Aggressive Even After a Bad Quarter
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ConocoPhillips (NYSE: COP), the second biggest independent oil and natural gas upstream company in the US in terms of market value after Occidental Petroleum (NYSE: OXY), has reported a 33% decline in its revenues compared to the previous year, same quarter.
ConocoPhillips in its first quarterly reports as only an exploration and production company reported a profit of $2.27 billion, or $1.80 a share, down from $3.4 billion, or $2.41 a share, a year earlier. The decrease in profit was mainly due to three reasons- decrease in price, less production and the spin off of the downstream business.
Let’s dig deeper:
The average realized price of crude oil dropped by 6.5% while natural gas fell by 20% in the second quarter, when compared with the same period last year. The concern over the performance of China’s economy followed by the fear of Europe being hit by another recession led to the downfall in the crude price. The weaker prices have also affected other oil and natural gas companies like Hess (NYSE: HES), which also reported a decrease in profit.
The decrease in price led oil companies to curtail production, and Conoco was no exception. Production declined by about 6 percent, as Conoco had forecasted, to 1.54 million barrels of oil (mbo) a day from 1.64 mbo a day because of asset sales, maintenance and curbing of conventional North American gas.
Conoco also spun off its downstream business with the creation of Phillips 66 (NYSE: PSX), a strategic decision that was also implemented by Marathon Oil to form its refinery business Marathon Petroleum last year. This also resulted in less earnings with revenue recognized from the downstream segment only until the month of April, 2012.
What the future holds?
Conoco has been on a selling spree and is trying to shed off assets related to refineries, pipeline, and other assets that strategically don’t fit in its business model to remake itself as an independent oil and gas producer. Conoco has already sold billions of assets and also plans another $8 to $10 billion of asset sales by the middle of 2013.
This has led to the decline in both production and profit for the company, but Conoco is determined to spring back to higher production and has continued to invest heavily on exploration, production and other projects. Conoco is emphasising on the unconventional oil plays and is milking on its presence there. Conoco already has increased its production from the Eagle Ford Shale in Texas and the Bakken in North Dakota by around 50,000 barrels of oil equivalent a day and is also expected to increase its natural gas production by 10,000 to 12,000 barrels of oil equivalent a day, from its curtailed North American gas operations due to weaker prices.
With prices of natural gas looking to improve, Conoco is all geared up to increase its production and is spending heavily as a result. But the only thing to care about is the source of financing such aggressive spending to increase production, as its planned spending is higher than its operating cash flow. Only time will tell if Conoco can achieve its target of asset sales to invest in better production activities. The stock is worth watching.
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