ConocoPhillips Outperforms Its Peers In The Second Quarter

Aug. 6.13 | About: ConocoPhillips (COP)

Second-quarter financials

ConocoPhillips (NYSE:COP) reported second-quarter earnings of $2.1 billion, an EPS of $1.65, compared with earnings of $2.3 billion and a corresponding EPS of $1.80 in the same quarter of the previous year. The figure for the previous year included $0.5 billion in revenue from downstream operations prior to the spinoff of Phillips 66 on April 30, 2012. Excluding exceptional items, second-quarter adjusted earnings were $1.8 billion ($1.41 per share) compared with adjusted earnings of $1.5 billion ($1.19 per share) for the previous year. Exceptional items for this quarter came mainly from favorable outcomes of claims and settlements. The company pointed out that it continues to deliver on its targets of a growth rate of between 3% and 5% in margins and volumes.

The increase in adjusted earnings for the quarter compared to the previous year was due to increased production volumes, a continuing move towards liquids production and an emphasis on higher margin products. The company's realized price was $66.82 per barrel of oil equivalent [BOE], flat when compared with $66.81 per BOE in the same period of the previous year and decreased prices for crude and natural gas liquids was more than compensated for by higher prices for natural gas and bitumen. Cash generation from operating activities was $3.7 billion excluding an increase of $0.7 billion in working capital. The company also raised $0.5 billion from asset disposals and this cash was used for the payment of dividends and capital expenditure of $3.9 billion.

Operational update

Second-quarter production in the lower 48 states and Latin America was 491,000 barrels of oil equivalent per day (MBOED), which is an increase of 50 MBOED over the previous year. Growth continues to be driven by plays rich in liquids in the Eagle Ford, Bakken and Permian. These plays delivered a 47% increase year-over-year and Eagle Ford, which increased production by 98%, now accounts for a quarter of all production in the Lower 48. Additionally, production in Canada increased by 3 MBOED to 271 MBOED. Production in North America continues to shift from natural gas to liquids with total liquids production for the quarter growing by 17% compared with the same quarter in the previous year and the percentage of production of liquids increased from 45% to 49%.

Production in Alaska for the quarter was 197 MBOED, a decline of 18 MBOED compared to the previous year as a result of normal field decline. The company has plans to pursue new work on the North Slope while adding an additional rig at Kuparuk. Production was 324 MBOED in Asia Pacific and the Middle East which is an increase of 54 MBOED when compared with the previous year as a result of the turnaround in the previous year at Bayu-Undan and Darwin LNG, new production from Malaysia and China, and the resumption of normal production at Bohai Bay. Unconventional exploration activity in North America continues to be focused on the Permian Basin, Wolfcamp and Niobrara in the Lower 48 and the Montney and Duvernay in Canada.

During the quarter, conventional exploration activity included acquiring a 20% stake in the Gila prospect located in the deepwater Gulf of Mexico and an initial exploration well is presently being drilled. The Thorn well was declared a dry hole in the second quarter of 2013. The Ardennes well is also presently being drilled and wells at Tiber and Deep Nansen are expected to be spudded in the third quarter. The company was also given four licenses in the Barents Sea, off the shore of Norway, and acquired an additional 20% working stake in Angola's deepwater Block 36.

The bottom line

The recent increase in the dividend makes the yield an impressive 4.2%, which by itself is sufficient to make ConocoPhillips a compelling income investment. However, the company has also significantly outperformed its peers, Exxon (NYSE:XOM) and Chevron (NYSE:CVX) because it was early to spot the potential of unconventional production assets and was able to acquire the best position in the Eagle Ford comparatively inexpensive. With another $10 billion due to come in from assets disposals in 2013, the company is financially sound and almost automatically recommends itself as a Buy.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.