Q3 2003 ChevronTexaco Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Good morning, ladies and gentlemen, and welcome to your ChevronTexaco third quarter investor relations analyst conference call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions following the presentation. It is now my pleasure to introduce your host, Mr. John Watson. Sir, the floor is yours.

JOHN WATSON, CFO AND CORP. VP, CHEVRONTEXACO: Thank you. Good morning. Welcome to ChevronTexaco's third quarter earnings conference call. As indicated I'm John Watson, the Chief Financial Officer of ChevronTexaco. Today on the call I am joined by Randy Richards our Manager of Investor Relations. Before we get started I'll remind you that our presentation today contains estimates, projections and other forward-looking statements, please review the usual Safe Harbor statement that's on Chart 2.

I'll begin by making some summary comments, Randy will follow with more detail on the quarter, and then we'll both take your questions. Chart 3 provides a brief overview of our financial performance, the company had its third straight strong quarter, nine-month earnings $5.5 billion and you saw a lot of detail in the press release. Return on capital employed was 17.2% for the quarter, 16.3% for nine months.

You'll recall that we've set a goal to improve our return on capital employed in order to close the gap with the average of our major competitors. Over the last five years, excluding special items, this gap has averaged about 2%. For the first six months of the year on the same basis, the gap was less than 1%. And while we're wary of drawing conclusions from a short time span the emerging third quarter evidence looks to further reinforce the trend of relative improvement. We continue to strengthen the balance sheet, our debt-to-capital ratio ended the quarter at 27% with a net debt ratio of less than 19%.

Turning to chart 4, on August 1, Dave O'Reilly outlined our portfolio evaluation decision, we've moved forward with the portfolio actions in the last few months, we've made substantial progress in the marketing and sale of producing properties in the U.S., sale proceeds have been over $150 million by the end of September and more is anticipated by year-end. Outside the United States we sold our interest in North Buzachi field in Kazakhstan, we exited Bangladesh exploration properties and closed on the previously announced sale of our interest in Papua New Guinea. We're conducting an auction process for our interest in prefields in the U.K., Galley, Orwell and Stefard [ph]. The closing date for bids will be mid November with sales expected to finalize in the first quarter next year.

In the downstream we closed the sale of the El Paso refinery in August and announced that our Batangas, Philippines refinery will be converted to a products import terminal. Service station sales are progressing nicely, in the U.S., for example, we've sold over 100 retail sites in the first nine months of the year. Earlier this month, the two-year pooling accounting period expired, ending the period of restricted asset sales generally for the company.

On August 1 we also talked about a program to realize $500 million in downstream improvements by 2005. we're acting quickly to capture these improvements, in the third quarter we've taken charges for upcoming severance costs related to a head count reduction of some 1,800 employees in the downstream end of the business. Our global functional reorganization will be fully effective January 1, and the majority of the head count reductions do reflect efficiencies directly related to these organizational changes. The rest are due to separate improvements, efforts under way and the impacts of asset restructuring.

Our focused exploration strategy continues to deliver results, we've great recent success offshore Nigeria with Nsiko-1discovery well and successful appraisal wells, Aparo-3 and Usan-4. Our deepwater Gulf of Mexico drilling has also had some success with the Perseus discovery near Patronious [ph] and the Sturgis discovery on Atwater Valley, block 183. We've reached an agreement with BP under which we'll increase our working interest to 50% and assume operatorship in the Blind Faith prospect. And this week you've seen the announcement about the discovery at St. Malo where we have a 12.5% interest and a good acreage position in the areas that are nearby.

Our strategic initiative for global gas business, to commercialize our equity resource base by targeting North America and Asia markets. That's our strategy, and in that regard we've had good news to report. The Gorgon Joint Venture received principal approval from the West Australia state government for the restricted uses of Barrow Island to cite an LNG facility. Subsequently, the Gorgon JC signed an agreement with the China National Offshore Oil Company expected to lead to one of the biggest LNG deals in the industry's history. Subject to completion of formal contracts, CNOOC will purchase an equity stake in Gorgon and purchase foundation volumes for LNG use in China.

Just yesterday we announced our proposal to build an offshore LNG import terminal and regasification facility at Baja, California in Mexico. Finally, in the Gulf of Mexico a decision is expected shortly on our Port Pelican deepwater LNG facility permit application. We've had a few additional milestones that will add to our liquids production, we saw our first oil in Chad, where we have a 25% interest in several fields. And the Karachaganak Phase II project increased production of sweet crude started up, a 400-mile pipeline was completed which will allow shipment of Karachaganak crude through the Kazakhstan pipeline company pipelined to export market.

In summary, the company had a very good quarter, and is moving forward rapidly on our announced strategic initiative. I'll turn the mike over to Randy Richards for a quick review of the charts covering the quarter's results. Randy?

RANDY RICHARDS, MANAGER OF IR, CHEVRONTEXACO: Thanks, John. I'll refer to the slides which were e-mailed to you this morning and available on the web. I'll also remind you that my remarks will be comparing third quarter 2003 to the second quarter. The earnings release compared third quarter 2003 to the same quarter a year ago. Chart five shows third quarter net income per diluted share was $2.02. As indicated in our last 10-Q, early in the quarter, we concluded an agreement with Dynegy to restructure our holding of their Series B preferred stock. As a result, Dynegy was able to reorganize its debt repayment schedule and further stabilize its liquidity outlook. We received cash and marketable securities and recognized a $365 million gain relative to our carrying value for the old Series B preferred. You can see that gain in our special items.

Let me address the second effect of the Dynegy exchange. Besides recording our own gain, we separately recognized our share of Dynegy's gain on the transaction. Under applicable accounting rules, Dynegy recorded the exchange of securities as a capital transaction. his results in the gain being recorded directly to retained earnings, but included in earnings per share. We also must record our share of Dynegy's gain in the same way, and this is the 16 cents per share item labeled "Dynegy" that you see on the slide. Be sure to note this accounting treatment as you reconcile our reported earnings and earnings per share.

During the quarter, the company recorded special items netting to a $14 million gain. Gains from the Dynegy preferred stock exchange and asset sales were offset by environmental remediation reserves, asset impairments and some severance costs. Chart 6 shows that net income increased by $375 million. The $14 million special items net gain in the third quarter compared to special items charges totaling $117 million in the second quarter. The previous quarter had included asset impairments related to anticipated sales.

Foreign exchange losses were $31 million in the third quarter, or $126 million less than the second quarter FX losses. The effect of higher crude prices outweighed somewhat lower natural gas prices. Production volumes were lower. Overall, downstream margins and volumes improved in the U.S. but were lower on average in the international segment. The variance in "Other" includes improvement in our share of design Dynegy income and higher power and gasification earnings, excluding special items.

Chart 7 shows U.S. upstream earnings. Special items contributed to a positive swing between quarters, due to the timing of …