Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

February 21, 2008

 

Results of Operations

Consolidated Results
A summary of the company’s net income (loss) by business segment follows:

 

2007 vs. 2006
The lower results in 2007 were primarily the result of:

• The complete impairment ($4,512 million after-tax) of our oil interests in Venezuela resulting from their expropriation in June 2007.
• Lower crude oil production in the E&P segment.
• Decreased net income from the Chemicals segment, primarily due to lower olefins and polyolefins margins.
• Higher production and operating expenses, higher production taxes, and higher depreciation, depletion and amortization expense in the E&P segment.

 

These items were partially offset by:

• The net benefit of asset rationalization efforts in the E&P and R&M segments.
• Higher realized crude oil, natural gas, and natural gas liquids prices in the E&P segment.
• Higher realized worldwide refining margins, including the benefit of planned inventory reductions in the R&M segment.
• Increased equity earnings from our investment in LUKOIL due to higher estimated commodity prices and volumes, and an increase in our average equity ownership percentage.

 

2006 vs. 2005
The improved results in 2006, compared with 2005, were primarily the result of:

• Higher crude oil prices in the E&P segment.
• The inclusion of Burlington Resources in our results of operations for the E&P segment.
• Improved refining margins and volumes and marketing margins in the R&M segment’s U.S. operations.
• Increased equity earnings from our investment in LUKOIL.
• The recognition in 2006 of business interruption insurance recoveries attributable to hurricanes in 2005.

 

These items were partially offset by:

• The impairment of certain assets held for sale in the R&M and E&P segments.
• Lower natural gas prices in the E&P segment.
• Higher interest and debt expense resulting from higher average debt levels due to the Burlington Resources acquisition.
• Decreased net income from the Midstream segment, reflecting the inclusion of our equity share of DCP Midstream’s gain on the sale of the general partner interest in TEPPCO in our 2005 results.

 

Income Statement Analysis
2007 vs. 2006
Equity in earnings of affiliates increased 21 percent in 2007. The increase reflects earnings from WRB Refining LLC and FCCL Oil Sands Partnership, our downstream and upstream business ventures with EnCana, formed in January 2007. Also, we had improved results from LUKOIL, reflecting higher estimated commodity prices and volumes, and an increase in our average equity ownership percentage. These increases were partially offset by lower earnings from Hamaca and Petrozuata, our heavy-oil joint ventures in Venezuela, primarily due to the expropriation of our interests during the second quarter of 2007. Additionally, CPChem reported lower earnings, primarily due to lower olefins and polyolefins margins.

Other income increased 188 percent during 2007, primarily due to:

• Higher net gains on asset dispositions associated with asset rationalization efforts.
• The release of escrowed funds related to the extinguishment of Hamaca project financing.
• The settlement of retroactive adjustments for crude oil quality differentials on Trans-Alaska Pipeline System shipments (Quality Bank) in 2007.

 

These increases were partially offset by the recognition in 2006 of recoveries on business interruption insurance claims attributable to losses sustained from hurricanes in 2005.

Exploration expenses increased 21 percent during 2007, primarily reflecting the amortization of unproved North American leaseholds obtained in the Burlington Resources acquisition and the impairment of an international exploration license. The increase also reflects higher geological and geophysical expenses and higher dry hole costs.

Depreciation, depletion and amortization (DD&A) increased 14 percent during 2007, primarily resulting from the addition of Burlington Resources’ assets in the E&P segment’s depreciable asset base for a full year in 2007 versus only nine months in 2006.

Impairment — expropriated assets reflects a non-cash impairment of $4,588 million before-tax related to the expropriation of our oil interests in Venezuela recorded in the second quarter of 2007. For additional information, see the “Expropriated Assets” section of Note 13 — Impairments, in the Notes to Consolidated Financial Statements.

Impairments, which excludes the expropriation of our oil interests in Venezuela, decreased 35 percent during 2007, primarily due to the significant impairments recorded in 2006 of certain assets held for sale in the R&M segment, comprised of properties, plants and equipment, trademark intangibles and goodwill. See Note 13 — Impairments, in the Notes to Consolidated Financial Statements, for additional information.

Interest and debt expense increased 15 percent during 2007, primarily due to the interest expense component of the Quality Bank settlements, as well as higher expense associated with the funding requirements for the business venture with EnCana.

Foreign currency transaction gains during 2007 primarily reflect the strengthening of the Canadian dollar against the U.S. dollar.

