ConocoPhillips (COP) Q4 2008 Earnings Report, Transcript and Summary

Ok Ladies and Gentleman and welcome to the ConocoPhillips fourth quarter 2008 earnings conference call. My name is Jen and I will be your coordinator for today. At this time, all participants are in a listen only mode. We will be facilitating a question and answer session towards the end of today's conference. If at any time during the call, you require assistance, please press * followed by 0 and a coordinator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to Mr. Gary Russell, General Manager of Investor Relations. Please proceed, sir. Mr. Gary Russell – GM of IR: Thanks, Jen, and welcome to everybody on our fourth quarter conference call. Joining me, today, are Jim Mulva, our Chairman and Chief Executive Officer, John Carrig, our President and Chief Operating Officer, as well as Sig Cornelius, Senior Vice President Finance and Chief Financial Officer. Jim will be taking you through our presentation today that has been prepared, and intended to help you with your understanding of our financial and operating performance in the fourth quarter of 2008. This presentation, along with other information regarding the fourth quarter performance, can be found on our website, www.conocophillips.com. Now, if you turn to Page 2 you will find our Safe Harbor Statement, which simply states that forward, looking statements made in our presentation, today, in our conference call today, represent our management's current expectations. Actual results could materially differ from those expectations and you can find in our FCC filings information on items that could … material differences. Now this presentation today also contains non-GAAP financial measures, which are reconciled to the most comparable general accounting principles, and measure either in the appendix of this presentation or in the investor relations section of our website. I'll now turn this call over to Jim Mulva. Jim Mulva – Chairman and CEO: Okay, Gary, thank you and I appreciate those who are participating In this conference call. Before I begin going through the slides, I'd like to briefly review the significant changes we encountered in the fourth quarter. You know commodity prices [cracks spread] experiences sharp declines and earlier in the quarter, we came to the conclusions we would experience a significant multi-year recession. We suspended our share repurchase program in mid-October and commenced downsizing our 2009 and 2010 operating capital investment programs in a way that is consistent with the anticipated business environment. During the fourth quarter, our share price experienced a sharp decline and resulting decrease in marketing capitalization along with all our expected prices to large impairments, which I will discuss in the slide presentation. Our capital investment plans have been adjusted so we continue with our committed and strategic key projects while deferring other investment opportunities. They are planning for a prolonged and difficult business environment. 2009 and 2010 will be very challenging for our global economy and the energy business. We believe our decisions, actions, and plans will enable us to live within our means. That is, generate sufficient cash flow to fund our capital investment program and fund our dividends. So, with those opening comments, I am moving now, on to Side 3. As you can see on Slide 3, our adjusted earnings for the fourth quarter were $1.9 billion. That excludes $33.7 billion adjustments and I'll discuss those in more details in following slides. So, with these adjustments, we reported a loss of $31.8 billion. We generated $3.1 billion from cash from operations and our debt capital ratio increased to 33%. Now, in the EMP business, we have produced 2.32 billion BOE a day. That includes an estimated 451,000 BOE a day from our LUKOIL segment. So, if you exclude LUKOIL, our production was near 1.8 million BOE a day. The downstream of our crude procession utilization was 93% and in fourth quarter, we completed our Origin transaction. Moving on to slide 4, fourth quarter adjusted earnings were $1.9 billion, you can see that sort of in the middle of the slide. So we start with Goldbar and … after the chart. See, third quarter net income was $5.2 billion and then as we move to the right, prices margin and other market impacts reduced fourth quarter net income. Higher bonds increased income $743 million. There was a benefit in the fourth quarter of $1.1 billion from lower taxes predominantly or production tax in Alaska in the lower 48. And we also saw lower estimated extraction and export taxes in our LUKOIL segment. This was expected given the sharply lowered price environment in the fourth quarter but these taxes in our LUKOIL segment were much higher than would be…by the price environment because of the lag effect. Then there are other things in the aggregate in the fourth-quarter improved income by $11 million, that brings us to our adjusted earnings of $1.9 billion, then we recorded the adjustment to $33.7 billion as we previously outlined. And most of our adjustments are a result of sharp decline in global equity markets, cloudy prices margins and that as well as a revised capital program that we announced on the 16th of January. And you will see, the segment impact these items as we go through each of these segments on the slides. So with these adjustments we have net loss in the fourth quarter of $31.8 billion shown by the gold bar on the far right of the slide. Now go to the next slide 5. Total company cash flow, we started on the left. We started the quarter with cash balance $1.1 billion generated $3.1 billion in cash from operations. Then moving to the right you see we had proceeds from dispositions of 9 hundred and 11 million dollars, $5.4 billion increase in debt due primarily to the origin