ConocoPhillips reported first-quarter earnings of $2.1 billion, compared with first-quarter 2009 earnings of $0.8 billion. Excluding after-tax charges of $110 million for ending participation in the Shah and Yanbu projects, first-quarter 2010 adjusted earnings were $2.2 billion, or $1.47 per share.
"Improving market conditions in the first quarter contributed to increased earnings," said Jim Mulva, chairman and chief executive officer. "Our performance in the first quarter was solid, with E&P production in line with the fourth quarter of the prior year. This allowed us to capture the benefit of significantly improved oil prices. In R&M, the U.S. refining capacity utilization rate improved, light-heavy crude differentials widened and we reduced costs."
Production from the Exploration and Production (E&P) segment for the first-quarter of 2010 was 1.83 million barrels of oil equivalent (BOE) per day, compared with 1.93 million BOE per day in the same period in 2009. The decrease was mainly due to normal field decline, primarily in the United Kingdom, Lower 48 and Alaska; increased impacts from production sharing agreements, mostly in Asia Pacific; and unplanned downtime in the Lower 48 due to weather conditions. Increased production from China and Canadian oil sands partially offset the decrease.
"The higher crude oil and natural gas liquids prices resulted in improved earnings across our E&P portfolio," added Mulva. "Within the Lower 48, where more than a third of our production is liquids, our presence in the Bakken, Permian, San Juan and offshore Gulf of Mexico areas enabled us to benefit from the higher prices which, along with ongoing cost reductions, resulted in substantially improved Lower 48 E&P earnings."
During the quarter, the company continued to ramp-up its drilling program in the Eagle Ford shale play. ConocoPhillips currently has three rigs drilling in the play and has completed the drilling of four horizontal wells. The first of these wells was placed on production in late March and flowed at an initial daily rate of 3.8 million cubic feet of gas and 1,200 barrels of condensate. This well and other industry drilling results reinforced the potential of ConocoPhillips' 240,000 net acre position in the liquids-rich core of this play.
In the Bakken shale play, three wells were spud during March, bringing the total current year well count to six. Three wells were placed on production during March with initial rates of approximately 2,000 barrels of oil per day each.
In Refining and Marketing (R&M), the first-quarter 2010 U.S. refining capacity utilization rate was 88 percent, reflecting economic run cuts and turnaround activity. The international utilization rate was 48 percent, which reflects turnaround activity in the company's joint-venture refineries in Malaysia and Germany, as well as the shutdown of the Wilhelmshaven, Germany refinery due to market conditions. Although overall market conditions for R&M were weaker during the quarter, light-heavy crude differentials widened and earnings benefited from lower costs and improved clean product yields. As a result, R&M earnings for the quarter were positive, excluding the Yanbu impairment of $25 million after-tax.
"During the quarter, the company's Chemicals and Midstream segments experienced improved market conditions," added Mulva. "Our 50 percent interest in CPChem delivered very good results, primarily due to strong margins that were a result of a tightening in the supply-demand balance, and DCP Midstream benefited from higher natural gas liquids prices."
In fourth-quarter 2009, ConocoPhillips announced a $10 billion two-year asset disposition program, with approximately half of the dispositions expected in 2010. As part of the program, in April 2010, ConocoPhillips entered into agreements with Sinopec to sell its interest in Syncrude for $4.65 billion. The company also initiated disposition efforts on the REX Pipeline, as well as selected E&P properties in Lower 48 and Canada. As previously disclosed, the company has agreed to sell its interest in the CFJ joint venture subject to the closing of the Flying J/Pilot merger and other customary conditions.
During the first-quarter of 2010, the company also announced plans to reduce its equity ownership in LUKOIL from 20 to 10 percent and execute a $5 billion share repurchase program, both by the end of 2011. In addition, the company announced a 10 percent increase in its quarterly dividend rate, continuing the practice of annual dividend increases since the formation of ConocoPhillips eight years ago.
"The increase in dividends and the sale of the Syncrude interest are examples of steps we have taken to increase distributions and improve our balance sheet," added Mulva. "As previously announced, we decided to opt out of the Yanbu refinery project and have elected not to participate in the Shah gas field development in Abu Dhabi. Over the next couple of years we expect to see improved shareholder returns through disciplined capital investment, a strengthened financial position, and growth in shareholder distributions."
2010 Financial Highlights
First-quarter 2010 earnings were $2.1 billion, or $1.40 per share, compared with earnings of $0.8 billion, or $0.54 per share, for the same period in 2009. The increase in earnings is primarily due to the impact of significantly higher crude oil prices and lower operating costs, partially offset by lower production volumes, lower worldwide realized refining and marketing margins, and after-tax charges of $110 million, or $0.07 per share, related to ending participation in the Shah and Yanbu projects.
For the quarter, cash from operations was $3.0 billion, which included a $1.0 billion reduction in cash from operations related to an inventory driven increase in working capital. The company funded a $2.5 billion capital program and paid $0.7 billion of dividends. As of March 31, 2010, debt was $29.0 billion and the debt-to-capital ratio was 31 percent.
Effective January 2010, ConocoPhillips changed the method used to determine its equity share of LUKOIL's earnings. Under the new method, the company records its equity share of LUKOIL's actual earnings on a one-quarter lag basis, rather than using an earnings estimate for the current quarter. Results for prior periods have been recast to reflect this change.
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