The Rising Influence of Rising Affluence

[DewDiligence]

COP Posts 2Q09 Production Increase and Q-o-Q Profit Gain

[The year-over-year production increase of 7% contrasts with declines in production by the other oil majors, although COP's management admits that the increase may not be sustainable. Y-o-Y profit and revenue were sharply down, of course, as 2Q08 was a period of very high oil prices.]

http://www.ft.com/cms/s/0/470886f0-7c6e-11de-a7bf-00144feabdc0,dwp_uuid=f2b40164-cfea-11dc-9309-0000779fd2ac.html

›By Sheila McNulty and Ed Crooks
July 29 2009 20:34

ConocoPhillips, the third-largest US oil company, has reported a 76 per cent drop in profits [relative to 2Q08] but a strong rise in production for the second quarter.

Jim Mulva, Conoco’s chairman and chief executive, also claimed success in his drive to cut costs.

The fall in profits was steeper than the 66 per cent underlying decline reported by BP, the first of the leading international oil companies to report this season, but in line with analysts’ expectations.

Conoco has been seen as the weakest as well as the smallest of the “big three” US oil companies. Over the past year its shares have fallen by 48 per cent, compared to a 12 per cent decline for ExxonMobil, the largest, and a 19 per cent fall for Chevron.

At the start of the year, falling commodity prices forced Conoco to take a $34bn writedown on the reduction in its asset values [this was a non-cash charge], announce 1,300 job cuts, and scale back capital expenditures to $12.5bn this year from $15.3bn in 2008.

In the second quarter, post-tax earnings were $1.3bn [0.87/sh], down from $5.44bn [3.50/sh] in the equivalent period of 2008, as plunging oil and gas prices and weak refining margins slashed revenues. [However, 2Q09 profit was 54% higher than in 1Q09, helped by the average price per boe in the quarter rising from $40 to $55.] Conoco has made natural gas its focus for several years, with a variety of deals including the Burlington Resources acquisition in 2006, and gas accounted for almost half of its production of 1.872m barrels of oil equivalent per day in the second quarter.

While the price of oil has picked up strongly this year, doubling from its low point in February, the price of gas has continued to decline.

Conoco also suffered from the squeeze on refinery margins. [The compression of the spread between light and heavy grades of crude also hurt COP’s results.] Its refining and marketing business made a loss of $52m in the second quarter, compared to a $664m profit in the equivalent period of 2008.

Like most other large oil companies, Conoco is not able to cover its capital spending and dividend payments from its cash flow from operations, and its debts are rising. Net debt was $30.4bn at the end of June, 34 per cent of capital employed [the company’s goal is to reduce net debt to 25% of capital], up from $27.5bn at the end of 2008.

In a recent research report, analysts at Credit Suisse highlighted Conoco’s poor long-term profitability.

“We continue to be concerned by the company’s persistently low return on capital,” the analysts said. Conoco’s return on capital was 5 per cent in the first quarter, compared to a 10-year industry average of 17 per cent.

However, analysts also pointed to some of Conoco’s strengths. The company has created some excitement with its recent announcement of a successful “wildcat” exploration well in the Browse basin off the coast of Australia.

In another recent report Paul Sankey of Deutsche Bank said Conoco’s plan to drill the next prospect on the project gave credibility to its claim to be rebuilding its portfolio “with the drill bit”. He described Larry Archibald, Conoco’s new head of exploration, as “highly regarded”.

One bright spot in Wednesday’s results was that production was 7 per cent higher in the second quarter than in the equivalent period of 2008 [COP was the only oil major to report an increase in production in the quarter], with new production coming on in countries from the UK to Vietnam.

Robin West, chairman of PFC Energy, the consultancy, said that for the long term Conoco had some positions that could be highly successful.

The company’s 20 per cent stake in Lukoil, one of Russia’s biggest oil companies in Russia, while subject to whatever political winds are blowing through that country, could yet prove valuable.

Conoco’s heavy emphasis on developed countries could also be a strength, given the growing vulnerability of western oil companies to resource nationalism in less-developed economies.

He added that the natural gas business would improve once the economy picked up, as the US looked to replace carbon-intensive coal with a less polluting fuel.‹