Conoco’s Results Hit By Lower Realized Prices But Big Projects On Track

ConocoPhillips (NYSE:COP) released its Q3 results on October 25. It was the first full quarter for the company after spinning off its refining, pipelines and chemical businesses into Phillips 66 in May earlier this year. After stripping out the effect of Phillips 66 from previous results, Conoco reported a year-over-year drop in earnings of 7%. It reported third-quarter 2012 earnings of $1.8 billion, or $1.46 per share, compared with third-quarter 2011 earnings of $2.6 billion, or $1.91 per share. Revenues this quarter decreased to $15.1 billion from approximately $17 billion year-over-year.

Quarterly production stood at 1.525 million BOE (barrels of oil equivalent), compared to 1.538 million BOE in Q3 2011. This was actually higher by 40,000 BOE per day compared to the third quarter of 2011, if one excludes the effect of dispositions. Production for the first nine months of 2012 was 1.569 million BOE per day, compared with 1.626 million BOE per day for the same period in 2011. Excluding asset dispositions, normal field decline was largely offset by new production from major projects and drilling programs. Conoco has generated $2.1 billion in asset dispositions in the first nine months of 2012, out of a targeted $8-10 billion by end of 2013. ^[1]

ConocoPhillips is a pure-play exploration and production firm. It is engaged in the exploration, production and marketing of crude oil, natural gas liquids, natural gas and bitumen.

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Realized Prices

ConocoPhillips’ realized prices for crude oil, natural gas liquids and natural gas fell in the third quarter compared to the same period of 2011. Realized crude oil prices decreased by $3.89 per barrel to $102.72 per barrel, compared with $106.61 per barrel for the third quarter of 2011. Realized natural gas prices decreased by 16%  from $5.45 per thousand cubic feet (MCF) in the third quarter of 2011 to $4.56 per MCF for the current quarter.

Natural gas prices in the U.S. have been hit by the booming shale output, and earlier this year the Henry Hub benchmark hit a 10-year low to reach below $2/MCF, although it has subsequently bounced back to about $3.40/MCF. Prices in the international gas markets, however, continued to remain on the higher side. Gas is typically supplied to these markets in the form of LNG. Asian countries are Conoco’s major customers for LNG and gas prices in these markets are indexed to the price of crude oil, not Henry Hub prices. The price of crude oil has continued to remain high and thus have international gas prices.

Prices for natural gas liquids used as chemical feedstocks have also been affected by the shale supply boom. Realized natural gas liquids (NGL) prices decreased by 27% to $40.39 per barrel, compared with $55.61 per barrel for the third quarter of 2011. ^[2]

Projects On Track

Conoco’s major growth projects around the world remain on track. It stands to benefit from its assets in the liquid-rich Eagle Ford and Bakken shale plays in the U.S. and is ramping up production in there areas. Conoco’s oil sand assets in Canada are performing well and production of bitumen has gone up to 92,000 BOE per day, a 28,000 BOE per day increase compared to the third quarter of 2011. Additional growth is expected from expansion at the FCCL and Surmont projects which are progressing on schedule.

Conoco continues to explore in deepwater regions in the Gulf of Mexico, and is drilling at the Coronado and Shenandoah prospects. It holds 1.5 million acres in the deepwater regions of Gulf of Mexico. It is also developing a large seam coal gas project in Australia, and exploring in deepwater areas in Malaysia, Indonesia and Bangladesh.

Most of its reserves are now located in regions which are politically stable and non-risky. This gives a sense of security in an industry where nationalization of resources is common, especially in non-democratic countries. ConocoPhillips has already faced such a situation in the past in Venezuela. ^[3]

Despite a strong asset base, ConocoPhillips remains vulnerable to the volatility in oil and gas prices. These are influenced by global macroeconomic factors. A downtrend in the global economy will have an impact on the demand-supply dynamics of oil and gas, hurting the sales prices for crude oil and natural gas.

We have a Trefis price estimate for ConocoPhillips of $63 which will be revised shortly in view of the recent earnings results.

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1. ConocoPhillips Reports Third-Quarter Earnings of $1.8 Billion or $1.46 Per Share, ConocoPhillips Press Release [↩]
2. ConocoPhillips profit drops after spin-off, Financial Times [↩]
3. ConocoPhillips Wins A Significant Victory In Ongoing Arbitration Battles With Venezuela, Trefis [↩]