Gary Russell - General Manager, Investor Relations
Jim Mulva - Chairman & CEO
John Carrig - EVP of Finance & CFO
Analysts
* Douglas Terreson - Morgan Stanley
* Paul Sankey - Deutsche Bank
* Mark Flannery - Credit Suisse
* John Herrlin - Merrill Lynch
* Ron Oster - A.G. Edwards
* Paul Cheng - Lehman Brothers
* Doug Leggate - Citigroup
* Mark Gilman - Benchmark Company
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Presentation
ConocoPhillips (COP) Q1 2007 Earnings Call,
transcript by SEEKING ALPHA
Operator
Good day ladies and gentlemen, and welcome to the ConocoPhillips First Quarter 2007 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 (Operator Instructions).
As a reminder, this conference call is being recorded for replay purposes. I will now turn the presentation over to Mr. Gary Russell, General Manager of Investor Relations. Please proceed, sir.
Gary Russell
Thanks, Jen, and welcome to everyone on the conference call this morning. Joining today is Jim Mulva, our Chairman and Chief Executive Officer along with John Carrig, our Executive Vice President of Finance and Chief Financial Officer.
We're going to be going through some material today that will help us review the financial and operating performance of the Company during the first quarter of 2007. You'll find the presentation for your use on our website at www.conocophillips.com.
Now on page two of the presentation this morning you'll find our Safe Harbor statement. It basically says that the presentation and our response to your questions today will include forward-looking statements about what our current expectations are and results, actual results may differ materially from what our current expectations are. You can find a list of those items that could cause material differences in our filings with the SEC.
With that said, I will turn the call over now to Jim Mulva.
Jim Mulva
Gary, thank you, and I welcome all those who are participating in the Company's first quarter earnings conference call. I am on page three, titled first quarter highlights. The first quarter of 2007 we generated $3.5 billion net income, and you see $6.9 billion of cash flow from our operations. During the quarter we reduced our debt by $3.5 billion down to $23.7 billion, so our debt to capitalization ratio was reduced by 2%, now down to 22%. That is 2% more than in the prior quarter.
In the first quarter we raised our dividend 14% and purchased $1 billion of our stock and along with continued funding of our capital program and other investments. We also are quite pleased that we completed the EnCana transaction at the beginning of the quarter, and I will talk more about this in subsequent slides.
During the quarter we produced 2.47 million BOE a day, which includes an estimated 445,000 BOE a day from our LUKOIL investment segment. And I've got more information subsequent slides. In the downstream part of the company our refineries ran at 94% accrued processing capacity, and this is consistent with the previous quarter.
Now I am moving on to page four. Our first quarter net income of $3.5 billion is about $350 million more than the fourth quarter, and you can see on the slide what contributed to the variance. I will cover all of this in more detail when I go on to the business segment slides. On this slide I will just go through rather quickly the variances in total.
If you start with the green bar on the left, our fourth quarter 2006 results were reduced to $180 million due to the effective and impairments related to our asset rationalization program, and we didn't have that in the first quarter. And moving to the right, you can see that prices, margins and other marketing impacts had a rather small effect quarter-over-quarter, but more sales volumes in the first quarter reduced our net income by a little over $300 million. In addition, we recorded a net benefit of $490 million related to our asset rationalization program in the first quarter.
I am moving on to page five now on cash flow. The pie chart on the left shows that cash available during the first quarter was around $8 billion, a $6.9 billion or 84% of that total was generated from operating activities, though 16% or $1.3 billion came from asset sales.
Cash from operations does include $2 billion benefit from working capital, which is largely attributable to taxes payable in Norway. Probably know we make two tax payments to Norway, one in early April and another in early October. So you would expect, then, that the second quarter cash from operations would be lower assuming that we have a similar kind of operating and market environment.
Now if you look at the pie chart on the right and see how we use the $8 billion, we reduced debt by $3.5 billion, funded our capital program of $3 billion, repurchased $1 billion of our company's stock and paid $674 million in dividends.
I am moving to page six; you can see we continue to make steady progress in the first quarter of '06 since the first quarter of '06 in building our equity and reducing our debt. If you look at the bar chart on the left our equity is now up to $86 billion. So that is $13 billion higher than a year ago.
Another bar chart in the middle you can see that over the same period of time we reduced our debt $8.5 billion so it was around that $23.7 billion at the end of the first quarter. And then on the right you can see our debt to capital ratio has fallen to 22% in the first quarter, so it is down 8 percentage points compared to a year ago.
So I am going to page seven, talking about exploration production. Sequentially what took place from the fourth quarter of last year to the first quarter of this year? You can see our total worldwide realized crude oil price was $53.38 a barrel in the first quarter. So it is $1.72 lower than the prior quarter. Realized natural gas price worldwide in the first quarter was $6.35 Mcf, so it is up $0.23 per Mcf compared to last quarter. Now E&P production sales were lower than the previous quarter. I will go into that in the next slide. And also the results in the first quarter we had the benefit of our asset rationalization program.
