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ConocoPhillips posts loss on special merger-related charges Upstream production shows decline; downstream segment remains weak Allen Baker PNA Contributing Writer
ConocoPhillips posted a loss of $116 million for the third quarter, with the results including a bunch of special charges related to the merger of Phillips Petroleum Co. and Conoco Inc.
Factoring out the adjustments, operating income was $456 million for the quarter. Phillips alone made $373 million a year ago. Second quarter profits for the two companies were $369 million for Phillips and $141 for Conoco.
Tough to compare The numbers for this quarter are hard to evaluate because the merger occurred two-thirds of the way through the latest quarter, and the results don’t reflect Conoco operations at all in the quarter a year ago. On top of that, Phillips bought Tosco Corp., the big refiner, toward the end of the third quarter of last year. So it’s really apples and oranges.
The merger triggered $531 of the $572 million in special charges the new Houston-based company listed in the quarter. ConocoPhillips is writing off $246 million to reflect the fair value of Conoco’s research and development operations. Another writedown, $200 million, reflects restructuring costs at Phillips alone. Restructuring costs for Conoco were already included in the merger accounting.
The new company is also listing impairments of $62 million for properties that are in the process of being sold to satisfy antitrust regulators. The “impairment” essentially reflects the difference between the book value of the assets and what ConocoPhillips expects to get by selling them.
Production declines Upstream operations brought $499 million in net income, up from $360 million a year ago for Phillips alone.
To help comparisons somewhat, the company did provide “pro forma” numbers for production, and those figures show a 3 percent decline in oil and gas production to 1.55 million barrels of oil equivalent daily. About a third of that decline reflected a reduction of about 19,000 barrels daily in Alaska and the United Kingdom, as well as disruptions from tropical storms in the Gulf of Mexico. About 9,600 barrels a day was cut because of OPEC restrictions, and the company sold some properties that were producing oil a year ago.
The comparison with the second quarter was more telling, though, with a 5 percent drop. Liquids decreased by 23,000 barrels daily in the third quarter compared with the one before, and gas production was down 302 million cubic feet a day.
In announcing the second-quarter results, CEO Jim Mulva had predicted production in the third quarter would match second-quarter numbers.
Worldwide crude prices averaged $25.96 a barrel, up from $24.65 a year ago. Average natural gas prices were a bit higher than a year ago at $2.49 per thousand cubic feet compared with $2.48. The Lower 48 number for the recent quarter was $2.65, up from $2.53.
Alaska net rises As for Alaska, production in the third quarter declined to 310,000 barrels daily from 325,000 a year ago, but the price more than made up for it. Alaska crude averaged $25.83 a barrel in the recent quarter compared with $24.38 a year earlier.
With that higher price, ConocoPhillips got $252 million in net earnings from its Alaska operations, up 11 percent from the $228 million the state produced a year ago. Alaska still represents more than half the E&P income of the new company, though that could change once the old Conoco holdings are included for the full quarter, not just one month as was the case this time.
Downstream woes continue Refining and marketing has been a weak spot for the industry in recent months, but the company did turn a profit in the segment. Operating income was $79 million, compared with $100 million a year ago and $111 million in the prior quarter. Given the impact of the Tosco and Conoco acquisitions, it’s tough to compare the figures in any meaningful way.
Looking at the pro forma numbers, which include Conoco and Phillips operations, refining throughput was down 3 percent, or 77,000 barrels a day, to roughly 1.8 million barrels of crude daily. Utilization rate was even with a year ago at 91 percent, but down from the 94 percent rate in the second quarter.
Gasoline brought 93 cents a gallon at wholesale, down from 89 cents a year earlier. But margins shrunk at the retail level, where ConocoPhillips got $1.02 for it gas, compared with $1.06 a year ago.
Profit from chemicals The company made a profit from chemicals of $5 million, compared with a $27 million operating loss a year ago.
Revenues were $15.7 billion, up from $6 billion a year ago, reflecting the addition of both Tosco and Conoco to the Phillips number.
Mulva was optimistic that the fourth quarter will show a big production increase.
“Upstream, we expect our fourth-quarter 2002 production to be up approximately 8 percent above the third quarter pro forma (Conoco and Phillips combined). Improvements are expected to come from seasonal increases in the North Sea and Alaska, and new production in the North Sea and China.”
He said refining margins are improving, which should help downstream profits, though the utilization rate isn’t expected to climb.
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