ConocoPhillips (COP) reported its third-quarter 2010 earnings of $1.50 per share (excluding non-recurring items), well above the year-ago quarter’s earnings of 95 cents as well as the Zacks Consensus Estimate of $1.46. The improved performance primarily reflects a hike in commodity prices associated with improved U.S.refining margins, partially offset by lower production volumes.
Revenues in the reported quarter improved more than 20% year over year to $49.5 billion, comfortably beating the Zacks Consensus Estimate of $43.5 billion.
Segmental Performance
Exploration and Production (E&P): The segment reported earnings of $1,506 million during the quarter, reflecting a significant improvement from the year-ago level of $947 million.
Daily production from the E&P segment averaged 1.72 million barrels of oil equivalent (MMBOE), down from 1.79 MMBOE in the year-ago quarter. Normal field reduction in North America and Europe as well as asset divestitures led to the decline in production. These were partially offset by the improved production in China, Australia and Canada.
Average realized price for liquids was $69.45 per barrel, compared with $62.08 in the year-earlier quarter. The price for natural gas was $4.53 in the reported quarter versus $3.67 in third quarter 2009.
Refining and Marketing (R&M): The segment recorded earnings of $268 million compared with $94 million in the year-ago quarter.
Domestic refining crude oil capacity utilization rate in the quarter averaged 92% (reflecting less unplanned downtime and turnaround activity) compared with 93% in the year-earlier quarter. International capacity utilization rate averaged 97%, up from 92% in the year-earlier quarter.
Midstream: The segment contributed $77 million to the net income during the quarter, up approximately 24% year over year, owing to the improved market conditions.
LUKOIL Investment: ConocoPhillips’ earnings from its LUKOIL Investment segment came in at $436 million, down 14.8% from $512 million in the comparable quarter last year.
Chemicals: The segment recorded earnings of $132 million, up nearly 27% from the year-ago quarter, driven by improved market conditions.
Financials
During the quarter, ConocoPhillips generated $4.3 billion in cash from operations. As of September 30, 2010, the company had $8 billion cash balance and $23.6 billion in debt, with a debt-to-capitalization ratio of 25%. During the quarter, the company repurchased $0.9 billion of ConocoPhillips common stock, paid $0.8 billion in dividends and invested $2.5 billion in capital expenditures.
LUKOIL Stake
Conoco plans to minimize debt by selling various assets including the LUKOIL stake. Year-to-date, the company sold $6.4 billion of the LUKOIL stake with an expectation of offloading remaining shares by the end of 2011.
Outlook
Conoco expects its fourth quarter production to be approximately 1.71 MMBOE, slightly lower than the third quarter level. Management anticipates over the next few years, production declines may be offset by new production from major projects in offshore southeast Asia, LNG projects in Qatarand Australia, Canadian SAGD oil sands projects and Lower 48 shale developments.
The company’s exploration initiatives toward liquids rich plays such as Eagle Ford, Bakken and North Barnett shale playsare gaining momentum.
As the new management team is on board and initiatives of offloading its stake in LUKOIL are on track, it remains to be seen how the company moves toward improving its bottom line. Our long-term Neutral recommendation remains unchanged at this stage with the Zacks #3 Rank (Hold).
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