transaction and working capital needs. So with these resources we funded $8.7 billion of our capital program, paid nearly $700 million in dividends, and purchased about $759 million of our shares. Then there were some other items in the aggregate that provided an additional $392 million leaving us with a cash balance of $755 million. Moving on to slide 6, the pie chart on the left shows the cash available during the year was $31 billion, $22.7 billion or 73% came from operations. $88.3 billion or 27% regenerated from combination of debt increase and proceeds from asset sales. If you look on the right, you can see how we used the $31 billion. We spent nearly $20 billion in our capital investment program including the origin transaction to purchase a little more than $8 billion of our stock and paid $2.9 billion in dividends. So I now move to Page 7. Looking at our capital structure of the company, you can see the chart on the left. Our equity out of 2008 was $56 billion and that reflects the impact of the [paramounts] recorded in the fourth quarter. The debt at $27 and half billion at the end of the year shown in the middle part of the slide, our debt capital ratio at year-end was 33%, which was 14% higher than at the end of the third quarter shown on the chart on the right. So all of this increase of 14%, 10% is due to the adjustments that recorded in the fourth quarter and 4% is due to an increase in debt. Then you can see in all the charts the year-end balance since 2003, and we are confident that we manage our financial position going forward in a way that returns our debt to capital ratio back to our target of 20 – 25%. I'd also like to point out that the … agencies just confirmed our AA1 credit ratings. I'm moving on to EMP Page 8. As mentioned earlier, our EMP segment was significantly impacted by impairment adjustment of $26 billion dollars in the fourth quarter. Crude oil prices were significantly lower during the fourth quarter as our realized group price was $52.82 a barrel. Now that is $59.37 barrel lower than the third quarter. Now turning to natural gas, as gas prices were lowered our realized natural gas price was $6.32 and MCF and that's $2.59 per MCF lower than the third quarter. Our fourth quarter production lines were higher than previous quarter and that's consistent with our guidance. You'll see more about this in details in the next slide. So I'm on Slide 9. You can see production from our EMP segment in the fourth quarter was 1.867 BOE a day. That's 119,000 BOE a day higher than in the third quarter and you can see this in the gold bar on the left of this chart. So we move across on the right. Production in the UK was 53,000 BOE a day higher, and that's due to the ramp up of production from the Britannia Satellites. Then we also had lower planned and non-planned down time. With respect to Alaska, production improved 44,000 BOE a day. And this is planned to lessen planned down time and seasonality and we also had improved drilling and well performance. In the lower 48 we had improved drilling well performance, somewhat offset by unplanned downtime and normal decline, but the other, we see improvement of 9,000 BOE a day. Then we have some other small variances that in total improved production 13,000 BOE a day. Then we have the segment from LUKOIL and the total was 2.318 million BOE a day in the fourth quarter. So for the full year production average excluding LUKOIL 1.79 million BOE a day, which includes the effect of hurricanes and production sharing contract impacts, if you adjust for these, then 2008 average production would have been 1.81 million BOE a day. That compares to 2007 full year average production of 1.88 million BOE a day, which includes two quarters of production from our expropriated Venezuelan assets when averaged over the year. That impact was 42,000 barrels per day. So if you look at this, we said earlier in 2008 our production excluding the LUKOIL segment would be about 1.8 million BOE a day and that's what we essentially did in 2008. So moving on to Slide 10, the MPs adjustment earnings for the fourth quarter you can see towards the middle, or a little bit to the right $1.4 billion to start with the gold bar on the far left, in covering the third quarter was $3.9 billion then you move to the right. Prices margin, other impacts reduced fourth quarter income by $3.4 billion. We have higher sales volume that helped us $432 million and with significant lower crude oil prices or natural gas price on production prices. Essentially, in Alaska and lower 48 improved income $505 million compared to the third quarter. Then we have some other items, which in the aggregate improved earnings $41 million. That [ore DD&A]. Or operating costs, higher equity earnings somewhat offset by higher dry hole expenses mainly in the Gulf of Mexico and South America. We had some waste impairments and severance accruals. That brings us to our adjusted earnings of $1.4 billion. There were impairment adjustments in the fourth quarter, you can see, $25.7 billion bringing our total reported net loss to $24.3 billion shown by the gold bar on the far right. Now I'm moving from EMP to refining marketing shown on the slide on Page 11. We find the marketing net income fourth quarter was also impacted by impairment adjustments that also refining margins in U.S. were significantly lower than the third quarter. You must realize that refining margins in the fourth quarter was $6.96 cents a barrel. Now that's $2.07 barrel lower that the third quarter. The significant decline in market cracks were only partially offset by the benefit we get at higher margins from secondary products and improved sour crude differential. The international side, refining margin was $8.31 a barrel, that's $2.93 cents a barrel lower than the third quarter and mainly due to the continued poor hydro skinning