ConocoPhillips 3Q Profit Fell 31% on Spinoff

Lower oil and gas prices took their toll, and ConocoPhillips continued to trim its portfolio of assets in the third quarter, but production results in unconventional U.S. oil formations helped the company come out ahead of analysts' expectations.

It was ConocoPhillips' second quarter of reporting earnings without income from its refining arm, which it spun off in May.

ConocoPhillips reported profit of $1.8 billion, or $1.46 a share, down from $2.62 billion, or $1.91 a share, a year earlier, a 31% drop. Excluding items such as asset-sale gains, pension settlement expenses and U.K. tax-law-change impacts, adjusted earnings from continuing operations were up at $1.44 a share from $1.40. The year-earlier period included contributions from discontinued operations of about $1.14 billion.

The third-quarter results beat the average estimate of analysts polled by Thomson Reuters, who most recently projected earnings of $1.19 a share on revenue of $11.12 billion.

ConocoPhillips is in the midst of a three-year repositioning aimed at improving its balance sheet and making itself more attractive to investors. That plan included the sale of $15 billion to $20 billion in assets, large-scale share buybacks and the spinoff of its refining arm as Phillips 66.

In the first nine months of the year, the proceeds from ConocoPhillips' asset sales totaled $2.1 billion, and Chief Executive Officer Ryan Lance said in a news release Thursday that the company is on track to complete the planned $8 billion to $10 billion asset-divestiture program by the end of 2013.

But Raymond James analyst Pavel Molchanov said the company's balance sheet remains a concern, as Conoco's cash flow from continuing operations together with the $500 million generated from asset sales during the third quarter weren't enough to cover its capital spending and dividend payouts during the period.

"Relying on asset sales to cover that cash-flow gap is something that can work for a period of time but is not a sustainable long-term solution," Mr. Molchanov said.

At the end of the second quarter, Mr. Lance told analysts he didn't intend to cut the company's $16 billion capital-expenditure program, saying it wouldn't be prudent.

During the third quarter, the company reported average production of about 1.525 million barrels of oil equivalent a day, down from 1.538 billion barrels a day a year earlier, amid the company's asset sales.

Analysts said production during the quarter came in ahead of expectations and at the high end of what the company had said it anticipated.

Like most other producers, Conoco is turning away from natural gas and toward oil and liquids production in the face of weak natural-gas prices, and ramping up production in unconventional oil-rich shale formations such as the Bakken and Eagle Ford. The company produced 102,000 barrels of oil equivalent per day in those two formations, twice what it produced there during last year's third quarter.

RBC analyst Scott Hanold said the company's shale production was "robust" in the third quarter, with Eagle Ford output reaching a record 86,000 barrels of oil equivalent per day during the quarter.

But the latest quarter was hurt by lower average realized prices for oil and natural gas, which fell 3.7% and 16%, respectively. Sales and other operating revenue decreased 12% to $14.52 billion.

Phillips 66 is set to release its third-quarter earnings report Oct. 31.

ConocoPhillips shares were up nearly 2% at $57.06 in Thursday morning trade.

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


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