Conoco Slashes 2010 Capex

ConocoPhillips (COP - Analyst Report) has approved its 2010 capital program of $11.2 billion. This is 10% lower than the estimated 2009 capital budget. The company has earmarked 86% of the total budget for the Exploration and Production (E&P) segment, while approximately 12% will be for the Refining and Marketing (R&M) segment.

ConocoPhillips intends to advance its existing E&P projects and preserve potential to develop large resource in the future. Management said the company is presently trying to replacing reserves organically and increase production from a reduced as well as strategic asset base. The capital program is in line with company’s initiative of improving returns through increased capital discipline, asset sales and continued growth in shareholder distributions.

Exploration and Production budget is expected to be approximately $4.1 billion in North America. Given the reduced spending in 2010, the company has given a greater emphasis on the high growth production operations. Capital expenditure in Europe, Asia, Africa and the Middle East would be approximately $5.6 billion. The capital program for the R&M segment is approximately $1.3 billion, with about $0.9 billion for its domestic downstream businesses and $0.4 billion for international R&M.

The company anticipates strong growth in the Asia-Pacific, Russia and Caspian, and the Middle East regions to offset natural declines in its North American and North Sea assets. The larger capital allocation for this region versus North America reflects this view.

Conoco expects its existing portfolio of high quality assets will enable it to replace reserves and maintain current production levels even in a low price environment. While we believe that this is a right step in a tentative outlook for U.S. natural gas environment, the company’s return on capital employed has still been lagging its super major peers such as Chevron Corporation (CVX - Analyst Report) and ExxonMobil Corporation (XOM - Analyst Report). We are unchanged with our Neutral rating for the stock.

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