margins. The domestic refining crude oil capacity realization the fourth quarter was 94% at 4% higher than the prior quarter. On the international side, utilization rate was 89%, that's up from 75% in the third quarter. The primary due that we saw some increase production and economic runs in our Wilhemshaven refinery in Germany. So worldwide, our crude oil capacity realization was 93%, which is 6% higher than the previous quarter. Now I'm going to Page 12 and we show fourth quarter adjusted earnings were $753 million, so we start with the gold bar on the left side. Third quarter income was $849 million as we move to the right, prices, margins. Other market impacts, reduced income $147 million. Then we had higher utilization improved sales bottoms, which helped us $40 million, and then there were some other items in the agrid that improved income $11 million, which brings us to $753 million. Then we had adjustments in the fourth quarter, $464 million which brings our total amount income fourth quarter to $289 million shown on the gold bar on the far right. Now moving on to Slide 13, which is the other segments where we compare fourth quarter to the third quarter. We do not estimate fourth quarter earnings from the LUKOIL segment. This does include a positive true up of $101 million for the third quarter of 2008 but excludes the $7.4 billion reduction in the book value of our investments. Our fourth quarter income for the LUKOIL segment was a loss of $7.4 billion. We had some other items impacting LUKOIL segment in the quarter, which include lower estimated realized prices, somewhat offset by lower estimated extraction, export taxes, and higher estimated buy yields. Turning to our mid stream business income was at $69 million, that's $104 million lower than in the prior quarter primarily due to lower realized natural gas prices. This is somewhat offset by higher vibes in the fourth quarter due to restoration of operations that were down in the third quarter due to hurricanes. Our chemicals joint venture had a net loss of $6 million dollars in the fourth quarter compared to income of $46 million in the third quarter. Variance is primarily due to lower margins and vibes in the fourth quarter. Now our emerging business segment - Adjusted earnings for the fourth quarter was $60 million, higher than the third quarter income of $35 million due to higher international power generation results, but our reported income of fourth quarter when you include the adjustments was a loss of $25 million. Now our adjusted corporate expenses were $354 million, that's $73 million higher than the third quarter due to higher net interest expense, which included lower capitalized interest and higher environmental crude oils. The reported corporate expenses including the adjustment was $388 million. Now moving to the profitability of upstream and downstream Slide 14, in these slides we report performance and income per barrel and cash contribution per barrel against what we see as the peer group to large publicly traded international oil companies, shaded in green, or shaded in grey. And that includes Exxon Mobile, Chevron, BP, Shell, and Total. So the chart shows our BMP incoming cash per BOE for the years 2003 – 2008. And in the green bars peer group shown in grey and well, we don't have data at this point for the fourth quarter 2008, we expect our income and cash contribution to be competitive. Now go down to Slide 15, which shows the same metrics of income and cash contribution for refining and marketing, the peer group is the same, we have the same time period and we would expect when the results are known for the peer group for the fourth quarter we would expect to be competitive in both metrics. Now I go on to Slide 16, return on capital. Again, it is the same peer group in the grey shaded area. Anyway, it reflects our return on capital with no adjustments for purchase accounting. As we've shown in the past, adjustments made to our peers are reflected, reflect purchase accounting shown on the table three. Our RROCE for the fourth quarter was 7% for the full year 2008 15%. I'm going to the last slide of our presentation on 17 so I'm going to summarize. As we said in our most recent release to the media, we've created a self-sustaining competitive integrated energy company and our long-term strategy remains unchanged. Organic growth and prior business transactions, we have the resources and opportunity for growth. Our existing portfolio of high quality assets will enable us to replace our reserve, maintain our current production levels, and operate in a low price environment. We anticipate the company's first quarter EMP segment production will be near fourth quarter 2008 production and we expect expiration expenses to be around $400 million for the quarter. Comments with respect to the EMP segment production, this is before consideration of OPEC cuts, but we don't see significant impact of OPEC cuts on our production. Downstream we anticipate worldwide refining crude oil capacity utilization rate. First quarter will be in the low 80% range. This is primarily due to – we have a lot of turnaround activity, both in the United States and international. We expect run reductions at the Wilhelmshaven refinery. Our turnaround costs, for the first quarter of 2009, we expect to be around $225 million before tax. In light of the business environment, that outlined as I started, we're reducing our cost structure and constraining our capital to live within our means. Then, we look forward to sharing these plans, operating capital plans, with you, when we meet the investment financial committee, in March 11, in New York. That concludes the prepared comments. Gary, I think we are now ready to entertain questions from those participating in the talk. Gary Russell – GM of IR: Thanks, Jim. We are ready for questions.

