ConocoPhillips Higher Production Offset by Slimmer Refining Margins

Oil major ConocoPhillips‘ (NYSE:COP) released its Q4 results, posting a sequential increase in upstream production levels while downstream earnings suffered because of lower margins. ^[1] Upstream results benefited from high oil prices and an increase in production in certain geographies. On the flip side, high crude prices resulted in lower refinery margins. Quarterly profits dropped to $2.67 billion from $3.45 billion in Q3 2011 because of weaker downstream results. Other oil majors such as Chevron (NYSE:CVX) and Exxon Mobil (NYSE:COP) will release their results over the next few days.

We have a $77 price estimate for ConocoPhillips, which is at a 10% premium to its current market price.

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Output grows

ConocoPhillips increased its output from 1.54 Million barrels of oil equivalent/day (MMBOE/d) in Q3 to 1.6 MMBOW/d in Q4 2011. The growth was a result of increased output from Alaska, the U.K., Nowray and from the lower 48 states. The Bohay Bay suspension in China and the suspension of operations in Libya continued to impact production levels. The realized price per barrel of oil and Natural Gas Equivalents (NGLs) stood at $96.40 in Q4, pushing up upstream revenues.

The company managed to earn a realized price of $5.2 /Million cubic feet of natural gas despite the supply glut in the U.S. Falling gas prices in the country have forced Conoco and other large producers to announce output cuts. ^[2] Excess supply and weak winter demand have forced gas prices to their lowest level in a decade.

Refining margins cool

High input prices resulted in lower refining margins for Conoco in the last quarter. Refining and Marketing (R&M) income per barrel fell to $0.70 /bbl from $4.10/bbl in the previous quarter. ^[1] Weak downstream earnings played a major role in the fall in sequential earnings and R&M adjusted earnings fell from $1.2 billion in Q32011 to $201 million.

Chinese spill settlement

Conoco also announced that the company along with its Chinese partner CNOOC would be paying approximately $159 million to settle compensation claims resulting from the offshore spill in the Bohay Bay. ^[3] Production from the fields has been completely suspended since last September after two spills in June, which resulted in around 3,000 barrels of crude and other impurities leaking into the ocean.

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1. Q4 Results, ConocoPhillips [↩] [↩]
2. Mother Nature Raps Natural Gas, WSJ [↩]
3. ConocoPhillips Reaches Settlement in China Spill,WSJ [↩]