ConocoPhillips 2Q Profit Falls 33% on Spinoff

ConocoPhillips' second-quarter earnings fell 33% during its first quarterly reporting period as a pure-play exploration and production company, beating analyst expectations on strong international sales of oil and gas and higher-than-forecast production from shale fields.

Conoco reported a second quarter profit of $2.27 billion, or $1.80 a share, down from $3.4 billion, or $2.41 a share, a year earlier. Excluding write-downs, asset gains and other items, earnings from continuing operations were $1.5 billion, or $1.22 per share, down from $2.3 billion, or $1.64 per share. Analysts polled by Thomson Reuters most recently projected earnings of $1.17 per share.

The latest period includes one month of earnings related to discontinued operations at its former downstream business, which was spun off as Phillips 66 in late April. The company's results were hurt by lower average realized prices for oil and natural gas, which declined 6.5% and 20% respectively.

But a strong international performance drove the company's exploration and production revenue higher than expected, and there was more production in unconventional areas than had been predicted, Deutsche Bank analysts said.

Conoco's spinoff of its refining, pipelines and chemicals business into a separate company marked the end of a three-year restructuring plan aimed at improving the company's finances and its attractiveness to investors. Before the split, Conoco was the third-largest U.S. oil company by market value after Exxon Mobil Corp. and Chevron Corp. Now it is the biggest independent oil and gas company in the U.S. by production and the second largest by market value after Occidental Petroleum.

But the company faces challenges in the midst of a global economic slowdown that has put downward pressure on energy prices. Credit Suisse analysts wrote in a note that Conoco's cash flow from operations didn't cover capital expenditures and its "healthy dividend" in the first half of the year. They said, however, that the company has a substantial resource base from which to increase production, which will make it less vulnerable to low oil prices.

The company said in its release that it is looking to expand its operations in unconventional oil plays. It produced 50,000 barrels of oil equivalent more a day than last year in areas such as the Eagle Ford Shale in Texas and the Bakken in North Dakota. In these places, Conoco and other companies apply horizontal drilling and hydraulic fracturing techniques to unlock large amounts of oil and gas.

"Our production was on target, our major growth projects are on track and we are continuing to add to our conventional and unconventional exploration inventory," Chairman and Chief Executive Ryan Lance said, adding that the company continued to move forward its asset sales program.

The company reported average production of about 1.54 million barrels of oil equivalent a day, down from 1.64 million barrels a day a year earlier. Production declined amid dispositions and maintenance downtime, as well as curtailments in its North American conventional natural gas operations.

Conoco's former refining arm, Phillips 66, is set to release its first quarterly report as a publicly traded company Aug. 1.

Copyright (c) 2012 Dow Jones & Company, Inc.


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