Our effective tax rate in 2007 was 49 percent, compared with 45 percent in 2006. The change in the effective rate for 2007 was primarily due to the impact of the expropriation of our oil interests in Venezuela in the second quarter of 2007. This impact was partially offset by the effect of income tax law changes enacted during 2007, and by a higher proportion of income in higher tax rate jurisdictions during 2006.

 

2006 vs. 2005

Sales and other operating revenues increased 2 percent in 2006, compared with 2005, while purchased crude oil, natural gas and products decreased 5 percent. The increase in sales and other operating revenues was primarily due to higher realized prices for crude oil and petroleum products, as well as higher sales volumes associated with the Burlington Resources acquisition. These increases were mostly offset by decreases associated with the implementation of Emerging Issues Task Force Issue No. 04-13, “Accounting for Purchases and Sales of Inventory with the Same Counterparty.” The decrease in purchased crude oil, natural gas and products was primarily the result of the implementation of Issue No. 04-13. See Note 2 — Changes in Accounting Principles, in the Notes to Consolidated Financial Statements, for additional information on the impact of this Issue on our income statement.

Equity in earnings of affiliates increased 21 percent in 2006, compared with 2005. The increase reflects improved results from:

• LUKOIL, resulting from an increase in our ownership percentage, as well as higher estimated crude oil and petroleum products prices and volumes, and a net benefit from the alignment of our estimate of LUKOIL’s fourth quarter 2005 net income to LUKOIL’s reported results.
• CPChem, due to higher margins and volumes, as well as the recognition of a business interruption insurance net benefit.

 

These increases were offset partially by the inclusion of our equity share of DCP Midstream’s gain on the sale of the general partner interest in TEPPCO in our 2005 results.

Other income increased 47 percent during 2006, compared with 2005, primarily due to the recognition in 2006 of recoveries on business interruption insurance claims. In addition, interest income was higher in 2006, compared with 2005. These increases were partially offset by higher net gains on asset dispositions recorded in 2005.

Production and operating expenses increased 22 percent in 2006, compared with 2005. The increase was primarily due to the acquired Burlington Resources assets, increased production at the Bayu-Undan field associated with the Darwin liquefied natural gas (LNG) project in Australia, the first year of production in Libya, and the acquisition of the Wilhelmshaven refinery in Germany.

Exploration expenses increased 26 percent in 2006, compared with 2005, primarily due to the Burlington Resources acquisition.

DD&A increased 71 percent during 2006, compared with 2005. The increase was primarily the result of the addition of Burlington Resources assets in E&P’s depreciable asset base. In addition, the acquisition of the Wilhelmshaven refinery increased DD&A recorded by the R&M segment.

Impairments were $683 million in 2006, compared with $42 million in 2005. The increase primarily relates to the impairment in 2006 of certain assets held for sale in the R&M and E&P segments. We also recorded an impairment charge in the E&P segment associated with assets in the Canadian Rockies Foothills area.

Interest and debt expense increased from $497 million in 2005 to $1,087 million in 2006, primarily due to higher average debt levels as a result of the financing required to partially fund the acquisition of Burlington Resources.

 

Restructuring Program
As a result of the acquisition of Burlington Resources, we implemented a restructuring program in March 2006 to capture the synergies of combining the two companies. Under this program, we recorded accruals totaling $230 million in 2006 for employee severance payments, site closings, incremental pension benefit costs associated with the workforce reductions, and employee relocations. Approximately 600 positions were identified for elimination, most of which were in the United States.

Of the total accrual, $224 million was reflected in the Burlington Resources purchase price allocation as an assumed liability, and $6 million ($4 million after-tax) related to ConocoPhillips was reflected in selling, general and administrative expenses in 2006. Included in the total accruals of $230 million was $12 million related to pension benefits to be paid in conjunction with other retirement benefits over a number of future years. See Note 6 — Restructuring, in the Notes to Consolidated Financial Statements, for additional information.

 

Segment Results
E&P

 

 

 

The E&P segment explores for, produces, transports and markets crude oil, natural gas, and natural gas liquids on a worldwide basis. It also mines deposits of oil sands in Canada to extract the bitumen and upgrade it into a synthetic crude oil. At December 31, 2007, our E&P operations were producing in the United States, Norway, the United Kingdom, the Netherlands, Canada, Nigeria, Ecuador, Argentina, offshore Timor-Leste in the Timor Sea, Australia, China, Indonesia, Algeria, Libya, Vietnam, and Russia.

