press release

Unocal posts record net earnings in second quarter

Download 2Q 2004 earnings news release (pdf format)

El Segundo, Calif., Aug. 2, 2004 - Unocal Corporation (NYSE: UCL) today reported record preliminary net earnings for the second quarter 2004 of $341 million, or $1.25 per share (diluted), 93 percent above the $177 million, or 68 cents per share (diluted), reported in the same period a year ago. The record earnings included a number of special items discussed below in connection with Unocal's adjusted after-tax earnings.

Unocal's preliminary adjusted after-tax earnings for the second quarter 2004 were $231 million, or 86 cents per share (diluted). This compares with the Thomson/First Call mean of analyst estimates (published July 26, 2004) of 83 cents per share. Unocal's adjusted after-tax earnings were $191 million, or 73 cents per share (diluted), in the second quarter 2003, and $239 million, or 89 cents per share (diluted), in the first quarter 2004. Adjusted after-tax earnings are net earnings excluding special items (discussed below) and cumulative effects of accounting changes.

    CONSOLIDATED RESULTS (UNAUDITED)

     Millions of dollars except                    2nd Q     1st Q     2nd Q
      per share amounts                             2004      2004      2003

     Earnings from continuing operations            $282      $266      $165
     Earnings from discontinued operations            59         3        12

     Net earnings                                    341       269       177

       Less: Special items in continuing
        operations                                    54        30      (22)
       Less: Special items in discontinued
        operations                                    56        --         8

     Adjusted after-tax earnings                    $231      $239      $191

     DILUTED EARNINGS PER SHARE
      DATA (UNAUDITED)

     Net earnings per share:
       Continuing operations                       $1.04     $0.99     $0.64
       Discontinued operations                      0.21      0.01      0.04

     Total net earnings per share                  $1.25     $1.00     $0.68

     Adjusted after-tax earnings per share         $0.86     $0.89     $0.73

     REVENUES FROM CONTINUING
      OPERATIONS (UNAUDITED)                      $1,980    $1,885    $1,613


  

"We had an outstanding second quarter, recording the highest quarterly profit in the company's history," said Charles R. Williamson, Unocal chairman, chief executive officer and president. "In the second quarter, we benefited from higher commodity prices and lower exploration expense."

Williamson went on to say, "We continued to execute on our major development programs in the Caspian Sea, Thailand, Bangladesh and deepwater Gulf of Mexico - programs that we believe will contribute to production growth in 2005 and 2006."

Recent operations highlights

Unocal's operational highlights and other developments during the second quarter and through the date of this news release include:

  • Deepwater oil discovery drilled on the Tobago prospect in the Gulf of Mexico (Unocal operator, 40.01% working interest)
  • Deepwater appraisal wells encountered hydrocarbons on the St. Malo prospect in the Gulf of Mexico (Unocal operator, 28.75% working interest) and on the deepwater Ranggas, Gehem and Gula prospects in Indonesia (Unocal operator of production-sharing contracts (PSCs), 80% working interest)
  • Ramp-up of production continued on the deepwater West Seno project in Indonesia (Unocal operator of PSC, 90% working interest), although slower than initially forecast
  • Construction progressed on the Phase 1 and 2 developments of the Azerbaijan International Operating Company (AIOC) project in the Caspian Sea (Unocal, 10.28% working interest); first oil at the wellhead expected in early 2005 for Phase 1
  • AIOC participant companies are reviewing the Phase 3 development project for approval; official sanction expected by year-end 2004
  • Approximately 70 percent of construction completed on the Baku-Tbilisi-Ceyhan export pipeline from the Caspian Sea (Unocal, 8.9% equity interest)
  • Sold certain fee mineral interests in the U.S. for approximately $190 million
  • Settlement of an eight-year dispute over operation of the Tiwi and Mak-Ban geothermal steam fields in the Philippines
  • Arbitration panel decision received in dispute over gas deliveries to Agrium's Kenai, Alaska, fertilizer plant; Unocal is required to pay $36 million for past underdeliveries through April 2004 plus $2 million in interest
  • Approximately $67 million cash received from the sale of Unocal's indirect interest in its last remaining oil and natural gas assets in Brazil; possible future payments contingent on achieving certain natural gas prices and/or volume thresholds
  • Installed a floating storage unit for oil production from fields in the Gulf of Thailand that resulted in decreased production during the installation process

