ConocoPhillips reported adjusted earnings of $543 million from its Alaska operations in the first quarter, down quarter-over-quarter and year-over-year on declining production.
The most prolific oil company in Alaska saw its adjusted earnings in the state drop 8.7 percent from the fourth quarter of 2012 and 12.4 percent from the first quarter of 2012.
Companywide, ConocoPhillips earned $2.1 billion in profits in the first quarter.
During a call for investors on April 25, ConocoPhillips also announced a discovery at its Cassin prospect in the National Petroleum Reserve-Alaska, but offered few details.
The call also yielded numerous questions about whether and how ConocoPhillips would increase investments in Alaska in the wake of recent changes to the fiscal regime.
While noting its recent decision to bring an additional rig to the Kuparuk field, company officials said ramping up production at existing drill sites might be possible within the next few years, but adding drill sites would take longer because of Arctic lead times.
“Our first-quarter earnings continue the general trend where under ACES, ConocoPhillips Alaska pays more than twice as much in taxes and royalties as we keep,” Bob Heinrich, vice president of finance for ConocoPhillips Alaska said. “We are encouraged by improvements the legislature and Governor have made to the state’s production tax and believe it should lead to more North Slope investment and production, even though the changes in the tax structure will not take effect until January 1, 2014.”
Although falling oil production in Alaska and rising oil production elsewhere promises to shift the balance in the future, Alaska remains a profitable segment for the company. By comparison, the company reported adjusted quarterly earnings of $431 million in Europe, $133 million in Canada, $105 million in the Lower 48 and $28 million in Latin America.
ConocoPhillips earned $918 million from its Asia Pacific and Middle East segment.
Production falling
With liquids prices remaining relatively stable in recent quarters, oil production continues to be the driving factor behind ConocoPhillips’ profits. And it is driving them down.
ConocoPhillips produced 218,000 barrels of oil equivalent per day in Alaska in the first quarter, down from 222,000 boe per day (or 1.8 percent) in the fourth quarter of last year and 236,000 boe per day (or 7.6 percent) in the first quarter of 2012. ConocoPhillips said this drop “primarily” reflected normal field decline, as opposed to maintenance work.
Crude oil production fell 3 percent quarter-over-quarter and 8.6 percent year-over-year to 190,000 barrels per day while gas production stayed level quarter-over-quarter but fell 5 percent year-over-year to 56 million cubic feet per day. Natural gas liquids production rose slightly quarter-over-quarter but was level year-over-year at 18,000 barrels per day.
Production will likely be further impacted this year by a major turnaround in Alaska, part of a maintenance program also covering assets in Canada, the Lower 48 and Indonesia.
By comparison, ConocoPhillips produced 475,000 barrels of oil equivalent per day in the Lower 48 in the first quarter, level quarter-over-quarter but up 5.3 percent year-over-year.
As ConocoPhillips develops its oil-rich assets in the Permian Basin and Eagle Ford Shale of Texas and the Bakken formation of North Dakota, its production mix in the Lower 48 is increasingly tilting toward oil. The company produced 148,000 barrels per day of crude oil in the Lower 48 during the first quarter, up from 136,000 bpd (or 8.8 percent) in the fourth quarter of last year and 117,000 bpd (26.4 percent) in the first quarter of last year.
ConocoPhillips produced 1.4 billion cubic feet of natural gas per day in the Lower 48 during the first quarter, down slightly both quarter-over-quarter and year-over-year.
With those figures, liquids now represent half of the production mix in the segment, up from 45 percent a year ago, and the company expects the figure to grow this year.
Companywide, ConocoPhillips produced nearly 1.6 million barrels of oil equivalent per day during the first quarter, down slightly both quarter-over-quarter and year-over-year.
Prices stabilizing
The drop in Alaska earnings came despite a rise in prices.
ConocoPhillips reported an average price of $110.79 per barrel for Alaska liquids during the quarter, up from $106.91 in the fourth quarter of last year but down from $112.20 in the first quarter. Companywide, ConocoPhillips reported an average price of $106.20.
For natural gas, ConocoPhillips reported an average price of $5.20 per thousand cubic feet in Alaska, up from $4.28 in the fourth quarter of last year and $4.68 in the first quarter of last year. Companywide, ConocoPhillips reported an average price of $5.74.
The tax question
The figures are the first since the Alaska Legislature approved a major revision to the state fiscal regime covering oil production — a revision ConocoPhillips desired.
Soon after the legislation passed, ConocoPhillips announced plans to bring an additional rig to the Kuparuk River unit to increase production from the legacy oil field. “We are currently analyzing the possible impact to our business, including where we could or would increase investment in Alaska, and we expect to provide more details on our future plans over time,” ConocoPhillips CFO Jeff Sheets said during an earnings call April 25.
Asked when the investments might impact production, EVP of Exploration and Production Matt Fox said, “You won’t really see any significant change in the short term, but the issue is: Given the new fiscal regime, are incremental capital investments now competitive? We think they will be, and we’re taking that through our overall planning process this year and we’ll be more equipped to talk about that later in the year.”
For now, the current financial figures reflect the previous fiscal regime.
ConocoPhillips reported an effective income tax rate of 35.5 percent for Alaska during the first quarter. The figure jumps to 61.6 percent when other taxes are included and the company said the marginal tax rate at current prices is around 82 percent in Alaska.
In dollar figures, ConocoPhillips said it paid an estimated $1.2 billion in state and federal obligations in Alaska in the first quarter, of which $900 million went to the state.
Among its other divisions, ConocoPhillips reported effective income tax rates of 49.1 percent in the Lower 48 and Latin America, 22.2 percent in Canada (after excluding special items that drove the actual figure up to 213.7 percent) and 63.8 percent in Europe.
ConocoPhillips only breaks out effective government share for Alaska.
Companywide, ConocoPhillips reported an effective income tax rate of 46.6 percent.
Cassin discovery
While taxes remained level, spending increased in the quarter.
ConocoPhillips spent $262 million in Alaska during the first quarter, up from $232 million in the fourth quarter of last year and $186 million in the first quarter of 2012.
ConocoPhillips reported $135 million in depreciation, depletion and amortization expenses in Alaska in the quarter, up slightly quarter-over-quarter and year-over-year.
Among the projects ConocoPhillips conducted during the quarter was the Cassin No. 1 well, which Fox described as a “wildcat.” ConocoPhillips made a discovery at the prospect, but details are scarce. Earlier this year, ConocoPhillips drilled the well to meet work commitments of its Bear Tooth unit in the National Petroleum Reserve-Alaska.
ConocoPhillips has made discoveries in the NPR-A through its previous exploration work, but development has been constrained by permitting and infrastructure. The company is currently working on its first NPR-A development project with the Alpine West/CD-5 satellite, a project that could pave the way for future westward expansion.
Speaking about the decision to delay Chukchi Sea exploration planned for next year, Fox said ConocoPhillips was “on the cusp of having to make some very significant commitments” for equipment, but felt unconfident about making those commitments given the current regulatory environment. “We felt that the prudent thing to do was to take a pause there and let things evolve a little bit before decide to drill those wells.”
Asked if ConocoPhillips would explore in 2015, Fox said, “Potentially,” adding that the decision ultimately depended on whether the regulatory environment inspired confidence.
