ConocoPhillips Co. reported adjusted earnings of $2.3 billion from Alaska in 2012, up nearly 13 percent from $2 billion in 2011 despite falling production and higher spending.
The largest producer in Alaska paid $4.9 billion in state and federal obligations in 2012.
As has been the norm in recent years, ConocoPhillips’ annual earnings come as state lawmakers are debating whether and how to change the fiscal system covering oil production in the state. And, as has also been the norm in recent years, the figures provide plenty of statistics to bolster arguments both for and against those revisions.
Earnings increased in 2012, but ConocoPhillips continues to shoulder a larger tax rate in Alaska than it does in some other regions. Capital spending in Alaska increased year-over-year, but the bump is largely attributable to ConocoPhillips sanctioning the CD-5 Alpine satellite in late 2011; ConocoPhillips is spending much less in Alaska than in its other segments. Alaska continues to be the most productive oil region for the company, but the Lower 48 is on pace to overtake the Last Frontier within the next two years.
“The fourth-quarter earnings continue the general trend where we pay twice as much in taxes as we keep,” Bob Heinrich, the vice president of finance for ConocoPhillips in Alaska, said in a statement on Jan. 31. “We are hopeful that the Governor and legislature will be successful in creating a better business climate on the North Slope.”
The annual figures are the first since ConocoPhillips split itself into separate upstream and downstream units in May 2012, becoming the largest independent in the country.
Earnings upConocoPhillips’ earnings in Alaska rose both year-over-year and quarter-over-quarter.
The company earned $570 million in the fourth quarter, up 6.5 percent from $535 million in the third quarter and up 34 percent from $426 million in the fourth quarter of 2011.
Including a $25 million adjustment in the fourth quarter for “pending claims and settlements,” ConocoPhillips earned $595 million in Alaska in the fourth quarter.
By comparison, ConocoPhillips reported adjusted earnings of $630 million in the Lower 48 in 2012, down from $1.08 billion in 2011 because lower commodity prices. In the fourth quarter, ConocoPhillips earned $147 million in the Lower 48, up from $145 million in the third quarter, but down from $317 million in the fourth quarter of 2011.
In Canada, ConocoPhillips reported a net loss of $122 million in 2012, down from adjusted earnings of $270 million in 2011. In the fourth quarter, ConocoPhillips reported adjusted earnings of $32 million in Canada, up from a net loss of $31 million in the third quarter but down from adjusted earnings of $92 million in the fourth quarter of 2011.
Companywide, ConocoPhillips reported adjusted earnings of $6.7 billion for the year and $1.7 billion for the quarter, down from nearly $8 billion in 2011 and $2 billion in the fourth quarter of 2011. The company attributed the drop to lower prices and production.
Revenues and taxesLike its earnings, ConocoPhillips’ revenues in Alaska also increased in 2012.
ConocoPhillips earned more than $3.5 billion in the state before income taxes in 2012, up 12 percent from more than $3.1 billion in 2011. For the fourth quarter, ConocoPhillips earned $882 million in Alaska before income taxes, up 7.5 percent from $820 million in the third quarter and up 27.6 percent from $691 million in the fourth quarter of 2011.
By comparison, ConocoPhillips earned more than $1.1 billion for the year and $279 million for the quarter before income taxes from its Lower 48 and Latin American segment, down from $2 billion for 2011 and $477 million in the fourth quarter of 2011.
Although revenues and earnings rose in Alaska, the tax rate dropped slightly.
In Alaska, ConocoPhillips reported an average effective tax rate of 35.8 percent for 2012, a figure that jumps to 62.5 percent when non-income taxes are included. For 2011, ConocoPhillips reported effective tax rates of 37.1 percent and 66.5 percent respectively.
The two figures put Alaska in the middle of the ConocoPhillips portfolio.
ConocoPhillips reported an effective tax rate of 11.4 percent from the Lower 48 and Latin America in 2011, but the figure is unusually low because of special tax items reported toward the end of the year. For much of 2012, ConocoPhillips reported a tax rate for the Lower 48 and Latin America segment between 38.3 percent and 42.6 percent.
Both of the figures ConocoPhillips reported for Alaska are higher than what it reported for Canada (26.9 percent) and the Asia Pacific and Middle East segments (28.3 percent), but lower than Europe (72.8 percent) and “other international” segments (80.5 percent).
ConocoPhillips only breaks out a non-income tax rate for Alaska.
While the tax rate fell, the total obligations in Alaska more than doubled earnings.
ConocoPhillips said it paid $3.7 billion in state taxes and royalties and $1.2 billion in federal taxes in 2012. The company said its 46,000-barrels-of-oil-equivalent production increase in the fourth quarter yielded $250 million in additional state obligations.
Spending up, but…ConocoPhillips spent more in Alaska in 2012 than it did in 2011, but its investment in the state remains far below other regions in its portfolio and only a sliver of overall spending.
ConocoPhillips reported $828 million in spending in Alaska in 2012, up from $775 million in 2011. For the fourth quarter, the company said it spent $232 million, up from $208 million in the third quarter and $190 million during the fourth quarter of 2011.
By comparison, the nearly $15 billion capital program for 2012 included more than $5.2 billion in the Lower 48 and Latin America, more than $2.8 billion in Europe, more than $2.4 billion in the Asia Pacific and the Middle East and nearly $2.2 billion in Canada.