2Q 2004 financial and operating details

In the second quarter 2004, after-tax special items included a $78 million gain from the sale of North American assets, a $46 million gain from the settlement of litigation related to Unocal's Philippine geothermal business, and $27 million for net settlements and adjustments relating to tax matters. Partially offsetting these gains were environmental and litigation provisions of $13 million and a provision related to the arbitration settlement on Alaska gas deliveries of $29 million. All of the special items are detailed in the Adjusted After-tax Earnings Reconciliation table included at the end of this news release.

Unocal's second quarter 2004 adjusted after-tax earnings (compared with 2Q 2003) reflected higher worldwide crude oil and natural gas prices and lower exploration expense. These positive factors were partially offset by lower worldwide natural gas and liquids production and higher dry hole costs.

Worldwide hydrocarbon liquids and natural gas production for the second quarter 2004 averaged 404,000 barrels of oil equivalent (BOE) per day, compared with 463,000 BOE per day in the same period a year ago. The production decline was due primarily to the sale of oil and gas producing assets in North America, which accounted for nearly 34,000 BOE per day during 2003, natural production declines in North America, and lower contractor's cost recovery barrels from certain PSCs in Asia, as a result of higher commodity prices and recovery of sunk costs, which reduced production by about 7,000 BOE per day.

Second-quarter 2004 worldwide price realizations (including hedging activities) for natural gas averaged $3.65 per thousand cubic feet (mcf), up from $3.53 during the prior year's second quarter. The company's second quarter 2004 worldwide liquids price realizations (including hedging activities) were $32.61 per barrel, up from $25.36 in the second quarter 2003. Hedging activities in the 2004 second quarter decreased worldwide liquids realizations by $1.94 per barrel and decreased worldwide natural gas realizations by 11 cents per mcf.

Unocal's preliminary EBITDAX for the second quarter 2004 was $762 million, or $2.74 per share (diluted). This compares with $720 million, or $2.65 per share (diluted), for the same period in 2003. EBITDAX is net earnings before interest, taxes, depreciation, depletion and amortization, impairments, exploration expenses, dry hole costs, special items, and cumulative effects of accounting changes.

The company's total consolidated long-term debt (including current maturities) was $3.34 billion at June 30, 2004. Because of an accounting rule change, in the first quarter 2004 the $522 million obligation for the Unocal Capital Trust convertible preferred securities was removed from the balance sheet and replaced by a debt liability of $538 million in 6-1/4-percent junior subordinated debentures of Unocal payable to Unocal Capital Trust. Cash and cash-equivalents were $939 million at June 30, 2004.

Six-months results

Preliminary net earnings for the first six months of 2004 were $610 million, or $2.25 per share (diluted), compared with $311 million, or $1.20 per share (diluted), reported for the same period a year ago.

Unocal's preliminary adjusted after-tax earnings for the six months 2004 were $470 million, or $1.75 per share (diluted). Unocal's adjusted after-tax earnings were $420 million, or $1.60 per share (diluted), for the six months 2003.

     CONSOLIDATED RESULTS (UNAUDITED)
                                                      For the Six Months
                                                        Ended June 30,
     Millions of dollars except
      per share amounts                              2004            2003

     Earnings from continuing operations             $548            $379
     Earnings from discontinued operations             62              15
     Cumulative effect of accounting changes           --             (83)

     Net earnings                                     610             311

       Less: Special items in continuing
        operations                                     84             (34)
       Less: Special items in discontinued
        operations                                     56               8
       Less: Cumulative effects of accounting
        changes                                        --             (83)

     Adjusted after-tax earnings                     $470            $420

     DILUTED EARNINGS PER SHARE
      DATA (UNAUDITED)

     Net earnings per share:
       Continuing operations                        $2.03           $1.45
       Discontinued operations                       0.22            0.05
       Cumulative effect of accounting changes         --           (0.30)

     Total net earnings per share                   $2.25           $1.20

     Adjusted after-tax earnings per share          $1.75           $1.60

     REVENUES FROM CONTINUING
      OPERATIONS (UNAUDITED)                       $3,865          $3,395


  

3Q 2004 earnings outlook

For the third quarter 2004, Unocal is forecasting adjusted after-tax earnings of 90 cents to $1.00 per share (diluted). This forecast compares with the Thomson/First Call mean of analyst estimates (published July 26, 2004) of 75 cents per share for the third quarter 2004. Unocal's third quarter forecast assumes average NYMEX benchmark prices of $39.90 per barrel of crude oil and $6.15 per million British thermal units (mmBtu) for North America natural gas for the period.

