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ConocoPhillips Shows Gains in Lower 48, but Spending Strained

Gains in the U.S. onshore and new international projects lifted ConocoPhillips' natural gas production in the first three months of this year from a year ago, the company reported Thursday.

However, the latest earnings report noted an 80% drop in profit from a year ago because of lower commodity prices. ConocoPhillips revealed in its quarterly filing that it borrowed money in 1Q2009 to avoid cuts to its capital spending plans and dividend payments. The drop in profits led some energy analysts to question whether ConocoPhillips' debt, accumulated by heavy asset spending before the recession hit, has begun to weigh on its prospects.

Analysts not only questioned the company's resources, but they also have begun to scrutinize the management team, led by CEO Jim Mulva, who has run the company since 1999. He is expected to retire in two years. At an investor conference in March, Mulva admitted that he was the only one within the company's top management ranks who holds the same position he held a year ago.

"That is unprecedented," said Credit Suisse energy analyst Mark Flannery. "There are legitimate concerns regarding the experience of the senior bench."

Argus Research's Phil Weiss also questioned whether current COO John Carrig, expected to take the helm from Mulva, is the right person. Carrig was CFO for six years before he was promoted last year.

"I don't know if I have the confidence that they have the right guy there," Weiss said. "I wonder if they are going to have to bring in someone from outside."

Concerns about ConocoPhillips' strategy to buy assets when commodity prices were particularly high have been heard before. In 2005 analysts questioned ConocoPhillips' deal to pay $35 billion to buy gas-focused producer Burlington Resources Inc. At the time of the transaction, New York Mercantile Exchange gas prices were at all-time record highs of more than $15.00/MMBtu.

The producer said in its quarterly filing that its return on capital employed was lower than its peers in the first three months of 2009, a trend that had continued from late in 2008.

"ConocoPhillips remains focused on maintaining operational excellence, implementing identified cost reduction initiatives, optimizing our capital program and progressing major development projects," said Mulva. "Our strategy has enabled us to perform well during the current economic downturn, and we are well positioned to attain our long-term plans when the global economy recovers in the future."

Domestic gas production rose in 1Q2009, boosted by onshore properties, the company said.

Total U.S. gas production in 1Q2009 was 2,119 MMcf/d, up from 2,063 MMcf/d in the year-ago period. From the Lower 48 states gas output was 2,027 MMcf/d versus 1,963 MMcf/d in 1Q2008. ConocoPhillips' Alaska gas production dropped to 92 MMcf/d from 100 MMcf/d. Kenai, AK liquefied natural gas sales were down at 43 MMcf/d from 63 MMcf/d a year earlier. In Canada ConocoPhillips' 1Q2009 gas production fell slightly to 1,066 MMcf/d from 1,101 MMcf/d a year earlier.

For consolidated operations and equity affiliates worldwide, ConocoPhillips' quarterly gas output averaged 5,087 MMcf/d, up from 4,900 MMcf/d in 1Q2008. Quarterly gas and oil production worldwide increased 131,000 boe/d from 1Q2008, mostly from growth in Canada and overseas.

The Houston-based major also reported a profit -- but one well below that from a year earlier. The company said it earned $840 million (56 cents/share) in 1Q2009, about 80% below the $4.14 billion ($2.62) reported in 1Q2008. Revenues in the period declined to $30.7 billion from $54.9 billion. In the first three months of this year the company generated $1.9 billion in cash from operations, and it spent $3.1 billion on its capital program. Total debt at the end of March was estimated at $29.4 billion, and the company carried a debt-to-capital ratio of 34% with a cash balance of $800 million.

"Although we delivered solid operational performance in our upstream business during the first quarter, lower commodity prices and realized margins negatively impacted our financial results," said Mulva. "Our upstream business produced 2.4 million boe/d, including our share of LUKOIL's production [in Russia]."

The exploration and production (E&P) segment reported a quarterly profit of $700 million, which was about half of what it earned for the same period of 2008: $1.39 billion. U.S. E&P profits plunged to $173 million from $1.349 billion a year ago. Daily production from the E&P segment, including Canadian Syncrude, averaged 1.93 MMboe/d, which was 58,000 boe/d higher than the previous quarter. The increase, said ConocoPhillips, came from new developments, primarily in Russia, Vietnam and China. Production also increased because of the impact of production sharing contracts, and less planned and unplanned downtime, partially offset by field decline.

ConocoPhillips is forecasting 2Q2009 production to fall sequentially from 1Q2009 because of planned maintenance and seasonal activity. "However, full-year production is expected to be slightly higher than 2008," said the CEO.

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