The nation's third largest oil company, ConocoPhillips, reported third quarter earnings that were 5% below the year-ago period. The decline was largely due to weakness in the company's refining business, it said last week.

ConocoPhillips reported third quarter net income of $3,673 million, or $2.23/share, down from $3,876 million, or $2.31/share, for the same quarter in 2006. Revenues were $46.1 billion versus $48.1 billion a year ago."During the third quarter, our upstream business produced 2.2 million Boe/d, including an estimated 0.4 million Boe/d from our LUKOIL Investment segment," said CEO Jim Mulva. "In the downstream business, our domestic refineries ran at 97% of capacity, an improvement from the previous quarter. Worldwide, our refining crude oil capacity utilization rate improved to 94%."

Exploration and production third quarter net income was $2,082 million, compared to third quarter 2006 net income of $1,904 million. The increase primarily was due to the negative impact of new tax legislation on third quarter 2006 results, higher realized crude oil prices, the effect of the company's asset rationalization efforts, and Alaska crude oil quality differential settlements. These increases were largely offset by lower volumes, lower realized natural gas prices and higher operating costs.

In the third quarter, ConocoPhillips realized $5.36/Mcf for its U.S. natural gas production, down from $5.98/Mcf in the year-ago period. Realized prices were down both in Alaska and the Lower 48. In Alaska the realized gas price declined to $2.15/Mcf from $3.36/Mcf in the year-ago period. The Lower 48 price declined to $5.38/Mcf from $6/Mcf in the third quarter of 2006.

Before-tax exploration expenses were $218 million in the third quarter of 2007, compared with $197 million in the third quarter of 2006.

During a conference call with analysts Wednesday, Mulva said the company could very well be spending less in Canada next year because of potential changes to Alberta's provincial royalty regime. "[T]he changes that are contemplated are going to have a significant impact on our capital spending in Canada," he said.

As it turns out, the royalty hike, announced Thursday, will be less onerous than industry feared. Alberta natural gas royalties will rise, but a year later than initially proposed, and the increase will be less than two-thirds of what had been demanded by a government-appointed revenue inquiry (see related story).

ConocoPhillips' midstream segment includes the company's 50% interest in DCP Midstream LLC. In this segment third quarter net income was $104 million, down from $169 million in the third quarter of 2006, primarily due to a favorable third quarter 2006 tax adjustment on an asset sale and lower volumes.

Refining and marketing net income was $1,307 million in the third quarter, down from $1,464 million in the third quarter of 2006, primarily due to lower realized margins and a business interruption insurance benefit recognized in the prior year. The decrease is further attributed to the net impact associated with the contribution of assets to a downstream business venture with EnCana. These decreases were largely offset by a net benefit associated with the company's asset rationalization efforts, as well as the impact of German tax legislation.

"We continue to progress our long-term strategic investment plans, and we remain focused on improving our operations and financial flexibility," Mulva said. "As planned, we repurchased $2.5 billion of our shares in the third quarter, and we anticipate fourth quarter 2007 repurchases to be between $2 billion and $3 billion. The results from our asset rationalization program have met our expectations, with proceeds of approximately $3.5 billion since inception. We anticipate continued progress through the remainder of 2007 and into next year."

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