So I am moving now on to page eight. Our first quarter production of 2.02 million BOE a day. Now that excludes LUKOIL, was down 27,000 BOE a day. That is consistent with our previous guidance. Now we saw continued improvement production from Alaska from our Prudhoe Bay unit, and we benefited from the startup of the upstream business venture with EnCana. These benefits were offset by the effective asset dispositions in Canada, maintenance and well performance in the lower 48, and then production reductions, OPEC reductions in Venezuela.
In addition, our Norway production was lower due to planned downtime and normal decline. Other impacts include OPEC reductions in Libya as well as the fourth quarter completion of our under-lift position in Libya. We had lower production in Australia, not because of operations, but due to the production sharing contract impacts.
And then lower production in Nigeria due to security issues. These were partially offset by higher production from Brittania in the U.K. And slightly higher production in Indonesia and China. Then if you add 445,000 BOE a day, which is our estimate of our equity share of LUKOIL's production, you get to the total company production of 2.47 million BOE a day in the first quarter.
I am moving on to page nine, E&P net income. Our net income for E&P in the first quarter was about $2.3 billion. That’s about $200 million higher than the last quarter. As you look at the small green bar on the left side of the chart you can see that prices and other market impacts had a rather smaller impact on first quarter. As higher natural gas and natural gas liquids were offset, mostly offset by lower crude oil prices.
As we move to the right we experienced lower sales volume sequentially, as a result of two fewer days in the first quarter compared to the fourth quarter and then a timing of crude liftings. For these reasons resulted in the reduction of our net income of about $211 million. And during the quarter we recorded net gains from our asset disposition program at $355 million.
There were other items that in the aggregate improved first quarter by $92 million. Some of these items include a Canadian asset impairment recorded in the fourth quarter, which did not reoccur in the first quarter; had lower exploration and operating expenses and somewhat better foreign exchange impacts. These were partly offset by higher DD&A and higher taxes and other items.
I am moving on to page ten, refining downstream part of the business. Now in the refining market domestic refining margins were higher than the previous quarter, while worldwide marketing margins were lower. In the U.S. our realized crack spread was $11.87 a barrel. That is only $0.48 a barrel higher than the previous quarter.
Although the domestic, WTI-based market crack spreads improved significantly during the quarter, narrowing crude differentials, periodic pricing of breadth and other crude had a premium to WTI, and our heavier distillate refining configuration only allowed us to capture approximately 10% of the WTI-based market crack improvement. Similarly, in our international refining market cracks increased in the first quarter, but our realized crack spread fell from $6.22 per barrel in the fourth quarter to $5.06 per barrel in the first quarter, mainly due to lower trading results.
With the contribution of the Wood River and Borger refineries to the downstream business venture with EnCana, our crude oil refining capacity has been reduced to 2.73 million barrels a day, compares to our previous capacity of 2.901 million barrels a day of capacity. Our U.S. refining system in the first quarter ran at 95% of stated capacity. That is just slightly lower than the previous quarter rate of 96%.
Our international refining system ran at 90% of stated capacity, that is 3% higher than last quarter. As a result our worldwide crude oil capacity utilization rate for the first quarter was the same as last quarter, 94%. We had two fewer days in the first quarter of '07 than the fourth quarter of '06. Our total refining volumes were lower even though the utilization rate is the same for the same quarter, for each quarter.
Our turnaround expenses in the first quarter amounted to $75 million pretax, that is $19 million lower than the prior quarter. Now results in the first quarter were impacted by our asset rationalization program.
I am moving on to slide 11. Our downstream net income for the first quarter was about $1.14 billion, and that is $217 million higher than the previous quarter. Moving to the first green bar on the left you can see that our fourth quarter net income, it included impairment of $192 million related to our U.S. marketing disposition plans. There is no additional impairment related to these assets, so nothing further was recorded in the first quarter.
Similar to our E&P segment, prices, margins and other market impacts had a minimal effect to our first quarter downstream net income even though the market cracks were significantly higher, as I explained earlier. Our slightly higher domestic realized refining margins were more than offset by lower worldwide marketing margins and lower trading results.
Prior to the fourth quarter of 2006 we recorded impairment on assets held for sale that were part of our asset rationalization program. When we finalized sales agreements for some of these assets, and when that was done the value achieved was higher than what we originally assumed when we impaired the assets. So as a result of this we recorded $135 million reduction to those impairments in the first quarter of '07.
We had some other items, which reduced first quarter income by $6 million, and those include higher taxes, unfavorable impact of foreign exchange and partially offset by lower operating expenses.
Now I am moving on to page 12. Our estimated equity earnings for the first quarter from LUKOIL is $256 million. Now that is down from a little over $300 million in the fourth quarter. The fourth quarter included a benefit of $61 million and the first quarter was reduced $20 million as a result of our alignment of our estimates to LUKOIL's actual reported results.
