Bloomberg News

ConocoPhillips Net Income Falls After Refining Spinoff

July 25, 2012

ConocoPhillips said second-quarter profit fell 33 percent for the newly independent oil and natural-gas producer after losing income from its refining segment, which was spun off April 30.

Production fell about 6 percent, consistent with the company’s forecast for declining output, to the equivalent of 1.54 million barrels of oil a day because of asset sales, maintenance downtime and curtailments of conventional North American gas.

“They slightly beat expectations, but production was in line with their guidance,” said Brian Youngberg, an analyst with Edward Jones in St. Louis who has a buy rating on ConocoPhillips shares and owns none. “This is probably going to be the ConocoPhillips of the future, where they can be a steady Eddie” among exploration and production companies, he said.

Net income dropped to $2.27 billion, or $1.80 a share, from $3.4 billion, or $2.41, a year earlier, Houston-based ConocoPhillips said in a statement today. Profit excluding refining and other one-time costs and gains was $1.22 a share, three cents more than the average of 17 analysts’ estimates (COP:US) compiled by Bloomberg.

The results included one month of earnings from ConocoPhillips’ former fuel-making business, compared to three months of refining earnings in the year-ago quarter. Its spinoff this year of refining, chemical and pipeline businesses created Phillips 66. (PSX:US)

Remaking Itself

ConocoPhillips is now the largest U.S. oil and gas producer without refineries or a chemical business, based on market value. The company has been selling assets and buying back shares as part of a three-year plan to remake itself and boost returns.

ConocoPhillips has ended share buybacks for now, though it may restart them in the future, Chief Financial Officer Jeff Sheets said in a telephone interview today. The company repurchased about 52 million shares in the second quarter, bringing its buyback total to about 20 percent of shares outstanding when the program began in 2010, it said in today’s statement.

Planned capital spending of about $16 billion this year reflects investments and the timing of asset sales, Sheets said. That annual spending will be about $15 billion in coming years as the company seeks to boost production and margins, he said.

Funding Spending

ConocoPhillips may use proceeds from asset sales to help fund its capital program in the near term, as cash flow may not cover spending and the dividend because of lower commodity prices, Sheets said.

Brent crude futures, a benchmark oil price used by much of the world, fell 7 percent from a year earlier to average $108.76 a barrel in the second quarter. Gas futures traded in New York plunged 46 percent to average $2.354 per million British thermal units.

The company can adjust its spending if prices fall further, Sheets said. Dividend payments were shown as the top priority among uses of cash in a slide presentation today.

The company said it’s on track to have $8 billion to $10 billion of asset sales by the middle of 2013. It raised about $1.6 billion of that in the first half of the year.

Strategic Objectives

ConocoPhillips (COP:US)’ adjusted earnings, which exclude refining income and other one-time items, fell 34 percent to $1.54 billion in the second quarter from $2.31 billion a year earlier.

“We’re making progress on all the strategic objectives that we’ve talked about,” Sheets said. While the level of prices affects short-term results, it “doesn’t affect our long- term plans,” he said.

Revenue, excluding refining and other discontinued items, fell 14 percent in the second quarter to $15.2 billion from $17.7 billion a year earlier, ConocoPhillips said. Output of oil and gas may be the equivalent of 1.565 million to 1.585 million barrels of oil a day this year, including the effect of dispositions, Sheets said today. That’s within an earlier forecast of as much as 1.6 million barrels a day of production.

Output from shale formations such as the Eagle Ford and Bakken continues to rise, the company said, and it plans to add more assets in North America.

Testing Mancos

ConocoPhillips is examining its holdings in the U.S. and Canada for additional opportunities, Chief Executive Officer Ryan Lance said during a conference call with analysts today. For example, he said, the company plans to test the Mancos shale in the western U.S. this year.

ConocoPhillips plans to return some curtailed North American gas operations to production in the third and fourth quarters because of higher prices, Sheets said. The company had curtailed gas totaling the equivalent of about 10,000 to 12,000 barrels of oil a day, he said.

Gas is trading in New York for more than $3 per million British thermal units today after falling to a 10-year-low of about $2 earlier this year, prompting producers to cut back some production.

ConocoPhillips is the first of the largest U.S. oil companies to report second-quarter earnings this year. Exxon Mobil Corp. (XOM:US), the biggest U.S. oil company by market value, plans to release results tomorrow, followed by Chevron Corp. (CVX:US), the second-largest U.S. oil company, on July 27.

Unlike ConocoPhillips, Exxon and Chevron operate refining and chemical plants.

ConocoPhillips fell 2.8 percent to $53.11 at 3:36 p.m. in New York.

To contact the reporter on this story: Edward Klump in Houston at eklump@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net


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Companies Mentioned

  • COP
    (ConocoPhillips)
    • $85.92 USD
    • -0.33
    • -0.38%
  • PSX
    (Phillips 66)
    • $82.65 USD
    • 0.55
    • 0.67%
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