Conoco Beats, Falls Y/Y

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ConocoPhillips (COP) reported fourth quarter 2012 adjusted earnings of $1.43 per share, surpassing the Zacks Consensus Estimate of $1.41. However, the reported figure fell almost 7.7% from the year-earlier profit of $1.55. The year over year underperformance mainly reflects weak oil and gas prices.

Revenues in the reported quarter increased to $16,366.0 million from the year-ago level of $16,118.0 million and comfortably surpassed our projection of $11,996.0 million.

In 2012, adjusted earnings of $5.37 per share dropped 6.6% from the year-ago profit level of $5.75 and also missed the Zacks Consensus Estimate of $5.87 by 8.5%.

Full-year total revenue of $62,004 million dropped 6.2% from $66,069 million in 2011.

Exploration and Production

Daily production averaged 1.607 million barrels of oil equivalent (:MMBOE) in the quarter, up marginally by 0.6% from 1.597 MMBOE in the year-ago quarter. The improvement was mainly attributable to the production from new fields as well as upstream ventures from key projects associated with higher production in China and Libya. This was partly offset by the natural decline in fields and downtime.

Full-year production of 1.578 MMBOE per day decreased by 2.5% from the year-earlier production level of 1.619 MMBOE/d.

Price Realization

Weak commodity prices across all set of categories adversely affected the company’s quarterly earnings. Overall price realization dropped 3.6% to $67.45 per BOE from $69.99 per BOE in the fourth quarter of 2011.

Average realized price for oil was $103.08 per barrel compared with $105.92 in the year-earlier quarter. The price for natural gas was $5.79 per thousand cubic feet (Mcf) versus $5.88 realized in fourth quarter 2011, reflecting a decrease of 1.5%. Natural gas liquids (NGL) were sold at $44.93 per barrel, a decrease of 18% from the year-ago level of $55.06 per barrel. The company’s bitumen prices tumbled 31% year over year to $48.31 per barrel.

Financials

At the end of the fourth quarter, ConocoPhillips generated $4.27 billion in cash from continuing operating activities (excluding working capital). As of Dec 31, 2012, the company had total cash and cash equivalents of $3. 62 billion and $21.7 billion in debt, with a debt-to-capitalization ratio of 31%.

ConocoPhillips also paid $3.3 billion in dividends during 2012 and incurred $15.7 billion in capital expenditures during the year.

Asset Sale Program

The company has generated $2.1 billion in proceeds from asset sales for the full year, and expects to raise an additional $9.6 billion from the disposition program by mid-2013.

Guidance

For the first quarter of 2013, daily production is expected in the band of 1,580–1,600 thousand barrels of oil equivalent (:MBOE). For full-year 2013, production is expected in the 1,475–1,525 MBOE per day range.

The ongoing ramp-up in major North American programs, mainly in the Eagle Ford and oil sands continue to contribute favorably to production.

The company also remains on track to deliver average annual production as well as margin growth of 3% to 5%, as it focuses on liquid-rich ventures primarily in the U.S. and Canada.

Outlook

With leading positions in both natural gas and heavy crude oil in North America, as well as a legacy position in the North Sea and growing exposure to lucrative international regions, ConocoPhillips expects to replace reserves and sustain production growth over the long term. ConocoPhillips' exploration initiatives toward liquids-rich plays are gaining momentum through the Eagle Ford, Bakken and North Barnett shale plays.

The Houston-based company said that its preliminary proved reserves were 8.6 billion BOE as of Dec 31, 2012, and Organic Reserve Replacement of 2012 will likely be 156%. This addition of proved reserve was mostly from its holdings in the Canadian oil sands.

The company also remains on track to shift its focus to the liquid-rich areas. In Canada and the lower 48 U.S. states, the percentage of liquids in production surged to 48% in the fourth quarter 2012 from 43% in the year-ago period. ConocoPhillips remains upbeat about its output in its Eagle Ford and Bakken holdings in the U.S.

Although the company experienced growth in production in the quarter, its full-year production level decreased. Again, ConocoPhillips completed the spin-off of its refining/sales business into a separate, independent and publicly traded company, Phillips 66 (PSX) last year. With this, ConocoPhillips has shifted its total focus to upstream operations and thus oil and gas prices play a major role in determining its performance.

We believe that any downtrend in the global economy will affect the supply-demand fundamentals of oil and gas, hurting the sales prices for crude oil and natural gas.

We have a Zacks Rank #3 Rank (Hold) for ConocoPhillips – the third biggest U.S. integrated oil company after ExxonMobil Corporation (XOM) and Chevron Corporation (CVX).
 

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