Conoco Profit Falls on Lower Production, Refining

ConocoPhillips Net Income Falls as Asset Sales Cut Production
The ConocoPhillips Co. refinery in Richmond, California. Photographer: David Paul Morris/Bloomberg

ConocoPhillips, the U.S. oil company that plans to spin off its fuel-processing and pipelines business next week, said first-quarter profit fell 3 percent because of production declines and lower refining earnings.

Net income dropped to $2.94 billion, or $2.27 a share, from $3.03 billion, or $2.09, a year earlier, Houston-based ConocoPhillips said in a statement today. Profit excluding one-time costs and gains related to asset sales and writedowns was about $2.02 a share, 6 cents less than the average of 16 analysts’ estimates compiled by Bloomberg.

ConocoPhillips’s refining profit dropped 6.2 percent in the quarter from a year earlier to $452 million, missing a Raymond James estimate for more than $600 million from the segment. General and administrative expenses surged 37 percent from a year earlier to $685 million, topping Raymond James’s estimate of about $500 million.

The weaker earnings report “just kind of looks bad” considering the company is about to spin off its refining unit, said Stacey Hudson, a research associate at Raymond James whose firm has a market perform, or hold, rating on ConocoPhillips shares.

Production Focus

ConocoPhillips fell 0.8 percent to $72.33 at the close in New York.

ConocoPhillips will focus on finding and producing oil and natural gas after spinning off its refining, chemical and pipeline businesses as Phillips 66 at the end of the month. Regular trading for the separate companies begins May 1. ConocoPhillips has been selling assets and buying back shares as part of a three-year restructuring.

Revenue in the first quarter totaled $58.4 billion, little changed from $58.2 billion a year earlier. The company had $239 million of earnings related to Russia’s OAO Lukoil in the first quarter of 2011, compared with none this year after it sold its stake in the producer.

Profit from producing oil and gas declined 3 percent from a year earlier, excluding one-time costs and gains, to $2.13 billion in the quarter.

The company said first-quarter output of oil and gas fell 3.8 percent to the equivalent of about 1.64 million barrels of oil a day, citing asset sales and a suspension in China’s Bohai Bay. For 2012, ConocoPhillips said it expects production to be 1.55 million to 1.6 million barrels a day, depending on the timing of asset sales.

Curtailing Gas Production

North American gas production was the equivalent of 18,000 barrels a day lower in the first quarter than a year earlier, with about half of that from curtailments, Chief Financial Officer Jeff Sheets said on a conference call with analysts and investors today.

Some natural-gas liquids prices didn’t move up along with crude prices, Sheets said, though the company’s plan to boost margins hasn’t changed. ConocoPhillips has said it sees annual 3 percent to 5 percent production and profit-margin increases in coming years.

The company’s focus on crude and petroleum liquids, which fetch higher prices than gas, was seen throughout its North America results.

About 60 percent of ConocoPhillips’s production in Texas’ Eagle Ford Shale is crude or condensate, while 20 percent is gas liquids and 20 percent is gas, Sheets said. Output in the Bakken in the northern U.S. is about 90 percent crude, he said. The company estimated at least half of its Permian Basin production is related to crude.

Asset Sales Target

The company is targeting $8 billion to $10 billion of asset sales over the next 12 months, Sheets said. ConocoPhillips plans to complete $5 billion of share repurchases in the first half of the year, with additional repurchases possible following asset sales, he said.

Brent crude futures, a benchmark oil price used by much of the world, climbed 12 percent from a year earlier to average $118.45 a barrel in the first quarter. Gas futures traded in New York tumbled 40 percent to average about $2.50 per million British thermal units.

Chemical profit in the first quarter rose 13 percent from a year earlier to $218 million, while midstream earnings climbed 27 percent to $93 million.

ConocoPhillips leads major U.S. oil companies in reporting first-quarter earnings. Exxon Mobil Corp., the largest U.S. oil company, plans to release results on April 26, followed by Chevron Corp., the second-biggest U.S. oil company, on April 27.

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