ConocoPhillips Doubles 3Q Earnings to $3.1B
ConocoPhillips reported third-quarter earnings of $3.1 billion, compared with third-quarter 2009 earnings of $1.5 billion. Excluding gains from asset dispositions and other items, third-quarter 2010 adjusted earnings were $2.2 billion, or $1.50 per share.
"We had a good quarter and operated as expected," said Jim Mulva, chairman and chief executive officer. "Our plans to improve returns through disciplined capital spending, reducing debt and repurchasing shares are on track. Considerable free cash flow should enable us to execute our capital program to organically convert resources to reserves and annually increase dividends while repurchasing shares."
Production from the Exploration and Production (E&P) segment for the third quarter of 2010 was 1.72 million barrels of oil equivalent (BOE) per day, compared with 1.79 million BOE per day in the same period in 2009. The decrease was due mainly to normal field decline, primarily in North America and Europe, as well as asset dispositions. Increased production from China, Australia, Lower 48 shale plays and the Canadian steam assisted gravity drainage (SAGD) projects partially offset the decrease. Late in the third quarter, the company initiated production curtailments of approximately 180 million cubic feet equivalent per day in North America in response to continuing low natural gas prices.
ConocoPhillips expects fourth-quarter 2010 production to be approximately 1.71 million BOE per day. Excluding the impact of asset sales, production sharing contracts and curtailments, the company expects both fourth-quarter and full-year production to be approximately 1.8 million BOE per day.
"Over the next several years, production declines are expected to be mitigated by new production from major projects offshore southeast Asia, LNG projects in Qatar and Australia, Canadian SAGD oil sands projects and Lower 48 shale developments," said Mulva.
The company continued its focus on the liquids rich Eagle Ford, Bakken and North Barnett shale plays, further accelerating appraisal and development drilling programs, with production ramping up in the third quarter of 2010. In Eagle Ford, the company has nine rigs currently active, with 15 wells successfully drilled and eight completed in the play during the third quarter. The company expects the pace of activity to continue to increase during the fourth quarter of 2010.
In Poland, the company completed a second well, testing a possible shale gas play, and is conducting additional tests on the first well drilled earlier in the year. Elsewhere, ConocoPhillips spud the Rak More wildcat well in Kazakhstan in late September and expects to reach target depth in the fourth quarter of 2010. The Dalsnuten wildcat well, located in deepwater offshore Norway, was also spud during the third quarter.
"Our R&M business ran well, as our refining business delivered utilization rates in line with expectations," said Mulva.
Compared with the third quarter of 2009, Refining and Marketing (R&M) benefited from an increase in realized refining margins, primarily from a 15 percent increase in global refining market crack spreads and increased premium coke production. The increase in the global crack spread was primarily driven by stronger distillate market cracks. Third-quarter 2010 R&M earnings were negatively impacted by approximately $75 million from inventory effects, which the company expects to recover in the fourth quarter.
In addition, compared with the third quarter of 2009, tax and foreign exchange impacts improved R&M earnings by almost $100 million. These improvements were partially offset by lower realized marketing margins, which were approximately $80 million less than in the same period in 2009, primarily due to market conditions.
The U.S. refining crude oil capacity utilization rate for the third quarter of 2010 was 92 percent, compared with 93 percent for the corresponding period in 2009. The international refining crude oil capacity utilization rate excluding Wilhelmshaven was 97 percent for the third quarter of 2010, compared with 92 percent for the same period in 2009. The increase is primarily due to less turnaround activity. Including Wilhelmshaven, the international capacity utilization rate was 60 percent for the third quarter of 2010.
"During the quarter, the company's Chemicals and Midstream segments experienced improved market conditions, compared with a year ago," added Mulva. "Our 50 percent interest in CPChem delivered particularly strong results, primarily due to improved ethylene margins, while DCP Midstream benefited from higher natural gas liquids prices."
Corporate expenses were $276 million after-tax for the quarter, including a $114 million premium on early debt retirement, compared with $283 million in the third quarter of 2009. Excluding the early debt retirement premium, adjusted Corporate expenses for the quarter were $162 million after-tax. The lower Corporate expenses were primarily related to decreased interest expense from reduced debt levels and foreign exchange gains on intercompany financing transactions as a result of the weakening U.S. dollar against the Canadian dollar and British pound.
September 2010 year-to-date adjusted controllable costs were approximately $400 million lower, or 4 percent, compared with the same period in 2009. The improvement was equally split between the E&P and R&M segments. Controllable costs for the nine-month period in 2010 were $9.6 billion, compared with $9.4 billion in the same period in 2009.
For the first nine months of 2010, ConocoPhillips received cash proceeds of $6.4 billion from the sale of OAO LUKOIL shares. At the end of the quarter, the company owned approximately 50 million shares, which are expected to be sold prior to the end of 2011. In addition, ConocoPhillips repurchased 22 million of its own shares for $1.3 billion.
ConocoPhillips recently announced several executive management changes, which were implemented as part of the company's business and strategic priorities. These moves support ConocoPhillips' corporate succession plans.
"This new management team provides strong leadership and experience in all aspects of our operations, which will help position the company to accomplish its objectives and ensure a smooth transition of leadership in the future," said Mulva.
2010 Financial Highlights
Third-quarter 2010 adjusted earnings were $2.2 billion, or $1.50 per share, compared with adjusted earnings of $1.4 billion, or $0.95 per share, for the same period in 2009. Adjusted earnings increased versus the prior year, primarily due to the impact of higher commodity prices and U.S. refining margins, partially offset by higher taxes and lower production volumes. For the third quarter of 2010, ConocoPhillips reported earnings of $3.1 billion, or $2.05 per share, compared with earnings of $1.5 billion, or $0.97 per share, for the same period in 2009.
ConocoPhillips' adjusted earnings for the first nine months of 2010 were $6.9 billion, compared with adjusted earnings of $3.1 billion in the corresponding period of 2009. Adjusted earnings for 2010 were higher than 2009, primarily due to higher commodity prices and global refining margins, partially offset by higher taxes and lower production volumes. Nine-month 2010 earnings were $9.3 billion, compared with $3.1 billion for the same period of 2009.
During the third quarter of 2010, the company generated $10.6 billion in cash, $4.3 billion in cash from operations and $6.3 billion in cash proceeds from asset dispositions. This cash was used to pay $2.7 billion of debt, fund a $2.5 billion capital program, repurchase $0.9 billion of ConocoPhillips common stock and pay $0.8 billion in dividends. The company had a cash balance of $8 billion at quarter end, a significant portion of which is expected to be used for additional share repurchases. As of September 30, 2010, debt was $23.6 billion and the debt-to-capital ratio was 25 percent.
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