Unocal's third quarter 2004 adjusted after-tax earnings are expected to change $8 million for every $1 change in its average worldwide realized price for crude oil and $3 million for every 10-cent change in its average realized North America natural gas price, excluding the effect of hedging activities.

The forecast also assumes pretax dry hole costs in the third quarter of $15 to $25 million.

The third-quarter adjusted after-tax earnings forecast excludes special items and accounting changes. Because of the inherent uncertainty related to these items, determining whether or when they will occur and quantifying their dollar impact, Unocal does not believe it is able to provide a meaningful forecast of third-quarter net earnings.

2004 production outlook

In the past, Unocal has had a goal to provide investors with a forecast amount for future production volumes that had an equal likelihood of being below or above the actual amounts. Because recent actual production levels have often fallen below Unocal's estimates, the company has decided to adopt a new approach for its production forecasts.

Previous production estimates have been affected by factors such as different than anticipated declines, project start-up timing, and performance of new projects. In addition, the company's production is sensitive to constrained markets and/or pipeline capacity, and by the volatility associated with oil price changes in Unocal's PSCs.

Beginning with today's outlook, Unocal will now offer production forecasts that the company expects will be exceeded by actual production. Accordingly, the production outlook based on the prior methodology is being revised from approximately 425,000 BOE per day to approximately 400,000 BOE per day for the full-year 2004. This reduced forecast reflects lower volumes in the second half of the year (annualized basis) due to dispositions of producing assets in the U.S. onshore and in Brazil (4,000 BOE per day), as well as the impact of higher prices on PSCs (3,000 BOE per day), infrastructure turnarounds, reduced West Seno performance (8,000 BOE per day), and other various factors (10,000 BOE per day).

As a part of this new approach, Unocal will also disclose on its website additional detailed ranges of the numerous areas of production, which describe the company's lowest and highest production estimates in those areas. In locations where Unocal is limited by market demand or pipeline capacity, the range will be between the contract minimum and the highest past production or the estimated capacity limits of the producing assets. A sensitivity factor will also be provided to adjust future production for the impacts of PSC adjustments due to changes in oil prices.

The details for 2004 and new projects for 2005 are posted in the Data Warehouse section of Unocal's Investor Relations web site, www.unocal.com.

About Unocal Corporation

Unocal is one of the world's leading independent natural gas and crude oil exploration and production companies. The company's principal oil and gas activities are in North America and Asia.

Conference call/financial database

Unocal will webcast its quarterly earnings conference call today at 1 p.m. PDT (4 p.m. EDT) over the Internet. To listen to the live webcast, go to the Investor Relations section of the Unocal web site, www.unocal.com. Replays of the conference call, including questions and answers, will be available.

Additional financial tables for the second quarter 2004 and the comparable prior periods are available in the company's "Quarterly Fact Book," which is posted in the Data Warehouse in the Investor Relations section of the company's web site. The Quarterly Fact Book is also available upon request from Unocal Investor Relations.

