ConocoPhillips last week said it intends to file required paperwork in early November to spin off its downstream unit from its exploration and production (E&P) business, which when completed would create the biggest pure-play independent in North America.

In addition to its restructuring plans, the company’s management team said it also “remains committed” to its $15-20 billion 2010-2012 asset disposition program.

The news came as the Houston-based oil major revealed that third quarter earnings had dropped 16% from a year ago on losses from asset sales and other items; higher oil prices offset weak production. Net profits in 3Q2011 were $2.6 billion ($1.91/share), down from $3.1 billion ($2.05) in the year-ago period. Excluding one-time charges and prior-year sales gains, earnings totaled $3.5 billion ($2.52/share), up from $3.1 billion ($1.50). Revenue jumped 28% to $63.63 billion.

“This quarter’s results benefited from improved market conditions,” said CEO Jim Mulva. “While commodity prices were higher, E&P production was lower, mainly due to suspended operations in Bohai Bay and Libya. Our downstream business ran well, allowing us to capture stronger refining margins.”

To launch the spinoff of its downstream business as a new company, ConocoPhillips plans to file an initial Internal Revenue Service ruling request this month and a Securities and Exchange Commission Form 10 in mid-November. The distribution of the downstream company shares is scheduled to occur in 2Q2012 (see NGI, July 18).

The spinoff would be the biggest split of a U.S.-based integrated energy company to date. Marathon Oil Corp., which had been a integrated producer, completed a similar spinoff in June (see NGI, July 4). Pipeline and midstream operator Williams plans to separate its E&P business via a tax-free spinoff to shareholders by the end of the year (see NGI, Oct. 24).

ConocoPhillips has quietly amassed more than 400,000 acres since the beginning of this year in North America’s unconventional plays, CFO Jeff Sheets told investors during the earnings conference call. Sheets spoke in July about the company’s aggressive onshore plans in the United States and Canada (see NGI, Aug. 1), and he said those plans have not changed.

“We have added around 400,000 acres so far this year, not just in Canada but a mix with the Lower 48,” Sheets said. “We had a substantial position already and we would like to add in the longer term. But we’d like to do it at prices that make sense in acreage and positions in areas that are still prospective in nature. We will be as aggressive as we can be but always with an eye on what kind of returns we can get out of these plays. You are not likely to see us competing in areas where the acreage costs are at very high levels.”

Most of the development today is in the Eagle Ford, where output continues to increase. The company was producing around 24,000 b/d at the end of June. At the end of September it was producing close to 36,000 boe/d; production is 77% weighted to liquids. Fifteen rigs are in operation, one more rig is to be added by the end of the year and the company has three dedicated hydraulic fracturing (fracking) crews.

The biggest issue remains a lack of takeaway capacity in the South Texas play, said Sheets. However, the company still expects to increase production threefold over the next two years.

“September production was 36,000 boe/d in Eagle Ford but there was a 10% reduction because of curtailments,” he said. “We continue to work to ensure takeaway capacity.” The company expects to be “still be dealing with production constraints from now through 2013, probably. I think we can produce 100,000 b/d in 2013 and as we bring on the field, it will be a fairly constant increase from current production levels…”

Natural gas production has been put on the back burner because of lower margins. Meanwhile, liquids output is forecast to increase by 5,000-10,000 b/d in each quarter, led by the Eagle Ford. Combined, the Bakken, Eagle Ford and Permian plays should be producing around 250,000 b/d by 2013, 70% oil-weighted, Sheets explained.

Clayton Reasor, vice president of corporate affairs, told investors that the company had a “backlog of 10,000-15,000 b/d in Eagle Ford that we can’t get out. That will continue until more infrastructure is built up in the area.”

To alleviate takeaway constraints in the Eagle Ford, ConocoPhillips is building out midstream infrastructure. Reasor noted that more trucking recently was added but it “didn’t move much…We’ve talked about building a trunkline to get the liquids to a trading point and we expect that to be done in the middle of next year.”

It’s not a backlog of wells that’s hindering takeaway, said Sheets. “It’s hooking the wells up…We have three dedicated completion crews in Eagle Ford and that’s more than enough to satisfy 15 rigs running. Condensate trucking is a specific constraint.”

Don’t expect the company to make any big investments over the coming year, said Sheets.

“If you look at our portfolio, we’ve got a lot of good opportunities within the existing portfolio and where we want to spend capital within the next three to five years is well defined. We are always on the outlook for opportunities but we are most interested in building out our long-term portfolio, beyond 2016. We’re still focused on adding to the resource acreage base, adding to exploration acreage and those types of opportunities as opposed to near-term capital.”

ConocoPhillips’ E&P adjusted earnings were higher from a year ago because of stronger commodity prices, which were partially offset by higher taxes and lower volumes. Excluding the impact of dispositions and the civil unrest in Libya, production was 90,000 boe/d lower than in 3Q2010.

The company noted that in the latest quarter it continued to expand its worldwide shale position and recently resumed deepwater Gulf of Mexico drilling activities. It also sanctioned the Australia Pacific LNG [liquefied natural gas] project, which holds one of the largest coal seam gas reserve positions in Australia. On higher ethylene margins, the chemicals and midstream segments posted a 49% jump in quarterly earnings from a year ago. Midstream earnings also were significantly higher than a year ago, reflecting improved natural gas liquids prices.

During the quarter the company also repurchased around 46 million of its shares, or 3% of shares outstanding, for $3.2 billion. This brings the company’s total shares repurchased to 12% since the program began in 2010.

ConocoPhillips said it remains on track to achieve its $13.5 billion capital program for 2011. Around 90% of the program is directed toward E&P to support expected reserve replacement for the year of more than 100%. Production for the final three months of 2011 is expected to be 1.56-1.58 million boe/d; full-year 2011 output is forecast to be 1.61-1.62 million boe/d.

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