ConocoPhillips reported $516 million in Depreciation, Depletion and Amortization expenses in Alaska in 2012, down from $576 million in 2011. For the fourth quarter, ConocoPhillips reported $131 million in DD&A expenses in Alaska, up from $117 million in the third quarter but down from $155 million in the fourth quarter of 2011.
“We could make other significant investments in Alaska, but they will require more competitive state fiscal terms,” Matt Fox, executive vice president of exploration and production, told analysts during a quarterly earnings teleconference on Jan. 31.
While the Alpine West, or CD-5, project represented a major spending bump last year, ConocoPhillips also touted an “octolateral” well drilled in 2012, or a development well with eight horizontal laterals, believed to be the first of its kind on the North Slope.
When asked whether he thought state lawmakers would change the fiscal regime this year, CEO Ryan Lance said he was “probably slightly encouraged.” While praising Gov. Sean Parnell for leading the effort to make Alaska more “competitive” for oil industry investment, Lance noted, “It’s going to be a tough haul through the Legislature.”
Production keeps fallingThe higher earnings mask declining production for ConocoPhillips in Alaska.
Across all commodities, ConocoPhillips produced 213,000 barrels of oil equivalent per day in Alaska in 2012, down 5 percent from 225,000 boe per day in 2011. For the fourth quarter of the year, the company produced 222,000 boe per day, up 26 percent from 176,000 boe per day in the third quarter because of turnarounds from seasonal fieldwork, but down 6.3 percent from 237,000 boe per day produced in the fourth quarter of 2011.
Those production figures place Alaska behind the Lower 48 and Europe, but ahead of Canada for production. In the Lower 48, ConocoPhillips produced 457,000 boe per day in 2012, up 6.7 percent from 428,000 boe per day in 2011. In Europe, ConocoPhillips produced 228,000 boe per day in 2012, down 18 percent from 279,000 boe per day in 2011. In Canada, ConocoPhillips produced 192,000 boe per day in 2012, down 5.4 percent from 203,000 boe per day in 2011. Companywide, ConocoPhillips produced 1.58 million boe per day in 2012, down 2.5 percent from 1.6 million boe per day in 2011.
Even with the continued declines, Alaska remains the most productive segment in the ConocoPhillips portfolio for crude oil. The company produced 188,000 barrels of crude oil per day in Alaska in 2012, down 6 percent from 200,000 bpd in 2011. In the fourth quarter, ConocoPhillips produced 196,000 bpd in Alaska, up 25 percent from 157,000 bpd in the third quarter but down 6.6 percent from 210,000 in the fourth quarter of 2011.
The Lower 48, though, is the fastest growing segment. In 2012, ConocoPhillips produced 123,000 bpd from its Lower 48 operations, up from the 94,000 bpd in 2011. The 30 percent increase was almost entirely attributed to growing production from two unconventional plays: the Eagle Ford of South Texas and the Bakken of North Dakota.
In Europe, ConocoPhillips produced 135,000 bpd in 2012, down nearly 17 percent from 164,000 bpd in 2011. In Norway, ConocoPhillips produced 104,000 bpd in 2012, down nearly 9 percent from 114,000 in 2011. Companywide, ConocoPhillips produced 618,000 bpd of crude oil in 2012, down nearly 5 percent from 650,000 bpd produced in 2011.
While oil production continued to decline in 2012, Alaska natural gas liquids stayed flat.
ConocoPhillips produced 16,000 bpd of natural gas liquids in Alaska in 2012, up slightly from 15,000 bpd in 2011. In the fourth quarter, the company produced 17,000 bpd of NGLs, up from 10,000 bpd in the third quarter, but level from the fourth quarter of 2011.
In the Lower 48, ConocoPhillips produced 85,000 bpd in 2012, up from 74,000 bpd in 2011. In Canada, ConocoPhillips produced 24,000 bpd, down from 26,000 bpd in 2011.
Just like its legacy North Slope oil fields, ConocoPhillips’ legacy Cook Inlet gas fields are declining. ConocoPhillips produced 55 million cubic feet of gas per day in Alaska in 2012, down nearly 10 percent from 61 mmcf per day in 2011. In the fourth quarter, the company produced 56 mmcf per day, up nearly 10 percent from 51 mmcf per day in the third quarter but down 5 percent from 59 mmcf per day in the fourth quarter of 2011.
As ConocoPhillips increasingly weights its portfolio toward oil, other segments saw gas decline in 2012. In the Lower 48, ConocoPhillips produced 1.49 billion cubic feet per day in 2012, down from 1.55 bcf per day in 2011. In Canada, ConocoPhillips produced 857 mmcf per day in 2012, down from 928 mmcf per day in 2011. Companywide, ConocoPhillips produced 4.2 Bcf per day in 2012, down from 4.5 Bcf per day in 2011.
ConocoPhillips is earning more from its Alaska commodities, though.
While reporting a realized oil price of $109.62 per barrel in Alaska in 2012 (up from $105.95 per barrel in 2011), ConocoPhillips reported a price of $91.67 per barrel in the Lower 48 (down from $92.79) and $78.26 per barrel in Canada (down from $86.04).
And because Alaska natural gas prices are set on contracts, rather than on the spot market, ConocoPhillips saw an average Cook Inlet gas price of $4.22 per thousand cubic feet in 2012 (down from $4.56 per mcf in 2011), compared to $2.67 per mcf in the Lower 48 (down from $3.99) and $2.13 per mcf in Canada (down from $3.46 per mcf).