Forward-Looking Statements; Preliminary 2004 Second Quarter Results

This news release contains forward-looking statements about matters such as plans for drilling and development operations; dry hole costs; production rates, timing and growth; commodity prices; contingent payments pursuant to completed transactions; and adjusted after-tax earnings. Although these statements are based upon Unocal's current expectations and beliefs, they are subject to known and unknown risks and uncertainties that could cause actual results and outcomes to differ materially from those described in, or implied by, the forward-looking statements, including changes in commodity prices and the effectiveness of the company's hedging activities to manage that volatility; the company's ability to find or acquire additional oil and gas reserves and to develop deepwater fields and other large projects in a timely and cost-effective manner; the accuracy of the company's estimates and judgments regarding hydrocarbon resources and formations; decline rates of producing properties in which the company has an interest; adverse geological and other operational factors; the extent of the company's operating cash flow and other capital resources available to fund its capital expenditures; international and domestic regulatory, political, and economic considerations; performance by third parties, including foreign government entities, joint venture partners, independent contractors and operators of properties in which the company has an interest, and other factors discussed in Unocal's 2003 Annual Report on Form 10-K, as amended, and subsequent reports filed by Unocal with the U.S. Securities and Exchange Commission (SEC).

Copies of the company's SEC filings are available from the company by calling 800-252-2233 or from the SEC by calling 800-SEC-0330. The reports are also available on the Unocal web site, www.unocal.com. Unocal undertakes no obligation to update the forward-looking statements in this news release to reflect future events or circumstances. All such statements are expressly qualified in their entirety by this cautionary statement.

In addition, disclosures in this news release, including in the attached tables, regarding Unocal's second quarter 2004 financial results are preliminary. These disclosures are subject to change in connection with Unocal's preparation and filing of its Form 10-Q for the second quarter 2004.

Supplemental Non-GAAP Financial Measures

The news release includes certain "non-GAAP financial measures" as defined under SEC regulations. Specifically, Unocal has referred to (1) adjusted after-tax earnings and (2) EBITDAX. Adjusted after-tax earnings are defined as net earnings excluding special items, and cumulative effects of accounting changes. EBITDAX is defined as net earnings before interest, taxes, depreciation, depletion and amortization, asset impairments, exploration expenses, dry hole costs, special items, and cumulative effects of accounting changes.

Special items represent certain significant matters which positively or negatively impact net earnings that management determines to be not representative of the company's ongoing operations. Examples include: gain/loss from major asset sales; environmental remediation costs related primarily to inactive, closed or previously owned company facilities and third party sites; costs or settlements associated with major restructuring plans; litigation settlement costs primarily associated with former company operations or closed/inactive facilities; significant impairments due to changes in commodity prices; material damage to company facilities or operations due to fire, explosion, earthquakes, storms or other "acts of god" not covered by insurance; certain costs associated with major acquisitions including litigation and significant trading derivatives; and insurance recoveries associated with former company operations or for costs incurred in prior years.

Unocal's management believes that adjusted after-tax earnings is a useful supplemental financial measure to investors and analysts because it facilitates a focus on the company's ongoing operations and allows for convenient comparisons to the company's prior reporting periods. Adjusted after-tax earnings is also used as a factor in calculating various performance measures in connection with payments under the company's annual bonus plan, and it is used by management as a factor in reviewing business unit performance. Unocal's management believes that EBITDAX is helpful to investors and analysts because it facilitates a comparison of companies like Unocal that use the "successful efforts" accounting method with other companies in the exploration and production industry that utilize the "full-cost" method of accounting.

Adjusted after-tax earnings and EBITDAX are not substitutes for net earnings determined in accordance with GAAP as a measure of profitability or other GAAP financial measures. Special items excluded from these non-GAAP measures do in fact positively or negatively impact net earnings. Other companies may define special items differently, and the Thomson/First Call mean of analyst estimates may not use a similar definition. Hence, these measures may not be comparable with similarly titled amounts reported by other companies or analyst estimates reported by Thomson/First Call.

A quantitative reconciliation of adjusted after-tax earnings and EBITDAX to GAAP net earnings is found in this news release, including certain of the tables accompanying the text.

