ConocoPhillips’ increased liquids production drives higher margins

Market Realist

Must-know: Key takeaways from ConocoPhillips’ Q2 earnings (Part 6 of 8)

(Continued from Part 5)

Price realization

For the second quarter, realized crude oil prices amounted to $103.53 per barrel—3.3% higher than last year. NGLs sold for $39.93 per barrel compared to $37.24 per barrel the year before—an increase of 7.2%. Bitumen (ultra-heavy oil produced in Canada) prices increased 18.2% year-over-year to $65.82 per barrel. Meanwhile, natural gas prices jumped by 8.29% to $6.66 per thousand cubic feet this quarter.

Higher realized prices across all commodities

The total average price for the quarter was $70.17 per barrel—5% higher than last year’s prices. Brent prices were supported by geopolitical tensions and strong U.S refinery runs, while natural gas prices rallied in the beginning of the year due to severe winter. Bitumen prices also spiked as a result of high refinery run rates and increased rail volumes.

 

Cash margins for the quarter were $31.78 per BOE—11% higher year-over-year but ~1% lower quarter-over-quarter. The company noted that discontinued operations in Libya and increased liquids production in the Lower 48 helped increase cash margins.

Company outlook

COP noted in its earnings release that cash margins will remain volatile on a quarter-by-quarter basis. But as it shifts to higher value products (liquids), and following the heavy maintenance work scheduled for the third quarter, the company will see stronger margins—in line with its growth objective of achieving 3%–5% margin growth in 2014.

Industry outlook

Crude and natural gas prices have both been trending downwards of late. Oil prices are affected by macroeconomic factors among others factors, while natural gases act based on the weather.

Lower prices affect the sales prices of oil and gas companies like ConocoPhillips (COP), Chevron Corp. (CVX), ExxonMobil (XOM), and EOG Resources (EOG). All these companies are components of the Energy Select Sector SPDR ETF (XLE).

Performance

The following part of this series assesses how COP has been doing in the market.

Continue to Part 7

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