(Operator Instructions) Thank you, sir. Ladies and gentlemen, if you would like to ask a question, please press *, followed by 1 on your touchtone telephone. If your question has been answered, or you wish to withdraw your question, please press * followed by a 2. Press *1 to begin. We will stand by for the first question. The first question comes from Arjun Murti, with Goldman Sachs. Arjun Murti – Goldman Sachs: Thanks, Jim. I was wondering if you could provide an update on the relationship with LUKOIL? I know you took an impairment charge, but otherwise still owned the stock. With Russian supply, looking like it's probably going to decline as a country, this year, and probably next year, are you starting to see the potential for more opportunities, given your ongoing partnership with LUKOIL? Or, in light of all the things that have gone on in Russia, with oil prices having fallen so much, has the relationship changed in a way where we shouldn’t think about gaining additional opportunities? I'm just hoping you can provide some update on LUKOIL and what you see in Russia, going forward. Jim Mulva – Chairman and CEO: Thank you, Arjun. Our relationship with LUKOIL continues very strong, Arjun, and I really shouldn't comment on the forecasts that they have, with respect to their production levels, and all. We are working quite well with LUKOIL on some investment opportunities, both inside and outside of Russia. Hopefully, as we go through 2009, those organic growth opportunities, we can make known to you and hopefully update some of that in March, with our presentation to the financial community. The other thing is that we continue t work with Gazprom, on things we can be doing inside and outside of Russia, to a lesser extent Russneft, but I was just in Russia this past week. I can tell you, the ministry and the authorities are certainly looking at ways in which they can help promote investment opportunities for companies like ConocoPhillips to be working in Russia, as well as outside of Russia, as I said, both with LUKOIL, Gazprom, and Russneft and others. Hopefully, as we go through 2009, we can roll out some of these opportunities. They are in the formative stage. We recognize that there are a different pricing environment, and I would also say that Russian authorities recognize the importance of having the right fiscal take to generate and support those investment opportunities. Pretty Bullish on Russia, but it remains to seen whether we can bring these new opportunities to the finish line. Arjun Murti – Goldman Sachs: Jim, thank you. That's very helpful. If I could ask one second one. You did announce that the Origin Energy investment closed in the fourth quarter. Obviously, the natural gas and oil price and the LNG price environment is very different. Can you talk about your plans to move forward with developing the LNG project there, or should we think that's on hold until the cycle recovers, more strongly, in the future? Jim Mulva – Chairman and CEO: First of all, we announce the $5 billion of the of the Origin transaction and fortunately, we did hedge a significant part of that expenditure. The net cost of the investment at the start was $4.5 billion. In terms of our plans, we have not cut back at all on the drilling program. For the feed and the studies that worked for the LNG, that we have in mind to develop, our first train that we have in mind is going to be in 2014. We continue to work. Obviously, we know the oil prices, gas prices, and the problem that it is today. But, we look through that and we see a better pricing environment when we get into 2014 and subsequent periods of time. We continue our drilling program in Queensland. The results that we get from our drilling program is just as we expected. There is really no change in that regard, Arjun. Arjun Murti – Goldman Sachs: I appreciate your comments, Jim. Thank you.

