By nearly every financial measure, ConocoPhillips is in enviable shape: a debt-to-capital ratio at 19%, an ongoing share buyback program, dividend payouts and consistently strong quarterly earnings. Even so, there’s likely to be few, if any, mergers and acquisitions (M&A) announced this year, CEO Jim Mulva said last week.

Mulva tamped down any rumors about possible mergers or significant purchases during a conference call to discuss the company’s 4Q2007 and full-year earnings.

“We recently haven’t done that much because we have created the company that we like; there are no glaring holes in the portfolio,” Mulva told energy analysts and investors. “We don’t see how the M&A environment fits into our plans in 2008 and even into 2009. We have a lot on our plate, and when we look at the M&A environment, substantial acquisitions don’t seem to work with what’s available at the quality or the price…or if they are even doable…We are really sticking with our knitting with our capital program, and [instead of buying assets], we’ll continue to be very aggressive with share repurchases [and] dividend payouts to our shareholders.”

Mulva and his management team took flak soon after ConocoPhillips announced it would pay $35.6 billion to acquire natural gas giant Burlington Resources Inc. in late 2005 (see NGI, Dec. 19, 2005). Many energy analysts at the time of the purchase said they thought the price paid for Burlington was excessive, especially if natural gas prices didn’t remain high.

A day before ConocoPhillips agreed to acquire Burlington, the January 2006 gas futures contract on the New York Mercantile Exchange settled at a recordbreaking $15.378/MMBtu (see Daily GPI, Dec. 14, 2005). In justifying the transaction, ConocoPhillips then estimated that Henry Hub prices would average $8/Mcf in 2006, hit above $7 in 2007 and average $6 in 2008.

Ten months later in October 2006 Mulva had to admit that domestic gas prices had fallen more than the company expected — November 2006 gas futures settled at $6.298 (see NGI, Oct. 9, 2006). Now two years down the road, an energy analyst asked Mulva whether the Burlington acquisition, in retrospect, had been a “positive” or a “negative.”

Mulva said most of his team’s originally projections had gone according to plan.

“First of all, in terms of the volumes [in reserves obtained from Burlington], they were spot on and not really different from what we expected when we did the transaction,” Mulva said. “In terms of Henry Hub, the first two years [the gas price] was less than we assumed, and today the gas prices are higher than we assumed. Through 2008, to the extent of gas prices at Henry Hub, if gas prices stay north of $6.50/Mcf…and we continue with the markets where they are today, essentially the three years’ average is where we thought it’d be.” (In 4Q2007, ConocoPhillips’ averaged realized gas price was $6.66/Mcf.)

“Fundamentally,” he said, “the [gas storage] inventories are higher than we expected in the U.S. today [because of] weather, but on the natural gas markets, we have not changed our view. We are more bullish long term than when we did the [Burlington] transaction. The reason is less imports from Canada, and I also think regarding the availability of LNG [liquefied natural gas] to the U.S. that it will take longer and there will be less amounts because it will go to stronger markets in Europe and Asia. Compared to when we did the transaction, I feel [as] strong or stronger about natural gas than when we did it.”

The CEO said it was unlikely that ConocoPhillips would increase its capital spending levels in 2008 above its estimated $15.5 billion. “That’s more likely in 2009. Realistically, the budget could be $13.5-15.5 billion, with which we could do essentially anything we have in mind. We have a lot of projects that don’t immediately require us to spend a lot of money, and initially we will work through the technical aspects, which don’t require a lot of capital.”

ConocoPhillips reported 4Q2007 net income of $4.37 billion ($2.71/share), compared with $3.197 billion ($1.91) for the same quarter in 2006. Revenues were $52.7 billion, versus $41.5 billion a year ago. The company ended the quarter with debt of $21.7 billion, a debt-to-capital ratio of 19% and a cash balance of $1.5 billion. During the quarter ConocoPhillips repurchased $2.5 billion of its common stock, funded $4.3 billion of its capital program, reduced debt by $2 million and paid $7 million in dividends.

For the year, net income was $11.9 billion ($7.22/share), including a 2Q2007 after-tax impairment of $4.5 billion in the Exploration and Production (E&P) segment related to the expropriation of the company’s Venezuelan oil projects. Earnings for 2007 adjusted for the Venezuela impairment were $16.4 billion ($9.97/share), versus net income of $15.55 billion ($9.66) for 2006. Revenues were $187.4 billion, versus $183.7 billion in 2006.

Daily production from the E&P segment, including Canadian Syncrude and excluding the LUKOIL Investment segment, averaged 1.84 MMboe/d, a sequential increase from 1.76 MMboe/d in 3Q2007 but down from 2.05 MMboe/d in 4Q2006.

“We anticipate the company’s first quarter E&P segment production will be approximately 1.8 MMboe/d, and we expect exploration expenses to be in the range of $250 million to $300 million for the quarter,” Mulva said.

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