    CONSOLIDATED EARNINGS (UNAUDITED)

                                  For the Three Months    For the Six Months
                                      Ended June 30,        Ended June 30,
    Millions of dollars except
     per share amounts                2004      2003        2004      2003

    Revenues
    Sales and operating revenues     $1,921    $1,557      $3,751    $3,325
    Interest, dividends and
     miscellaneous income                19         9          30        20
    Gain on sales of assets              40        47          84        50
       Total revenues                 1,980     1,613       3,865     3,395

    Costs and other deductions
    Crude oil, natural gas and
     product purchases                  766       536       1,516     1,182
    Operating expense                   376       325         662       618
    Administrative and general
     expense                             46        87         109       138
    Depreciation, depletion and
     amortization                       240       254         472       513
    Impairments                           9         3          14         3
    Dry hole costs                       40        10          65        81
    Exploration expense                  48        88          98       143
    Interest expense                     46        36          87        74
    Property and other operating
     taxes                               22        21          42        43
    Distributions on convertible
     preferred securities of
     subsidiary trust                    --         8          --        16

       Total costs and other
        deductions                    1,593     1,368       3,065     2,811

    Earnings from equity investments     38        53          75        96

    Earnings from continuing
     operations before income
     taxes and minority interests       425       298         875       680

    Income taxes                        144       131         323       297
    Minority interests                  (1)         2           4         4

    Earnings from continuing
     operations                         282       165         548       379
    Earnings from discontinued
     operations (a)                      59        12          62        15
    Cumulative effect of accounting
     changes (b)                         --        --          --       (83)

       Net earnings                    $341      $177        $610      $311

    Basic earnings per share of
     common stock (c)
       Continuing operations          $1.07     $0.65       $2.08     $1.47
       Discontinued operations        $0.22     $0.04       $0.24     $0.06
       Cumulative effect of
        accounting changes              $--       $--          --     (0.32)

       Net earnings                   $1.29     $0.69       $2.32     $1.21

    Diluted earnings per share of
     common stock (d)
       Continuing operations          $1.04     $0.64       $2.03     $1.45
       Discontinued operations        $0.21     $0.04       $0.22     $0.05
       Cumulative effect of
        accounting changes              $--       $--          --     (0.30)

       Net earnings                   $1.25     $0.68       $2.25     $1.20

    Cash dividends declared per
     share of common stock            $0.20     $0.20       $0.40     $0.40

    (a) Net of tax (benefit)            $30        $7         $32        $9
    (b) Net of tax (benefit)            $--       $--         $--      $(48)
    (c) Basic weighted average
        shares outstanding
        (in thousands)              263,916   258,202     262,945   258,103
    (d) Diluted weighted average
        shares outstanding
        (in thousands)              277,754   272,108     277,232   271,907



    CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)

                                               At June 30,   At December 31,
    Millions of dollars                            2004            2003

    Assets
    Cash and cash equivalents                      $939            $404
    Other current assets - net                    1,603           1,587
    Investments and long-term receivables - net     886             892
    Properties - net                              8,440           8,324
    Goodwill                                        130             131
    Other assets                                    479             460

       Total assets                             $12,477         $11,798

    Liabilities and Stockholders' Equity
    Current liabilities (a)                      $2,102          $2,085
    Long-term debt and capital leases             3,104           2,635
    Deferred income taxes                           724             704
    Accrued abandonment, restoration
     and environmental liabilities                  871             844
    Other deferred credits and liabilities        1,042             960
    Minority interests                               46              39
    Convertible preferred securities
     of a subsidiary trust                           --             522
    Stockholders' equity                          4,588           4,009

       Total liabilities and
        stockholders' equity                    $12,477         $11,798

    (a) Includes current portion of Long-term
        debt and capital leases of:                 236             248



    CONSOLIDATED CASH FLOWS (UNAUDITED)

                                                    For the Six Months
                                                      Ended June 30,
    Millions of dollars                            2004            2003

    Cash Flows from Operating Activities
    Net earnings                                   $610            $311
    Adjustments to reconcile net earnings
     to net cash provided by operating
     activities
       Depreciation, depletion and
        amortization                                472             515
       Impairments                                   14               3
       Dry hole costs                                65              81
       Amortization of exploratory
        leasehold costs                              32              71
       Deferred income taxes                         11              40
       Gain on sales of assets                      (84)            (50)
       Gain on disposal of discontinued
        operations                                  (84)            (13)
       Pension expense net of contributions          44              42
       Restructuring provisions net
        of payments                                 (14)             27
       Cumulative effect of accounting
        changes                                      --              83
       Other                                        (37)              4
    Working capital and other changes related
     to operations
       Accounts and notes receivable                 45               6
       Inventories                                   (1)             (4)
       Accounts payable                              76              26
       Taxes payable                                (26)             (3)
       Other                                          3             (54)

