holding. Margins have been poor for several years, but we felt the market held more potential for economic and income growth than other parts of the world. That potential along with quality assets and good market shares in our countries of operation led to our decision to declare Asia downstream core. Since then, as everyone knows, the region has felt the influence of very high energy demand in China. Getting direct data on Chinese demand is difficult. One way to look at is it to tract China's crude and product imports. Looking at the graph we see totals over 2 million barrels per day in the second half of 2003 spiking to 3 million barrels per day early this year.

Much of the recent surge in Chinese demand has been driven by demand has been driven by industrial consumption. Demand for transportation fuels while growing briskly, was a smaller part of the recent story. We believe the transportation fuels have potential for good growth in China and some other Asian countries for many years ahead. Slide 5 shows improvement in Singapore refining margins in recent quarters. While margins will always experience ups and downs we think we're seeing a better balance between regional refining capacity and product demand leading to long awaited solid refining margins. Against this backdrop we recently announced intention to incur ownership in the Singapore refining company from one third to one-half. This will add 47,500 barrels per day of refining capacity. The price is $70 million plus our share of working capital and the transaction is expected to close at the end of June.

For ChevronTexaco we think it's a good deal at a good price and it fits strategically strengthening our refining position and supply chain in a core area and positions the company to capitalize on the region's improving economic fundamentals. Moving on to financial performance on slide 6, the company had its 5th strong quarter in succession, achieving record quarterly earnings totaling $2.6 billion. First quarter annualized ROCE was a strong 21%. We continue to strengthen the balance sheet.

Our debt-to-capital ratio ended the quarter at 25% with a net debt-to-capital ratio that is debt less cash balances, of 13%. In the first quarter we added $500 million to our pension plan after contributing more than $1 billion in the previous quarter. Having strengthened our balance sheet over the last year and with continuing strong cash flow we recently announced a significant stock repurchase program. I'll have a few more comments on that a little later in the presentation.

On slide 7 I'd like to briefly revisit our company's performance as measured by return on capital employed. Once again I'll refer back to the analyst meeting presentation last August. At that time we showed that ChevronTexaco's average return on capital employed over the five-year period 1998 to 2002 trailed the average of our three super major competitors as represented on this chart with the yellow diamonds. This it was case whether we used reported generally accepted accounting principles, GAAP earnings, or earnings excluding special items.

Excluding special items the GAAP was about 2%. The bars on this chart show 2003 ROCE, again excluding special items on the same basis used at the analyst meeting. We're using adjusted earnings mainly for comparability across companies. ChevronTexaco's special items for the year 2003 netted to a fairly small amount. You can see that our relative position improved in 2003.

In fact, at 16.3% we beat the average of our super major competitors by about half a percent with some of this relative -- while some of this relative improvement is attributable to the macro environments and other factors, it also reflects the full effect of merger synergies coming through and continuing improvements to our base business. When we make a business decision our focus is on forward-looking value creation not book ROCE per se.

Nevertheless, we're working hard to improve the base business, make good investment decision and execute well on major investment projects and over time this will be reflected in our ROCE. In this manner, we'll continue to strive to improve our relative ROCE performance. Now I'll turn it over to Randy to run through the quarter's earnings details.

RANDY RICHARDS, MANAGER OF IR, CHEVRONTEXACO: Thanks, John. Slide 8 shows the fourth quarter net income per diluted share was $2.40. During the quarter, the company recorded one special item related to a litigation matter resulting in a $55 million charge, or 5 cents per share. First quarter foreign currency effects were a negative $43 million, or 4 cents per share. The largest impact resulted from the U.S. dollar weakening against the U.K. pound.

Although currency effects were modest in the first quarter, I'll remind you that they primarily reflect balance sheet translations and other accounting calculations. Not speculative or hedging trades. I'll also remind you that under accounting rules, the choice of functional currency …