Company plans to sell entire LUKOIL stake
- ConocoPhillips quarterly conference call is scheduled for 11 a.m. Eastern time today. To listen to the conference call and to view related presentation materials, click here. For detailed supplemental information, click here.
HOUSTON, July 28, 2010 --- ConocoPhillips [NYSE:COP] today reported second-quarter earnings of $4.2 billion, compared with second-quarter 2009 earnings of $0.9 billion. Excluding a net benefit of $1.7 billion, primarily from dispositions and an impairment, second-quarter 2010 adjusted earnings were $2.5 billion, or $1.67 per share.
"We had a solid quarter, with strong earnings and meaningful progress in executing our plans to create value," said Jim Mulva, chairman and chief executive officer. "E&P delivered production volumes and costs in line with expectations, while our R&M business benefited from improved global refining and marketing margins and higher U.S. refining capacity utilization rates. We are pleased to announce agreement with LUKOIL for the sale of a 7.6 percent interest in LUKOIL. This, along with our Syncrude and CFJ divestments, is consistent with our strategy to enhance returns."
"Over the past five years, ConocoPhillips and LUKOIL have worked closely together to develop opportunities in and out of Russia," Mulva added. "Our experience with LUKOIL and the Russian authorities has been positive, and we look forward to a productive relationship in the future. However, given the expected business environment and our stated strategy to enhance returns and increase distributions, we have made the decision to sell our entire stake in LUKOIL. We expect to accomplish this by the end of 2011, with the proceeds used primarily to repurchase ConocoPhillips shares."
ConocoPhillips and LUKOIL have reached an agreement under which approximately 64.6 million Russian registered shares will be purchased by LUKOIL for $3.44 billion. These shares represent a 7.6 percent interest in LUKOIL, or 40 percent of ConocoPhillips’ 163.3 million shares currently owned. This transaction is expected to close in the third quarter of 2010. The remaining 60 percent owned by ConocoPhillips are depositary receipts and are expected to be sold in open market transactions or to LUKOIL by the end of 2011.
Production from the Exploration and Production (E&P) segment for the second quarter of 2010 was 1.73 million barrels of oil equivalent (BOE) per day, compared with 1.87 million BOE per day in the same period in 2009. Approximately 140,000 BOE per day of the decrease was from normal field decline, primarily in North America, the United Kingdom and Norway. In addition, production was negatively impacted 50,000 BOE per day from planned maintenance, primarily reflecting the routine three-year turnaround in the Greater Ekofisk Area in Norway and the full shutdown at Bayu-Undan and the Darwin LNG plant in Australia. New production of 75,000 BOE per day in China, Canada and Indonesia partially offset these decreases. Excluding planned and unplanned downtime, as well as production sharing contract impacts, production for the second quarter of 2010 would have been approximately 1.8 million BOE per day.
In Exploration, ConocoPhillips successfully completed the drilling and testing of the Kronos-1 well on the Greater Poseidon structure off the northwest coast of Australia. Testing has validated the significance of this discovery, and additional appraisal activity is being conducted to fully assess the scope of future development.
In the Eagle Ford shale play, ConocoPhillips continued a five-rig drilling program. During the quarter, the company successfully drilled seven wells and completed five. Given the encouraging results to date, the company has allocated additional capital to this area, bringing the total to $450 million for full year 2010. The company expects to deploy at least five additional drilling rigs prior to year end.
Refining and Marketing (R&M) benefited from improved market conditions, with global refining market crack spreads improving more than 15 percent, compared with the same period last year. Realized refining margins improved more than $550 million and primarily reflect stronger distillate market cracks, as well as increased premium coke production. In the United States, distillate market cracks almost doubled from the low levels experienced a year ago, while internationally they improved nearly 50 percent. Realized marketing margins improved approximately $150 million, compared with a year ago, largely due to favorable market conditions.
