ConocoPhillips (COP)
Q2 2009 Earnings Call Transcript
July 29, 2009 11:00 a.m. ET

Executives

Clayton Reasor - VP, Corporate Affairs
Sigmund Cornelius – Senior VP, Finance and Chief Financial Officer

Analysts

Neil McMahon – Sanford C Bernstein
Evan Khalil – Morgan Stanley
Mark Flannery – Credit Suisse
Arjun Murti – Goldman Sachs
Doug Leggate – Howard Weil
Jason Gammel – Macquarie Research
Paul Cheng – Barclays Capital
Robert Kessler – Simmons & Co
Mark Gilman – The Benchmark Company
Powell Maltunal [ph]

Presentation

Operator

Good day, ladies and gentlemen and welcome to the second quarter 2009 ConocoPhillips earnings conference call. My name is Keisha, and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator instructions) If at any time during the call you require assistance please press “*0” and an operator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes. I will now like to turn the call over to Mr. Clayton Reasor, Vice President of Corporate Affairs. Please proceed sir.

Clayton Reasor – Vice President of Corporate Affairs

Thanks, Keisha. Well good morning everybody, and welcome to ConocoPhillips second quarter conference call. Joining me this morning is our Senior Vice President of Finance and CFO, Sig Cornelius. Earlier this morning, we issued our earnings press release and updated supplemental information package, and posted the slides we''ll be using on this teleconference. You can find this information on our website. You may have noticed that we made some changes from what we''ve shared over the past several years regarding the content of our earnings release on the conference call slides. These changes were made with the intent to be more consistent with our SEC filings, without reducing the information you''ve received in the past. The most significant change is the use of year-over-year, rather than sequential variations, as the basis for discussing our most recent quarterly results.

Before we get started, I need to direct you to our Safe Harbor statement on page two. This is our standard reminder that we''re going to use forward-looking statements that maybe made, during our presentation in response to questions you may have and our actual results may be materially different than the answers we provide today. The sources of those material differences can be found in our filings with the SEC.

So now, I''ll turn the call over to our Senior VP Finance and CFO, Sig Cornelius.

Sigmund Cornelius – Chief Financial Officer

Thanks, Clayton. I''ll start my comments on page three, which shows a summary of our key operating and financial performance for the quarter. Earnings for the quarter were $1.3 billion or $0.87 per share, with cash from operations of $2.6 billion. We ended the quarter with debt of $30.4 billion, resulting in a debt to capital ratio of 34%, which is flat versus last quarter. Operationally, we delivered strong results. Compared to last year, E&P production was up by 7%. In addition, operating costs across the company were down by more than 15%, due to market improvements and other cost reduction initiatives. Although these factors were positive, the combined impact of continued low North American natural gas prices, and weak realized refining margins, created significant headwind for us.

Turning now to page four, total earnings were down by 76% compared to last year. The slide shows changes in the various reporting segments. The biggest decrease was in our E&P segment, driven by lower oil and gas prices. Prices in margins were also the largest driver in our downstream segment, and resulted in a loss of $52 million compared to earnings to $664 million last year. For all segments, prices, margins, and other market impacts decreased our earnings by nearly $5.4 billion in aggregate. This was partially offset by higher volumes primarily in our E&P segment and after tax cost reduction benefits of more than $450 million across the company. Page five speaks to our cash flow performance. We generated $3 billion of cash from operations, excluding working capital changes. Working capital increased by $400 million this quarter, primarily related to timing of tax payments. These items, coupled with a capital spend $2.9 billion, and dividends of $700 million, resulted in an overall debt increase of $1 billion this quarter.

I''m moving now to a review of our segment performance, starting with total company production on page six. Overall E&P production was up 7%, or 122,000 BOE per day versus last year. Market factors accounted for approximately 25% of this increase. This included positive PSC adjustments, and benefits from sliding scale royalty rates in Canada, which were partially offset by OPEC curtailments. Excluding these market impacts, production was up 92,000 BOE per day, or a little over 5%. In our operations category, production from new projects more than offset decline in other operational factors. We had a total increase of over 175,000 BOE per day from new developments and project start-ups. This includes YK in Russia, BritSats and other new wells in the UK, Alvheim in Norway and Sutu Trang in Vietnam. We are also seeing production increases from our heavy oil projects in Canada. Finally, in the second quarter of this year, the new Bohai Bay FPSO came online. When you add our share of Lukoil production, which is an estimated 442,000 BOE per day, the total company production was a little over 2.3 million BOE per day for the quarter.

Now, turning to page seven, total E&P earnings for the second quarter were $725 million, down from $4 billion last year. The tables on the bottom of the page show the earnings variances by geographic area and changes in price realizations. On the left hand side, you can see that the earnings variances are fairly evenly split between US and international. Moving to the right side of the table, you can see the significant decline in realized prices year-over-year. Compared to last year, natural gas and NGL prices were down around 60% and crude oil prices were approximately 50% lower. In total, lower prices negatively impacted earnings by around $4.5 billion. After including the price impact on production taxes, the overall decrease was $3.9 billion, which is shown on the second bar from the left on the chart. Although production volumes were up 7%, our overall sales volumes were up only 5%, reflecting an over lift position in the second quarter of last year. This higher sales volume resulted in an increase to earnings of approximately $650 million. Overall, operating costs were lower, consistent with our performance in the first quarter.

On a pre-tax basis, costs were down around $275 million compared to last year. Market factors such as foreign currency and utility rates, represented about 75% of the savings. The balance is due to savings in operations from lower activity levels, lower service cost, and portfolio changes, which is partially offset by higher cost for new production. The other bar includes two special items. First, we had an impairment of $51 million for the expropriation of our Ecuador assets, after we suspended operations there on July 16. In addition, we also booked a $37 million after tax asset retirement charge related to an incident on June 8th at our Ekofisk 24/W water injection platform. The other bar also reflects an after tax increase of $75 million in DD&A, predominately due to the increased production and major project start-ups that I referenced earlier.

The R&M earnings variance is shown on page eight. It was a tough quarter for refining, as margins decreased significantly and demand remained weak, particularly for distillates. Compared to last year, the overall global market refining crack spread decreased by over 40%, resulting in a $1 billion earnings decrease for refining. As shown on the graph on the margins and other market impacts bar, overall margins were down by $770 million, reflecting some claw back from higher relative values for secondary co-products such as coke and fuel oil. US refining market capture was less that 50% this quarter, which is down compared to recent quarters and the second quarter of 2008. The main driver of this lower capture was low distillate margins in compressed light heavy crude differentials. Compared to the second quarter last year, distillate cracks were down over $20 per barrel and heavy crude sour differentials tightened by more than 70%. On the volume side, we had a 5% decrease in global refining utilization compared to last year, due to continued weak hydro skimming economics and optimization of margins based on market conditions. In addition, we also have higher turn around activity in our international operations this past quarter.

Pre-tax operating costs were down around $400 million. This was fairly equally split between market factors and operational savings which included lower turn around costs, staff costs, and other maintenance and operating items.