 

2007 vs. 2006

Net income from the E&P segment decreased 53 percent in 2007. In the second quarter of 2007, we recorded a non-cash impairment of $4,588 million before-tax ($4,512 million after-tax) related to the expropriation of our oil interests in Venezuela. For additional information, see the “Expropriated Assets” section of Note 13 — Impairments, in the Notes to Consolidated Financial Statements, which is incorporated herein by reference. The decrease in net income during 2007 reflects this impairment, as well as lower crude oil production, higher production taxes and operating costs, and higher DD&A expense. These decreases were partially offset by:

• Higher realized crude oil, natural gas liquids and natural gas prices.
• A net benefit from asset rationalization efforts.
• A benefit related to the release of escrowed funds in connection with the extinguishment of the Hamaca project financing.
• The Quality Bank settlements.

 

If crude oil prices in 2008 do not remain at the levels experienced in 2007, and if costs continue to increase, the E&P segment’s earnings would be negatively impacted. See the “Business Environment and Executive Overview” section for additional information on industry crude oil and natural gas prices and inflationary cost pressures.

Proved reserves at year-end 2007 were 8.72 billion barrels of oil equivalent (BOE), compared with 9.36 billion BOE at year-end 2006. This excludes the estimated 1,838 million BOE and 1,805 million BOE included in the LUKOIL Investment segment at year-end 2007 and 2006, respectively. Also excluded is our share of Canadian Syncrude mining operations, which was 221 million barrels at year-end 2007, compared with 243 million barrels at year-end 2006.

 

U.S. E&P

Net income from our U.S. E&P operations decreased 2 percent, primarily due to higher production taxes in Alaska, higher operating costs and DD&A expense, and lower crude oil production. These decreases were mostly offset by:

• Higher crude oil and natural gas liquids prices, and higher natural gas and natural gas liquids production.
• The Quality Bank settlements.
• Gains on the sale of assets in Alaska and the Gulf of Mexico.

 

In December 2007, the state of Alaska enacted new production tax legislation, with retroactive provisions, which results in a higher production tax structure for ConocoPhillips.

U.S. E&P production averaged 843,000 BOE per day in 2007, an increase of 4 percent from 808,000 BOE per day in 2006. Production was impacted by the inclusion of the Burlington Resources assets for the full year of 2007, offset slightly by normal field decline.

 

International E&P

Net income from our international E&P operations decreased 93 percent, primarily due to the impairment of expropriated assets in Venezuela, lower crude oil production, higher DD&A expense, and higher operating costs. These decreases were partially offset by higher crude oil and natural gas prices, a net benefit from asset rationalization efforts, and the benefit from the release of the escrowed funds related to the Hamaca project.

International E&P production averaged 1,014,000 BOE per day in 2007, a decrease of 10 percent from 1,128,000 BOE per day in 2006. Production was impacted by the expropriation of our Venezuelan oil projects, planned and unplanned downtime in Australia and the North Sea, production sharing contract impacts in Australia, our exit from Dubai, and the effect of asset dispositions. These decreases were slightly offset by new production volumes from our upstream business venture with EnCana, as well as inclusion of the Burlington Resources assets for the full year of 2007. Our Syncrude mining operations produced 23,000 barrels per day in 2007, compared with 21,000 barrels per day in 2006.

 

2006 vs. 2005

Net income from the E&P segment increased 17 percent in 2006, compared with 2005. The increase was primarily due to higher realized crude oil prices and, to a lesser extent, higher sales prices for natural gas liquids and Syncrude. In addition, increased sales volumes, primarily the result of the Burlington Resources acquisition, contributed positively to net income in 2006. These items were partially offset by lower realized natural gas prices, higher exploration expenses, the negative impacts of changes in tax laws, and asset impairments.

 

U.S. E&P

Net income from our U.S. E&P operations increased slightly in 2006, compared with 2005, primarily resulting from higher crude oil prices, as well as increased crude oil, natural gas, and natural gas liquids production in the Lower 48 states, reflecting the Burlington Resources acquisition. These increases were partially offset by lower natural gas prices, higher exploration expenses, lower production levels in Alaska, and higher production taxes in Alaska.

In August 2006, the state of Alaska enacted new production tax legislation, retroactive to April 1, 2006. The new legislation resulted in a higher production tax structure for ConocoPhillips.

