ConocoPhillips (COP) reported first quarter 2012 adjusted earnings of $2.02 per share, failing to meet the Zacks Consensus Estimate of $2.08, mainly on account of lower production volume. However, earnings were higher by almost 11% from the year-earlier profit of $1.82.
Revenues in the reported quarter increased to $58,354 million from the year-ago level of $58,247 million. The reported figure also failed to meet our projection of $59,737 million.
Segmental Performance
Exploration and Production (E&P): The segment reported adjusted earnings of $2,131 million during the quarter, reflecting a downfall of 3% from the year-ago level of $2,197 million. The decrease was mainly due to reduced volumes, higher taxes and lower natural gas prices. However, these negatives were partially mitigated by higher crude oil and liquefied natural gas (LNG) prices.
Daily production from the E&P segment averaged 1.64 million barrels of oil equivalent (MMBOE), down from 1.70 MMBOE in the year-ago quarter. The decline was mainly due to natural decline in fields and disruption of operations at the Peng Lai Field in Bohai Bay. However, improvement of U.S. shale plays as well as Canadian oil sands, in association with lower downtime and a better well performance are added positives.
While the company’s production declined, it continued to expand its worldwide shale position, resumed Libyan operations, and executed compelling near-term growth opportunities on high-margin projects.
Average realized price for liquids was $101.56 per barrel, compared with $91.55 in the year-earlier quarter. The price for natural gas was $4.80 per thousand cubic feet (Mcf) versus $5.22 realized in first quarter 2011.
Refining and Marketing: The segment registered earnings of $444 million compared with $480 million in the year-ago quarter. The decrease was attributable to lower refining margins.
Domestic refining crude oil capacity utilization rate in the quarter averaged 89% compared with 87% in the year-ago quarter. International capacity utilization rate averaged 97%, up marginally from 96% in the year-earlier quarter.
Midstream: The segment contributed $93 million to the net income during the quarter, up more than 27% from the year-earlier level of $73 million on increased volumes from lower downtime and better operational performance.
Chemicals: The segment recorded earnings of $218 million, up almost 13% on a year-over-year basis, mainly on higher margins.
Financials
As of March 31, 2012, ConocoPhillips generated $4.2 billion in cash from operations. At quarter end, the company had $3.7 billion cash balance and $28.4 billion in debt, with a debt-to-capitalization ratio of 30%.
The company repurchased 25 million shares, or 2% of shares outstanding, for $1.9 billion, thus bringing the total to 16% of shares outstanding at the inception of the repurchase program in 2010. ConocoPhillips also paid $800 million in dividends and incurred $4.4 billion in capital expenditures.
Guidance
The company maintained its full-year 2012 production guidance in the range of 1.55-1.60 MMBOE/d, depending on the timing of disposals. Earlier, the company had disclosed that it expects production growth to average between 3% and 5% in the next five years, as it focuses on liquid-rich ventures primarily in the U.S. and Canada.
Outlook
We remain optimistic on ConocoPhillips’ ability to generate free cash flow by unlocking capital tied to non-core assets. The company is in the midst of a three-year strategic operation that includes an asset sale program, large-scale share buybacks and the spin-off of its refining unit. The company has already received approval for the spin-off of its refinery unit, Phillips 66. Beginning May 1, 2012, the company will become two leading, independent energy companies, ConocoPhillips and Phillips 66.
The company is on track with its first initiative, having already divested $20.2 billion of non-strategic assets last year and $1.1 billion in the first quarter of 2012, with plans to offload $10 billion worth of properties this year. From 2013, ConocoPhillips may continue to divest $1 billion to $2 billion of mature assets per year.
The U.S. oil company intends to use the proceeds from the sale for its share repurchase program. For 2012, the company aims to buy back shares up to an additional $10 billion.
Although we remain positive on the outlook for the new ConocoPhillips post-split, as it holds the promise of unlocking significant value, we remain on the sidelines considering its sensitivity to changes in the crude oil price, as well as geopolitical risks associated with international operations and operational challenges. Hence, we believe that ConocoPhillips shares will perform in line with the broader market and maintain our long-term Neutral recommendation.
The third biggest U.S. integrated oil company, following ExxonMobil Corporation (XOM) and Chevron Corporation (CVX), holds a Zacks #3 Rank (short-term Hold rating).
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