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Conoco profits down Dropping prices, production hit bottom line; company still expects busy year Eric Lidji For Petroleum News
ConocoPhillips Co. is feeling the impact of oil prices in its bottom line and its budget.
The largest independent oil company in the world reported declining profits from its Alaska operations in the fourth quarter of last year, which led to declining profits for the entire year. With oil prices expected to remain at current levels for a while, the company has deferred a major development project in the National Petroleum Reserve-Alaska.
With declining oil prices and declining oil production, the Houston-based company reported $2.077 billion in adjusted earnings from its Alaska operations in 2014, down from $2.177 billion in 2013. The company reported adjusted earnings of $379 million in the fourth quarter of 2014, down from $555 million in the fourth quarter of 2013.
Companywide, ConocoPhillips earned $6.609 billion in 2014, down from $7.061 billion in 2013. The company also further reduced its total capital budget to $11.5 billion.
Down and down The fourth quarter financial trends suggest various trends on the horizon.
For many years, ConocoPhillips has been reporting level and sometimes even increased profits from its Alaska operations, as rising oil prices offset declining production.
The decline in oil prices makes the decline in production more pronounced.
ConocoPhillips produced 162,000 barrels per day of oil in Alaska in 2014, down nearly 9 percent from 178,000 bpd in 2013. The declines were even sharper in the fourth quarter of the year, with production down nearly 10 percent year-over-year to 164,000 bpd.
With the decline in oil production came a corresponding decline in natural gas liquids production. ConocoPhillips produced 13,000 barrels per day of NGLs in 2014, down from 15,000 bpd in 2013. The company saw a similar decline in the fourth quarter, with NGL production at 14,000 bpd, down from 16,000 bpd in the fourth quarter of 2013.
Those declines are relatively normal. The company attributed them to “normal field decline and planned downtime, partially offset by improved well performance.”
What changed were prices.
ConocoPhillips reported an average sales price of $97.68 per barrel for Alaska liquids in 2014, down from $107.83 per barrel in 2013. The decline was even sharper in the fourth quarter, where the company reported an average price of $74.07 per barrel, down from $102.36 in the third quarter and $104.04 per barrel in the fourth quarter of 2013.
Alaska North Slope crude oil averaged some $50 per barrel in January 2015.
Down and up While Alaska experienced rising oil prices and declining production for several years, the Lower 48 is now experiencing an opposite trend: rising production amid falling oil prices.
ConocoPhillips produced 188,000 barrels per day of oil in the Lower 48 in 2014, up from 152,000 bpd in 2013. With that large increase, oil production in the Lower 48 decisively passed oil production in Alaska after several years where the trend lines were converging.
Those trend lines promise to continue. ConocoPhillips produced 199,000 bpd from its Lower 48 operations in the fourth quarter of 2014, up nearly 26 percent year over year.
Compounding the difference, ConocoPhillips earned $84.18 per barrel, on average, for its Lower 48 crude oil in 2014, down from $93.79 per barrel in 2013 - a slightly smaller decrease than what the company reported for Alaska. The company earned $65.34 per barrel in the fourth quarter of 2014, down from $87.91 in the third quarter of the year.
Combined, all those factors helped ConocoPhillips increase profits from its Lower 48 operations. The company reported adjusted earnings of $861 million in 2014, up from $745 million in 2013. Alaska remains the more profitable segment for the time being.
Up and up The financial information also suggests different circumstances within Alaska.
As oil prices and production fell last year, natural gas went the other direction. While the correlation is imperfect, the Cook Inlet region is generally a gas-producing basin.
ConocoPhillips produced 49 million cubic feet of gas per day in Alaska in 2014, up from 43 mmcf per day in 2013. The company reported an average sales price of $5.42 per thousand cubic feet in Alaska in 2014, up from $4.35 per thousand cubic feet in 2013.
Even in Cook Inlet, though, circumstances could be changing.
With natural gas sold on long-term contract governed by regulatory pricing mechanisms connected, in some cases, to oil-backed indices, gas prices could soon fall too. ConocoPhillips reported an average price of $5.01 per mcf for Alaska in the fourth quarter, down from $5.47 in the third quarter and $6.03 in the second quarter.
ConocoPhillips experienced a similar trend in the Lower 48, with average natural gas prices rising year-over-year while falling between the second and fourth quarters.
The Alaska price advantage grew annually. In 2013, the average Alaska natural gas price was 85 cents per mcf higher than in the Lower 48. In 2014, it was $1.13 per mcf higher.
Even so, the Lower 48 continues to be the center of ConocoPhillips’ natural gas operations, producing 1.491 billion cubic feet per day in 2014, even with 2013 rates.
Altogether, ConocoPhillips produced 183,000 barrels of oil equivalent per day in Alaska in 2014, down from 200,000 boe per day in 2013. The company produced 533,000 boe per day in the Lower 48 in 2014, up from 491,000 boe per day in 2013. Companywide, ConocoPhillips produced 1.561 million boe per day in 2014, up from 1.545 million boe per day in 2013.
Down and up? With the decline in oil prices and income comes a decline in the tax rate.
ConocoPhillips reported an average effective income tax rate of 34.6 percent from its Alaska operations in 2014, down from 35.9 percent in 2013. Including taxes other than income taxes, the rates jumped to 49.4 percent in 2014 and 57.1 percent for 2013.
Those rates fell even more sharply in the fourth quarter.
ConocoPhillips reported an average income tax rate of 31.1 percent in the final months of 2014, compared to 35.4 percent for the same period in 2013. Including other taxes, those figures jump to 44.2 percent for the final months of 2014 and 56.2 percent for 2013.
Even though income fell, spending rose.
ConocoPhillips spent $1.564 billion on its capital program in Alaska in 2014, up from $1.140 billion in 2013. The increased spending comes from work on the CD-5 satellite of the Alpine field and the Drill Site 2S project at the Kuparuk River unit, both of which are expected to come online by the end of the year. ConocoPhillips also increased infill drilling in 2014, which is apparently already offsetting declines to some measure.
Those projects should overshadow the recent decision to wait before sanctioning the GMT-1 pad in the Greater Mooses Tooth unit in the NPR-A, at least in the short term.
Also helping matters in the short term, ConocoPhillips officials have also said they “intend to sanction” part of the North East West Sak project at Drill Site 1H at Kuparuk.
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