Turning to the midstream, midstream earnings $85 million. That is down from $89 million in the fourth quarter and its due to lower volumes, partially offset by higher natural gas liquids prices. If we look at our chemicals joint venture, it contributed $82 million. That is down from $98 million of the last quarter. That is mainly due to business interruption insurance benefit that we recognized in the fourth quarter.
Also the first quarter margins were lower, and turnaround costs higher than the previous quarter. Emerging businesses lost $1 million. We had $8 million income in the fourth quarter, and the difference is primarily lower power generation earnings.
I am moving on to page 13. Corporate segments impact on net income was a loss of $341 million, that’s greater than the $306 million loss in the fourth quarter. You can see from the first two red bars on the left that both the fourth quarter and the first quarter were impacted by foreign exchange. Actually had a $61 million benefit from foreign exchange in the fourth quarter, but in the first quarter we had a loss of $14 million.
Then we paid $14 million for early debt retirement premium in the first quarter, but the net interest expense was $38 million lower in the first quarter compared with the last. We had $16 million reduction in our first quarter loss, and it was primarily related to lower Burlington Resources acquisition related debt.
I am moving on to page 14. Earnings per barrel oil equivalent in the upstream. This chart shows E&P's income per BOE for the years 2003 through 2006 as well as the fourth quarter of '06 and the first quarter of '07. Our E&P income per BOE is competitive with the peer group and we expect to continue to be competitive.
When we talk about the peer group in all of our slides we are really talking about publicly traded companies; ExxonMobile, BP, Shell, Total and Chevron. We just as one of the first companies reporting we just don't have the peer group numbers to put on the slide. We'll incorporate those as the information becomes available.
I am moving to page 15. Same kind of slide only it is directed to income per barrel in the downstream. And in the downstream our results are competitive with the peer group for all periods and we expect to be competitive as we go through 2007. Same peer group.
I am moving to slide 17. The bar chart reflects ConocoPhillips return on capital employed with no adjustments for purchase accounting. We do make adjustments to peer group to reflect purchase accounting for transactions that they may have done, and this is how we make the adjustments in table two.
As you can see to the right, the annualized return on capital employed for the first quarter for ConocoPhillips is 12%. This compares to 13% for the fourth quarter and 17% for full-year of 2006. For segments what comprises the 12% in the first quarter of '07, E&P was around 11%, refining marketing 19%, midstream 21%, LUKOIL 11%, the total is 12%.
Moving to page 17. You can see from our recent announcements the Company is taking a more proactive visible role in the development of alternative renewable fuels and climate change initiatives. And we recently last week announced formation of strategic alliance with Tyson Foods to produce some market for next generation of renewable diesel fuel.
And we also announced the establishment of an eight-year $22.5 million research program at Iowa State University, and that is dedicated to developing technologies that produce biorenewable fuels. We also continue with quite a number of research program at many other major universities.
In addition, we joined the U.S. climate action partnership and announced support for a mandatory national framework to address greenhouse gas emissions. We essentially want do make sure that our company and our industry have a seat at the table for the discussions, legislation and regulation as it addresses climate change.
So meeting the challenges of taking action on climate change and providing adequate reliable supplies, it requires technical innovation, resource commitments and stewardship by the energy providers and consumers.
I am moving to the last slide, 18, the outlook. We are continuing to progress on our asset rationalization program. We are on track to deliver $3 to $4 billion in proceeds by the end of the year. We continue our work to advance our Canadian heavy oil projects with the implementation of the EnCana upstream business venture in the first quarter along with our continued development of the Surmont Phase I program. Our downstream business venture with EnCana we continue to make progress on the capital investments at the Wood River and Borger refineries.
Looking to the second quarter of 2007, we expect our upstream production to be lower as planned, due to scheduled maintenance. We have a lot of maintenance, in Alaska, certainly in the North Sea and China. And the normal seasonality in Alaska. Also need to remember that starting in 1st of April, we have exited from Dubai and we also have continued asset dispositions of mature low value, or upside value to the company E&P production.
With respect to Venezuela you see on the slide discussions continue. We certainly acknowledge the Presidential decree in Venezuela by which operatorship with Petrozuata, Hamaca and Corocoro will transfer to PDVSA on the first of May. That will ensure that a safe and efficient transfer of operatorship for those facilities and projects go to PDVSA.
With respect to compensation for expropriation, commercial terms going forward, governance, those are all areas that we continue to be in discussion with the ministry and with PDVSA. And downstream we expect crude oil capacity utilization to be in the mid 90% range, with turnaround costs around $60 million pretax. And we expect to purchase another $1 billion of our company stock in the second quarter of the year.
