ConocoPhillips net earnings fall slightly with lower production

First-quarter profit fell for Houston-based ConocoPhillips, as it works to implement its ‘shrink to grow’ strategy, moving forward with asset sales and intensified focus on key areas.

The company’s net income of $2.14 billion, or $1.73 a share, is lower compared with $2.94 billion, or $2.27 a share, in the January-March quarter of 2012, reflecting the impact of asset sales.

“We are off to a strong start to the year, highlighted by the announcement of two significant oil discoveries in the deepwater Gulf of Mexico,” said Ryan Lance, chairman and chief executive officer. “Our base business is operating to plan, our development programs and major projects are performing as expected and we are on track to deliver production and margin improvements this year.”

The company announced its Coronado and Shenandoah discoveries in the deepwater Gulf of Mexico during the first quarter, with more than 1,000 feet of net pay and more than 400 feet of net pay respectively.

Conoco, now the nation’s largest independent oil and gas producer, sold off its refining division in April 2012 as a separate company, Phillips 66. The refining division had accounted for about $700 million of first-quarter earnings last year, the company said.

Analysts: Shedding refineries could hurt ConocoPhillips

While Conoco beat most of its own projections about oil and gas production for the quarter, its decline in the North Sea has been notable, dropping 25 percent from this time last year, and is 6 percent lower than the company’s projections.

Most of this decline comes from the sale of non-core assets in the North Sea, as the company has continued with its ‘shrink to grow’ strategy. The asset sales have funded capital investments and dividends and has announced that it plans to sell $12 billion in asset sales in 2013.

The asset sales have contributed to lower production, down to 1.56 million barrels oil equivalent per day for the first quarter from 1.58 million barrels of oil equivalent per day a year earlier.

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Significant assets sold in the first quarter included the divestiture of the Cedar Creek Anticline properties for $1 billion in March 2013.

The company expects that two major turnarounds in North Sea projects will further disrupt production in the second and third quarters of 2013, as it temporary shuts down production to complete installations for its J-Area and Greater Ekofisk projects.

The company will have a 30 percent more downtime than its five year average, according to Matt Fox, executive vice president of Exploration and Production.

“This really is a big year for planned shutdowns,” Fox said at its quarterly earnings call, noting that the shutdown at its Ekofisk field in Norway will be the biggest shutdown ever in ConocoPhillip’s history.

“We have seen them successfully sell assets, which is the ‘shrink’ part,” said James Sullivan, an analyst with Alembic Global Advisors. “The question now is if they can grow.”

Sullivan noted that Conoco has significant assets: acreage in unconventional plays in North America, oil sands projects in Canada, investments in liquefied natural gas in Australia and a range of deepwater targets in the Gulf of Mexico and Africa.

It has also been quick to pursue attractive new opportunities, such as Colombia’s La Luna Shale, where it is planning to drill an exploration well in the second quarter of 2013.

“They are moving quickly to push the ‘grow’ piece,” Sullivan said. “They haven’t done it yet, but we can say that they are moving swiftly to grow.”

In North American plays, Conoco is also looking to improve pipeline and marketing infrastructure to help boost future profit margins, Fox said.

ConocoPhillips stock closed at $58.26 yesterday, down slightly from its $59.21 price at the beginning of the year.

The company has also provided pro forma earnings for the quarter that subtract out sold assets to make the performance of its remaining assets more comparable. These first-quarter 2013 adjusted earnings were $1.8 billion, or $1.42 per share, compared with first-quarter 2012 adjusted earnings of $1.8 billion, or $1.38 per share, the company said in an earnings release.

But the accounting for a spin-off is typically too messy for such comparisons to provide valuable insights.

“There are corporate expenses that they are arbitrarily dividing – it is not going to be a comparable thing,” Sullivan said.

Nevertheless, Conoco executives made it clear on the earnings call that it is positioning itself through its investments and exploration targets for strong growth fueled by production increases.

“The business is running well,” Fox said. “The momentum coming out of 2013 will be strong and will position us for a very strong 2014.”