The third-quarter earnings report for ConocoPhillips tells two distinct stories.
During the quarter, the largest oil company in Alaska achieved first oil at two major North Slope projects, exported three cargos of liquefied natural gas and even reported a rare year-over-year increase in oil production. But those successes come amid drastically lower oil prices, and the company posted its lowest quarterly earnings in many years.
ConocoPhillips reported $63 million in adjusted earnings from its Alaska operations during the third quarter of the year, down from $195 million in the second quarter and down from $473 million in the third quarter of last year. Even so, with most segments losing money, Alaska was the second most profitable segment in the company portfolio.
By comparison, after adjustments, ConocoPhillips reported a loss of $463 million from its Lower 48 operations and a loss of $118 million from its Canadian operations, and gains of $302 million from its Asia Pacific and Middle Eastern operations and $3 million from its European operations during the second quarter. Companywide, ConocoPhillips reported a net loss of more than $1 billion on $7.5 billion in revenue during the quarter.
Rising production
In recent years, high oil prices have tempered the impact of declining North Slope production, but those trend lines are currently moving in an opposite direction.
ConocoPhillips produced 160,000 barrels of oil equivalent per day in Alaska during the third quarter, down from 174,000 boe per day in the second quarter but up from 155,000 boe per day during the third quarter of 2014.
The 3 percent increase year-over-year was the result of lower planned downtime for major project turnarounds at the Prudhoe Bay and Kuparuk River units this summer.
But production could stay flat over the next few years.
ConocoPhillips brought two major projects into production in October: the CD5 pad at the Colville River unit and the Drill Site 2S pad at the Kuparuk River unit. Together, those two projects should produce enough at their peak to offset regular declines from existing fields in the ConocoPhillips Alaska portfolio. The company also expects some increases from infill drilling and from other projects underway or proposed.
With a recent favorable permitting decision from federal officials, ConocoPhillips is now able to proceed with a development at the Greater Mooses Tooth unit in the National Petroleum Reserve-Alaska. Asked about that project during a teleconference, ConocoPhillips Executive Vice President for Exploration and Production Matt Fox acknowledged the permitting ruling and said, “We’re working through the process of deciding the sanction of that project but that sanction decision hasn’t been made yet.”
Gains entirely from liquids
The recent production gains came entirely from liquids.
ConocoPhillips produced 144,000 barrels of oil per day in Alaska during the third quarter, down from 154,000 barrels per day in the second quarter and up from 139,000 bpd in the third quarter of 2014. The company also produced 10,000 barrels of natural gas liquids per day during the quarter, down from 13,000 bpd in the second quarter and up from 8,000 bpd in the third quarter of last year.
By comparison, in the third quarter, the company produced 213,000 barrels of oil per day in the Lower 48, 12,000 bpd in Canada, 90,000 bpd in Norway and 26,000 bpd in the United Kingdom. Of those, only the Lower 48 reported a quarter-over-quarter increase.
With natural gas, ConocoPhillips reported declines, even though the company resumed liquefied natural gas shipments during the quarter. The production declines might have come in part from using the export terminal to ship supplies on behalf of other producers in the Cook Inlet region. The company produced 34 million cubic feet of natural gas in Alaska during the third quarter, down from 41 million cubic feet per day in the second quarter and down from 48 million cubic feet per day in the third quarter of last year.
Cook Inlet assets
Earlier this year, ConocoPhillips announced plans to market its Cook Inlet assets, including its North Cook Inlet unit and its stake in the Beluga River unit. So far, the company has opened a data room but has yet to announce a sale of those fields.
The company plans to keep its liquefied natural gas export terminal in Kenai, which delivered six cargos this year (three in the third quarter). The company has applied for an extension to its federal export license, which would allow shipments through early 2018.
By comparison, in the third quarter, the company produced 1.45 billion cubic feet of natural gas per day in the Lower 48 and 712 million cubic feet per day in Canada.
Companywide, ConocoPhillips produced nearly 1.6 million boe per day in the third quarter, down slightly from the first quarter but up slightly from the third quarter of 2014. Alaska accounted for more than 10 percent of total company production.
Prices slide
While oil prices recovered some in the second quarter, they lost those gains in the third.
During the quarter, ConocoPhillips reported an average sales price of $50.48 per barrel for Alaska crude oil, which includes natural gas liquids. The company reported an average price of $61.51 per barrel in the second quarter and $102.36 per barrel in the third quarter of 2014. By comparison, the company reported average prices of $41.56 per barrel for oil and $12.55 per barrel for natural gas liquids in the Lower 48 and $38.44 per barrel for oil and $14.50 per barrel for natural gas liquids in Canada in the third quarter.
ConocoPhillips reported an average sales price of $4.26 per thousand cubic feet for natural gas in Alaska during the quarter, down from $4.50 per mcf in the second quarter and down from $5.47 per mcf in the third quarter of 2014. Alaska gas prices are set on long-term contracts using indices tied to Lower 48 markers and approved by regulators.
By comparison, the company reported an average sales price of $2.65 per mcf in the Lower 48 and $1.94 per mcf in Canada, where gas is traded on a sport market. While gas prices in Alaska fell quarter-over-quarter, they rose in the Lower 48 and Canada.
Spending and taxes
Capital spending in Alaska dropped considerably this year after ConocoPhillips finished the bulk of its work at CD5 and Drill Site 2S and continued to fall into the third quarter.
The company reported $304 million in capital expenditures and investments in Alaska during the quarter, down from $379 million in the second quarter and from $369 million in the third quarter of 2014. Companywide, ConocoPhillips reported nearly $2.2 billion in capital expenditures and investments in the third quarter, mostly in the Lower 48.
The company also reported $183 million in depreciation, depletion and amortization expenses from its aging Alaska operations in the third quarter of this year, up from $158 million in the second quarter of the year and $123 million in the third quarter of last year.
The biggest change in the quarter was taxation. ConocoPhillips reported an effective income tax rate of 8.4 percent for its Alaska operations during the third quarter - down from 36.3 percent in the second quarter and 34.4 percent in the third quarter of 2014.
Companywide, ConocoPhillips reported an effective income tax rate of 41.3 percent.
