ConocoPhillips Third-Quarter 2006 Interim Update


This update is intended to give an overview of market and operating conditions experienced by ConocoPhillips (NYSE:COP) during the third quarter of 2006. The market indicators and company estimates may differ considerably from the company's actual results scheduled to be reported on October 25, 2006.

Highlights - Third-Quarter 2006 vs. Second-Quarter 2006

-- Exploration and Production

-- Crude oil prices similar to second quarter.

-- Lower U.S. natural gas prices.

-- Lower worldwide production.

-- Results negatively impacted by recent tax legislation and revised depreciation, depletion and amortization rates.

-- Refining and Marketing

-- Significantly lower worldwide refining margins.

-- Significantly higher worldwide marketing margins.

-- Improved refining capacity utilization rate in the mid-90-percent range.

-- Significantly lower turnaround activity.

-- Loss from impairment of certain assets held for sale.

-- LUKOIL Investment

-- Ownership of approximately 19 percent at quarter end.

-- Midstream and Chemicals

-- Midstream and Chemicals results expected to be improved from the previous quarter.

-- Corporate and Other

-- Corporate expenses anticipated to be lower than the previous quarter.

-- Debt balance of approximately $27.8 billion.

-- Benefit from hurricane-related insurance impacts.

Exploration and Production (E&P)

The table below provides market price indicators for crude oil and natural gas. The company's actual crude oil and natural gas price realizations may vary from these market indicators due to quality and location differentials, as well as the effect of pricing lags.

Market Indicators
                                                   3Q 2006
                               3Q 2006   2Q 2006   2Q 2006   3Q 2005
Dated Brent ($/bbl)              $69.49    $69.62    $(0.13)  $61.54
WTI ($/bbl)                       70.38     70.40     (0.02)   63.05
ANS USWC ($/bbl)                  68.95     68.78      0.17    60.79
Henry Hub first of month
 ($/mmbtu)                         6.58      6.80     (0.22)    8.53
                                                       Source: Platts

Third-quarter production on a barrel-of-oil equivalent (BOE) per day basis, including Syncrude and excluding LUKOIL, is expected to be approximately five percent lower than the previous quarter. More than half of the decrease was associated with the partner-operated Prudhoe Bay oil field in Alaska. Planned seasonal maintenance in the United Kingdom and Venezuela also contributed to the third-quarter decline in production.

During the third quarter, the United Kingdom enacted higher income tax rates retroactive to the beginning of the year. A charge of approximately $440 million, including $270 million related to the revaluation of deferred taxes and $170 million related to the company's operations for the first nine months of 2006, is expected to be recorded in the third quarter.

Also during the third quarter, the state of Alaska enacted new production tax legislation retroactive to April 1, 2006. A third-quarter, after-tax charge of approximately $180 million is anticipated related to the company's operations for the second and third quarters of 2006.

While the purchase price allocated to properties, plants and equipment has not changed materially, the application of purchase accounting for the Burlington Resources acquisition at the operating-area level affects the mix of depreciation, depletion and amortization (DD&A) rates and the timing of expense. As a result, third-quarter DD&A is expected to be $170 million (before-tax) higher than second quarter, reflecting the effect for the second and third quarters of 2006.

Exploration expenses are expected to be approximately $215 million before-tax for the quarter.

Refining and Marketing (R&M)

The table below provides market indicators for regions where the company has significant refining operations. The Weighted U.S. 3:2:1 margin is based on the geographical location and capacity of ConocoPhillips' U.S. refineries. Realized refining margins may differ due to the company's specific locations, configurations, crude oil slates or operating conditions. The company's refining configuration generally yields somewhat higher distillate volumes and lower gasoline volumes than those implied by the market indicators shown below. In addition, marketing margins may differ significantly from the U.S. wholesale gasoline marketing indicator due to the product mix, distribution channel and location of the company's refined product sales.

Market Indicators ($/bbl)
                                                   3Q 2006
                               3Q 2006   2Q 2006   2Q 2006   3Q 2005
Refining Margins
    East Coast WTI 3:2:1         $10.54    $15.21    $(4.67)  $14.81
    Gulf Coast WTI 3:2:1          11.00     17.26     (6.26)   17.42
    Mid-Continent WTI 3:2:1       17.75     19.60     (1.85)   17.06
    West Coast ANS 3:2:1          21.70     32.47    (10.77)   26.61
    Weighted U.S. 3:2:1           14.86     20.39     (5.53)   18.51
    NW Europe Dated Brent
     3:1:2                        14.18     15.20     (1.02)   16.53
WTI/Maya Differential (trading
 month)                           14.87     15.69     (0.82)   15.48
U.S. Wholesale Gasoline
 Marketing                         5.75      1.83      3.92     0.70
                             Source: Platts, Lundberg Survey and OPIS

Worldwide refining margins for the third quarter are expected to be significantly lower than the second quarter, as indicated in the table above. Worldwide marketing margins are expected to be significantly higher than the second quarter. Turnaround activity decreased in the third quarter with costs expected to be approximately $40 million before-tax. The company's average crude oil refining capacity utilization rate for the third quarter is expected to be in the mid-90-percent range.

Although the company continues to expect the previously announced asset rationalization program to result in an overall net gain to the company, R&M expects to record an impairment of approximately $250 million after-tax in the third quarter related to assets held for sale.

Corporate and Other

The company expects corporate expenses to be lower, reflecting favorable foreign currency impacts in the third quarter compared to negative foreign currency impacts in the second quarter.

The company's debt balance is expected to be approximately $27.8 billion at the end of the third quarter. The number of weighted-average diluted shares outstanding during the third quarter is expected to be 1,676 million shares.

During the third quarter, the company expects to benefit from hurricane-related insurance impacts of approximately $170 million before-tax. The anticipated benefit primarily impacts the company's R&M segment.

The company's effective tax rate for the third quarter is expected to be approximately 50 percent, reflecting the impact of recently enacted tax legislation in the United Kingdom.