Conoco disappoints Wall Street analysts

ConocoPhillips’ announcement that it added three times as much oil and gas to its reserves as it produced last year did little to impress Wall Street analysts, largely because the gains occurred through acquisitions. At least three major brokerage houses — A.G. Edwards, Deutsche Bank and Citigroup — said Jan. 11 they were disappointed with Conoco’s 2006 reserves replacement figures, released Jan. 10.

The company said it likely ended 2006 with the equivalent of 11.1 billion barrels of oil in proved reserves, up from 9.4 billion barrels in 2005. But the growth was largely tied to a $35.6 billion purchase of Burlington Resources last spring and Conoco’s increased stake in Russian producer OAO Lukoil.

“With a low-profile exploration program that has offered little in the way of exploration success, (Conoco) has pursued acquisitions to bolster reserve additions that in this environment, we believe, will likely come with a high price tag and (put) further pressure on the balance sheet,” Citigroup analyst Doug Leggate said Jan. 11.

Leggate, who maintained his “hold” rating on Conoco stock, estimated the company’s organic reserves replacement has averaged only 73 percent in the past five years. Some analysts say a company’s reserves replacement should average around 130 percent over a three-year period if it expects to grow production.

A.G. Edwards’ Bruce Lanni said that Conoco reserves replacement likely amounted to only 10-15 percent last year excluding purchases, and 2006 marked the third straight year of reserves replacement below 100 percent. He also reiterated his hold rating on Conoco shares.

“In our opinion, this announcement, along with the company’s dependence on acquisitions and joint ventures, further suggests that Conoco’s future organic growth opportunities remain somewhat limited,” the A.G. Edwards note said.

—The Associated Press