The next question is from Mark Flannery, with Credit Suisse. Mark Flannery – Credit Suisse: Thank you. I'm interested in the capital program. Maybe you could just give us some general color on the kinds of things, or the specific things that you will not be doing, now, versus what you might have had in the plans let's say, one or two quarters ago. In other words, where is the capital being extracted from? Jim Mulva – Chairman and CEO: Well, the details of this will all come at our March presentation, in New York. First of all, there has been absolutely no cut back or reduction in expenses or capital spent on maintenance of our facilities around the world. The second point is all of our committed major projects, multi-year projects like LNG Projects in [Gutter], Shah Project, all of these different ones we have in mind doing, or that we've committed to doing, we still have in the $12.5 billion that we have announced. Some of the upgrades in the refineries, we are deferring. We have deferred, somewhat, waiting for new capital investment numbers on Yanbu. We have cut back some of our drilling in the lower 48 and in Canada. Of course, that is kind of a swing factor that we have to look at what the prices are and returns are. Those are some of the areas that we have cut back. We will outline this in full detail when we come to meet with you, in March. Mark Flannery – Credit Suisse: Thank you.

The next question is from Robert Kessler, with Simmons & Company. Robert Kessler – Simmons & Company: Good morning, Jim, I wanted to see if you could provide your latest thoughts on the North American National gas market. You're opening comment certainly presented a fairly conservative or weak view for the energy markets, in general, for 2009 and 2010. I suppose that speaks to your lower expectation for demand for natural gas. In combination with that, and the recent success on the shale plays, I'm wondering what you are thinking could be the supply/demand balance in North America, for natural gas, the next couple of years. Jim Mulva – Chairman and CEO: Well, the next short period of the next two years or so, we see certainly having plentiful supply. The real question is what's taking place with respect with demand. Demand has a lot to do with the economy, industrial activity, weather and all of that. When we look at natural gas prices today, we are somewhat surprised at the whole $5 in MCF. Our plan is going forward, over the next year or two, we expect to see some improvement in natural gas prices, but not a lot more than $5 in MCF. If the market gives us $6 or more, obviously, that's helpful to the industry and to drilling programs. With these prices, I think what you're going to have is, most likely, less investment. That will lead to some correction in supply/demand. A lot has to do with we don't really know what's taking place on demand, because of the strength of the economy. Our view is we see natural gas prices, in the short term, being around $5 in MCF, maybe a little bit better. Maybe that gives you the collar of what we plan and expect as we go over the next year or two. Robert Kessler – Simmons & Company: Sure, that's helpful. Thank you for that. A real quick question on Gutter Gas 3, where that project stands now, in terms of expected start up. I want to say it's already slipped into 2010, but any additional color would be helpful. Jim Mulva – Chairman and CEO: Yes, I think you're right. I don't have the exact specific date. So much is being done over at [Rasol Fon] and it does take longer for each of the trains. Of course, our train follows each of the trains ahead of us. That's the way it works. The trains ahead of us have some delay. I think 2010 is the right year. We will update, specifically, that date when we see you, in March. Robert Kessler – Simmons & Company: Thanks, Jim

