ConocoPhillips CEO Jim Mulva said it’s unlikely the company will pursue any significant acquisitions or consider any merger opportunities for the foreseeable future.

In January, Conoco reported it had increased its year-end 2006 reserves by 2.6 billion boe from 2005. However, energy analysts criticized the news, noting that almost all of the company’s new reserves last year had resulted from its $35.6 billion cash-and-stock acquisition of Burlington Resources Inc. and its increased stake in Russia’s LUKOIL (see NGI, Jan. 15).

With its Venezuela oil exploration prospects up in the air after the company and ExxonMobil Corp. turned down a deal to eventually turn over their production to the country, Mulva last week seemed to be more cautious about the company’s near- to medium-term strategic plans. During a conference call to discuss 2Q2007 earnings, Mulva shot down a question posed by an energy analyst who wondered if the company might be considering any mergers or major acquisitions.

“I really think on that cycle…we’ve done that, acquisitions and mergers,” Mulva said. “There probably will be more consolidation in the next decade, but I think this has pretty much run its course for this company. It’s very expensive, and at this time it’s not very doable.”

The better value for shareholders, said the CEO, is to repurchase shares.

“When we buy back shares, that says we feel pretty bullish about the company,” Mulva said. “And we also feel that the shares are undervalued, and this offers one of the best opportunities we have [as a company]…to buy shares back.”

The company has spent a lot of time developing its global oil and natural gas businesses, but it has not turned its back on North America.

“We are very interested in the Arctic, LNG [liquefied natural gas], the deepwater in the Gulf of Mexico…” Mulva said. “We have some deals to do some farm outs to commercialize to get something from our acreage in the Gulf of Mexico, and we’re in the process of starting to drill one of those wells. This is an area that is pretty interesting to us. It could be quite promising, but we want to work on the exploration side of it, and not just drill the wells. We have to be realistic.”

Another avenue that holds promise for the company is in the North.

“We are quite interested in the Arctic,” Mulva told analysts. “This is an important play for us, and we will carry this forward to next year. There are new opportunities, and we are spending money on the geophysical work as opposed to just drilling wells that may or may not have prospectivity…We have quite a bit of experience…in the Arctic in Russia, Alaska and Canada. We look at the Arctic as a new province; it’s more remote, more challenging technically and commercially, but this is something in the long-term future for exploration.”

Through the rest of this year, Conoco will continue its “asset rationalization” program, and more noncore properties will be put up for sale. The amount of the sales and exactly which assets may be sold “will be shared with the market when they are ready to be announced.”

The oil major also will move at a steady pace to build its alternative energy business; no major step-up in spending is planned over the next year.

“We have to do a lot more of technical research work and…get some projects in shape,” said Mulva. “We are working on it, but I don’t see us spending a lot more money in 2008 than we will in 2007..We have been looking at alternative fuels, renewables, as something for a number of years. In terms of our traditional business, access is an issue, and access is becoming more competitive as to oil companies that are becoming stronger and stronger everyday, more competitive.

“The national oil companies, some of the smaller companies…it’s a very competitive environment. We want to make sure that we play in that game very competitively, very aggressively, but we don’t just want to chase access [to alternatives] with projects with little profitability or value for shareholders.”

An after-tax charge of $4.5 billion ($2.72/share) related to the pullback in Venezuela hit Conoco’s quarterly earnings particularly hard, cutting net income by 94% from a year earlier. Net income was $301 million (18 cents/share) on revenue of $47.4 billion for 2Q2007, compared with $5.2 billion ($3.09) on revenue of $47.1 billion in 2Q2006.

Total U.S. oil and gas production was 848 million boe/d, slightly below the 894 million boe/d in 2Q2006. U.S. gas production fell to 2,319 MMcf/d from 2,428 MMcf/d in 2Q2006. U.S. gas prices in the quarter averaged $6.49/Mcf, up from $5.78 a year ago.

U.S. exploration expense jumped to $119 million in 2Q2007, well above the $19 million from a year earlier. Dry holes cost Conoco $36 million, up from $3 million, and lease impairments were $43 million, up from $15 million in 2Q2006. Total noncash charges were $79 million, substantially higher than the $18 million a year earlier, and general expenses and lease rentals increased to $40 million from only $1 million in 2Q2006.

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