U.S. E&P production on a BOE basis averaged 808,000 barrels per day in 2006, compared with 633,000 barrels per day in 2005. Production was favorably impacted in 2006 by the addition of volumes from the Burlington Resources assets, offset slightly by decreases in production levels in Alaska. Production in Alaska was negatively impacted by operational shut downs and weather-related transportation delays.

 

International E&P

Net income from our international E&P operations increased 33 percent in 2006, compared with 2005, reflecting higher crude oil, natural gas, and natural gas liquids prices and production, as well as higher levels of LNG production from the Darwin LNG facility associated with the Bayu-Undan field in the Timor Sea. These increases were offset partially by increased exploration expenses and a $93 million after-tax impairment charge associated with assets in the Canadian Rockies Foothills area. In addition, the increases to net income were partially offset by the net negative impacts of tax law changes in the United Kingdom, Canada, China, Venezuela, and Algeria.

During 2006, significant tax legislation was enacted in the United Kingdom and in Canada. The United Kingdom increased income tax rates on upstream income, resulting in a negative earnings impact of $470 million to adjust 2006 taxes and restate deferred tax liabilities. In Canada, an overall rate reduction in 2006 resulted in a favorable earnings impact of $401 million to restate deferred tax liabilities.

International E&P production averaged 1,128,000 BOE per day in 2006, an increase of 24 percent from 910,000 BOE per day in 2005. Production was favorably impacted in 2006 by the addition of Burlington Resources assets, higher gas production at Bayu-Undan associated with the Darwin LNG ramp-up in Australia, and the 2006 re-entry into Libya. Our Syncrude mining operations produced 21,000 barrels per day in 2006, compared with 19,000 barrels per day in 2005.

 

Midstream

 

The Midstream segment purchases raw natural gas from producers and gathers natural gas through an extensive network of pipeline gathering systems. The natural gas is then processed to extract natural gas liquids from the raw gas stream. The remaining “residue” gas is marketed to electrical utilities, industrial users, and gas marketing companies. Most of the natural gas liquids are fractionated — separated into individual components like ethane, butane and propane — and marketed as chemical feedstock, fuel, or blendstock. The Midstream segment consists of our 50 percent equity investment in DCP Midstream, LLC, as well as our other natural gas gathering and processing operations, and natural gas liquids fractionation and marketing businesses, primarily in the United States and Trinidad.

 

2007 vs. 2006

Net income from the Midstream segment decreased 5 percent in 2007, reflecting a shift in natural gas purchase contract terms that are more favorable to natural gas producers. In addition, earnings from DCP Midstream were lower, primarily due to increased operating costs, mainly repairs, maintenance and asset integrity work. The results also reflect a positive tax adjustment included in the 2006 results. These decreases were partially offset by higher natural gas liquids prices.

 

2006 vs. 2005
Net income from the Midstream segment decreased 31 percent in 2006, compared with 2005, primarily due to the gain from the sale of DCP Midstream’s interest in TEPPCO included in 2005 results. Our net share of this gain was $306 million on an after-tax basis. This decrease was partially offset by a $24 million positive tax adjustment recorded in 2006 to the gain recorded in 2005 on the sale of DCP Midstream’s interest in TEPPCO, as well as higher natural gas liquids prices and an increased ownership interest in DCP Midstream.

In July 2005, ConocoPhillips increased its ownership interest in DCP Midstream to 50 percent from 30.3 percent.

 

R&M

 

The R&M segment’s operations encompass refining crude oil and other feedstocks into petroleum products (such as gasoline, distillates and aviation fuels); buying, selling and transporting crude oil; and buying, transporting, distributing and marketing petroleum products. R&M has operations mainly in the United States, Europe and Asia Pacific.

2007 vs. 2006
Net income from the R&M segment increased 32 percent in 2007. The increase resulted primarily from:

• The net benefit of asset rationalization efforts.
• Higher realized worldwide refining margins, reflecting in part the impact of planned inventory reductions, including a benefit of $260 million from the liquidation of prior year layers under the last-in, first-out (LIFO) method.
• Higher U.S. Gulf and East Coast refining volumes due to lower planned maintenance and less weather-related downtime.
• A $141 million deferred tax benefit related to tax legislation in Germany during the third quarter of 2007.