Your next question is from Neil Mcmahon, with Sanford Bernstein. Neil Mcmahon – Sanford Bernstein: Hi, I have a few questions. The first one, maybe I'll get a quick answer on this one. It may not be the best question to ask. Jim, I think, if you look at your return on Capital Employed, 2008 came in at 15%, at $100 per barrel of oil price. 2004 came in at 15% at a $42 oil price. From the outside looking in, it just doesn’t seem like the strategy of acquiring companies for growth is working all that well. Maybe you could have some comments on that. Jim Mulva – Chairman and CEO: Well, it may be two questions, in some ways. First, for a historical perspective, when we look at what we've done in acquisitions, and the assumptions we used when we made the acquisitions, whether it was [HarcroAska], it was Tosko, Burlington, or the merger of the two companies, Conoco and Phillips, our experiences historically, we have either met or exceeded our expectations when it came to prices and cost and synergies. As you look forward, with the pricing environment, I just think it's going to be most difficult to be looking at doing acquisitions of large entities, versus picking up acreage and picking up an asset that is close to you that seems to fit with where you have a large position. Historically, in hindsight, you can look at it, the price environment we are seeing today; the returns are not as great. If you see prices that are $70, $80, or $90 dollars, obviously, they are much better. I can tell you that everything we have done in the past, so far, the history has been that the premise that we used when we did the transactions, we have exceeded. I don't think you're going to see much of this, going forward, for ConocoPhillips. Neil Mcmahon – Sanford Bernstein: I'm just concerned that when you try and look at metrics going forward, I know you make the argument about purchase accounting versus pooling, since that is quite a long way in the past, it's going to be very hard to catch up with some of your peer companies if you continue to have returns that are massively down on competitors. I'm just trying to understand how you're going to try to improve those returns in your cost base, if you're relying more and more on acquisitions for growth. Jim Mulva – Chairman and CEO: I just said, Neil, that we're not relying on that acquisition for growth going forward, and our $12.5 billion capital program has nothing of acquisitions in it. Obviously, we have the portfolio that we have, today. That's what we're going to manage. We've historically been pretty good on exploitation and operations. There is a lot of emphasis, as I said, in opening comments and the slides. It's a real emphasis in this challenging business environment that we're in is we have to run well. We have to get the cost structure right. That cost structure is not only day-to-day operations, but we have to also be quite aggressive on procurement when we buy goods and services. The suppliers are not just going to offer it up to you. You have to be pretty aggressive to get it. We have the portfolio that we do. If our returns are less than the peer group, then it's up to us to take actions in our plans, how we invest our money, and operate to close that gap. We intend to do that. Neil Mcmahon – Sanford Bernstein: Just one quick final one. Just looking at the first quarter, in terms of your cash position, which fell from Q3 into Q4, you're now carrying less cash than [HAS is] into Q1. With LUKOIL, potentially, likely to make a loss in Q1 as well, I'm just wondering what you are looking at, in terms of increase in debts in Q1 or indeed, through the first half of this year, or if you have any plans, there? Jim Mulva – Chairman and CEO: First of all, with respect to LUKOIL, there is no requirement for us to be putting any cash into LUKOIL. All of their operations investment is done by the corporate entity of LUKOIL. We get a small dividend back, but it is cash flow positive. There is no drain, requirement, or call on cash from ConocoPhillips to fund or support LUKOIL. When we look out, we are adjusting our operating plan and all, in such that with a low price environment, we want to operate and fund our dividends and our capital spending program, without a change in debt. If you look at this year, so far, based on what we would expect for the full year, the oil prices might be just about what we expected. The crack spreads a little bit better than we expected, and natural gas price is lower than expected. That is, so far in the first month of the year, how we look at it. Of course, it's the first month of the year, and it's the first month of the quarter. Neil Mcmahon – Sanford Bernstein: Okay, so there is no plans to increase debt in the first quarter if conditions continue the way they are? Jim Mulva – Chairman and CEO: Our plans are that as we go through each quarter, and as we go through the whole year, our plans are not to increase debt. Our plans are to hold debt constant. If the market helps us a little bit better, then we would be reducing debt. I'm not really disclosing or trying to disclose our internal forecast, the prices, or margins, but if you take the first call assessment of what our company is going to do, it has a cash flow in the neighborhood of around $16 billion, $15 billion, or $16 billion. If we spend $12.5 billion on capital and $3 billion for dividends, that is essentially, living within our means. That means that the debt won't go up or won't go down. If the market is a little bit helpful to us, then what the first call has, the debt will go down. If the environment is not as good, it goes up a little bit. Neil Mcmahon – Sanford Bernstein: Okay, thanks.

The next question is from Erik Mielke, with Merrill Lynch. Eric Mielke – Merrill Lynch: Good morning. I would like to follow-up from the question that Neil just had, around acquisitions. I realize that you have an analyst meeting planned for March and you may want to defer some of these questions, until then. Given that you have just had to take a very significant write down on various assets on your balance sheet, are there things you would do differently, going forward? In particular, I'm thinking about … Origin. Is that the sort of deal that you might continue to do, or is that the sort of thing that we should not expect to see, going forward? Jim Mulva – Chairman and CEO: First, we always, like any company, will look at all opportunities. In the case of the Origin transaction, we see as a minimum of four LNG trains. The first one is coming in 2014. We expect to see a better pricing environment than we see today. We expect natural gas to be tied to oil price, and we see a significant amount of resource there, over and above what is already publically been noted. We see a lot of upside in that. So, we look back at what we've done. We like what we've done. We look at our investment for the long term. We are going to spend $12.5 billion in our capital program. There is nothing in it for acquisitions. We say we are going to live within our means. There always is that opportunity to spend $50, $100, or $200 million if we have the right asset, acreage, or producing property, where we already have a position of strength. But, our plans to not envisage doing multi-billion dollar transactions, as we go through this near-term period of time. Eric Mielke – Merrill Lynch: Okay, thank you. Can I ask, do you have any update on recent expiration, any expiration that you have included within your $12.5 billion budget for 2009? Jim Mulva – Chairman and CEO: No, I don't think so. Of course, we'll update what we're doing in expiration, on March 11. Eric Mielke – Merrill Lynch: Thank you.

