ConocoPhillips (NYSE:COP) reported strong third quarter results on higher commodity prices and better volume-mix. Earnings per share (EPS) adjusted for discontinued operations and other special items grew ~7% y-o-y to $1.47. However, production volume remained flat compared to last year as normal field declines, downtime due to maintenance activities and unplanned disruptions in Libya largely offset the impact of new development. ConocoPhillips even lowered its full year production guidance due to ongoing disruptions in Libya. However, on-track development projects in other parts of the world and continued margin expansion reinforce our positive outlook for the company. 
We currently have $70 price estimate for ConocoPhillips, which we will soon update based on the third quarter earnings announcement.
Lower 48 Development Drives Production Volume Growth
ConocoPhillips' third quarter production volume adjusted for asset sales, project downtime and the impact of disruptions in Libyan operations grew 2% y-o-y, primarily due to ongoing development activities in the Lower 48 region. The company's Lower 48 business is organized within four regions covering the Gulf Coast, Mid-Continent, Rockies and San Juan. Combined with Latin America, this region contributes more than one-third to the company's total production volume. 
Ongoing field development activities at liquids-rich plays in the Eagle Ford, Bakken and the Permian basin delivered strong production growth (up 40% y-o-y) during the quarter. Eagle Ford production, which now represents 25% of the total Lower 48 production, increased 66% year-over-year to 126,000 barrels of oil equivalent per day (MBOED). ConocoPhillips also reported that it had as many as 11 rigs operating at both the Bakken as well as the Eagle Ford plays at the end of the quarter. The company expects ongoing development activities in the Lower 48 region to boost production volume by ~365 MBOED by 2017. 
On the other hand, ConocoPhillips' third quarter production from Europe declined by ~8%. This was primarily due to natural field declines and major planned turnaround activities in Norway and the U.K. However, the company started production from the Ekofisk South project ahead of schedule during the quarter, which will be ramped up in the coming months. Furthermore, the Jasmine project in the U.K. is also expected to start producing in the fourth quarter. We expect these new projects to result in better production numbers from Europe in the coming quarters. 
Higher Prices, Improved Product Mix Fuel Margin Expansion
Average West Texas Intermediate (WTI) oil prices and Henry Hub natural gas prices were up by ~15% and 25% y-o-y during the third quarter, respectively. As a result, ConocoPhillips' average price realization on the sale of produced commodities was up by more than 6% over last year. Not only this, the company's production volume mix also continued to shift toward liquids (crude oil and natural gas liquids), which are more profitable than natural gas.
Amid depressed natural gas prices in North America, energy companies are increasingly focusing on boosting production of liquids to realize better margins. ConocoPhillips' total liquids production in the Lower 48 and Canada increased by 15% over last year, which boosted the proportion of liquids in the company's total production from these two areas to 51% from 46% last year. As a result, the company's cash margin during the quarter expanded by more than $3 per barrel over last year. Going forward, we expect margins to improve further as ConocoPhillips continues to ramp up production from the liquid rich shale plays in the Lower 48 region. 
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