ConocoPhillips Q2 Earnings Beat on Higher Prices and Volume

ConocoPhillips (COP) reported second-quarter 2014 adjusted earnings of $1.61 per share, surpassing the Zacks Consensus Estimate of $1.60 per share and increasing 14.2% from the year-earlier profit of $1.41. The year-over-year growth was mainly attributable to higher realized prices and volumes, partially offset by higher depreciation and operating costs.

Revenues in the reported quarter increased to $14,701 million from the year-ago level of $14,142 million and comfortably surpassed our projection of $14,404 million.

Exploration and Production

Daily production averaged 1.557 million barrels of oil equivalent (:MMBOE) in the quarter, up from 1.510 MMBOE in the year-ago quarter. This increase was primarily attributable to new production from development programs and major projects, partially offset by normal field decline.

Price Realization

Overall price realization increased 5% to $70.17 per BOE from $66.82 per BOE in the second quarter of 2013.

Average realized price for oil was $103.53 per barrel compared with $100.14 in the year-earlier quarter. Natural gas liquids (NGL) were sold at $39.93 per barrel, reflecting an increase of 7.2% from the year-ago level of $37.24 per barrel. The price for natural gas was $6.66 per thousand cubic feet (Mcf) versus $6.15 in second quarter 2013, reflecting an increase of 8.3%. The company’s bitumen prices jumped 18.2% year over year to $65.82 per barrel.

Financials

At the end of the second quarter, ConocoPhillips generated $3.6 billion in cash from continuing operating activities (excluding working capital). As of Jun 30, 2014, the company had total cash and cash equivalents of $6.1 billion and $21.2 billion in debt, with a debt-to-capitalization ratio of 28%. ConocoPhillips also paid $1.7 billion in dividends and incurred $8.1 billion in capital expenditures during the quarter.

Guidance

For the third quarter of 2014, daily production is expected in the band of 1,435–1,485 thousand barrels of oil equivalent (:MBOE), excluding Libya. ConocoPhillips expects to deliver 3–5% production growth in 2014. Excluding Libya, the company’s 2014 full-year production is expected in the band of 1,525–1,550 MBOED.

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.

Again, ConocoPhillips completed the spin-off of its refining/sales business into a separate, independent and publicly traded company, Phillips 66 (PSX) in 2012. With this, ConocoPhillips 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 of crude oil and natural gas.

ConocoPhillips currently carries a Zacks Rank #2 (Buy). One can also consider other energy sector stocks such as Newfield Exploration Co. (NFX) and Cameron International Corp. (CAM). Both these stocks currently sport a Zacks Rank #1 (Strong Buy).

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