          Net cash provided by operating
           activities                             1,126           1,085

    Cash Flows from Investing Activities
      Capital expenditures
       (includes dry hole costs)                   (801)           (917)
      Proceeds from sales of assets                 158             191
      Proceeds from sales of discontinued
       operations                                   120              --
      Return of capital from affiliate company       48              --
          Net cash used in investing activities    (475)           (726)

    Cash Flows from Financing Activities
      Long-term borrowings                          135              79
      Reduction of long-term debt and
       capital lease obligations                   (241)           (143)
      Minority interests                             (1)             (3)
      Repurchases of common stock                   (20)             --
      Proceeds from issuance of common stock         94              10
      Dividends paid on common stock               (105)           (103)
      Loans to key employees                         24               3
      Other                                          (2)             (7)
          Net cash used in financing
           activities                              (116)           (164)

    Net increase in cash and cash equivalents       535             195
    Cash and cash equivalents at beginning
     of year                                        404             168
    Cash and cash equivalents at end of period     $939            $363



    NET EARNINGS AND ADJUSTED AFTER-TAX EARNINGS
    BY BUSINESS SEGMENT (UNAUDITED)

                                 2nd Q 2004                1st Q 2004
                                         Adjusted                  Adjusted
                              Net       After-Tax       Net       After-Tax
    Millions of dollars     Earnings   Earnings (a)   Earnings   Earnings (a)

    Exploration and Production
      North America
        U.S.                   $108       $86           $113         $92
        Canada                   16        16             12          12
          Total North America   124       102            125         104
      International
        Asia                    137       137            158         158
        Other                    29        29             17          17
          Total International   166       166            175         175
    Total Exploration and
     Production                 290       268            300         279
    Midstream and Marketing      18        18             23          23
    Geothermal                   57        11             37          16
    Corporate and Other
        Administrative and
         General                (21)      (21)           (27)        (27)
        Interest Expense
         - Net                  (33)      (33)           (32)        (32)
        Environmental and
         Litigation             (11)       (3)           (16)         (5)
        Other                   (18)      (12)           (19)        (18)
    After-tax earnings from
     continuing operations      282       228            266         236
    After-tax earnings from
     discontinued operations     59         3              3           3
    After-tax earnings         $341      $231           $269        $239

    (a) For a reconciliation to net earnings, see the Adjusted After-Tax
        Earnings Reconciliation table.



    NET EARNINGS AND ADJUSTED AFTER-TAX EARNINGS
    BY BUSINESS SEGMENT (UNAUDITED)

                                 2nd Q 2004                2nd Q 2003
                                         Adjusted                  Adjusted
                              Net       After-Tax       Net       After-Tax
    Millions of dollars     Earnings   Earnings (a)   Earnings   Earnings (a)

    Exploration and Production
      North America
        U.S.                   $108       $86           $100         $81
        Canada                   16        16              8           6
          Total North America   124       102            108          87
      International
        Asia                    137       137            126         126
        Other                    29        29             19          19
          Total International   166       166            145         145
    Total Exploration and
     Production                 290       268            253         232
    Midstream and Marketing      18        18             21          21
    Geothermal                   57        11              7           7
    Corporate and Other
        Administrative and
         General                (21)      (21)           (22)        (22)
        Interest Expense
         - Net                  (33)      (33)           (28)        (28)
        Environmental and
         Litigation             (11)       (3)           (28)         (2)
        Other                   (18)      (12)           (38)        (21)
    After-tax earnings from
     continuing operations      282       228            165         187
    After-tax earnings from
     discontinued operations     59         3             12           4
    After-tax earnings         $341      $231           $177        $191

    (a) For a reconciliation to net earnings, see the Adjusted After-Tax
        Earnings Reconciliation table.




