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Impressive 2Q for Conoco
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ConocoPhillips (COP) reported its second-quarter 2010 earnings of $1.67 per share (excluding a net benefit of $1.7 billion, primarily from dispositions and an impairment), substantially higher than the year-ago quarter earnings of 66 cents as well as the Zacks Consensus Estimate of $1.55. The improved performance primarily reflects a hike in commodity prices associated with improved global refining and marketing margins, partially offset by lower production volumes.
Revenues in the reported quarter improved more than 38% year over year to $50.1 billion, comfortably beating the Zacks Consensus Estimate of $44.7 billion.
Segmental Performance
Exploration and Production (E&P): The segment reported earnings of $1,517 million during the quarter, reflecting a significant improvement from the year-ago level of $776 million.
Daily production from the E&P segment averaged 1.73 million barrels of oil equivalent (MMBoe), down from 1.87 MMBoe in the year-ago quarter. Normal field reduction in North America, the United Kingdom and Norway, the planned maintenance in the Greater Ekofisk Area in Norway as well as the shut down of a liquid natural gas (LNG) plant in Australia led to the decline in production. These were partially offset by the production initiation in China, Canada and Indonesia.
Refining and Marketing (R&M): The segment recorded earnings of $736 million compared with $20 million in the year-ago quarter.
Domestic refining crude oil capacity utilization rate in the quarter averaged 96% (reflecting less unplanned downtime and turnaround activity) compared with 93% in the year-earlier quarter. International capacity utilization rate averaged 54%, down from 72% in the year-earlier quarter, primarily due to economic run cuts at the Wilhelmshaven Refinery, which was partially offset by less turnaround activity elsewhere.
Excluding Wilhelmshaven, the international capacity utilization rate would have been 88%. Worldwide utilization averaged 86% compared with 88% in the year-ago period.
Midstream: The segment contributed $61 million to the net income during the quarter, up approximately 97% year over year, owing to the improved market conditions.
LUKOIL Investment: ConocoPhillips’ earnings from its LUKOIL Investment segment came in at $430 million, up significantly from $243 million in the comparable quarter last year.
Chemicals: The segment recorded earnings of $138 million as against $67 million in the year-ago quarter, driven by improved market conditions.
Financials
During the quarter, ConocoPhillips generated $3.5 billion in cash from operations. As of June 30, 2010, the company had $26.3 billion in debt, with a debt-to-capitalization ratio of 28%. During the quarter, the company repurchased $0.4 billion of ConocoPhillips common stock, paid $0.8 billion in dividends and invested $2.2 billion in capital expenditures.
Gulf of Mexico (GoM) Impact
The company highlighted that its second-quarter operations were not impacted by the GoM moratorium, due to its negligible (less than 1%) oil and natural gas production from the affected areas. As a preventive measure, ConocoPhillips is planning a rapid response system that can contain potential oil spills at any underwater well in future, in association with its peers.
LUKOIL Stake
Houston-based Conoco plans to minimize debt by selling $10 billion in assets. In this context, the company announced that it will sell 40% of its stake in Lukoil back to the Russian oil major for $3.44 billion. Conoco will sell the remaining of its stake in open market transactions by the end of 2011, with proceeds primarily for the share repurchase.
Our Recommendation
We remain optimistic on Conoco, given its ability to generate returns from its fundamental portfolio and recent developments in divestiture programs that are expected to move the needle in the positive direction for shareholders.
We prefer to remain on the sidelines owing to uncertainties related to the impending divestures and an expected downtrend in Conoco’s reserves at year end or in 2011. Additionally, non-exposure to the prolific non-conventional plays and strong exposure to the tentative U.S. natural gas markets also remain as causes for concern. Consequently, our Neutral recommendation for Conoco remains unchanged at this stage.
Revenues in the reported quarter improved more than 38% year over year to $50.1 billion, comfortably beating the Zacks Consensus Estimate of $44.7 billion.
Segmental Performance
Exploration and Production (E&P): The segment reported earnings of $1,517 million during the quarter, reflecting a significant improvement from the year-ago level of $776 million.
Daily production from the E&P segment averaged 1.73 million barrels of oil equivalent (MMBoe), down from 1.87 MMBoe in the year-ago quarter. Normal field reduction in North America, the United Kingdom and Norway, the planned maintenance in the Greater Ekofisk Area in Norway as well as the shut down of a liquid natural gas (LNG) plant in Australia led to the decline in production. These were partially offset by the production initiation in China, Canada and Indonesia.
Refining and Marketing (R&M): The segment recorded earnings of $736 million compared with $20 million in the year-ago quarter.
Domestic refining crude oil capacity utilization rate in the quarter averaged 96% (reflecting less unplanned downtime and turnaround activity) compared with 93% in the year-earlier quarter. International capacity utilization rate averaged 54%, down from 72% in the year-earlier quarter, primarily due to economic run cuts at the Wilhelmshaven Refinery, which was partially offset by less turnaround activity elsewhere.
Excluding Wilhelmshaven, the international capacity utilization rate would have been 88%. Worldwide utilization averaged 86% compared with 88% in the year-ago period.
Midstream: The segment contributed $61 million to the net income during the quarter, up approximately 97% year over year, owing to the improved market conditions.
LUKOIL Investment: ConocoPhillips’ earnings from its LUKOIL Investment segment came in at $430 million, up significantly from $243 million in the comparable quarter last year.
Chemicals: The segment recorded earnings of $138 million as against $67 million in the year-ago quarter, driven by improved market conditions.
Financials
During the quarter, ConocoPhillips generated $3.5 billion in cash from operations. As of June 30, 2010, the company had $26.3 billion in debt, with a debt-to-capitalization ratio of 28%. During the quarter, the company repurchased $0.4 billion of ConocoPhillips common stock, paid $0.8 billion in dividends and invested $2.2 billion in capital expenditures.
Gulf of Mexico (GoM) Impact
The company highlighted that its second-quarter operations were not impacted by the GoM moratorium, due to its negligible (less than 1%) oil and natural gas production from the affected areas. As a preventive measure, ConocoPhillips is planning a rapid response system that can contain potential oil spills at any underwater well in future, in association with its peers.
LUKOIL Stake
Houston-based Conoco plans to minimize debt by selling $10 billion in assets. In this context, the company announced that it will sell 40% of its stake in Lukoil back to the Russian oil major for $3.44 billion. Conoco will sell the remaining of its stake in open market transactions by the end of 2011, with proceeds primarily for the share repurchase.
Our Recommendation
We remain optimistic on Conoco, given its ability to generate returns from its fundamental portfolio and recent developments in divestiture programs that are expected to move the needle in the positive direction for shareholders.
We prefer to remain on the sidelines owing to uncertainties related to the impending divestures and an expected downtrend in Conoco’s reserves at year end or in 2011. Additionally, non-exposure to the prolific non-conventional plays and strong exposure to the tentative U.S. natural gas markets also remain as causes for concern. Consequently, our Neutral recommendation for Conoco remains unchanged at this stage.
Read the full analyst report on COP
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