IHS Global Insight Perspective | |
Significance | ConocoPhillips yesterday kicked off earnings season for the supermajors, reporting fourth-quarter earnings of US$1.2 billion and adjusted earnings of US$1.7 billion for the quarter. |
Implications | The U.S. company ended a difficult year with positive news in the upstream sector, reporting a more-than-3% increase in its hydrocarbon output, although its downstream segment continued to struggle. |
Outlook | ConocoPhillips recently announced plans to further cut spending in 2010 from 2009 levels, but the company may need to accelerate its plans to divest US$10 billion in assets in order to solidify its financial standing. |
End of a Difficult Year
For the oil industry, 2008 was a rollercoaster year, with oil prices and company profits in the first half of the year soaring to new highs, only to fall to shocking lows with the epic oil price crash in the second half of the year. At least 2008 had a high to it, however; for ConocoPhillips and the rest of the supermajors, 2009 was mostly a forgettable year, marked by sharply lower profits and the need to cut spending and investments. The U.S. supermajor yesterday put a cap on its year, announcing fourth-quarter earnings of US$1.2 billion, which—while in no way comparable to its record profits at the height of the market in 2008—were at least higher than the US$31.8 billion in net losses from write-offs that the company took in the final quarter of 2008. Still, ConocoPhillips's adjusted earnings in the fourth quarter stood at US$1.71 billion, down from adjusted earnings of US$1.91 billion in the same time period in 2008.
ConocoPhillips: 2009 Financial and Operational Performance at a Glance | |||
2009 | 2008 | % Change | |
Adjusted Earnings | US$5.37 bil. | US$16.43 bil. | -67.3% |
Revenues | US$149.34 bil. | US$240.84 bil. | -53.4% |
Production* | 1.85 mil. boe/d | 1.79 mil. boe/d | +3.4% |
* includes stake in Canada's Syncrude project, does not include 20% share in Russia's LUKoil | |||
For 2009 overall, the company reported adjusted earnings of US$5.37 billion on revenues of US$149.34 billion, down sharply from 2008, when adjusted earnings of US$16.43 billion were recorded on revenues of US$240.84 billion (see table). The bulk of the company's adjusted earnings in the fourth quarter came from its exploration & production (E&P) segment, which recorded adjusted earnings of US$1.71 billion (up from US$1.39 billion in adjusted earnings in the October–December 2008 period). These E&P earnings actually accounted for almost all of ConocoPhillips's adjusted earnings during the quarter, however, as the company's 20% stake in LUKoil accounted for US$388 million, while midstream (US$97 million), chemicals (US$54 million), and emerging businesses (US$3 million) barely offset losses from the company's refining & marketing (R&M) segment (US$204 million) and corporate segment (US$311 million). For 2009 overall, however, the R&M segment did manage to post US$115 million in adjusted earnings (down from US$2.67 billion in 2008), while its E&P segment's adjusted earnings of US$4.13 billion paled in comparison to 2008 (US$12.07 billion adjusted earnings).
Company CEO Jim Mulva acknowledged the difficult conditions in the downstream sector, saying that ConocoPhillips is "responding to a difficult market by lowering utilization, reducing discretionary capital expenditures, managing costs and optimizing turnaround timing". The company, which has already deferred a project to upgrade its refinery at Wilhelmshaven, Germany, said that its worldwide refining crude oil capacity utilisation rate was just 76%, the result of low worldwide refining margins. On a positive note, however, the company managed to increase its overall hydrocarbon production by 65,000 barrels of oil equivalent per day (boe/d), from 1.79 million boe/d in 2008 to 1.85 million boe/d in 2009, as a result of project developments in the United Kingdom, China, Canada, Norway, Vietnam, and Russia. "Our upstream business performed well during this quarter and throughout 2009", Mulva said.
Outlook and Implications
ConocoPhillips announced during the fourth quarter of 2009 that it would move to cut its costs more aggressively, with plans to shore up its financial position via a two-year, US$10-billion asset divestiture initiative. The company announced yesterday that it has achieved cost reductions of US$1.9 billion in 2009, 12% for the year, exceeding its original target of 10% (US$1.4 billion). ConocoPhillips said it reduced its overall debt to US$28.7 billion by the end of the year, but its recent announcement that it will reduce capital expenditures by 10% this year compared to 2009 signals that the firm has more room to cut in order to realise cost savings. The market's reaction to the company's fourth-quarter financial results—shares closed at US$49.81/share, down 1.23% on the day—may indicate that ConocoPhillips will have to pursue cost-cutting more aggressively and accelerate the asset disposition programme (or at least begin to show progress on it).
The good news for ConocoPhillips is that 2010 is a new year, and the outlook for the company—at least in the upstream—appears to be improving. A renewed focus on organic growth rather than acquisitions is already starting to pay off, with several potentially significant discoveries in 2009, including the Poseidon discovery off the north-west coast of Australia and the two Lower Tertiary discoveries, Tiber and Shenandoah, in the Gulf of Mexico (GOM). In addition, ConocoPhillips has bolstered its acreage position in the Lower Tertiary GOM with interests in 21 blocks, and has recently taken a 50% stake in 16 Statoil-operated deepwater GOM leases, as well as fully reabsorbing Statoil’s 25% stake in five ConocoPhillips-owned GOM blocks. In exchange, Statoil will share the costs and risks of exploring the frontier Chukchi Sea offshore Alaska. Elsewhere, the company is continuing to ride the U.S. unconventional gas wave, and has begun drilling at several promising shale gas plays. The company, in partnership with French supermajor Total, also recently sanctioned plans to expand the Surmont oil sands project in Canada from the current 27,000 b/d to 110,000 b/d b, signalling a potential resurgence of the industry following a period of credit crunch and low oil price-induced decline. ConocoPhillips is betting that the combination of further cost-cutting and improved organic production growth will help it stabilise its finances and better weather future price fluctuations in the oil market.
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