ConocoPhillips Reports 'Solid' 2Q Earnings of $3.4B

- ConocoPhillips Reports 'Solid' 2Q Earnings of $3.4B

Wednesday, July 27, 2011
ConocoPhillips

ConocoPhillips reported $3.4 billion second-quarter earnings and $3.4 billion adjusted earnings. This compares with second-quarter 2010 earnings of $4.2 billion and adjusted earnings of $2.5 billion.

Second-Quarter Highlights

• Production of 1.64 million BOE per day
• Worldwide refining capacity utilization rate of 91 percent
• Repurchased 3 percent of ConocoPhillips shares
• Improved E&P and R&M margins
• Annualized ROCE of 15 percent
• Announced plan to create two leading energy companies

"We had a solid quarter," said Jim Mulva, chairman and chief executive officer. "Higher adjusted earnings and cash flow were driven by better commodity prices and refining margins. Production performance was strong and capacity utilization of our refineries exceeded 90 percent." During the second quarter, ConocoPhillips repurchased 42 million of its own shares, or 3 percent of shares outstanding, for $3.1 billion. This brings the company's total shares repurchased to 9 percent of the shares outstanding at the inception of the repurchase program in 2010.

ConocoPhillips recently announced its Board had approved pursuing the separation of the company's Exploration & Production (E&P) and Refining & Marketing (R&M) businesses into two leading energy companies. "This is consistent with our strategy to create differentiated value for our shareholders," said Mulva. "Both companies will be uniquely positioned in their respective industries, with the management focus, financial strength and technical capability to successfully invest in the industry's highest returning projects."

The upstream company will be the largest U.S. pure-play E&P business, positioned for profitable growth from a rich resource base and a portfolio of quality investment opportunities. Production growth will come from investments in unconventional liquids-rich resource plays, SAGD oil sands, LNG, and ultimately from the company's vast natural gas position as that market recovers. The new downstream company will be a low-cost, integrated refining, marketing and transportation organization, with complex refining assets, an investment grade credit rating and significant financial flexibility. "We believe our investors will see significant long-term benefit from this repositioning, and we look forward to providing additional information about the transaction in September," added Mulva.

E&P's second-quarter 2011 adjusted earnings were higher, compared with the same period in 2010, primarily due to stronger commodity prices, partially offset by higher taxes. Production for the second quarter of 2011 was 1.64 million barrels of oil equivalent (BOE) per day, a decrease of approximately 90,000 BOE per day versus the same period in 2010. Excluding the impact of dispositions and the civil unrest in Libya, production exceeded levels from the second quarter of 2010 as new projects and lower downtime more than offset decline. Production per share, adjusted for Libya, increased 4 percent over the same period a year ago.

"Upstream operated well and we are seeing the benefits of our focus on margins and returns," said Mulva. “While our production fell, the earnings impact was limited as we shifted production from North American natural gas toward higher margin production of oil sands, Lower 48 liquids and LNG."

The company continues to expand its footprint in emerging exploration regions. ConocoPhillips signed a new deepwater production sharing contract in Bangladesh, was a successful bidder on acreage in the Canol shale play in northern Canada, and signed an agreement for a potential interest in the Goldwyer project in the Canning shale basin, onshore Western Australia. Year to date, the company added a total of 340,000 acres in North America resource plays.

R&M's second-quarter 2011 adjusted earnings were slightly higher than the same period of 2010, primarily due to improved U.S. refining margins. However, international refining margins were lower and costs were slightly higher driven by foreign exchange impacts. In the quarter, the U.S. refining crude oil capacity utilization rate was 90 percent and the international rate was 96 percent.

The Chemicals and Midstream segments posted strong earnings for the second quarter. The Chemicals segment's record earnings of $199 million were primarily due to higher margins, mostly in olefins and polyolefins, and higher volumes. Midstream earnings of $130 million were more than double that of a year ago, primarily due to improved natural gas liquids prices.

Corporate expenses for the quarter of $203 million after-tax were improved compared with the second quarter of 2010, primarily due to foreign exchange impacts and lower net interest expense. In addition, for the total company, controllable costs were flat through the second quarter compared with a year ago.

ConocoPhillips Contributions to Economic Growth

In addition to generating shareholder value, ConocoPhillips activities contribute substantially to job creation and economic growth in the communities in which we operate. During the first half of 2011, the company spent $6.5 billion on operating expenses, which supported jobs at ConocoPhillips and its suppliers. A further $6.1 billion was invested in capital projects helping to create new energy supplies and fuel additional job creation. ConocoPhillips distributed $6.6 billion to its wide shareholder base, which includes numerous state and local pension and investment funds that benefit millions of individual investors and retirees. In addition, $7.7 billion was paid to governments in the form of income, production and severance taxes.
Second-Quarter Financial Highlights

For the second quarter of 2011, ConocoPhillips reported earnings of $3.4 billion, or $2.41 per share, compared with earnings of $4.2 billion, or $2.77 per share, for the same period in 2010. Second-quarter 2011 earnings included an impairment for the Denali pipeline project cancellation, offset by gains from asset dispositions.