The next question is from Paul Sankey, with Deutsche Bank. Paul Sankey – Deutsche Bank: Good morning, everyone. I have three very specific ones, if I could. In US oil, particularly, historically your realizations have tended to be below headline market prices. This is for Q3 and now Q4, those realizations have moved to a premium. Could you help me understand the dynamics of that? Thank you. Jim Mulva – Chairman and CEO: Maybe John Carrig would help out with that. I think it has to be just the portfolio. There is nothing unusual taking place, with respect to operating costs or taxes. We ran well. We are watching our costs very carefully. I don't think there is really anything unusual there, John. I don't know. John Carrig – COO: Yes, Paul, I would have to come back to you. There is nothing in my mind that stands out. Certainly, it is an observation worthy of our reply to you, but I don't have anything, at the moment, that stands out. Paul Sankey – Deutsche Bank: Okay, thank you. Secondly, you mentioned the very low utilization in Q1 for refining. I was wondering whether that's a level of utilization that you see, already in January, or whether the down time that you're expecting is effectively back-end loaded in the quarter? Jim Mulva – Chairman and CEO: Well, we have some major refineries down to thirty or forty-five days turnaround. It was all scheduled. Paul Sankey – Deutsche Bank: I guess I'm asking if they're down now, or are they going to go down? Jim Mulva – Chairman and CEO: They're down now. John Carrig – COO: Yeah, but we just don't disclose that. Paul Sankey – Deutsche Bank: Oh, okay, but essentially I guess we can rate the down time, over the course of the quarter, as opposed to thinking of it as back-end loaded? John Carrig – COO: Paul, what we give is just 80% for the quarter. The precise allocation of that, in a typical environment, these are timed to deal with a variety of factors. How much is down in March versus February; I don't have that available, right now. Paul Sankey – Deutsche Bank: Fair enough, and finally, were there any goodwill implications from the Origin deal? John Carrig – COO: No Paul Sankey – Deutsche Bank: Fair enough, that was a straight answer, thank you.

The next question is from Paul Cheng, with Barclays Capital. Paul Cheng – Barclays Capital: Hey guys. I just have a quick question. John or Jim, I presume that given you want to … we should assume a share buyback, right now is probably on hold? Jim Mulva – Chairman and CEO: We suspended it in early or mid-October and plans are that it will continue to be suspended. Paul Cheng – Barclays Capital: Okay, and you gave a first quarter outlook for production similar to the fourth quarter. Any rough estimate on how your 2009 [target] may look like? Jim Mulva – Chairman and CEO: We will give that to you, in March. Paul Cheng – Barclays Capital: Okay. Headcount reduction, can you tell us where is the … of the headcount is being cut? What functionality? Jim Mulva – Chairman and CEO: Well, we are really in the process of continuing to work our 2009 operating plan, all the way down to business units. When we say the business unit, that is the geographic location in E&P and by individual refineries. We will share that with you, in March, but the detail of that is not yet really known. Paul Cheng – Barclays Capital: Okay, Jim can you tell us is it more on the administrative side or on the technical, functional side of the business? Jim Mulva – Chairman and CEO: Well, it is a bottoms-up process, Paul. It's based on the needs of each individual staff and operating unit. We are still in the midst of finalizing these plans and we will review them, internally, shortly. We don't have a breakdown for you of where. Maybe we will be able to give a little more color on that, in March. Paul Cheng – Barclays Capital: Okay, two final, short questions. One, [Ann] Canada Joint Venture, is both the upstream and downstream development plans still remain on track as is it based on the previous program, or has that been changed? The second one, I'm wondering if you can give us some color, in terms of the industry-wide cost trend. Have you started seeing meaningful jobs in the … way, and if you do, when do you think the company will start to see some benefit showing up in your operating results, your financial results? Jim Mulva – Chairman and CEO: First, on the downstream and joint venture with [Ann] Canada, there is no change in what we're doing. In terms of the upstream, there is no real change. It might be that some of the investment and adding on the wells slowed down somewhat. There is no change in strategy, what we're ultimately going to do, but maybe some slow down in terms of the capital and how quickly we bring on the production. Cost trend – know that costs are coming down, somewhat, but I can't really comment on that. Maybe John or Sig can, whether we have really seen significant reductions yet.

I would comment that as you might expect, we are aggressively pursuing reductions, not just with our own direct costs, but also the companies with whom we do business. We are starting to see some reductions. I don't have the multiplier factors for you, at hand, but the time that will take to work its way into the system, a lot of it is capital. A lot of those costs get capitalized. Some is operating costs, but there is a LAG effect, just like there was a LAG effect on the way up. Jim Mulva – Chairman and CEO: It's around the world, both upstream and downstream. Some of our projects that we defer, we are deferring not that we are going to do them. We just defer them because we want to go back and rebid or wait six or twelve months because we think we are going to get a better cost structure. Paul Cheng – Barclays Capital: Thank you.

The next question is from Mark Gilman, with Benchmark Mark Gilman – Benchmark: Good morning, I had a couple of quick things. First, the release indicates you took the impairments in the downstream side on two refineries. Can you identify which ones they were, please?

