ConocoPhillips (COP) has always been one of the more interesting stocks I follow. The company is in the midst of a large turnaround, shifting capital and assets away from risky overseas locations and towards North American energy plays, particularly in the Bakken, Permian, Eagle Ford, and Canadian Oil Sands.
Last month I wrote that ConocoPhillips was likely to post strong Q3 results. My argument was simple -- elevated prices for WTI based crude alongside increased production were likely to boost ConocoPhillips' revenues and thus profits. As it turns out, my thesis was mostly correct. ConocoPhillips recently posted its best quarter since its 2012 spinoff of downstream assets via Phillips 66 (PSX).
Q3 2013 Overview
On October 31, ConocoPhillips reported its Q3 2013 results. For the quarter, the company posted earnings of $2.5B, or $2.00 per share, up significantly from $1.8B, or $1.46 per share, last year. Adjusted for one time items related to gains from asset sales, ConocoPhillips earnings were $1.8B, or $1.47 per share, compared to $1.7B, or $1.38 per share, last year.
ConocoPhillips results are quite impressive when considering that production is actually down slightly from last year. For the quarter, the company averaged production of 1,514 MBOE/D, down from 1,525 MBOE/D from last year. 1,470 MBOE/D of production came from continuing operations and 44 MBOE/D from discontinued operations.
Solely looking at continuing operations, we can see that ConocoPhillips' assets are clearly generating production growth. Production actually posted net growth of 29 MBOE/D, with most of this growth coming from liquids rich North American fields. As shown below, ConocoPhillips results would have been much better, by around 28 MBOE/D, if not for two months of distributions from Libya.
Production growth in North America Accelerates
As noted above, ConocoPhillips is seeing growth primarily in North American liquids. Production in the Eagle Ford, Bakken and Permian increased nearly 40% from last year to 214 MBOE/D. This is very much intentional, as the company has been plowing large amounts of capital into these areas.
Higher Margins were Key to Strong Earnings
Also note that production has declined in several low margin products, such as North American natural gas. This resulted in much improved average realized prices per BOE. ConocoPhillips's cash margins were $28.84 per BOE in Q3 2013, up 13% compared to last year, and 6.5% from last quarter. These increased margins are largely thanks to much improved pricing for WTI based crude, which lifted overall realized prices to $69.68 per BOE, up 6.2% from last year and 4.3% from last quarter.
Updated guidance points towards a strong Q4
Finally, let us look at ConocoPhillips' updated guidance. In general, nothing much changed from the previous outlook, except for a 50 MBOE/D reduction in production due to ongoing issues in Libya. FY 2013 production from continuing operations is expected to come in from 1,505 to 1,515 MBOE/D, while discontinued operations are expected to produce 35 to 45 MBOE/D.
For Q4, this likely means ConocoPhillips will produce around 1,500 to 1,570 MBOE/D, of which 15 to 45 MBOE/D comes from discontinued operations. I suspect that the company will likely continue to see improvements in its margins, especially since production growth is mostly coming from liquids, while declines are coming from low priced natural gas.
ConocoPhillips' third quarter is likely to be the start of a trend. With more and more capital being invested into North American liquids plays, ConocoPhillips will continue to see its realized prices for its products increases and margins expand. When coupled with anticipated production growth, this may result in much improved EPS growth in 2014.
One area of concern would have to be the recent decline in WTI prices. As many will be aware of, WTI has fallen over $15 per BBL in less than two months to under $95 per BBL. However, I think this decline is only short-term, with any price decline in shares of ConocoPhillips likely to be a buying opportunity. As shown in the above margins chart, ConocoPhillips remains highly profitable even if WTI drops to $92 per BBL.
Disclaimer: The opinions in this article are for informational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned. Please do your own due diligence before making any investment decision.