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ConocoPhillips Profit: $5 Billion

July 28, 2008

By JIM KENNETT

ConocoPhillips, the third-largest U.S. oil producer, posted the highest quarterly profit in its history after crude prices climbed to a record and natural gas surged to a 2 1/2-year high.

Second-quarter net income jumped 18-fold to $5.44 billion, or $3.50 a share, from $301 million, or 18 cents, a year earlier, the Houston-based company said Wednesday in a statement. Profit was 2 cents a share higher than the average of 13 analyst estimates compiled by Bloomberg. The 2007 results included $4.51 billion in costs related to an asset seizure in Venezuela.

U.S. oil futures rose above $140 a barrel for the first time in June and natural gas rose even faster in 2008′s first half. Price gains made up for a drop in output and the inability of ConocoPhillips, the No. 2 U.S. maker of gasoline and diesel, to pass on the full brunt of record crude costs to motorists.

“These are blowout results,” said Robbert Van Batenburg, head of research at Louis Capital Markets in New York. “It’s tough to argue with that, and it’s a direct function of the high oil prices, which also eat away at some of the margins on the refining side.”

ConocoPhillips, which has a large operation in Bartlesville, said second-quarter revenue jumped 51 percent to $71.4 billion. Even excluding the Venezuela costs, earnings from oil and gas sales surged 90 percent to $4 billion.

ConocoPhillips is first among the major U.S. oil producers to report earnings for the quarter. The biggest, Exxon Mobil Corp., is scheduled to release its results on July 31, and Chevron Corp. reports the following day.

Oil and gas production at ConocoPhillips fell 8.4 percent from a year earlier to the equivalent of 1.75 million barrels of oil a day. Output was undercut by Venezuelan President Hugo Chavez’s seizure of fields operated by ConocoPhillips and Exxon Mobil last year after the companies refused to give the government larger stakes.

ConocoPhillips relied on Venezuela for 10 percent of reserves and 4 percent of production. Maintenance work in the U.K., Norway, Alaska and Canada contributed to a 2.2 percent decline in output from first-quarter levels, the company said.

The company’s forecast for similar production in the third quarter doesn’t assuage concerns, J.P. Morgan analyst Michael LaMotte said in a note to clients.

ConocoPhillips fell $2.48 to $81.83 in New York Stock Exchange composite trading. The stock climbed 24 percent in the second quarter, the biggest gain among the four largest U.S. oil companies.

Higher-than-expected profit from the company’s 20 percent stake in Russia’s OAO Lukoil helped it exceed earnings estimates, LaMotte said. ConocoPhillips said profit from the stake rose 47 percent to an estimated $774 million.

Energy companies are struggling to increase production as oil- rich governments limit access to the world’s largest fields and competition increases from producers in countries such as India and China. As oil prices rise, many production-sharing contracts transfer increasing volumes of output to the host governments.

ConocoPhillips CEO Jim Mulva has sought to counter limitations overseas by investing more in developed countries, where contracts are more readily enforced and producers pay royalties, rather than sharing production with governments.

The 2006 acquisition of Burlington Resources Inc. made ConocoPhillips the largest U.S. gas producer. Gas touched a record $15.78 per million British thermal units in December 2005, the day after Mulva announced the Burlington deal. After falling 74 percent to almost $4 in 2006, gas rebounded to average $11.47 in the second quarter.

ConocoPhillips had an 8.1 percent drop in second-quarter gas production in the U.S. The trend toward lower output is worrisome, said Robert Goodof, who helps manage $22 billion in assets, including about 442,000 shares of ConocoPhillips, at Loomis Sayles & Co. in Boston.

“These guys bought Burlington for growth,” Goodof said. “You have to wonder how they’re operating it. They seem content to keep a lot of gas in the ground, and I don’t think that’s going to make a lot of shareholders happy.”

Mulva told investors on a conference call that production will increase in the fourth quarter, allowing ConocoPhillips to meet its full-year output target of 1.8 million barrels of oil equivalent a day.

Increased oil and gas earnings offset a refining business weakened as crude prices rose faster than gasoline and diesel. The 90 percent increase in the second-quarter average for oil futures prices was more than double that of gasoline futures.

ConocoPhillips ranks behind only Valero Energy Corp. of San Antonio in U.S. oil-processing capacity.

Originally published by JIM KENNETT Bloomberg News.

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