ConocoPhillips Posts Strong Earnings Across Divisions

Oil major ConocoPhillips (NYSE:COP) posted a strong Q3 by improving earnings across the board despite a 10% decline in volume, which was almost double the decline posted by competitors Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX). The large decline was partially because of suspended operations in Bohai Bay and lower output from Libya, Russia and some fields in North America. Asset dispositions accounted for around 39,000 Barrels of Oil Equivalent/day (BOE/d). ^[1] Midstream and refining earnings were boosted by higher refining margins and the chemicals division also continued its strong performance.

We have an $80 price estimate for ConocoPhillips, which is a nearly 15% premium over its current market price.

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Multiple Factors Eat into Production

Conoco’s sharp production decline over the last quarter was the result of a multitude of factors which resulted in output falling across geographies. Most importantly, asset dispositions resulted in a significant reduction in North American natural production, while Russian production fell to almost half of its level in the same period last year. ^[1] The company’s upstream output also faced temporary hurdles from the suspension of operations in the Bohai Bay area in China due to leakage of oil from its wells, while the decline in production in Libya dented the output by around 48,000 BOE/d.

While the loss of production in America, Libya and Russia accounted for almost half of the decline, overall margins improved because cash margins from these assets ranged between $10 – $15 in comparison with the $27 margins across the company’s portfolio. ^[1] Production levels are also set to improve with the resumption of operations after planned downtime activity in the North Sea and unplanned downtime in Indonesia and Alaska. Production from Qatar and lower 48 liquid plays increased to offset normal fuel declines. ConocoPhillips increased its exposure to unconventional sources and added approximately 400,000 acres in shale plays in North America. Conoco is also becoming a major partner in the Goldware shale project in Australia.

Refining results improve

Refining earnings shot up in Q3 2011 to $1.2 billion, an increase of over $900 million over the same period last year. The strong results were almost entirely due to strong margins, which more than doubled in the U.S. Refining capacity utilization also remained high both in the U.S. and internationally. Foreign exchange impacts pulled down the results slightly as the U.S. dollar strengthened in the period. Chemicals and midstream results also posted growth because of high ethylene margins and higher equity earnings from its interests in the Q-Chem 2 project in Qatar.

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1. ConocoPhillips Management Discusses Q3 2011 Results – Earnings Call Transcript, Seeking Alpha [↩] [↩] [↩]