    NET EARNINGS AND ADJUSTED AFTER-TAX EARNINGS
    BY BUSINESS SEGMENT (UNAUDITED)

                                   For the Six Months Ended June 30,
                              2004         2004         2003         2003
                                         Adjusted                  Adjusted
                              Net       After-Tax       Net       After-Tax
    Millions of dollars     Earnings   Earnings (a)   Earnings   Earnings (a)

    Exploration and Production
      North America
        U.S.                   $221      $178           $223        $204
        Canada                   28        28             32          28
          Total North America   249       206            255         232
      International
        Asia                    295       295            258         258
        Other                    46        46             29          29
          Total International   341       341            287         287
    Total Exploration and
     Production                 590       547            542         519
    Midstream and Marketing      41        41             30          30
    Geothermal                   94        27             19          19
    Corporate and Other
        Administrative and
         General                (48)      (48)           (45)        (45)
        Interest Expense
         - Net                  (65)      (65)           (59)        (59)
        Environmental and
         Litigation             (27)       (8)           (45)         (5)
        Other                   (37)      (30)           (63)        (46)
    After-tax earnings from
     continuing operations      548       464            379         413
    After-tax earnings from
     discontinued operations     62         6             15           7
    Cumulative effect of
     accounting changes          --        --            (83)         --
    After-tax earnings         $610      $470           $311        $420

    (a) For a reconciliation to net earnings, see the Adjusted After-Tax
        Earnings Reconciliation table.



    OPERATING HIGHLIGHTS

                                   For the Three Months   For the Six Months
                                       Ended June 30,       Ended June 30,
                                      2004       2003      2004       2003
    North America Net Daily Production
      Liquids (thousand barrels)
         U.S. (a)                       55         67        55         68
         Canada                         15         17        16         17
           Total liquids                70         84        71         85
      Natural gas - dry basis
       (million cubic feet)
         U.S. (a)                      511        719       512        742
         Canada                         83         86        83         91
           Total natural gas           594        805       595        833

    North America Average Prices
     (excluding hedging
     activities) (b)
      Liquids (per barrel)
         U.S.                       $35.91     $26.53    $33.66     $29.11
         Canada                     $29.89     $23.52    $29.17     $26.05
           Average                  $34.58     $25.93    $32.66     $28.48
      Natural gas (per mcf)
         U.S.                        $4.80      $4.64     $5.20      $5.25
         Canada                      $5.40      $5.13     $5.37      $5.40
           Average                   $4.88      $4.69     $5.23      $5.27

    North America Average Prices
     (including hedging
     activities) (b)
      Liquids (per barrel)
         U.S.                       $30.52     $26.41    $29.64     $28.49
         Canada                     $29.89     $23.52    $29.17     $26.05
           Average                  $30.38     $25.84    $29.54     $27.99
      Natural gas (per mcf)
         U.S.                        $4.53      $4.50     $5.34      $4.86
         Canada                      $5.08      $4.79     $5.06      $5.07
           Average                   $4.61      $4.53     $5.30      $4.89

    (a) Includes proportional interests in production of equity investees.

    (b) Excludes gains/losses on derivative positions not accounted for as
        hedges and ineffective portions of hedges.



    OPERATING HIGHLIGHTS (CONTINUED)

                                   For the Three Months   For the Six Months
                                       Ended June 30,       Ended June 30,
                                      2004       2003      2004       2003
    International Net Daily
     Production (c)
      Liquids (thousand barrels)
         Asia                           61         59        64         58
         Other (a)                      20         20        20         20
           Total liquids                81         79        84         78
      Natural gas - dry basis
       (million cubic feet)
         Asia                          891        977       885        968
         Other (a)                      31         23        28         22
           Total natural gas           922      1,000       913        990

    International Average Prices (d)
      Liquids (per barrel)
         Asia                       $34.02     $24.77    $32.66     $27.06
         Other                      $36.01     $25.19    $34.30     $27.10
           Average                  $34.52     $24.90    $33.02     $27.07
      Natural gas (per mcf)
         Asia                        $3.02      $2.74     $2.99      $2.75
         Other                       $4.01      $4.60     $4.17      $4.38
           Average                   $3.03      $2.76     $3.01      $2.76

    Worldwide Net Daily
     Production (a) (c)
      Liquids (thousand barrels)       151        163       155        163
      Natural gas - dry basis
       (million cubic feet)          1,516      1,805     1,508      1,823
      Barrels oil equivalent
       (thousands)                     404        463       406        467

    Worldwide Average Prices
     (excluding hedging
     activities) (b)
      Liquids (per barrel)          $34.55     $25.40    $32.86     $27.80
      Natural gas (per mcf)          $3.76      $3.60     $3.89      $3.88

    Worldwide Average Prices
     (including hedging
     activities) (b)
      Liquids (per barrel)          $32.61     $25.36    $31.41     $27.54
      Natural gas (per mcf)          $3.65      $3.53     $3.92      $3.71

    (a) Includes proportional interests in production of equity investees.

