Conoco Profit Dips on Lower Volume

ConocoPhillips ( COP - Analyst Report ) reported second quarter 2012 adjusted earnings of $1.22 per share, surpassing the Zacks Consensus Estimate of $1.17. However, earnings were down by almost 25.6% from the year-earlier profit of $1.64, reflecting lower oil price realization, weak production volume and the divestiture of its refining and pipelines business.

Revenues in the reported quarter decreased to $15,166 million from the year-ago level of $17,668 million. However, the reported figure comfortably surpassed our projection of $9,883 million.

Recently, ConocoPhillips completed the spin-off of its refining/sales business into a separate, independent and publicly traded company Phillips 66 ( PSX - Snapshot Report ) . Hence, the current quarter includes one month of downstream earnings, whereas the prior-year quarter included three months of downstream earnings.

Exploration and Production

Daily production averaged 1.54 million barrels of oil equivalent (MMBOE), down from 1.64 MMBOE in the year-ago quarter. The decline was mainly due to the impact of divestitures and maintenance downtime, accompanied by reductions in North American conventional natural gas. In addition, natural decline in fields also contributed to the weak production that was partly mitigated by production from key projects and drilling ventures.

Average realized price for oil was $105.56 per barrel, compared with $112.95 in the year-earlier quarter. The price for natural gas was $4.41 per thousand cubic feet (Mcf) versus $5.50 realized in second quarter 2011.

Financials

As of June 30, 2012, ConocoPhillips generated $3.0 billion in cash from continuing operating activities (excluding working capital). At quarter end, the company had total cash of $6.0 billion and $23.0 billion in debt, with a debt-to-capitalization ratio of 33%.

The company repurchased 52 million shares, or 4% of shares outstanding, for $3.1 billion, thus bringing the total to 20% of shares outstanding since the inception of the repurchase program in 2010. ConocoPhillips also paid $800 million in dividends and incurred $4.0 billion in capital expenditures.

Guidance

ConocoPhillips maintained its full-year 2012 production guidance in the range of 1.55-1.60 MMBOE/d, depending on the timing of disposals. Earlier, the company had disclosed that it expects production growth to average between 3% and 5% in the next five years, as it focuses on liquid-rich ventures primarily in the U.S. and Canada.

Recommendation & Rating

We have a long-term Underperform recommendation on ConocoPhillips – the third biggest U.S. integrated oil company, following ExxonMobil Corporation ( XOM - Analyst Report ) and Chevron Corporation ( CVX - Analyst Report ) – supported by a Zacks #5 Rank (short-term Strong Sell rating).