Conoco Profit Exceeds Estimates; Gas Output Cuts Planned

ConocoPhillips (COP) reported fourth- quarter profit that surpassed analysts’ estimates as the producer said it plans to idle some natural-gas wells because of low prices and focus on boosting output of petroleum liquids such as crude.

The company will shut about 100 million cubic feet of daily gas production this quarter out of 2.5 billion cubic feet a day in Canada and the lower 48 U.S. states, Chief Financial Officer Jeff Sheets said in a telephone interview today. Sheets said gas, which touched a 10-year low this month and is trading for less than $3 per million British thermal units, may remain “soft for another year or two.”

Gas prices ultimately need to rise to a level to generate long-term supply, such as $5 or $6, Sheets said. ConocoPhillips, based in Houston, is pushing ahead with onshore U.S. projects in areas rich in liquids such as the Eagle Ford and Bakken formations. Eagle Ford daily output in Texas may double to the equivalent of 100,000 barrels of oil by the end of this year from more than 50,000 barrels in late December, the company said.

“I’m a big believer that these unconventional shale plays are going to be the source of future growth for them,” said Gianna Bern, president of Brookshire Advisory & Research Inc. in Chicago. At the same time, she said, “you’re going to see many producers begin to pull back on the natural-gas side” until prices improve.

North American Gas

Economics remain favorable for production that is associated with output of oil and natural-gas liquids, Sheets said. Some partners may not want to idle other gas production because they want to continue receiving cash flow, he said.

ConocoPhillips said it’s limiting investment in North American gas production, which comprised about 26 percent of output last year.

The company said output of oil and gas in the fourth quarter fell 7.6 percent from a year earlier following asset sales and suspensions of projects in Libya and China. ConocoPhillips said quarterly production was the equivalent of about 1.6 million barrels of oil a day, surpassing a previous daily forecast of 1.56 million to 1.58 million barrels.

ConocoPhillips fell 0.89 percent to $69.68 at the close in New York. Before today, the stock had declined 3.1 percent this year.

Revenue Increases

ConocoPhillips said it bought more than 100,000 acres in North American shale projects that are rich in petroleum liquids, taking its shale acquisitions to more than 500,000 acres in 2011. ConocoPhillips’s daily output from North American projects in the Bakken, Permian and Eagle Ford may rise to the equivalent of about 270,000 barrels of oil in several years from 120,000 barrels, Sheets said.

Net income in the fourth quarter climbed 66 percent to $3.39 billion, or $2.56 a share, from $2.04 billion, or $1.39, a year earlier, Houston-based ConocoPhillips said in a statement today. Profit excluding gains on pipeline asset sales and one- time costs was about $2.02 a share, 22 cents more than the average of 18 analysts’ estimates compiled by Bloomberg.

The company said fourth-quarter revenue rose 17 percent from a year earlier to $62.4 billion.

“ConocoPhillips continues to hit on all cylinders,” said Brian Youngberg, an analyst at Edward Jones in St. Louis who has a “buy” rating on ConocoPhillips shares and owns none. “Production was slightly higher than the company had guided toward and the refining and marketing decline in earnings was not as great as generally anticipated.”

Refining, Marketing

Refining and marketing income fell 2.9 percent to $201 million, excluding gains from asset sales. Refiners including Tesoro Corp. and Marathon Petroleum Corp. warned of losses in the quarter as profit margins narrowed on rising oil prices.

ConocoPhillips plans to spin off its refining business in the second quarter so it can focus on finding and producing oil and natural gas. The new company will be known as Phillips 66 and will trade under the symbol PSX.

ConocoPhillips is in the midst of a three-year plan to sell $15 billion to $20 billion of assets by the end of 2012 to fund share repurchases and position itself for future growth.

The company may have daily production of about 1.6 million barrels of oil equivalent in 2012, excluding possible asset sales, Sheets said on a conference call with analysts and investors today. That forecast assumes rising production from Libya and Bohai Bay in China, which was the site of an oil spill.

Oil Price Boost

Brent crude futures, a benchmark oil price used by much of the world, climbed 25 percent from a year earlier to average $109.02 a barrel in the quarter. Natural-gas futures traded in New York averaged $3.48 per million British thermal units in the quarter, a decline of 13 percent from a year earlier. Gas this month traded at the lowest price since 2002.

Unrest in Libya caused ConocoPhillips to suspend production from that country last year. The company’s net oil output from Libya averaged about 46,000 barrels a day in 2010, according to a regulatory filing. Production from Libya is about 20,000 barrels a day currently, Sheets said today.

To contact the reporter on this story: Edward Klump in Houston at eklump@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net

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