ConocoPhillips (COP)

Q3 2011 Earnings Call

October 26, 2011 11:00 am ET

Executives

Clayton Reasor - Vice President of Corporate Affairs

Jeffrey Wayne Sheets - Chief Financial Officer and Senior Vice President of Finance

Analysts

Evan Calio - Morgan Stanley, Research Division

Paul Y. Cheng - Barclays Capital, Research Division

Arjun N. Murti - Goldman Sachs Group Inc., Research Division

John P. Herrlin - Societe Generale Cross Asset Research

Mark Gilman - The Benchmark Company, LLC, Research Division

Iain Reid - Jefferies & Company, Inc., Research Division

Edward Westlake - Crédit Suisse AG, Research Division

Philip Weiss - Argus Research Company

Doug Terreson - ISI Group Inc., Research Division

Paul Sankey - Deutsche Bank AG, Research Division

Ann L. Kohler - CRT Capital Group LLC, Research Division

Jacques H. Rousseau - RBC Capital Markets, LLC, Research Division

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

Faisel Khan - Citigroup Inc, Research Division

Presentation

Operator

Welcome to the Q3 2011 ConocoPhillips Earnings Conference Call. My name is Kim, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Mr. Clayton Reasor, Vice President of corporate and Investor Relations. Mr. Reasor, you may begin.

Clayton Reasor

Thank you. Well, good morning, and welcome to ConocoPhillips Third Quarter Earnings Conference Call. We appreciate your interest in the company.

I'm joined today by Jeff Sheets, Senior Vice President of Finance and our CFO. This morning, we'll provide a summary of our key financial and operating results for the third quarter, as well as our outlook for the remainder of 2011. You can find our presentation material in the Investor Relations section of the ConocoPhillips website.

But before we get started, I'd like you to take a look at the Safe Harbor statement that we have on the next slide. It's a reminder that we will be making forward-looking statements during this presentation and during the Q&A. Actual results may differ materially from what's presented today, and factors that could cause those actual results to change are included in this slide, as well as in our filings with the SEC.

So with that, I'll turn the call over to Jeff Sheets to take you through our prepared remarks and presentation.

Jeffrey Wayne Sheets

Thanks, Clayton. I'll start on Slide 2, which highlights some of our third quarter results.

During the quarter, we had adjusted earnings of $3.5 billion, which is $2.52 per share. This compares to adjusted earnings of $1.50 per share in the third quarter of 2010. We generated cash from operations of $4.10 per share during the quarter. Third quarter production of 1.54 million BOE per day was lower than the prior quarter, but in line with our expectations. In R&M, with 92% global refining utilization, we were able to take advantage of the improved refining margin environment. We generated $5.6 billion in cash from operations this quarter. Our annualized return on capital employed was 16% and our cash return on capital employed was 24%.

During the quarter, we completed the sale of the Wilhelmshaven Refinery in Germany and announced that we are marketing the Trainer Refinery in the Philadelphia area. These steps are consistent with our stated objective to reduce refining capacity by rationalizing low-returning refining assets. Our purchase of 46 million shares this quarter represented 3% of our shares outstanding.

So let's turn to Slide 3 and we'll discuss some of the details of our performance for the quarter.

Total reported earnings were $2.6 billion, which included $837 million of special items. Special items included $329 million in noncash charges related to the Trainer Refinery, a 275 -- $279 million loss on the dilution of the company's interest in APLNG, a $109 million increase in deferred tax expense from tax legislation enacted in the United Kingdom, as well as losses on the sale of our Wilhelmshaven Refinery and costs related to the Bohai Bay incident.

Total company adjusted earnings were $3.5 billion, which is up about $1.2 billion compared to the third quarter of last year.

Our E&P segment improved by $686 million due primarily to higher prices, but this is partially offset by higher taxes and lower volumes. R&M adjusted earnings increased $928 million due largely to higher global Refining and Marketing margins.

In the third quarter of 2010, our earnings included $436 million related to our ownership interest in LUKOIL. And since we've disposed off our interest in LUKOIL, we no longer have similar earnings in our third quarter 2011 results.

Our other segment earnings were $38 million higher than a year ago as a result of higher Chemicals and Midstream earnings, offset by higher corporate expenses.

So next, we'll look at more detail on our segment earnings, starting with our Upstream business, which is highlighted on Slide 4, and we'll talk about production first.

Our production decreased approximately 10% compared to the third quarter of last year. And on this slide, I'm going to walk through the key factors behind this change. We had asset dispositions of 39,000 BOE per day, about 20 of which was North America natural gas production. The events in Libya reduced production by around 48,000 BOE per day. We continue to see significant decline in Russia. Our production in Russia this quarter was down 24,000 BOE per day, which is about half the production level we saw in the third quarter last year, and that's due to poor reservoir performance at the YK field. We also saw a reduction of around 28,000 BOE per day in our North America natural gas production due to our decision to reduce capital directed toward North America natural gas.

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