And then in conclusion, we know that the consensus view of our earnings if you take out the asset realizations were about $1.91 a share. Reported results are $1.83 a share. In terms of our operations of the companies, our volumes and our cost structure are right according to plan. The difference between what the consensus view of $1.91 clean and $1.83 was reported as primarily the income associated with the LUKOIL segment is somewhat less than expected, and the other is we did not see the full realization of crack spreads for the items I outlined, but trading wise, our trading income and profits we certainly are profitable, but not as much as we would have expected. And some of that may come back to us in the second quarter.
We saw quite a change in inventory as we went through the second quarter and volatility in prices. So some of that profitability on the trading side, it always shows up in realizations of upstream and downstream, but some of that we would expect comes back to us in the second quarter. So that is the observations I would say with respect to the reported results versus consensus. And that concludes my prepared remarks. And I think we are prepared to entertain questions in our conference call.
Gary Russell
Jen, I think we are ready for questions if you will queue them up.
Question-and-Answer Session
Operator
(Operator Instructions) Your first question gentlemen, comes from Douglas Terreson with Morgan Stanley.
Douglas Terreson - Morgan Stanley
Good morning, guys. Investment in operating costs increased significantly for the industry during the past several years and you guys obviously responded appropriately with one of the more disciplined capital investment programs for 2007. And so on this point I wanted to see whether the company is experiencing improvement in cost trends in any of its major businesses. And if so, if you can provide some color on those trends both functionally geographically, I would appreciate it.
Jim Mulva
What we have seen as a result of some pretty significant reductions in drilling programs in the upstream part of the business in Canada. We are seeing reductions in terms of the cost of the service industry on the drilling side of what we would be doing up in Canada. And there is some indication that there is moderation on inflation in terms of the service industry and cost with respect to drilling programs in the lower 48, but not quite to the extent that we see up in Canada.
With respect to oil sands development and the contracting side of the business to build large projects upstream and downstream, onshore and offshore, we continue to see upward movement of inflation. And we talk about inflation it goes all the way from high single digits, more than likely into double-digits. So we don't see the moderation on the contracting side of the large projects onshore and offshore, upstream and downstream. But we do see moderation and some decline on the service side in North America.
Douglas Terreson - Morgan Stanley
And also, Jim, within that context could you provide a status update on the projects with Aramco and IPIC in the Middle East? And specific next steps that you guys envision for those two ventures during the next six to nine months?
Jim Mulva
We are doing a very exhaustive FEED study with Saudi Aramco on the Yanbu project, and we continue to work that really hard and aggressive with Saudi Aramco, working really well on that. I think we expect to get that completed as we go through 2007 and 2008.
In terms of a refinery and Fujairah working with IPIC, that project is not as far along in terms of its conceptual development. It is a project that we are interested in, but we are working with IPIC, I merely would say though, that it is defined in terms of its conceptual approach and moving on with the FEED study.
Douglas Terreson - Morgan Stanley
Okay. Great. Thanks a lot.
Operator
Gentlemen, your next question comes from Paul Sankey with Deutsche Bank.
Paul Sankey - Deutsche Bank
Hi, good morning gentlemen. I know it is going to be difficult for you to answer this question but if you could update us on the latest situation in Venezuela and how you expect that to pan out, that would be great. Longer-term I was wondering if you could make any comments about firstly, where you expect your equity share to go to in Venezuela, and secondly anything that you could possibly say about compensation would be very interesting. Thanks.
Jim Mulva
In terms of Venezuela I thought I pretty well covered it. It may not be satisfactory to what you're looking for, but we will turn over all the operations, PDVSA becomes the operator first of May and we are working with them to make sure that is done in a very safe and efficient way. That transition is going well, and we don't see any issues or problems in accomplishing that.
But in terms of the expropriation of PDVSA increasing their ownership to 60% those discussions will continue on for some time beyond the first of May, as well as what are the terms and conditions going forward in those projects. So it is really premature for us to say anything more than that. Now you asked another question on -- what was the second one?
Paul Sankey - Deutsche Bank
No. I haven't asked the second one yet. Sorry I may have missed your comments on Venezuela and I apologize for that. A further one that I would ask you if I could would be on Iraq. Is there any update that you can give us in keeping on the kind of geographic geopolitical theme about the situation in Iraq and the potential for investment there that has changed over the past quarter or so? Thanks.
Jim Mulva
We certainly would like to see Iraq security situation settle down and sort out just for human mankind. And so I think and hopefully this can be done. But until the security situation sorts out and becomes far more safer and the petroleum law becomes past and develop with respect to international oil companies investing, I don't see that it is going to progress as well as we would like.
It is a great province for an opportunity for companies like ourselves, but actually I don't see anything necessarily changing here in the last month or two. So hopefully it will.
Paul Sankey - Deutsche Bank
If I could just switch gears to a specific one on the environment, you mentioned in Q1 it was tough to capture the downstream environment as it appears on our screens. Is that changing in Q2? Is there a change in dynamics which means the margins that we see are more representative, or is it going to be a continuing theme that would appear to be very, very strong margins on captured quite as well as might be expected. And I will leave it there. Thank you.
