ConocoPhillips Earnings: Rising Oil Prices, Refining Margins In Focus

ConocoPhillips (NYSE:COP) will declare its Q1 results on Monday. The company will be spinning off its downstream businesses next month as it prepares to concentrate on upstream exploration. Conoco’s earnings results should be boosted by the high oil prices in the past few months and a revival in downstream margins as refining capacity in the U.S. fell during this period. The company’s production levels could see a decline because of the cuts announced in North American gas production and also due to its ongoing divestment program. In its interim results update, rival Chevron (NYSE:CVX) announced that high oil prices and better conditions in downstream should boost its results for the quarter. (See: Chevron’s Interim Q1 Report Shows Higher Profit On Oil Prices; Refining Margins Improve)

Based on the latest results, we will revise our $79.93 price estimate for ConocoPhillips, implying a 10% premium to the current market price.

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Good quarter expected

The uncertainty in oil markets over the past few months, characterized by high oil prices, has benefited upstream earnings of oil majors like Conoco. Revenues from liquids are expected to overcome the negative impact of low gas prices in the U.S. The company announced that it will be cutting back on natural gas production in North America and focus more on profitable businesses of liquids production and gas and LNG production targeting international markets. (See: ConocoPhillips Targets $10 Billion Assets Sale in 2012)

Conoco has also undertaken a major asset sale program to finance some of its new exploration projects. It was reportedly in talks with Delta Airline regarding the sale of a mid-sized refinery in the U.S. (See: Conoco May Sell Idled Mid-Sized Refinery To Delta Airlines)

Downstream revival

ConocoPhillips’s Q4 2011 results were impacted by lower margins in refining and marketing. According to industry reports, refining margins have shown an improvement in the last quarter. We expect higher downstream earnings to boost the company’s performance in the period. After the spin-off, the downstream segment will focus on growing business segments such as chemicals and transport. (See: ConocoPhillips Worth $80: Downstream Spinoff Will Focus On Chemicals, Transport)

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