Sunday, July 29, 2012

Conoco earns $551M; Second quarter earnings down on production, prices; Conoco gives tax data

Eric Lidji
For Petroleum News

ConocoPhillips earned $551 million in Alaska in the second quarter, down from $620 million earned in the first quarter on steadily declining production and lower oil prices, but a slight increase from adjusted earnings in Alaska during the same period last year.

“Our legacy asset in Alaska continues to operate well and provides strong earnings and production performance… The lower production was driven by natural gas field decline partially offset by improved drilling performance and lower unplanned downtime,” Chief Financial Officer Jeff Sheets said during a quarterly earnings call for analysts on July 25.

ConocoPhillips completed “a major turnaround at Kuparuk on schedule and on budget” during the second quarter and expects to lose between 40,000 to 50,000 barrels of oil equivalent per day during the third quarter as a result of planned turnaround activities.

In its first full quarter as an independent exploration and production company, ConocoPhillips is releasing detailed information from its business units — including information on revenue and taxation sure to add to the local debate on oil tax reform.

Looking ahead in Alaska, “we have opportunities to mitigate decline from incremental exploitation opportunities and we retain the option for some longer term projects such as [liquefied natural gas] exports of [Alaska North Slope] gas,” Sheets said. “However, future developments from Alaska are contingent upon some improved fiscal terms.”

But opponents of such changes drew a different conclusion for the earnings report.

“Under our current tax structure, ConocoPhillips is making huge profits from Alaska’s oil,” Sen. Bill Wielechowski, D-Anchorage, said in a statement. “While this is great news for ConocoPhillips and Alaskans, it calls into question the need for major tax rollbacks.”

ConocoPhillips earned $104 million in the Lower 48 and lost $94 million in Canada during the second quarter. Companywide, ConocoPhillips reported adjusted earnings of $1.5 billion, down from $1.8 billion quarter over quarter and $2.3 billion year over year.

The additional information also includes revenue figures for various business units.

ConocoPhillips brought in $856 million in Alaska before income taxes — a figure that does not include the impact of other taxes and royalties in the state — down from $983 million in the first quarter but up from $781 million in the second quarter of 2011.

The company earned $207 million before income taxes in the Lower 48 and Latin America and lost $134 million before income taxes in Canada during the second quarter.

Companywide, ConocoPhillips earned $4 billion before income taxes during the second quarter, down from $4.4 billion quarter over quarter and $4.5 billion year over year.

Production declining

The quarter saw continued production declines for ConocoPhillips in Alaska.

The largest producer of oil in the state had an output of 215,000 barrels of oil equivalent per day in Alaska in the second quarter, down nearly 9 percent quarter over quarter and nearly 8 percent year over year. Companywide, ConocoPhillips produced 1.54 million boe per day during the second quarter, down nearly 6 percent both quarter over quarter and year over year.

Although natural gas production dropped in the quarter, the decline in Alaska production came largely from oil. ConocoPhillips produced 190,000 barrels of oil per day in Alaska in the second quarter, down some 9 percent both quarter over quarter and year over year.

Even with those continuing declines, though, Alaska remains the most prolific oil-producing region in the ConocoPhillips portfolio. By comparison, the company produced 115,000 bpd in the Lower 48. However, Lower 48 oil production is up 30 percent year over year as the company expands in unconventional oil plays, particularly the Eagle Ford Shale of South Texas, the Williston Basin of North Dakota and Canadian oil sands.

Companywide, ConocoPhillips produced 608,000 bpd in the second quarter.

ConocoPhillips reported an average price of $112.38 per barrel for Alaska liquids during the second quarter, roughly even with prices quarter over quarter and year over year.

While oil production is declining in Alaska, natural gas liquids production is steadier.

ConocoPhillips produced 16,000 bpd of NGLs in Alaska in the second quarter, down from 18,000 bpd during the first quarter but even to the second quarter of 2011. By comparison, ConocoPhillips produced 83,000 bpd in the Lower 48 (up from 72,000 bpd year over year) and 154,000 bpd companywide (up from 146,000 bpd year over year).

But natural gas production dropped.

ConocoPhillips produced 56 million cubic feet per day of natural gas in Alaska in the second quarter, down 5 percent quarter over quarter and nearly 10 percent year over year.

By comparison, the company produced 1.4 billion cubic feet per day from its Lower 48 operations and 864 million cubic feet per day from its Canadian operations during the quarter. Companywide, ConocoPhillips produced 4.1 bcf per day in the second quarter.

ConocoPhillips reported an average price of $3.93 per thousand cubic feet for Alaska gas during the second quarter, down from $4.68 per mcf in the first quarter and $4.66 per mcf in the second quarter of 2011. Because of a supply glut from shale plays, though, those relatively low prices are still higher than the $2.10 per mcf average from the Lower 48.

Taxation tops a billion

As part of its expanded reporting, ConocoPhillips is providing quarterly and annual effective income tax rates for continuing operations across its various business units.

The Alaska unit reported an effective income tax rate of 35.7 percent in the second quarter, compared to an average rate of 37.1 percent for all of 2011. The Alaska rate is well below the ConocoPhillips companywide average of 57.1 percent across all its units in the second quarter, and lower than every other individual unit listed beside Canada (29.8 percent) and the combined Asia Pacific and Middle East unit (27.1 percent).

But when non-income taxes are included, the effective tax rate in Alaska jumps to 63.9 percent rate. ConocoPhillips did not include corresponding figures for other units.

In the second quarter, ConocoPhillips paid around $1.25 billion in taxes and royalties on its operations in Alaska, including $983 million paid to the state of Alaska in severance taxes, royalties, property taxes and state income tax, or around $11 million per day.

“The very high government take on the North Slope created by Alaska’s tax structure negatively impacts the investment climate. We believe a better balance between government and producer share would stimulate additional investment in legacy fields and increases in production and jobs,” Bob Heinrich, vice president of finance for ConocoPhillips Alaska said in a statement, pointing to higher spending outside the state.

Since ACES went into effect, tax payments in Alaska have been roughly double earnings in the state, according to the company. In the first half of 2012, ConocoPhillips earned some $1.2 billion in Alaska and paid some $2.8 billion in state and federal obligations.
The Alaska Legislature recently completed another session where the debate over oil taxes took center stage, but lawmakers failed to agree to his changed to the tax code.

For Wielechowski, though, the earnings prove Alaska “is one of the most profitable places in the world for the oil and gas industry.” He added: “This earnings report is another reason Alaskans should continue to fight for our fair share. It’s right here in black and white. Oil companies are making very strong profits in Alaska. We have jobs at an all-time high under ACES. And finally, we have many more companies doing business in the state of Alaska. ACES is truly a win-win situation for everyone involved.”

Capital spending up

ConocoPhillips spent $202 million on capital expenditures and investments in Alaska in the second quarter, up from $196 million in the second quarter of 2011, but considerably less than in the Lower 48 and Latin America ($1.3 billion) and Canada ($428 million).

ConocoPhillips reported $133 million in depreciation, depletion and amortization in Alaska in the second quarter, down from $135 million quarter over quarter and $151 million year over year. The company reported $1.6 billion in DD&A across all units.