Jim Mulva
The differentials continue to be quite similar to what we saw at the end of the third quarter. Hopefully those differentials will widen, and it will translate into higher realized price. But I think some of the trends you see in the first quarter are continuing into the second quarter.
On the other hand, though, as I mentioned at the close of my opening comments, our commercial trading activity was not as profitable as we normally -- it was profitable but not as profitable as we normally would have. And that is why it passed-through in terms of higher realizations. We think some of that will come back to us in terms of inventory and crude and product that we have in the water from the first quarter to the second quarter. So hopefully you will see better realizations.
Paul Sankey - Deutsche Bank
Great. Thank you.
Operator
Gentlemen, your next question is from Mark Flannery with Credit Suisse.
Mark Flannery - Credit Suisse
Hi, thank you. I have two questions on the downstream. One follows on from Paul's question there. Can you give us an idea in millions of dollars of the kind of swing in trading in the downstream that we saw between say an average type of quarter, and what you've got in the first quarter? Just to give us an idea of the magnitude here? It might be difficult, but then I have a follow-up.
Jim Mulva
Well, I think you're talking about $0.02 or $0.03 a share. John Carrig, you might want to comment on that but its nothing that major. As I said, the difference between as we look at if the Street and consensus view of earnings was $1.91 a share after you take out the net asset gains and then we reported a clean $1.83, that is $0.08, maybe $0.03 or $0.04 of that is attributed to LUKOIL financial results. Then you're looking at the difference being primarily trading and realizations in the downstream part of the Company.
Mark Flannery - Credit Suisse
And the follow-up question is similar area, different product. It is in the area of biodiesel. As we saw the announcement of your agreement with Tyson, the eventual volumes there are actually relatively small. Is this an area of biodiesel or second-generation biofuels or anything like that? Do you intend to put more effort into -- in other words do you see this becoming a more meaningful part or is it going to be restricted to relatively small stroke experimental areas now?
Jim Mulva
As you indicated, it has relatively small volumes but in terms of renewable diesel it probably dwarfs all that has been already announced by others. What we are doing is we like renewable diesel because we can take this animal fat, put it right into our refineries and our distribution system. So we want to learn from it. But in the context of ramping up and investing more into alternatives and renewables in the context of the total company it's going to continue to be quite small.
Mark Flannery - Credit Suisse
Great. Thank you very much.
Operator
Gentlemen, your next question is from John Herrlin with Merrill Lynch.
John Herrlin - Merrill Lynch
Yes, hi. Couple quick ones, Jim; you said that services cost in Canada have come down a lot. Would you at all feel compelled to take advantage of that by accelerating development drilling in non-winter access areas?
Jim Mulva
Well, compared to what our initial thoughts of spending in Canada would be for 2007 and what was actually requested by the business unit, we took $1 billion out of the request for essentially drilling up in Western Canada for our 2007 program.
Now if we look into seasonality, so we've got to be preparing for 2008; what is the sustained level of what we want to accomplish? We see lower service cost. We also see we didn't take away the optionality of ultimately drilling those wells, so we knew we were always going to come back and drill those wells. So we see a lower pressure on cost, and we also see a somewhat better gas price environment.
So the question for us that we are working through right now is what is the sustained level of what we want to be spending for Canada going forward really for this winter season coming up as we go from into 2008? We haven't determined that, but I think you can expect we're going to spend more money than we did in 2007.
John Herrlin - Merrill Lynch
Okay. Next one for me is on free cash flow. Even after your planned debt pay downs, dividends, share repurchases we still have you generating substantial free cash flow over about $8 billion. Should we expect a more aggressive buyback program versus cash for a rainy day?
Jim Mulva
Well, what we are going to do -- no, we're not going to maintain cash levels over and above what you see here in the last several quarters. So what you will see us do we want to get another quarter under our belt, so we get at the end of the second quarter say 90 days from now, we report our results. We will see some additional debt reduction. We will buy another $1 billion of stock back. Then we will take an assessment as we look for the next six months of the year, do we want to ramp up our share repurchase a little bit more in the third and fourth quarter than $1 billion a quarter? We will make that call and talk about that 90 days from now.
But I think what you can see is debt reduction essentially is going to be over for us at the end of this year. So based on the business environment, the capital spend, assume it is around 13.5 or $14 billion going forward, not paying down anymore debt, assume an annual dividend increase, the rest will all go towards share repurchase and not accumulation of cash.
John Herrlin - Merrill Lynch
Okay. Last one for me is on emissions; you have taken a proactive stance with regard to that issue. What are you looking at exactly? Sequestration, reduction, and how quickly or how costly can you implement such programs or how much time will it take?
Jim Mulva
Well, climate change one of the questions to come forth so I will take just a few moments to respond to it. First, we have come out proactively and indicated yes, voluntary programs have worked well particularly in our industry in the downstream part reducing emissions associated with our refineries. But the science has become quite compelling, and we see that greenhouse gas emissions, resulting from human activity and just growth in the economy is something that needs to be addressed. And we look at it; it is being addressed. It needs a national mandated framework.