No Mark, obviously, we haven't' identified that. I don't know that we have any plans to do that. Mark Gilman – Benchmark: … solvent, or not, John?

I don't think we have any plans to do that.

We don't identify it for competitive reasons. Mark Gilman – Benchmark: Okay, do you plan to be able to formally sanction the Shah Gas project in 2009? Jim Mulva – Chairman and CEO: That is the plan. Mark Gilman – Benchmark: And it is not changed by anything in the environment, that you envision?

Not that we see right now. Mark Gilman – Benchmark: Can you give us a rough idea of the impact, in 2009, of the royalty changes in Canada, with respect to both the natural gas as well as the oil… inside? What is it going to cost you, in terms of production?

In 2009, we would not expect a material impact because we our heavy oil projects were in the early phase. That still persists until – there is an early phase reduction that still persists. Mark Gilman – Benchmark: About natural gas?

We don't see – there obviously are going to be some impacts. It's muted at lower prices, but we don't see a major impact. Mark Gilman – Benchmark: Finally, in your interim, you talked a little bit about reserve ads in 2008 and other adjustments. Was there any production sharing contract related price benefit implicit in the additions number, which you provided at that time?

Yes, there were price reductions that were, to some extent, offset by impact of production sharing contracts and Canadian royalty effects. Mark Gilman – Benchmark: Quantify the positive impact of the [PFC] effect, John?

No, we haven't done that, Mark. Mark Gilman – Benchmark: Thanks guys, very much.

The next question is from Doug [Flegitt] with Howard Weil. Doug [Flegitt] – Howard Weil: Thank you and good morning, guys. I have a couple of questions around reserves and portfolio debt. I guess that the first one is on LUKOIL. Just as you said, you can't estimate the earnings for LUKOIL; neither can you estimate what they are going to see about reserves when they come with DOT. Is there any risk, or have you fully taken account of any possibility that they're going to have significant impairments, also?

Are you referring to the current outlook? Doug [Flegitt] – Howard Weil: Yes, I'm talking about the reserve changes that you've already announced. How have you taken into account what might happen with LUKOIL, in terms of potential impairments? You full consolidated, obviously.

It's an equity affiliate, but yes, we apply the same – obviously, they're an equity affiliate. We do get – work with LUKOIL and we're not going to get ahead of what LUKOIL is going to determine, but from our perspective, we followed the same processes this year, that we followed in the prior years. It includes our assessment of LUKOIL reserves. Doug [Flegitt] – Howard Weil: You have full access to the appropriate [sealing] test information, and so on?

It's not a full cost accounting exercise, but yes. Doug [Flegitt] – Howard Weil: Over the past few years now, if you look at the averages, obviously reserve replacement hasn't really been there. I guess the question is, do you feel confident with what you have, right now? This can relate to the acquisition question; have you got the portfolio depth, to sort of maintain the targets you had laid out over the last few years? Jim Mulva – Chairman and CEO: What you will see from us, in March, is that we believe that we have the resources that we will replace our reserves over the next five years, without banking or having to have expiration success, or having to make an acquisition. Doug [Flegitt] – Howard Weil: I guess, Jim, that the follow-up on that is, and I understand this is not something you want to disclose, at this point, but under pricing scenario, is that possible in a $50 environment, or does it require … to an $80 environment? Jim Mulva – Chairman and CEO: No, let's put it this way. I don't want to give you the specific numbers, but it doesn't require $70 and $80 price environment. Doug [Flegitt] – Howard Weil: I guess the final one is going back to Mark's question on Shah. Shah and Origin are both fairly big CapEx items that you committed to, last year. Could you give us an idea, in light of just how significant those capital commitments could be, what are some of the indications of the break-even economics? Where do they not work, given that you have recommitted to sanctioning Shah, this year? Jim Mulva – Chairman and CEO: I don't have right at hand, and then for competitive reasons, I don't think we want to give that to you. In terms of commitment and the amount of money that is going to be included in our capital budget, you are going to see that when we come to you in March. Doug [Flegitt] – Howard Weil: Right, I'll leave it there, thanks.

As there are no further questions in the queue, I will turn the call back to management for any closing remarks.

Thanks Jim, and we appreciate everybody that participated in the call, this morning. Let me remind you that you can find the presentation that Jim walked through, this morning, along with the transcript of the call today, on our website, www.conocophillips.com. I wish everybody a good day.

Ladies and gentlemen, we thank you for your participation in today's call. This does conclude the presentation. You may now disconnect. Have a great day.