ConocoPhillips (COP) reported fourth quarter 2011 adjusted earnings of $2.02 per share, comfortably beating the Zacks Consensus Estimate of $1.80. The earnings were also better than the year-earlier profit of $1.32.

For the full year 2011, ConocoPhillips reported adjusted earnings of $8.76 per share compared with $5.92 per share in 2010. Reported EPS also beat the Zacks Consensus Estimate of $8.48.

The solid quarterly result came on the back of higher price realizations, partially offset by lower refining margins and higher taxes

Revenues in the reported quarter jumped more than 15% year over year to $59.9 billion.

For full year 2011, the company registered revenue of $251.2 billion compared with $198.7 billion in 2010. Conoco beat the Zacks Consensus Estimate of $222.7 billion.

Segmental Performance

Exploration and Production (E&P): The segment reported adjusted earnings of $2.3 billion during the quarter, reflecting an impressive 26.7% growth from the year-ago level of $1.9 billion. The improvement was aided by higher commodity prices, which were partially offset by higher taxes

Daily production from the E&P segment averaged 1.60 million barrels of oil equivalent (MMBOE), down from 1.73 MMBOE in the year-ago quarter. The decline was mainly due to natural decline in fields, partially mitigated by production start-ups at key projects and exploitation of various other fields.

While the company’s production declined, the impact on earnings was limited as the company has shifted its focus toward higher margin production of oil sands, acquired acreage in North American liquids-rich shale plays and signed production sharing agreements for deepwater blocks in Angola’s emerging subsalt play. In the Exploration arena, ConocoPhillips continued to expand its worldwide shale position and also resumed deepwater Gulf of Mexico drilling activitie

Average realized price for liquids was $96.42 per barrel, compared with $78.76 in the year-earlier quarter. The price for natural gas was $5.19 per thousand cubic feet (Mcf) versus $4.95 realized in third quarter 2010

Refining and Marketing: The segment registered earnings of $201 million compared with $207 million in the year-ago quarter. The upswing was attributable to improved refining margins worldwi

Domestic refining crude oil capacity utilization rate in the quarter averaged 93% compared with 83% in the year-ago quarter. International capacity utilization rate averaged 98%, up significantly from 61% in the year-earlier quarte

Midstream: The segment contributed $118 million to the net income during the quarter, up substantially from the year-earlier level on increased natural gas liquids prices.

Chemicals: The segment recorded earnings of $156 million, up considerably on a year-over-year basis, mainly on higher volumes related to the start-up of international projects late in 2010.

Financials

As of December 31, 2011, ConocoPhillips generated $5.8 billion in cash from operations. At year-end 2011, the company had $5.8 billion cash balance and $22.6 billion in debt, with a debt-to-capitalization ratio of 26%.

The company repurchased 46 million shares, or 3% of shares outstanding, for $3.1 billion, thus bringing total shares repurchased to 15% of shares outstanding at the inception of the repurchase program in 2010. ConocoPhillips also paid $900 million in dividends and incurred $4.0 billion in capital expenditures.

Guidance

ConocoPhillips has a three-year strategic plan in place to reposition the company. It is focused on improving portfolio returns and increasing value and distributions for the shareholders. These actions, which were initiated in 2010, are to be extended into 2012

Outlook

We remain optimistic on ConocoPhillips’ ability to generate free cash flow by unlocking capital tied up in non-core assets. The company also remains committed to its $15 billion to $20 billion 2010-2012 asset disposition program. Despite a production decline, upstream earnings increased year over year, boosted by strong realized pricing.

Again, we have a positive outlook on ConocoPhillips post split, as it holds the promise of unlocking significant value. The idea behind the spin-off is to create value for shareholders who like the volatility in the refining business.

Creation of two separate companies is also believed to be helpful as both entities will get to pursue greater opportunities in their respective market segments, without the constraints of the parent company, and better serve the needs of both investor groups. We expect this move to allow Conoco to narrow the return gap at which it historically lagged its peers

ConocoPhillips’ exploration initiatives toward liquids rich plays such as Eagle Ford, Bakken and North Barnett shale plays are gaining momentum. Although we are encouraged by the recent discoveries and the company’s new exploration efforts as well as with a wider reserve base, production growth remains a long-term story.

Hence, we maintain our long-term Neutral recommendation on ConocoPhillips, the third-largest U.S. oil company by market value after ExxonMobil Corp. (XOM) and Chevron Corp. (CVX). ConocoPhillips holds a Zacks #3 Rank, which translates to a short-term Hold rating.

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