You don't want to see like we have in boutique fuels, we don't want to see 50 different states coming up with their own program on addressing climate change. So we as an industry and as a company we want to have a seat at the table to ensure that whatever is done is done in a way that is transparent, is consistent, is fair, it is recognizing the cost of addressing climate change. We don't want to create winners and losers. We don't want to come up with a program that adds to volatility and energy prices. And we want to have a program that ties into the international community. We just want to make sure that we have a seat at the table.
Now in terms of how this is done, a different alternatives and programs, whether it alternately leads to CO2 sequestration, that makes a lot of sense but primarily the program has got to be -- let's have a holistic, complete program, national mandated program for our country. And the other thing is we want to really emphasize one of the things that we can do first and foremost is energy efficiency.
And that is why we conduct our operations and we conduct our privately our own personal lives, how we transportation fuels, more energy efficiency and the other thing is we will need to ramp up our technology and our research spend so that we can figure out how best to address climate change. Because what we are really trying to do is slowdown the intensity level, slow down the growth and then second, stop and then move towards absolute reductions. But that is going to take a lot of energy efficiency and quite a bit of spend on research with new technology to do things like you are suggesting, CO2 sequestration.
John Herrlin - Merrill Lynch
Thanks very much.
Operator
Gentlemen, your next question is from Ron Oster with A.G. Edwards.
Ron Oster - A.G. Edwards
Good morning. I just had a quick question on the infrastructure you have in place to handle ethanol. I was just wondering if you could kind of put percentage terms, what amount of your terminals are equipped to handle E10 blends? And if you have any timeframe or any targets in place of when you might be fully capable of handling 10% ethanol blend in your gasoline mix.
Jim Mulva
Well, I think we would have to get back to you on that but in terms of we're very big in ethanol because we are very big in refining and transportation fuels and gasoline. And so we need to buy and blend a lot of ethanol. And I don't see that we necessarily -- we responded quite well and been able to do that. But in terms of the specific questions you have, I don't know Gary…
Gary Russell
Ron, let me get back with you on that, if that's okay?
Ron Oster - A.G. Edwards
Sounds good. And just kind of a broader industry question on the same topic. How do you see this as we move closer to an E10 blend, how do you see this impacting refining margins in the broader picture? Is it too small to have much of an impact or just kind of what is your general outlook there?
Jim Mulva
Ron, first of all, when you look at how much ethanol can probably be made from corn ultimately you want to make ethanol from certainly sugarcane, but that is most of that is coming from Brazil. You ultimately want to make ethanol from cellulose but it's going to take a lot of research. So people consultants and external people look at this they say probably the most that you can make from corn and have the right balance with use of corn for food and -- its probably 15 or 16 billion gallons. If you look at the size of the amount of gasoline that is used in the United States, it is going to be difficult if you use all the ethanol moving up to 15 or 16 billion gallons a year. At best you're probably getting up to E9 or E10. So it seems to be within that envelope that seems to be what may ultimately could be done.
Ron Oster - A.G. Edwards
I guess my question is if we move to those levels, would you expect some downward pressure on refined margins, or how would you expect that to play out?
Jim Mulva
So far we haven't really seen necessarily an impact in terms of one way or another, I think to respond to that question. But we do see, and maybe this is a good opportunity, demand continues to go up.
You would think with an oil price of $60 a barrel you would expect that it would have some more impact in terms of demand. But we see our demand up in different periods of time you want to look at like 1.5 to 2.5% year-over-year.
The demand continues to go up, and we are not importing as much gasoline from Europe because they've had some refinery downtime. They've had the harbor or the strike in France. So we've imported less. So we've had some operating on schedule downtime in the industry here in the lower 48. So you have less imports, the inventories are down.
We really have to run well. And so if you look at the supply demand situation and hopefully we don't have weather-related issues -- we didn't have any in 2006 and hopefully we don't have much in 2007.
The issue and the concern we have is are we going to be able to run and provide the supply that is going to be needed as we go through the summer time period.
It seems that not only the summer time period, it goes from the summer to the winter, and so you asked the question about what is the impact of ethanol going to be on price.
I think there is a major issue, and that is the ability of the supply and demand, meet the demand from as we go through the summer and the winter.
Ron Oster - A.G. Edwards
Great. And just one more, another broader industry question in terms of utilization rates, we saw them come down again today. And they are about three percentage points below the historic norms.
Is that something we need to deal with on a sustainable basis, or do you think it is just more of a seasonal issue that we are dealing with right now? Or do you expect utilization rates to go back towards the historic norms?
Jim Mulva
We would like to see ourselves operating higher than 94% and 95% utilization. On the other hand, the refineries and the complexes are becoming more sophisticated, more complex and sophisticated. That is, they are handling more quality crude.
