With a third quarter merger completion still on schedule, Phillips Petroleum and Conoco Inc. released lower second quarter earnings Tuesday, citing “significantly depressed” natural gas prices compared to 2001, and the negative impact of a weakening U.S. dollar. Conoco reported profit fell 76% from a year ago, with net income of $130 million or 20 cents a share, down from $552 million, or 87 cents a year ago. Phillips said its net income fell 43% to $351 million, or 91 cents a share, compared with $619 million, or $2.40 a share, from last year’s second quarter.

Conoco said the costs associated with its pending merger and a revised recovery estimate for an explosion in the United Kingdom last year also brought earnings down. Analysts surveyed by Thomson Financial/First Call were expecting earnings of 34 cents a share. Conoco’s upstream earnings were down 45%, but were hit hardest in the United States, dropping 77%, the result of lower gas prices.

For Conoco, upstream earned $273 million for the quarter, and production increased 25% year-over-year. Exploration expenses for the unit were up 89% to $106 million, reflecting the inclusion of the Gulf Canada acquisition. U.S. upstream earned $57 million with lower gas prices and decreased volumes due to dispositions, Conoco said. Last year’s results also benefited from higher gas transportation and storage margins and mark-to-market gains on commodity hedges.

“It was a difficult quarter due to weak refining margins, especially in the United States ,” said Conoco Chairman Archie W. Dunham, in a prepared statement. However, he said Conoco has reached an agreement with the U.S. government on the drilling moratorium in Destin Dome offshore Florida. Conoco’s share of the settlement will be $47 million and will result in an estimated gain of about $11 million in the third quarter.

At Phillips, net operating income was down for the quarter “as both commodity prices in our upstream business and margins in our refining, marketing and transportation segment were lower,” said CEO Jim Mulva. Excluding items in both quarters, the Bartlesville, OK-based Phillips earned $369 million, or 95 cents a share, compared with a year earlier, which had earnings of $602 million, or $2.34 a share. Analysts had pegged earnings at $1.02. However, revenue more than doubled to $11.6 billion from $5.4 billion for the second quarter of 2001.

In its upstream performance, Phillips produced 799,000 boe/d, “essentially meeting our stated second quarter daily production target of 800,000,” noted Mulva. Production was down from 823,000 boe/d for the second quarter a year ago, partially because of lower gas production in the Lower 48, he said.

“While upstream prices were higher when compared with the previous quarter…our U.S. Lower 48 average natural gas price declined 35% from that of the second quarter of 2001, from $3.91/Mcf to $2.56,” said Mulva. And in the “gas gathering, processing and marketing segment, earnings, compared with the same quarter a year ago, were reduced, largely due to lower natural gas liquids (NGL) prices. In addition, earnings were negatively impacted by $4 million due to changes in gas imbalances and inventory storage losses.”

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