Second-quarter 2011 adjusted earnings were $3.4 billion, or $2.41 per share, compared with adjusted earnings of $2.5 billion, or $1.63 per share, for the same period in 2010. Adjusted earnings for the quarter increased compared with the prior year, primarily due to the impact of higher commodity prices and global refining margins, partially offset by the absence of equity earnings from LUKOIL and higher taxes.

During the second quarter of 2011, ConocoPhillips generated $6.3 billion in cash from operations. The company funded a $3.1 billion capital program, repurchased $3.1 billion of ConocoPhillips common stock and paid $0.9 billion in dividends. At June 30, 2011, the company's cash and short-term investments were $8.1 billion, including cash and cash equivalents of $5.5 billion. ConocoPhillips ended the quarter with debt of $23.2 billion and a debt-to-capital ratio of 25 percent.
Six-Months Financial Highlights

ConocoPhillips' six-month 2011 earnings were $6.4 billion, compared with $6.3 billion for the same period in 2010.

Adjusted earnings for the first six months of 2011 were $6.0 billion, compared with adjusted earnings of $4.7 billion in the corresponding period of 2010. Adjusted earnings were higher than a year ago, primarily due to the impact of higher commodity prices and global refining margins. The increase was partially offset by the absence of equity earnings from LUKOIL, higher taxes and lower production volumes.

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Encana Delivers Solid Financial Results on Hedging Gains

- Encana Delivers Solid Financial Results on Hedging Gains

Thursday, July 21, 2011
Encana Corp.

Encana delivered strong operational performance and solid financial results in the second quarter of 2011, growing natural gas and liquids production by 4 percent per share from the second quarter in 2010. Cash flow was US $1.1 billion, or $1.47 per share. Operating earnings were $166 million, or 22 cents per share. As a result of commodity price hedging in the second quarter, Encana's cash flow was $131 million, after tax, or 18 cents per share, higher than what the company would have generated without its commodity price hedging program. Second quarter total production was approximately 3.46 billion cubic feet equivalent per day (Bcfe/d), up 111 million cubic feet equivalent per day (MMcfe/d) from the same quarter in 2010.

"Encana delivered another quarter of strong operating performance and achieved solid cash flow and operating earnings in the face of natural gas prices that remain at levels that we believe are unsustainably low in the long term. We are on track to meet our annual guidance for cash flow and production, which is expected to grow between 5 and 7 percent per share in 2011. We remain firmly focused on being among the lowest-cost producers in the natural gas industry, diligently applying capital discipline, risk management and increased operational efficiencies in all of our decision making," said Randy Eresman, President & Chief Executive Officer.

Pursuing cost savings through operating efficiencies and supply chain optimization

"We have adapted to this prolonged period of soft natural gas prices by taking meaningful steps and applying advanced technologies to manage costs over the long term as we pursue margin maximization on all of the natural gas that we produce. On our Haynesville resource play hubs, we have reduced well drilling times in the last year by 20 percent to 40 days, and a number of wells this year have been drilled in 35 days. To counter the high demand and inflationary rates for well completion equipment, we have established long-term, efficiency-based contracts with four new, dedicated completions crews. In addition, by applying effective logistics management and leveraging Encana's demand, we have reduced our cost of commodities by self-sourcing steel, sand and fuel. These are proactive cost management programs that we expect will result in significant and ongoing cost savings. Our integrated supply chain approach also helps eliminate bottlenecks and optimize cycle times. We now have 15 rigs fueled by natural gas, about one-third of our current drilling complement, generating fuel savings of between $300,000 and $1 million per rig per year, depending on the rig's size and fuel system. While industry cost inflation this year is expected to average about 10 percent, we expect our inflation rate to average approximately half that level – which we expect will be more than offset by improvements in efficiencies," Eresman said.

Encana establishes sizable positions in two promising liquids rich plays – Duvernay and Tuscaloosa

In keeping with the company's first-mover strategy of quietly assembling meaningful land positions to capture large resource opportunities, Encana has established two more sizable land positions in prospective liquids rich plays. In western Alberta, the company has accumulated more than 365,000 net acres in the Duvernay play, where preliminary drilling results by Encana and other operators show significant potential. Two more Duvernay exploration wells are planned for this year. In Mississippi and Louisiana, Encana has captured more than 250,000 net acres of the Tuscaloosa marine shale lands and the company plans to evaluate the play's potential this year.

"Both of these plays are in their early days, but we are encouraged by our exploration results to date. Duvernay and Tuscaloosa are just two of a handful of exciting opportunities that we are pursuing on the more than 2.1 million net acres we hold with strong potential for liquids production. The Niobrara formation in Colorado and the Collingwood shale in Michigan, plus our well-established land positions in the Alberta Deep Basin and the Montney formation in Alberta and British Columbia, provide us with a diverse and promising portfolio of prospective opportunities to grow liquids production over the long term," Eresman said.