 

These increases were partially offset by the net impact of our contribution of assets to WRB Refining LLC (WRB), our downstream business venture with EnCana; foreign currency impacts; and lower marketing sales volumes due to asset sales. See the “Business Environment and Executive Overview” section for our view of the factors supporting industry refining and marketing margins.

We expect our average worldwide refinery crude oil utilization rate for 2008 to average in the mid-nineties.

 

U.S. R&M
Net income from our U.S. R&M operations increased 18 percent in 2007, primarily due to:

• Higher refining volumes at our Gulf and East Coast refineries.
• Higher realized refining and marketing margins, due in part to the benefit of planned inventory reductions.

 

These items were partially offset by the net impact of our contribution of the Wood River and Borger refineries to WRB, and the impact of business interruption insurance recoveries on our 2006 results.

Our U.S. refining capacity utilization rate was 96 percent in 2007, compared with 92 percent in 2006, primarily reflecting lower planned maintenance and less weather-related downtime.

 

International R&M
Net income from our international R&M operations increased 131 percent in 2007, due primarily to:

• The net benefit of asset rationalization efforts.
• The deferred tax benefit related to the tax legislation in Germany.
• Higher realized refining margins.

 

These increases were partially offset by foreign currency impacts and lower marketing volumes due to the asset sales.

Our international refining capacity utilization rate was 90 percent in 2007, compared with 91 percent in 2006. The 2007 utilization rate was affected by a temporary idling of the Wilhelmshaven refinery in Germany during the month of August due to economic conditions.

 

2006 vs. 2005
Net income from the R&M segment increased 7 percent in 2006, compared with 2005. The increase resulted primarily from:

• Higher U.S. refining and marketing margins and higher U.S. refining volumes.
• The recognition of a net benefit related to business interruption insurance.
• The inclusion of an $83 million charge for the cumulative effect of adopting Financial Accounting Standards Board (FASB) Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations — an interpretation of FASB Statement No. 143” (FIN 47) in the results for 2005.

 

The increase in net income was partially offset by impairments on assets held for sale recognized in 2006, as well as higher depreciation expense.

 

U.S. R&M
Net income from our U.S. R&M operations increased 18 percent in 2006, compared with 2005, primarily due to:

• Higher refining and marketing margins, and higher refining volumes.
• The recognition of a net $111 million business interruption insurance benefit.
• A $78 million charge for the cumulative effect of adopting FIN 47 in 2005.

 

These items were partially offset by after-tax impairments of $227 million associated with certain assets held for sale, as well as higher depreciation expense.

Our U.S. refining capacity utilization rate was 92 percent in 2006, the same as in 2005, reflecting unplanned weather-related downtime in both years.

 

International R&M

Net income from our international R&M operations decreased 33 percent in 2006, compared with 2005, due primarily to:

• The recognition of a $214 million after-tax impairment charge on certain assets held for sale.
• Lower refining margins.
• Preliminary engineering costs for certain refinery-related projects.

 

These decreases were partially offset by favorable foreign currency exchange impacts and higher refining and marketing sales volumes.

Our international refining capacity utilization rate was 91 percent in 2006, compared with 99 percent in 2005. The decrease reflected scheduled downtime at certain refineries and unscheduled downtime at the Humber refinery in the United Kingdom.

 

LUKOIL Investment

 

This segment represents our investment in the ordinary shares of LUKOIL, an international, integrated oil and gas company headquartered in Russia, which we account for under the equity method. During 2005, we expended $2,160 million to purchase LUKOIL’s ordinary shares, increasing our ownership interest to 16.1 percent. We expended another $2,715 million to increase our ownership interest in LUKOIL to 20 percent at December 31, 2006, based on 851 million issued shares. At December 31, 2007, our ownership interest was 20 percent based on issued shares. Our ownership interest based on estimated shares outstanding, used for equity-method accounting, was 20.6 percent at December 31, 2006 and 2007.

 

2007 vs. 2006
Net income from the LUKOIL Investment segment increased 28 percent during 2007, primarily due to higher estimated realized prices, higher estimated volumes, and an increase in our average equity ownership. The increase was partially offset by higher estimated taxes and operating costs, as well as the net impact from the alignment of estimated net income to reported results.