They are also -- we're making absolute clean fuels and gasoline and ultra-low sulfur diesel. And the result of that is the units are more integrated. So if a unit comes down, has more impact in terms of total capacity and capability of the refinery. So they're becoming more complex, more sophisticated.
We would like to see ourselves get updated on 97 or 98% capacity utilization. But we are running around 95%.
Usually, historically, we do a little bit better than rest of the industry, but for these reasons I think it may be that we are looking at numbers in the mid 90s and to be looking at numbers closer to 100%.
Ron Oster - A.G. Edwards
Great. Thank you.
Operator
And your next question is from Paul Cheng with Lehman Brothers.
Paul Cheng - Lehman Brothers
Jim, when you're talking about in the second quarter sequentially that it would be down about 150,000, 160,000 barrels per day due to seasonality, maintenance and some other stuff, can you break down roughly what is the component for the maintenance work and what is the component for the asset sales?
Jim Mulva
Yes, we are probably -- and it all won't happen exactly this way, but in Dubai we no longer have 20,000 barrels oil equivalent because we left Dubai. And the reason we left Dubai is our earnings were just $2 million or $3 million a year; we were making at best $0.50 a barrel. So we have left Dubai, so those volumes are gone.
We also have the result of asset dispositions. Now that could be 20,000 or 30,000 BOE a day. It depends upon how quickly we complete the asset dispositions.
Now in Alaska, we have scheduled maintenance and we have seasonality. That can be 10,000, 20,000, 30,000 barrels a day. In China we have scheduled maintenance that is 5,000, 10,000 barrels a day.
And in the North Sea where we have some very large scheduled maintenance downtime at Britannia and the Ekofisk complex, that is in the neighborhood of 90,000 barrels a day.
Now, it doesn't all add up, but some numbers will be a little bit higher, a little bit less. It depends upon the ability to get the work done on time; depends on the asset dispositions. But that is why we gave that range in our outlook of somewhere 150,000 barrels equivalent a day.
Paul Cheng - Lehman Brothers
Thank you. Two other questions. First, is there any update you can provide relating Mackenzie Delta negotiation and also the Alaskan gas pipeline, or that is pretty much dead in the water at this point?
Jim Mulva
Well, the Mackenzie Delta pipeline I think Imperial just came out, and we don't really have anything more to add to that than the public announcement.
In Alaska, Alaska is moving forward with legislation in the state, the governor has legislation that is going to essentially we would expect to get passed as we go into the May time period and into the summer time period.
And of course our concerns as producers, we think that whatever project is ultimately developed up there we thought we had a really good discussion, negotiation with the former governor.
It was a tough negotiation for the better part of two years. We thought it was a great balance, tough on everyone, but it was good balance to develop between the state of Alaska and the producers.
We do think though that whatever is done up in Alaska it's very important that what legislation is passed is not done in a way that excludes any producer or non-producer to submit a proposal that could be considered by the state.
We don't want to see something that is so exclusive that it stops others from participating or submitting proposals. Then the other thing is we think that whatever is done ultimately the producers need to be involved. Because producers one way or another are going to produce the gas and they are going to have to provide the economic and credit support for the pipeline; whether the producers own the pipeline or they don't own the pipeline, we are still going to need to be involved. So it just seems to be whatever develops the producers must be involved.
We did lose since the legislature in Alaska did not pass what was negotiated by the former governor we have lost at least two years in terms of the development to bring in that gas pipeline on stream.
And you know it is a great resource, it is indigenous resource for the United States and North America, and we have a huge -- I think we have a huge gas problem in North America. And LNG imports probably aren't going to come in the amount or as quickly as one may have thought.
We see the natural decline of production both in the Lower 48 and Canada, so we need this gas pipeline. We've already lost two years. If we don't start now, we just keep losing time.
Paul Cheng - Lehman Brothers
Jim, just final question. Can I circle back a little bit to the ethanol issue? It looked like the ethanol industry was starting to get into a supply surplus situation by the second half of this year in excess of 6 billion gallons of the current demand.
The question is that based on your system, your network, do you vanity at this point if the supply is there for you to be able to bring and outside the current mandatory area or that outside the current market domain?
For example you forward there with other areas, if your system logistic system is ready to do it, and what are financial incentives in terms of a discount or the pump price you need in order for you to have the incentive to do so?
Jim Mulva
I don't know if I can really adequately answer the question. Maybe we'll have to come back and circle back and talk to you off-line. In terms of yes, the capability in the production of ethanol continues to go up far more quickly than we would've thought. But it does create distribution issues.
But the industry has responded pretty well, and I think we have found that I believe John or Gary can respond to this, the availability of ethanol and blending it into gasoline is other than the distribution issues and how it has to be segregated, has gone reasonably well.
John Carrig
I think from an industry standpoint some of the issues with blending ethanol at the terminals and not being able to blend it at the refinery put in into the pipes, some of those issues are also being solved.
