ConocoPhillips (COP)

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ConocoPhillips (COP)

Q3 2010 Earnings Call

October 27, 2010 11:00 am ET

Executives

J. Mulva - Chairman, Chief Executive Officer and Chairman of Executive Committee

Clayton Reasor -

Analysts

Edward Westlake - Crédit Suisse AG

Douglas Terreson - ISI Group Inc.

Pavel Molchanov - Raymond James & Associates

Mark Gilman - The Benchmark Company, LLC

Arjun Murti - Goldman Sachs Group Inc.

Faisel Khan - Citigroup Inc

Robert Kessler - Simmons & Company

Douglas Leggate - BofA Merrill Lynch

Paul Sankey - Deutsche Bank AG

Blake Fernandez - Howard Weil Incorporated

Jason Gammel - Macquarie Research

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the ConocoPhillips Third Quarter 2010 Earnings Conference Call. My name is Jen, and I will be your coordinator for today. [Operator Instructions] I would now like to turn the presentation over to Mr. Clayton Reasor, Vice President, Corporate and Investor Relations. Please proceed, sir.

Clayton Reasor

Thank you. And thanks everybody, on the line for your interest in ConocoPhillips in our third quarter conference call. I'm joined today by Jim Mulva, our Chairman and CEO. And this morning we'll be discussing third quarter results and also provide an update on the status of our strategic initiatives.

A summary of our key financial and operating results for the quarter will be provided, as well as our outlook for the remainder of 2010. And as in the past, you'll find our presentation materials on the IR section of the ConocoPhillips website.

Before we get started, I'd like you to look at the Safe Harbor statement on Slide 2. It's a reminder that we'll be making forward-looking statements during the presentation and Q&A. Actual results may differ materially from what's presented today, and factors that could cause actual results to differ are included in our filings with the SEC.

Moving to Slide 3, a summary of our key third quarter results and highlights. You can see that earnings for the third quarter, adjusted for special items, were $2.2 billion or $1.50 per share, up 56% from this quarter a year ago. Cash from operations was $4.3 billion. Cash returns on capital employed was 20%. Upstream production, excluding LUKOIL, was 1.72 million BOE per day. Our refineries ran at relatively high-capacity utilization. R&M's adjusted earnings topped $1 billion through the first nine months of the year. We completed $6.3 billion of dispositions, including $6 billion of LUKOIL share sales. Debt was reduced by $2.7 billion during the quarter, and we ended with an $8 billion cash balance.

So turning to Slide 4. Total company adjusted earnings were $2.2 billion, up over $800 million compared to the third quarter of last year. Both E&P and R&M improved earnings year-over-year. Our E&P segment improved $559 million, primarily due to higher commodity prices, partially offset by lower volumes. Compared to the third quarter of last year, R&M adjusted earnings increased $174 million, mainly due to improved U.S. refining margins. The $149 million improvement in other reflects a reduction in corporate costs, as well as earnings improvements in our Midstream and Chemicals ventures. September 2010 year-to-date adjusted controllable costs were approximately $400 million lower compared with the same period in 2009. The improvement is evenly split between E&P and R&M segments. Total controllable costs, unadjusted for market factors and asset sales for the first nine months of 2010, were $9.6 billion compared to $9.4 billion during the same period in 2009.

Moving to Slide 5, cash flow sources and uses. You can see that we generated $10.6 billion in cash during the quarter. $4.3 billion came from operations, and $6.3 billion in cash proceeds and dispositions, primary the LUKOIL stock sales. We repaid $2.7 billion of debt, funded $2.5 billion in capital, repurchased almost $900 million of ConocoPhillips common stock and paid over $800 million in dividends. At the end of the quarter, we had a cash balance of close to $8 billion, the majority of which we expect to use to repurchase ConocoPhillips shares.

Now let's review our Upstream production on Slide 6. Third quarter production was 1.72 million BOE per day, down 4% or 74,000 BOE per day from the third quarter of last year. You can see from the chart that 14,000 per day of the reduction was due to market factors, including PSC impacts due to higher prices and royalty impacts at Foster Creek and Christina Lake. FCCL production continues to grow, however, higher royalty take caused a negative impact on reported production. Late in the quarter, we initiated production curtailments of approximately 180 Mcf equivalent or 30,000 BOE a day in response to continuing low gas prices in Western Canada and parts of the U.S. 27,000 barrels a day of production was lost due to asset sales of Syncrude and Lower 48 production. Maintenance activity was about the same as last year.

The decrease in operations is mainly due to normal fuel decline, offset by new production. The majority of our decline came from North America, with almost 90,000 BOE per day and in the North sea, which had almost 40,000 BOE per day of lower production. Almost 75,000 barrels a day of new production from China, our SAGD operations in Canada, Australia and other locations partially offset this decline. Unplanned downtime was about the same as last year. And we'll talk more about the 2010 and 2011 production expectations later during the outlook portion of today's conference call.

Turning to Slide 7. You can E&P's adjusted earnings for the quarter were $1.5 billion, up almost 60% from the same quarter a year ago. Higher prices and other market impacts contributed more than $600 million of the increase in earnings. The earnings improvement was partially offset by $207 million decrease from lower sales volumes, primarily coming from normal fuel decline. The positive $149 million in other is largely comprised of lower dry hole costs and DD&A, partially offset by increased impairments and lower contributions from equity companies in Russia and Canada. Year-to-date 2010, E&P adjusted controllable costs improved by about $200 million compared with the first nine months of 2009. And looking at the table at the bottom of the slide, you can see that both the U.S. and international adjusted earnings improved significantly compared to last year.

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