ConocoPhillips (COP) reported first-quarter 2011 earnings of $1.82 per share (excluding non-recurring items), way below the Zacks Consensus Estimate of $1.97 due to lower production volumes, the absence of equity earnings from LUKOIL and higher taxes.
However, the quarter’s earnings increased from $1.47 in the year-ago quarter. The improved performance primarily reflects a hike in commodity prices associated with better U.S. refining margins.
Revenues in the reported quarter jumped more than 27% year over year to $58.2 billion, comfortably beating the Zacks Consensus Estimate of $53.7 billion.
Segmental Performance
Exploration and Production (E&P): The segment reported earnings of $2,197 million during the quarter, reflecting an improvement from the year-ago level of $1,915 million.
Daily production from the E&P segment averaged 1.7 million barrels of oil equivalent (MMBOE), down from 1.83 MMBOE in the year-ago quarter. Normal field reduction in North America, Lower 48, China and Alaska as well as asset divestitures were the dampeners. These were partially compensated by new and improved production from the company's Qatargas 3 project, Bohai Bay’s development optimization program and liquids-rich shale plays in the Lower 48.
Average realized price for liquids was $91.55 per barrel, compared with $71.86 in the year-earlier quarter. The price for natural gas was $5.22 per Mcf versus $5.57 in first quarter 2010.
Refining and Marketing: The segment recorded earnings of $480 million compared with $21 million in the year-ago quarter. The upswing was attributable to improved proved global refining margins.
Domestic refining crude oil capacity utilization rate in the quarter averaged 87%, marginally below 88% in the year-ago quarter. International capacity utilization rate averaged 96%, up significantly from 48% in the year-earlier quarter.
Midstream: The segment contributed $73 million to net income during the quarter, down approximately 5% year over year.
LUKOIL Investment: ConocoPhillips’ earned only $2 million from this segment versus $387 million in the comparable quarter last year.
Chemicals: The segment recorded earnings of $193 million, up from the year-ago quarter’s level of $110 million.
Financials
During the quarter, ConocoPhillips generated $4.0 billion in cash from operations. As of March 31, 2011, the company had $8.4 billion cash balance and $23.2 billion in debt, with a debt-to-capitalization ratio of 25%. During the quarter, the company repurchased $1.6 billion of its common stock, paid $0.9 billion in dividends and incurred $3.1 billion in capital expenditures.
In February 2011, ConocoPhillips announced a capital budget program of $13.5 billion for 2011, 90% of which will be burnt up in exploration and development. The primary emphasis will be on the Eagle Ford Shale along with the Permian, Bakken and Barnett Fields.
Further expenditures will be directed toward Canada (SAGD oil sands projects and Western Canada gas basins) and Alaska (Prudhoe Bay and Kuparuk Fields). Conoco plans to invest $14 billion to $15 billion per year from 2012 to 2015. Internationally, the primary emphasis will be on Australia followed by China and Poland.
Outlook
We remain optimistic on ConocoPhillips’ ability to generate free cash flow by unlocking capital tied up in non-core assets. The third-largest U.S. oil company by market value, ConocoPhillips, after ExxonMobil Corp. (XOM) and Chevron Corp. (CVX), said it expects its output to grow 2% to 3% a year on a long-term basis.
Although we are encouraged by the recent discoveries and the company’s new exploration efforts, the transition into improvements in the reserves base, finding and development costs, the production growth remains a long-term story.
The divestment of certain non-strategic assets helps the company to apportion capital to higher margin projects such as Canadian oil sands, LNG and unconventional resource plays. Houston-based ConocoPhillips plans to sell an additional $5 billion to $10 billion worth of non-core resources by the end of 2012 as it looks for more oil and gas production and exploration by streamlining its business and improving shareholder returns. Notably, Conoco completed the sale of its OAO LUKOIL shares in the first quarter.
Again, ConocoPhillips’ exploration initiatives toward liquids rich plays such as Eagle Ford, Bakken and North Barnett shale plays are gaining momentum.
We maintain our long-term Neutral recommendation on the stock. Conoco holds a Zacks #3 Rank, which translates to a short term ‘Hold’ rating.
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