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ConocoPhillips (COP - Analyst Report) reported second quarter 2013 adjusted earnings of $1.41 per share, surpassing both the Zacks Consensus Estimate of $1.28 and year-earlier profit of $1.19. The year-over-year growth was mainly attributable to increased volumes, continued portfolio shift to liquids and higher proportion of production in higher-margin areas.

Revenues in the reported quarter decreased to $14,142.0 million from the year-ago level of $14,842.0 million but comfortably surpassed our projection of $11,478.0 million.

Exploration and Production

Daily production averaged 1.510 million barrels of oil equivalent (MMBOE) in the quarter, up 1.4% from 1.489 MMBOE in the year-ago quarter. This increase was primarily attributable to new production from development programs and major projects.

Price Realization

Overall price realization was flattish at $66.82 per BOE versus $66.81 per BOE in the second quarter of 2012. This was due to lower overall crude and natural gas liquids prices, offset by higher natural gas and bitumen prices.

Average realized price for oil was $100.14 per barrel compared with $105.56 in the year-earlier quarter. Natural gas liquids (NGL) were sold at $37.24 per barrel, reflecting a decrease of 14.5% from the year-ago level of $43.55 per barrel. The price for natural gas was $5.77 per thousand cubic feet (Mcf) versus $5.14 in second quarter 2012, reflecting an increase of 12.3%. The company’s bitumen prices rose from $51.38 per barrel a year ago to $55.69 in the reported quarter.

Financials

At the end of the second quarter, ConocoPhillips generated $4.4 billion in cash from continuing operating activities (excluding working capital). As of Jun 30, 2013, the company had total cash and cash equivalents of $3.9 billion and $21.7 billion in debt, with a debt-to-capitalization ratio of 31%.

ConocoPhillips also paid $0.8 billion in dividends and incurred $3.7 billion in capital expenditures during the quarter.

Asset Sale Program

The company generated $542 million in proceeds from asset sales and expects to raise $10.5 billion from the disposition program in 2013.

Guidance

For the third quarter of 2013, daily production is expected in the band of 1,460–1,490 thousand barrels of oil equivalent (MBOE). For full-year 2013, production has been revised to 1,515–1,530 MBOE from the earlier estimate of 1,485–1,520 MBOE per day range.

The ongoing ramp-up in major North American programs, mainly in the Eagle Ford and oil sands continue to contribute favorably to production.

The company also remains on track to deliver average annual production as well as margin growth of 3% to 5%, as it focuses on liquid-rich ventures primarily in the U.S. and Canada.

Outlook

With leading positions in both natural gas and heavy crude oil in North America, as well as a legacy position in the North Sea and growing exposure to lucrative international regions, ConocoPhillips expects to replace reserves and sustain production growth over the long term. ConocoPhillips' exploration initiatives toward liquids-rich plays are gaining momentum through the Eagle Ford, Bakken and North Barnett shale plays.

Again, ConocoPhillips completed the spin-off of its refining/sales business into a separate, independent and publicly traded company, Phillips 66 (PSX - Analyst Report) in 2012. With this, ConocoPhillips shifted its complete focus to upstream operations and thus oil and gas prices play a major role in determining its performance.

We believe that any downtrend in the global economy will affect the supply-demand fundamentals of oil and gas, hurting the sales prices for crude oil and natural gas.

We have a Zacks Rank #3 (Hold) for ConocoPhillips. However, Zacks Ranked #1 Gulfmark Offshore, Inc. (GLF - Snapshot Report) and Dril-Quip, Inc. (DRQ - Analyst Report) are expected to outperform the market over the next few months.

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