Several divestiture and joint venture initiatives moving forward

Encana's non-core divestiture program is well underway towards achieving the company's 2011 net divestitures goal of between $1 billion and $2 billion. Encana is actively engaged with a number of parties in a competitive process to divest of non-core midstream and upstream assets in Canada and the U.S. – transactions that include the northern portion of Encana's Greater Sierra resource play, midstream assets in the Cutbank Ridge resource play which straddles the British Columbia-Alberta border, the company's interest in the Cabin Gas Plant in Horn River and midstream assets in the Piceance basin of Colorado. In its joint venture initiatives to accelerate the value recognition of its enormous resource potential, Encana is also pursuing investment partners in its undeveloped Horn River lands and producing properties in the south portion of Greater Sierra. In addition, competitive marketing of joint venture opportunities on Encana's extensive undeveloped lands in its Cutbank Ridge resource play will commence this summer. Proceeds from these planned transactions are expected to supplement 2011 cash flow generation in the current low price environment and strengthen the company's balance sheet, providing financial flexibility going into 2012.

Deep Panuke project gearing up to begin production in fourth quarter

After sailing from its Abu Dhabi construction site in the Middle East, the production field center (PFC) for Encana's Deep Panuke natural gas development offshore Nova Scotia arrived in the port of Mulgrave on the Strait of Canso in late June. Crews are completing pre-commissioning work before the PFC is towed to the field location for installation about 250 kilometres southeast of Halifax. Deep Panuke is expected to deliver its first natural gas to market in the fourth quarter of 2011, with production ramping up to about 200 million cubic feet per day (MMcf/d). Offshore work this fall includes commissioning of all the operational systems, hooking up the four production wells to the PFC and connecting production facilities to the 176 kilometer pipeline that will deliver natural gas to shore at Goldboro, Nova Scotia.

"Our Deep Panuke project is gearing up to begin delivering clean natural gas to prime markets along the Eastern seaboard of North America," said Michael Graham, Encana's Executive Vice-President & President, Canadian Division.

Natural gas hedges help protect cash flow generation

For the next 18 months, Encana has about half of its expected production hedged at attractive prices – about 1.8 billion cubic feet per day (Bcf/d) at an average NYMEX price of $5.75 per thousand cubic feet (Mcf) for the last half of 2011 and approximately 2.0 Bcf/d of expected 2012 natural gas production at an average NYMEX price of about $5.80 per Mcf.

"Our risk management programs increase the certainty of our cash flow generation and help ensure stability for our capital programs and dividend payments – prudent measures that continue to underpin Encana's financial strength," Eresman said.

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Infamous Oil Forecasts that Failed & What Makes a More Solid Forecast

- Infamous Oil Forecasts that Failed & What Makes a More Solid Forecast

Tuesday, July 19, 2011
Rigzone Staff
by Barbara Saunders

Even before Colonel Edwin Drake confirmed a way to drill for crude oil in 1859, pundits were already active in predicting the future of oil. Some called it "Drake's Folly" and forecast that drilling was not the way to reach oh well.

Skeptics called America's first drilled oil well "Drake's Folly" and insisted that drilling was no way to reach . . . Oh well.

But oil prices are what draw the primary predictions nowadays, even though $100 per barrel oil is really nothing new. During the Civil War, for instance, the price of oil soared to about $115 per barrel when adjusted for inflation in 2010 dollars. In fact, until an extended period after World War II through about 1970, oil prices were anything but stable and were often above levels seen in the 1980s and 1990's even without inflation taken into account.

In real terms, or adjusted for inflation, oil prices hit the equivalent of $100 per barrel or more in 1861 and again in 1980.

This underscores how poorly oil prices tracked inflation in modern history and the importance of technology in keeping pace with supply, regardless of price. In fact, according to the Society of Petroleum Engineers (SPE,) during the extended periods of low prices after the price crash of 1986, a number of technological advances occurred that lowered finding and lifting costs. These included the polycrystalline carbon drill bit and the expanded use of horizontal drilling.

In terms of price predictions, one of the biggest boners occurred only a few years ago, when forecasters during the summer of 2008 were predicting that oil prices would remain at levels of $150 or higher for the foreseeable future. Then came the global financial meltdown and took oil prices along with it, with an oil price plunge to the $30's by the following winter ooops!

A similar prediction occurred during the 1980's. Following the supply panics of the late 1970's, many were predicting that oil would reach $100 per barrel in nominal, or pre-inflation terms, by or before mid-decade. However, no such thing happened. Consumers, in part, had responded by purchasing much smaller cars than in the past and prices ultimately cratered by mid-decade, into the single digits for some crude grades.

"Beware all forecasts that do not have a strong basis in quantifiable supply/demand trends.

The problem with these particular forecasts was that some were predicated on wishful thinking, primarily by traders, not sound market fundamentals. Beware all forecasts that do not have a strong basis in quantifiable supply/demand trends. Just because renewed tensions have erupted in the Middle East, for instance, does not mean that oil prices are destined to fly up. Some of what is touted as "forecasts" in news bulletins is really the hype of traders hoping to make headlines that will push prices up on the commodity futures markets. Such hype may work briefly, but invariably, when there's nothing backing a prediction, prices will drop back in short order.

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