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Wednesday, April 27, 2011

ConocoPhillips 1Q Earnings Increase to $3B

Wednesday, April 27, 2011

ConocoPhillips reported first-quarter earnings of $3.0 billion, compared with first-quarter 2010 earnings of $2.1 billion. Excluding gains from asset dispositions, first-quarter 2011 adjusted earnings were $2.6 billion, or $1.82 per share.

"While our financial results were much improved from a year ago, E&P production and R&M capacity utilization did not meet our targets," said Jim Mulva, chairman and chief executive officer. "The quarter was negatively impacted by approximately $200 million from unplanned downtime and from variable compensation expense related to prior-year performance."

Exploration and Production's (E&P) first-quarter 2011 adjusted earnings were higher, compared with the same period in 2010, primarily due to higher prices, partially offset by lower volumes and higher taxes.

Production for the first quarter of 2011 was 1.7 million barrels of oil equivalent (BOE) per day, a decrease of about 125,000 BOE per day versus the same period in 2010. Field decline, primarily in the North Sea, Lower 48, China and Alaska, decreased production by approximately 190,000 BOE per day, which was largely offset by about 180,000 BOE per day of new production and improved well performance. The new production was primarily from the company's Qatargas 3 project, Bohai Bay's development optimization program and the liquids-rich shale plays in the Lower 48. Unplanned E&P downtime, primarily from the temporary shutdown of the Trans Alaska Pipeline System in January, a supply vessel collision with the company's Britannia platform and civil unrest in Libya, adversely impacted production by about 65,000 BOE per day. Asset dispositions in 2010 and the first quarter of 2011 also negatively impacted year-over-year production by approximately 50,000 BOE per day.

The unplanned E&P downtime of approximately 65,000 BOE per day reduced earnings for the quarter by about $100 million.

"Consistent with our strategy, we continue to build our Exploration portfolio of high-impact drillable prospects and expand our positions in world-class shale opportunities," added Mulva.

During the quarter, significant exploration activities included the acquisition of two Norwegian blocks in the Barents Sea, the spudding of the Peking Duck wildcat well in the North Sea and the acquisition of 33,000 net acres in the emerging Wolfcamp shale play in North America. In the Lower 48 shale plays of Eagle Ford, North Barnett and Bakken, exploration and development continues with 20 operated rigs currently drilling. Results from these programs continue to meet or exceed expectations.

"While we had significant improvement in earnings from our downstream business, we did not capture all the market opportunities available to us due to downtime at several refineries," said Mulva.

Refining & Marketing's (R&M) first-quarter 2011 earnings were higher than the corresponding period of 2010, primarily due to improved global refining margins. Improved market crack spreads were partially offset by weaker crude differentials and lower secondary product margins. The U.S. refining crude oil capacity utilization rate was 87 percent and the international rate was 96 percent in the quarter.

"For the quarter, earnings would have been about $50 million higher if we had operated our U.S. downstream at planned levels," said Mulva.

During the quarter, R&M's working capital increased $2.0 billion, adversely impacting cash from operations. The increase was primarily related to management of the company's discretionary inventory position. An earnings benefit of about $50 million was recognized this quarter related to trading around these inventory positions. Later this year, ConocoPhillips expects to recognize an additional $50 million of earnings from inventory positions taken in the first quarter of 2011.

The Chemicals segment posted record earnings of $193 million in the first quarter. The strong earnings were due to higher margins, mostly in olefins and polyolefins, as well as lower costs. The Midstream segment's results for the first quarter of 2011 were in line with the first quarter of 2010.

Corporate expenses for the quarter of $304 million after-tax were improved slightly compared with the first quarter of 2010. Although interest expense decreased due to reduced debt levels, higher benefit-related expenses and taxes nearly offset the improvement.

Controllable costs were flat for the quarter compared with a year ago. However, variable compensation expense related to prior-year performance negatively impacted earnings for the quarter by approximately $50 million after-tax.

The company completed the sale of its OAO LUKOIL shares in the first quarter. In addition, ConocoPhillips repurchased 21 million of its own shares for $1.6 billion and increased the quarterly dividend rate by 20 percent to 66 cents per share.

Also during the quarter, the company announced plans to sell an additional $5 billion to $10 billion of noncore assets over the next two years. Proceeds from the increased asset sales are expected to be used primarily to fund the company's recently announced $10 billion share repurchase program and for capital investment opportunities.

"We remain focused on delivering value through improving returns, increasing shareholder distributions and growing production and reserves per share," said Mulva.

First-Quarter Financial Highlights

For the first quarter of 2011, ConocoPhillips reported earnings of $3.0 billion, or $2.09 per share, compared with earnings of $2.1 billion, or $1.40 per share, for the same period in 2010. First-quarter 2011 earnings included $394 million in gains from North American asset sales and LUKOIL share dispositions.

First-quarter 2011 adjusted earnings were $2.6 billion, or $1.82 per share, compared with adjusted earnings of $2.2 billion, or $1.47 per share, for the same period in 2010. Adjusted earnings for the quarter increased versus the prior year, primarily due to the impact of higher commodity prices and global refining margins. This increase was partially offset by lower production volumes, the absence of equity earnings from LUKOIL and higher taxes.

During the first quarter of 2011, ConocoPhillips generated $4.0 billion in cash from operations excluding working capital increases of $2.1 billion, resulting in cash from operations of $1.9 billion. In addition, the company received $1.8 billion in proceeds from asset dispositions. These proceeds plus available cash were used to fund a $3.1 billion capital program, repurchase $1.6 billion of ConocoPhillips common stock, pay $0.9 billion in dividends and reduce debt by $0.4 billion. At March 31, 2011, the company's cash and short-term investments were $8.4 billion, including cash and cash equivalents of $6.2 billion. The company ended the quarter with debt of $23.2 billion and a debt-to-capital ratio of 25 percent.

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