ConocoPhillips reported adjusted earnings of $585 million from its Alaska segment in the second quarter, an increase despite lower production and prices, and higher spending.
“Differences between the timing of production and sales explain much of the variance,” CFO Jeff Sheets said on August 1. “The first quarter of this year included an adverse impact on earnings of approximately $50 million from these lift timing impacts, while this quarter included the benefit of about $25 million, a positive swing of $75 million.”
The rest of the difference came from a small drop in prices during the quarter, which triggered a reduction in the progressivity of the Alaska tax rate, the company said. Still, ConocoPhillips paid some $1 billion in state and federal “obligations” during the quarter.
All told, ConocoPhillips produced 197,000 barrels of oil equivalent in Alaska during the quarter, down 8 percent year-over-year and nearly 10 percent quarter-over-quarter, “due to planned downtime at Kuparuk and Prudhoe, and normal field decline,” Sheets said.
The impact of lower production was most visible in sales. ConocoPhillips earned $2.1 billion in revenues in Alaska during the quarter, down from $2.3 billion year-over-year.
In the quarterly earnings call, ConocoPhillips Executive Vice President Matthew Fox described the CD-5 project at the Alpine field as being “on track” and said the company is “progressing engineering work and additional satellite projects for sanction in 2014.”
This refers to the GMT1 well the company recently permitted in its Greater Mooses Tooth unit. The company will “seek project sanctioning” in the second half of 2014.
During the second quarter, ConocoPhillips produced 491,000 barrels of oil equivalent per day from the Lower 48 and 183,000 barrels of oil equivalent per day from Canada.
Companywide, ConocoPhillips produced 1.5 million barrels of oil equivalent per day.
In the quarter, ConocoPhillips earned $164 million in the Lower 48 and only $5 million in Canada. Companywide, the company reported adjusted earnings of $1.75 billion.
Production declining
ConocoPhillips saw Alaska production fall for all products during the quarter.
The company produced 176,000 barrels of oil per day (down 7 percent both year-over-year and quarter-over-quarter), 15,000 barrels of natural gas liquids per day (down 6 percent year-over-year and nearly 17 percent quarter-over-quarter) and 38 million cubic feet of natural gas (down 32 percent both year-over-year and quarter-over-quarter).
While production continues to decline in Alaska, it continues to rise in the Lower 48, where ConocoPhillips produced 147,000 barrels of oil per day (up nearly 28 percent year-over-year and relatively flat quarter-over-quarter), 91,000 barrels of NGLs per day (up nearly 10 percent year-over-year and 4 percent quarter-over-quarter) and 1.5 billion cubic feet of gas per day (up 4.1 percent year-over-year and 5.2 percent quarter-over-quarter).
Companywide, ConocoPhillips produced 603,000 barrels of oil per day (relatively flat year-over-year and down 6 percent quarter-over-quarter), 161,000 barrels of NGLs per day (up 4 percent year-over-year and relatively flat quarter-over-quarter) and 4.1 billion cubic feet of gas per day (down slightly both year-over-year and quarter-over-quarter).
Alaska currently accounts for some 23 percent of ConocoPhillips’ worldwide liquids production, but only 1 percent of its total gas production, according to the company.
Prices mostly down
Commodity prices also predominately fell in Alaska.
ConocoPhillips reported an average realized price of $106.09 per barrel for Alaska liquids during the quarter, down $6.29 year-over-year and $4.70 quarter over quarter.
By comparison, though, Alaska oil is trading at a premium. ConocoPhillips reported an average price of $93.56 per barrel in the Lower 48 and $81.09 per barrel in Canada.
The premium appears to come in some measure from blending NGL into the crude oil stream in Alaska. The two liquids are typically separated in the Lower 48 and Canada.
Companywide, ConocoPhillips reported an average oil price of $100.14 per barrel.
For natural gas, ConocoPhillips reported an average realized price of $4.03 per thousand cubic feet in Alaska, up 10 cents year-over-year but down $1.17 quarter-over-quarter.
By comparison, ConocoPhillips reported an average price of $3.85 per thousand cubic feet in the Lower 48 and $3.28 per thousand cubic feet in Canada. While Alaska natural gas has historically been heavily discounted to Lower 48 prices, the tables have turned in recent years as the result on indexed prices in Alaska and increased Lower 48 supplies.
The premium is shrinking, though, as Lower 48 prices rise.
The 18-cent margin between Alaska and Lower 48 natural gas prices in the second quarter is down from $2.01 in the first quarter and $1.04 in the second quarter of 2012.
Companywide, ConocoPhillips reported an average gas price of $5.77 per mcf.
Alaska spending up
ConocoPhillips reported $283 million in capital expenditures and investments in Alaska during the quarter, up $81 million year-over-year and $21 million quarter-over-quarter.
But spending lags behind other segments.
The company spent $1.37 billion in the Lower 48 and Latin America, $827 million in the Asia Pacific and Middle East, $765 million in Europe and $422 million in Canada.
All told, ConocoPhillips conducted a $3.9 billion capital program during the quarter.
ConocoPhillips continues to evaluate its portfolio in the light of the recent changes to the Alaska oil tax, Fox said, “and we expect to invest more capital in Alaska over time.”
Asked whether the hypothetical Alaska spending would increase the overall $16 billion capital budget ConocoPhillips is projecting for its global portfolio for the coming year, or whether the company would simply shuffle money within its portfolio, Sheets said, “any increase that we see in Alaska is also included in opportunities that we are modeling within the $16 billion overall program,” and would be unlikely to increase the total.
Asked whether the Alaska projects under evaluation involved light or heavy oil, Sheets said, “we are looking at predominantly light oil opportunities” similar to its existing Alaska production. “We also see opportunities in the heavy oil in Alaska,” he added, “but that would be a bit further out and before we would see a significant increase in that.”
ConocoPhillips also reported $135 million in depreciation, depletion and amortization for Alaska in the quarter, essentially level both year-over-year and quarter-over-quarter.
The second quarter earnings are the first ConocoPhillips has released since Alaska revised its oil taxes, but continue to reflect the elements of the previous fiscal regime.
ConocoPhillips reported an adjusted effective income tax rate for Alaska of 35.6 percent, essentially steady from previous quarters over the past year. When adding “taxes other than income taxes,” a distinction ConocoPhillips only draws for Alaska, the rate rises to 52.9 percent for the second quarter, which represents a decrease over previous quarters.
ConocoPhillips reported an effective income tax rate of 58.3 percent in Europe, 52.2 percent in Canada, 29.6 percent in the Lower 48 and Latin America, and 27.2 percent in the Asia Pacific and Middle East. The average overall company rate was 44.1 percent.
Of its $1 billion Alaska tax and royalty obligations during the quarter, $662 million went to the state in the form of severance taxes, royalties, property taxes and state income tax.
ConocoPhillips also reported a $97 million one-time credit to its balance sheet during the quarter, which it attributed to a recent Federal Energy Regulatory Commission decision to allow the owners of the trans-Alaska oil pipeline to pool their operation costs.
