ConocoPhillips Co. reported $146 million in adjusted earnings from its Alaska operations during the first quarter, a significant decline over last year on lower oil prices.
The largest oil company in Alaska had earned $379 million in the fourth quarter of last year and $598 million in the first quarter of last year. The quarterly and annual declines in profits during the first quarter were largely the result of oil prices, which were less than half their average from a year earlier. Compounding those lower commodity prices were regular declines in oil and natural gas production and steady spending and taxation.
Oddly, though, Alaska accounted for slightly more than half of ConocoPhillips’ total net income for the quarter, as many segments of the company’s portfolio reported losses.
Companywide, ConocoPhillips earned $272 million on $8 billion in revenue during the first quarter, down from $2.1 billion on $16 billion in revenue in the first quarter of 2014.
By comparison, ConocoPhillips reported a loss of $389 million from its Lower 48 operations and a loss of $140 million from its Canadian operations during the first quarter, and gains of $396 million from its Asia Pacific and Middle Eastern operations and $86 million from its European operations during the first quarter of the year.
Production could stabilize
The quarterly report amplifies a trend from the end of 2014.
Typically, in recent years ConocoPhillips had seen its Alaska earnings increase even though it was producing less oil and gas, as rising prices offset declining production.
Now, those trend lines are reversing.
ConocoPhillips produced 186,000 barrels of oil equivalent per day in Alaska during the first quarter of 2015, even quarter-over-quarter and down from 200,000 boepd year-over-year.
The company produced 163,000 barrels of oil per day in Alaska during the quarter, down from 164,000 bpd in the fourth quarter of 2014 and 175,000 bpd in the first quarter of 2014. Natural gas liquids production in the state was relatively flat at 14,000 bpd in the first quarter, level quarter-over-quarter and down from 16,000 bpd year-over-year.
By comparison, ConocoPhillips produced 198,000 bpd of oil in the Lower 48 and 14,000 bpd of oil in Canada during the first quarter and produced 93,000 bpd of NGL in the Lower 48 and 25,000 bpd of NGL in Canada during the first quarter.
But ConocoPhillips expects its Alaska production to flatten over the next three years as a range of projects come online, starting with CD-5 and DS-2S toward the end of this year.
The CD-5 satellite of the Alpine field is already 75 percent complete, according to the company. Drilling has begun and installation of pipelines and modules is eminent.
Alaska oil production will likely decline in the short term, though, as ConocoPhillips undertakes regular summer maintenance activities in the second and third quarters.
The company produced 52 million cubic feet per day of natural gas in Alaska during the first quarter, up from 49 mmcf per day in the fourth quarter and down from 55 mmcf per day in the first quarter of 2014. Those rates should rise in the second quarter, as the Kenai liquefied natural gas export terminal resumed operations in April and will export in May.
By comparison, ConocoPhillips produced 1.5 billion cubic feet per day of gas in the Lower 48 and 736 mmcf per day of gas in Canada during the first quarter of the year.
Companywide, ConocoPhillips produced 1.6 million barrels of oil equivalent per day from its worldwide operations. Alaska accounted for some 11.5 percent of that total.
Sinking prices
As production promises to stabilize, though, commodity prices have fallen.
ConocoPhillips reported an average sale price of $50.74 per barrel in the first quarter for Alaska crude oil, which includes natural gas liquids. The average price was $74.07 per barrel in the fourth quarter of 2014 and $106.39 per barrel in the first quarter of 2014.
By comparison, the company reported an average sale price of $40.77 per barrel of oil and $15.55 per barrel of NGL in the Lower 48 during the first quarter and $37.12 per barrel of oil and $18.28 per barrel of NGL in Canada during the first quarter.
The company reported an average sale price of $4.29 per thousand cubic feet for natural gas in Alaska during the first quarter, down from $5.01 per mcf in the fourth quarter of 2014 and $5.22 per mcf in the first quarter of 2014. Alaska gas prices are set on long-term contracts using indices based on Lower 48 markets and approved by regulators.
By comparison, ConocoPhillips reported an average sale price of $2.60 per mcf in the Lower 48 and $2.21 per mcf in Canada during the first quarter. In those regions, natural gas is traded on the open market, where prices fluctuate based on supply and demand.
Among the open questions for ConocoPhillips is whether Alaska oil can compete with other crude oil stocks in the Lower 48, where most Alaska oil ends up. According to Executive Vice President Matthew Fox, realizations for Alaska crude are currently averaging $2 to $3 below Brent crude, which could make alternative markets attractive.
“We have taken one cargo this year to Asia and one last year. We always have that option if that is what we choose to do,” Fox said, referring to export opportunities from Alaska.
Spending even/up
Even though falling prices and level-to-falling production is bringing down revenue, ConocoPhillips saw spending and expenses stay level for its Alaska operations.
The company reported $402 million in capital expenses during the first quarter, up from $390 million in the fourth quarter of 2014 and $415 million in the first quarter of 2014.
The spending comes from the new capital projects as well as increased drilling.
By comparison, during the first quarter of the year ConocoPhillips spent $1.37 billion on Lower 48 capital projects, $500 million on European capital projects, $488 million on Asia Pacific and Middle East capital projects and $455 million on Canadian capital projects.
The company spent $3.33 billion on capital projects worldwide during the quarter.
ConocoPhillips also reported $140 million in depreciation, depletion and amortization expenses from its aging Alaska operations in the first quarter of this year, up from $135 million in the fourth quarter of last year and $132 million in the first quarter of last year.
ConocoPhillips reported an effective income tax rate of 35.2 percent for its Alaska operations during the first quarter. The company paid an effective income tax rate of 31.5 percent in the fourth quarter of last year and 35.6 percent in the first quarter of last year.
By comparison, during the first quarter of the year, ConocoPhillips reported an effective income tax rate of 58.3 percent in Europe, 36.5 percent in the Lower 48, 28.6 percent in Asia Pacific and the Middle East and 28 percent in Canada. The total government take in a region also includes obligations such as royalties and taxes other than income taxes.