    (b) Excludes gains/losses on derivative positions not accounted for as
        hedges and ineffective portions of hedges.

    (c) International production is presented utilizing the economic interest
        method.

    (d) International did not have any hedging activities.



    ADJUSTED AFTER-TAX EARNINGS RECONCILIATION (UNAUDITED)

    Millions of dollars except                   2nd Q    1st Q     2nd Q
     per share amounts                            2004     2004      2003

    Net earnings                                  $341     $269      $177

    Less: Special items from continuing
     operations
       E&P - North America - U.S.
         Asset sales                                22        6        20
         Litigation provisions / settlements        --       15        (1)
       E&P - North America - Canada
         Derivatives -- non-hedging                 --       --         2
       Geothermal
         Asset sales                                --       21        --
         PGI settlement                             46       --        --
       Corporate and Other
         Environmental and litigation
          provisions                               (13)     (12)      (26)
         Net tax adjustments for
          settlements / assessments                 27       --        --
         Restructuring provisions                    1       --       (17)
         Provision related to Agrium
          arbitration settlement                   (29)      --        --
    Less: Special items from discontinued
     operations
         Gain on asset disposals                    56       --         8
       Adjusted after-tax earnings                $231     $239      $191
       Adjusted after-tax earnings
        per share (diluted)                      $0.86    $0.89     $0.73



    ADJUSTED AFTER-TAX EARNINGS RECONCILIATION (UNAUDITED)

    Millions of dollars except                      Six Months     Six Months
     per share amounts                                 2004           2003

    Net earnings                                       $610           $311

    Less: Special items from continuing
     operations
       E&P - North America - U.S.
         Asset sales                                     28             20
         Litigation provisions / settlements             15             (1)
       E&P - North America - Canada
         Derivatives -- non-hedging                      --              4
       Geothermal
         Asset sales                                     21             --
         PGI settlement                                  46             --
       Corporate and Other
         Environmental and litigation
          provisions                                    (25)           (40)
         Net tax adjustments for
          settlements / assessments                      27             --
         Restructuring provisions                         1            (17)
         Provision related to Agrium
          arbitration settlement                        (29)            --
    Less: Special items from discontinued
     operations
         Gain on asset disposals                         56              8
    Less: Cumulative effect of accounting
     changes                                             --            (83)
       Adjusted after-tax earnings                     $470           $420
       Adjusted after-tax earnings
        per share (diluted)                           $1.75          $1.60



    EBITDAX RECONCILIATION (UNAUDITED)

    Millions of dollars except       2nd Q   2nd Q   Six Months   Six Months
     per share amounts                2004    2003      2004        2003

    Net Earnings                      $341    $177      $610        $311

    Less:
      Special items from continuing
       operations                       54     (22)       84         (34)
      Special items from discontinued
       operations                       56       8        56           8
      Cumulative effect of accounting
       changes                          --      --        --         (83)
    Adjusted after-tax earnings        231     191       470         420
    Add-backs to adjusted after-tax
     earnings:
        Depreciation, depletion and
         amortization (a)              240     255       472         515
        Impairments                      9       3        14           3
        Dry hole costs                  40      10        65          81
        Exploration expenses
         (including amortization of
         undeveloped leasehold costs)   48      88        98         143
        Current income taxes           126     100       267         238
        Deferred income taxes           22      37        45          74
        Interest expense (b)            46      36        87          74
          EBITDAX                     $762    $720    $1,518      $1,548
    EBITDAX per share (diluted)      $2.74   $2.65     $5.48       $5.69

    (a) Includes DD&A from
        discontinued operations of:     --       1        --           2
    (b) Net of capitalized
        interest of:                    10      19        26          35
  

Updated: August 2004