Because LUKOIL’s accounting cycle close and preparation of U.S. generally accepted accounting principles (GAAP) financial statements occur subsequent to our reporting deadline, our equity earnings and statistics for our LUKOIL investment are estimated, based on current market indicators, publicly available LUKOIL operating results, and other objective data. Once the difference between actual and estimated results is known, an adjustment is recorded. This estimate-to-actual adjustment will be a recurring component of future period results. The adjustment to estimated results for the fourth quarter of 2006, recorded in 2007, decreased net income $19 million, compared with a $71 million increase to net income recorded in 2006 to adjust the estimated results for the fourth quarter of 2005.

In addition to our estimate of our equity share of LUKOIL’s earnings, this segment reflects the amortization of the basis difference between our equity interest in the net assets of LUKOIL and the historical cost of our investment in LUKOIL, and also includes the costs associated with our employees seconded to LUKOIL.

 

2006 vs. 2005
Net income from the LUKOIL Investment segment increased 100 percent during 2006, compared with 2005, primarily as a result of our increased equity ownership, higher estimated prices and volumes, and a net benefit from the alignment of our estimate of LUKOIL’s fourth quarter 2005 net income to LUKOIL’s reported results.

 

Chemicals

 

The Chemicals segment consists of our 50 percent interest in Chevron Phillips Chemical Company LLC (CPChem), which we account for under the equity method. CPChem uses natural gas liquids and other feedstocks to produce petrochemicals. These products are then marketed and sold, or used as feedstocks to produce plastics and commodity chemicals.

 

2007 vs. 2006
Net income from the Chemicals segment decreased 27 percent during 2007, primarily due to lower olefins and polyolefins margins and higher turnaround and weather-related repair costs, offset partially by a capital-loss tax benefit of $65 million recorded in the fourth quarter of 2007.

 

2006 vs. 2005
Net income from the Chemicals segment increased 52 percent during 2006, compared with 2005. Results for 2006 reflected improved olefins and polyolefins margins and volumes. The results for 2006 also included a hurricane-related business interruption insurance benefit of $20 million after-tax, as well as lower utility costs due to decreased natural gas prices.

 

Emerging Businesses

 

The Emerging Businesses segment represents our investment in new technologies or businesses outside our normal scope of operations. Activities within this segment are currently focused on power generation and other items, such as carbon-to-liquids, technology solutions, and alternative energy and programs, such as advanced hydrocarbon processes, energy conversion technologies, new petroleum-based products, and renewable fuels.

 

2007 vs. 2006
The Emerging Businesses segment had a net loss of $8 million in 2007, compared with net income of $15 million in 2006. The decrease reflects lower margins from the Immingham power plant in the United Kingdom, as well as higher spending associated with alternative energy programs. These decreases were slightly offset by the inclusion of a write-down of a damaged gas turbine at a domestic power plant in 2006 results.

 

2006 vs. 2005
The Emerging Businesses segment had net income of $15 million in 2006, compared with a net loss of $21 million in 2005. The improved results reflect higher international power margins and volumes. The increase in net income was partially offset by the write-down of a damaged gas turbine, as well as lower domestic power margins and volumes.

Corporate and Other

 

2007 vs. 2006

Net interest consists of interest and financing expense, net of interest income and capitalized interest, as well as premiums incurred on the early retirement of debt. Net interest decreased 6 percent in 2007, primarily due to higher amounts of interest being capitalized and higher interest income. These decreases were partially offset by the net impact of the interest components of the Quality Bank settlements and a premium on the early retirement of debt.

Corporate general and administrative expenses increased 32 percent in 2007, primarily due to higher benefit-related expenses.

Acquisition-related costs in 2007 included transition costs associated with the Burlington Resources acquisition.

The category “Other” includes certain foreign currency transaction gains and losses, and environmental costs associated with sites no longer in operation. Results from Other were primarily impacted by foreign currency losses in 2007.

 

2006 vs. 2005

Net interest increased 86 percent in 2006, compared with 2005. The increase was primarily due to higher average debt levels as a result of the financing required to partially fund the acquisition of Burlington Resources. The increases were partially offset by higher amounts of interest being capitalized, as well as higher premiums incurred in 2005 on the early retirement of debt.

Corporate general and administrative expenses decreased 27 percent in 2006, compared with 2005, primarily due to reduced benefit-related expenses.

Acquisition-related costs in 2006 included seismic relicensing and other transition costs associated with the Burlington Resources acquisition.

Results from Other improved during 2006, compared with 2005, primarily due to foreign currency transaction gains in 2006, versus losses in 2005, partially offset by certain tax items not directly attributable to the operating segments.

 

Click to continue reading, Capital Resources and Liquidity