So the fungability of the product going through our existing systems is improving all the time. So the ability to service other areas is probably going to improve.
Jim Mulva
In terms of transportation costs, because we really essentially haven't found a way to utilize existing transportation networks.
Paul Cheng - Lehman Brothers
Very good. Thank you.
Operator
Gentlemen, your next question comes from Doug Leggate with Citigroup.
Doug Leggate - Citigroup
Hi, good morning, Jim. A couple of questions, I guess. The first one is on disposals. Clearly that went pretty well in the first quarter. Can you just give us an update as to how you see things for the balance of the year and maybe comment on the possibility of selling the Wilhelmshaven refinery in Germany? And I've got a couple of follow-ups.
Jim Mulva
Okay. In terms of dispositions, yes, as you said we expect to complete the program as we announced $3 billion to $4 billion by the end of the year. I think you're going to see more the completion of that, not just prorated through the second quarter, more of that is going to be done in the third and fourth quarter. So you would see dispositions somewhat less in the second quarter; most of the remaining done in the third and fourth quarter.
In terms of Wilhelmshaven, we like Wilhelmshaven refinery. We acquired it, announced it in November of '05, actually completed the transaction in early part of '06. We wouldn’t have bought Wilhelmshaven, unless we have a deep conversion project. Its a very nice refinery, nice layout, but it is a hydro skimmer, and it needs a deep conversion project.
When we look at the deep conversion projects that we intended to do we saw the inflation of cost expectations goes so high, so much higher than we had thought as we went through the early and the mid part of 2006. So we stopped and said we got to rethink this.
And what our people have been working on is using more traditional, proven technology, existing proven units that can be part of the deep conversion project. And we now are starting to see that we have the ability to essentially accomplish our objective with more certainty on cost and schedule. So I don't think we are going to, you will see us approve the deep conversion project in 2007.
But our plans are probably to approve a project going forward and build it into our capital programs in 2008 going forward. So we are not interested in selling Wilhelmshaven. We are interested in bringing it into one of the most sophisticated refineries in not only in Europe, but in the world.
Doug Leggate - Citigroup
Thanks for the clarification. The other two are probably a lot quicker, the first one is on DD&A, maybe one for John just to maybe help us understand the jump in the E&P internationally in PDD near this quarter? And I guess I'm looking at it versus Q4
John Carrig
Doug, let me answer that. We have the biggest jump on a per barrel basis and also on absolute is most likely related to Canada. And it is related to the transition that we are making in systems and the way that we allow the systems to automatically calculate the rate for DD&A as we go forward.
So there is a little bit of noise in the first quarter in the numbers. The expectation is that potentially could abate a bit in the second quarter as we make the kind of final transition to systems. But the noise in the first quarter was really related to Canada.
Jim Mulva
But there is no change in the total that we expect for DD&A for the company for the entire year.
Doug Leggate - Citigroup
Okay, great. And the final one for me is just I'm afraid this is on Venezuela, but hopefully an easy one. In the context of your production guidance for this year, have you taken it into account any potential reduction in volumes from there, or is the target still assuming no change?
Jim Mulva
We are assuming that $2.375 billion. We are still stating that that's what we're going to do for the year. It assumes that we, I don't know, do you know the assumption on Venezuela, John?
John Carrig
We're not making any, what we've done is we've assumed that OPEC restrictions will continue along the levels that they have been in the first quarter.
Jim Mulva
In other words, current production continues.
John Carrig
Right, but we are not making any further assumptions at this point.
Doug Leggate - Citigroup
Great. That's it for me. Thank you.
Operator
Gentlemen, your next question is from Mark Gilman with the Benchmark Company.
Mark Gilman - Benchmark Company
Guys good morning. I had two real quick ones. First I just want to clarify going back to this trading thing for a minute. The trading effect is included in your reported margin number?
Jim Mulva
Yes.
Mark Gilman - Benchmark Company
Secondly, can you give us what the equity earnings and the two joint venture partnerships were in the first quarter, please?
Jim Mulva
I think will have to come back to you.
John Carrig
Let me call you separately on that, Mark, because there are probably some things I need to explain to you as we go through that. So it would be better served if I call you.
Mark Gilman - Benchmark Company
Okay, third and finally progress on the Whitegate Refining sale.
Jim Mulva
Well, I don't know that we really announced that; we are selling Whitegate, but I think we look at all of our assets. No, there's nothing more that I have to pass along on that.
Mark Gilman - Benchmark Company
Okay. Thanks a lot.
Operator
Gentlemen, that is all the questions that we have in queue at this time. I will now turn the call back to Gary Russell for closing remarks.
Gary Russell
Thanks, Jen. We do appreciate everybody's interest in the company and your participation in the conference call today. I would remind you that you could find materials that we went through this morning on our website at www.conocopphillips.com. Good day.
Operator
Ladies and gentlemen, thank you for your participation in today's conference call. This concludes the presentation, and you may now disconnect. Have a great day.
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