The U.S. refining crude oil capacity utilization rate for the second quarter of 2010 was 96 percent, compared with 93 percent for the same period in 2009. The increase primarily reflects less unplanned downtime and turnaround activity. The international refining crude oil capacity utilization rate was 54 percent for the second quarter of 2010, compared with 72 percent for the same period in 2009. The decrease primarily reflects economic run cuts at the Wilhelmshaven Refinery, partially offset by less turnaround activity elsewhere. Excluding Wilhelmshaven, the international capacity utilization rate would have been 88 percent.
"As previously announced, we have cancelled our plans to upgrade Wilhelmshaven and will explore other options to improve shareholder value, including operating the facility as a terminal and pursuing the sale of the asset," added Mulva. "These moves are consistent with our strategy of improving returns through capital discipline and reducing our downstream presence over time."
The company’s second-quarter 2010 earnings from the Chemicals, Midstream and LUKOIL segments improved due to market conditions, compared with the same quarter in the prior year.
Adjusted Corporate expenses were $365 million after-tax for the quarter, compared with $157 million of expenses in the previous year. Approximately $150 million of the increase is due to foreign currency losses in the current quarter, compared with gains in the prior year, primarily resulting from the impact of the strengthening U.S. dollar against British pound and Canadian dollar financing transactions. Corporate expenses for the second quarter of 2010 were $389 million, compared with $157 million for the second quarter of 2009.
For the first six-months of 2010, controllable costs adjusted for market conditions, new project scope, and E&P turnaround activity were approximately $300 million lower, or 5 percent, compared with the same period in 2009. The improvement is equally split between the E&P and R&M segments. Controllable costs for the six-month period in 2010 were $6.4 billion, compared with $6.3 billion in the same period in 2009.
The Syncrude and the CFJ sales represent significant progress in achieving the company’s $10 billion disposition program. Proceeds from the program are expected to reach $7 billion to $8 billion by year end and will be targeted toward debt reduction.
ConocoPhillips’ second-quarter results were not significantly impacted by the current U.S. offshore drilling moratorium, as less than one percent of the company’s oil and natural gas production comes from the impacted areas. However, as recently announced, ConocoPhillips is participating with peers in a plan to build and deploy a rapid response system designed to improve the industry’s capability to contain oil in the event of a potential future underwater well blowout in the deepwater Gulf of Mexico.
"There has been heightened public focus on the safety of the oil and gas industry during this past quarter, and we are committed to improve our ability to respond immediately to offshore incidents," said Mulva. "Safety and environmental stewardship, including the operating integrity of our assets, remain our highest priorities."
2010 Financial Highlights
Second-quarter 2010 adjusted earnings were $2.5 billion, or $1.67 per share, compared with adjusted earnings of $1.0 billion, or $0.66 per share, for the same period in 2009. Adjusted earnings increased versus the prior year, primarily due to higher commodity prices and global refining and marketing margins, partially offset by lower production volumes. For the second quarter of 2010, ConocoPhillips reported earnings of $4.2 billion, or $2.77 per share, compared with earnings of $0.9 billion, or $0.57 per share, for the same period in 2009.
ConocoPhillips’ adjusted earnings for the first six months of 2010 were $4.7 billion, compared with adjusted earnings of $1.7 billion in the corresponding period of 2009. Adjusted earnings for 2010 were higher than 2009, primarily due to higher commodity prices and global refining and marketing margins, partially offset by higher taxes and lower production volumes. Six-month 2010 earnings were $6.3 billion, compared with $1.7 billion for the same period of 2009.
During the second quarter of 2010, the company generated $3.5 billion in cash from operations and $5.8 billion in cash proceeds from asset dispositions. This cash was used to pay $2.7 billion of debt, fund a $2.2 billion capital program, repurchase $0.4 billion of ConocoPhillips common stock and pay $0.8 billion in dividends. The company had a cash balance of $4.1 billion at quarter end, the majority of which will be used to pay down debt. As of June 30, 2010, debt was $26.3 billion and the debt-to-capital ratio was 28 percent. After considering the ending cash balance, the second-quarter 2010 net-debt-to-capital ratio was 25 percent.
ConocoPhillips will host a conference call at 11 a.m. Eastern time today to discuss its quarterly results and provide a status update on operational and strategic plans. To listen to the conference call and view related presentation materials, go to