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Vol. 19, No. 19 Week of May 11, 2014
Providing coverage of Alaska and northern Canada's oil and gas industry

Conoco: $598M in 1Q

Profits and spending up, taxes and production down, in first quarter review

Eric Lidji

For Petroleum News

ConocoPhillips Co. reported $598 million in adjusted earnings in the first quarter in Alaska.

The earnings represent a 10 percent increase year-over-year and a nearly 8 percent increase quarter-over-quarter despite falling production, steady oil prices and increased spending, reflecting changes to the fiscal system put into place earlier this year.

“Our first quarter production taxes would have been about the same under the old tax system as under the 2013 More Alaska Production Act,” ConocoPhillips Alaska Vice President of Finance Bob Heinrich said in a statement, referring to the old Alaska’s Clear and Equitable Share system. “The difference is that the More Alaska Production Act will encourage industry to spend more to increase production, because the new tax law allows the industry to keep a more equitable share of the benefits of higher oil prices.”

Those opposed to the new fiscal system saw the profits as proof that the law favors industry over the public. “Under the previous oil tax structure, both Alaska and the oil industry benefited,” Vic Fischer, a constitutional delegate and a primary sponsor of a measure to repeal the law, said in a statement. “The state was able to put away $17 billion in savings. Now three of the richest companies in the world are reaping handsome profits from Alaskans’ oil, while we wonder which essential services will have to be cut next.”

The question of whether to keep or repeal the current system will go before voters in a referendum on the primary ballot this August, near the release of second quarter earnings.

Profits up, taxes down

ConocoPhillips saw increased profits in Alaska in the first quarter.

The $598 million in adjusted earnings came on $930 million in income from continuing operations before income taxes. In the first quarter of 2013, the company reported $543 million in adjusted earnings on $842 million in revenue. In the fourth quarter of last year, the company reported $555 million in adjusted earnings on $860 million in revenue.

By comparison, ConocoPhillips reported adjusted earnings of $446 million from the Lower 48 and $356 from Canada during the first quarter of the year. Companywide, ConocoPhillips reported more than $2.2 billion in consolidated adjusted earnings.

ConocoPhillips paid $876 million in state and federal obligations during the first quarter, with $570 million going to state production, property and income taxes and state royalties, according to the company. The remainder went to the federal government.

The company reported a tax rate of 51.6 percent for Alaska during the first quarter, down from 61.6 percent in the first quarter of 2013 and 56.2 percent in the fourth quarter of 2013. Considering only income taxes, ConocoPhillips reported a 35.6 percent effective tax rate in the first quarter, roughly even year-over-year and quarter-over-quarter.

By comparison, ConocoPhillips reported an effective income tax rate of 66.9 percent for Europe, 37.5 percent for the Lower 48 and Latin America, 30.9 percent for the Asia Pacific and Middle East, 23.7 percent for Canada and 42.8 percent for its entire portfolio.

ConocoPhillips only details its total tax rate — income and non-income — for Alaska.

Higher spending

The increased profits come amid increased spending.

ConocoPhillips reportedly spent $415 million on capital expenditures in Alaska during the first quarter of the year, considerably higher than the $262 million spent during the first quarter of last year and the $304 million spent during the fourth quarter of last year.

By comparison, ConocoPhillips spent much more in other regions: $1.3 billion in the Lower 48 and Latin America, $848 million in the Asia Pacific and Middle East, $622 million in Canada and $613 million in Europe. The Alaska spending constituted nearly 11 percent of the total $3.9 billion capital program for the company during the first quarter.

The Alaska spending went toward adding two rigs to its existing four-rig fleet and drilling two exploration wells in the National Petroleum Reserve-Alaska. The company said it is still evaluating the results of those wells: Rendezvous No. 3 and Flat Top No. 1.

The company is also planning a new drill site at the Kuparuk River unit, a new development in the NPR-A Greater Mooses Tooth unit and a renewed push for heavy oil production. ConocoPhillips said it hired some 1,700 new workers in the first quarter.

The company said it is still aiming for a late 2015 start-up of the CD-5 Alpine satellite.

Asked during a recent quarterly earnings call whether Alaska could become an area of growth for ConocoPhillips over the near term, Executive Vice President of Exploration and Production Matt Fox said, “Depending on how things play out as we put these development plans together, there’s a possibility that we could see growth in Alaska, but even just stabilizing production on an asset of that size and that maturity would be a pretty good accomplishment and I think that’s achievable over the long run.”

ConocoPhillips spent $132 million on depreciation, depletion and amortization expenses in Alaska during the first quarter, down slight year-over-year and quarter over quarter.

Production down

The higher profits mask declining production.

All told, ConocoPhillips produced 200,000 barrels of oil equivalent per day from Alaska during the first quarter, out of nearly 1.6 million boe per day for the company as a whole.

ConocoPhillips produced 175,000 barrels of oil per day in Alaska in the first quarter, down nearly 4 percent quarter-over-quarter and nearly 8 percent year-over-year.

By comparison, Lower 48 oil production was 171,000 bpd during the first quarter, up 8.2 percent quarter-over-quarter and 15.5 percent year-over-year. With the rise in unconventional oil production from the Eagle Ford shale and Bakken formation, the Lower 48 is becoming increasingly oil prone for ConocoPhillips after years of being primarily a gas-producing region for the company. At the current rate, Lower 48 oil production will likely pass Alaska oil production during the second quarter of the year.

ConocoPhillips believes its currently slate of programs could add more than 40,000 barrels of oil equivalent per day of new oil production from Alaska by 2018.

ConocoPhillips produced 16,000 bpd of natural gas liquids in Alaska during the first quarter of the year, even quarter-over-quarter and down 11 percent year-over-year.

$106.39 per barrel

The company reported earning an average liquids price of $106.39 per barrel from Alaska during the quarter, up $2.35 quarter-over-quarter and down $4.40 year-over-year.

ConocoPhillips produced 55 million cubic feet of natural gas per day in Alaska during the first quarter, up 21 percent quarter-over-quarter and mostly even year-over-year. The Alaska natural gas market often fluctuates depending on the status of the aging liquefied natural gas export terminal on the Kenai Peninsula. The facility sat idle for much of last year.

The company plans to deliver six LNG shipments this year. Each would contain some 2.75 billion cubic feet, of which some 60 percent is expected to be from third parties, according to ConocoPhillips, reflecting the rise of smaller Cook Inlet producers.

By comparison, ConocoPhillips produced nearly 1.5 bcf of natural gas per day from the Lower 48 and 707 mmcf per day from Canada during the first quarter.

ConocoPhillips reported an average price of $5.22 per thousand cubic feet for its Alaska natural gas during the first quarter, up from $3.74 per mcf during the fourth quarter of last year and $5.20 per mcf during the first quarter of last year, reflecting exports.

ConocoPhillips reported an average price of $5.08 per mcf from the Lower 48 and $5.81 per mcf from Canada during the fourth quarter, suggesting a narrow premium for Alaska.



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