--ConocoPhillips earnings down 33% after spinoff of refining,
midstream and chemicals business
--Earnings beat analyst expectations
--Analysts caution about cash-flow issues, but company expects
to break even by 2016
(Updates throughout, including with comment from CFO.)
By Alison Sider
ConocoPhillips's (COP) second-quarter earnings fell 33% during
its first reporting period as a stand-alone producer of oil and
gas, beating Wall Street forecasts even as low oil prices cut into
on-target production results.
The Houston-based oil giant, the biggest independent oil and gas
company in the U.S. by production, posted a second-quarter profit
of $2.27 billion, or $1.80 a share, down from $3.4 billion, or
$2.41 a share, a year earlier. Excluding write-downs, asset gains
and other items, earnings from continuing operations were $1.5
billion, or $1.22 a share, down from $2.3 billion, or $1.64 a
share, a year ago. Analysts polled by Thomson Reuters most recently
projected earnings of $1.17 a share. The latest period includes one
month of earnings related to discontinued operations at its former
refining business, which was spun off as Phillips 66 (PSX) in late
April.
Investors seemed unimpressed by the beat, however. Conoco shares
were down 2.7% at $53.15. Analysts pointed to higher-than-forecast
capital expenses and dividend payments exceeding cash flow during a
global economic slowdown that has prompted a sharp reduction in oil
prices. The market is taking "a negative view of the company's
ability to maintain the high dividend and the high capital
spending," said Oppenheimer & Co. analyst Fadel Gheit.
ConocoPhillips, which is in the midst of a major production
ramp-up, says its capital budget will total $16 billion this year,
about $1 billion more than previously expected, and will be about
$15 billion next year. It also expects to spend one-fifth to
one-quarter of its cash flow on dividends to lure investors. Chief
Financial Officer Jeff Sheets said in an interview that by
increasing oil production and margins, the company expects to
generate enough cash flow to cover capital expenditures and
dividends by 2016, in any kind of price scenario. "At current price
levels, it happens before that," and even sooner if prices rise,
Mr. Sheets said.
"We feel like the investments we're making make sense in a broad
range of price environments," Mr. Sheets said.
ConocoPhillips, a large producer of natural gas, is investing
heavily to produce more oil, which is far more profitable at
current price levels. It now seeks to expand its operations in
unconventional oil plays. In the second quarter, it produced 50,000
barrels of oil equivalent more a day than last year in areas such
as the Eagle Ford Shale in Texas and the Bakken in North Dakota. In
these places, Conoco and other companies apply horizontal drilling
and hydraulic fracturing techniques to unlock large amounts of oil
and gas.
"These are projects that will generate growth, margin
improvements and returns," Chief Executive Ryan Lance said. "For
that reason, we do not think it's prudent to reduce our capital
spending at this time."
Another reason for the expected increase in capital expenditures
is that the company has pushed back somewhat the timing of planned
sales of some of its assets. Mr. Sheets said that it was because
some of these assets are complex and the company seeks to maximize
the price it would obtain. The asset sales are part of the
company's bid to improve its balance sheet, started under former
CEO Jim Mulva.
This year so far, the company has sold $1.6 billion in assets,
and expects to realize $8 billion to $10 billion when the last deal
closes, which the company said will likely be in mid-2013.
Mr. Sheets said that despite recent gains in natural-gas prices,
which have risen above $3 per million British thermal units, he
doesn't expect to see much investment in natural gas until prices
approach the $5-to-$6/mmBtu range. ConocoPhillips, which bought
large conventional natural-gas producer Burlington Resources in the
middle of the last decade, has plenty of assets that don't require
much spending and that could be ramped up at that point, Mr. Sheets
said.
Conoco's former refining arm, Phillips 66, is set to release its
first quarterly report as a publicly traded company Aug. 1.
Write to Alison Sider at alison.sider@dowjones.com
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