Conoco unveils Russia plans as profits double

Financial Times ^ | January 26 2005 | Doug Cameron

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ConocoPhillips on Wednesday outlined plans to expand its investments in Russia as the US oil and gas group reported a near-doubling in profits for the fourth quarter.

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The third-largest US energy group by production opened a reporting season for the major oil companies expected to be dominated by near-record earnings, but tempered by concerns over rising exploration and production cuts and increasing government intervention.

Conoco's net profits climbed from $1.02bn to $2.43bn in the three months to December 31, with earnings per share rising from $1.48 to $3.44, ahead of the $3.07 consensus among analysts. Rising oil, gas and chemical prices pushed up revenues from $28bn to $40.1bn.

Conoco is credited with capturing synergies and strengthening its balance sheet through asset sales, while its production profile has been diversified with last year's agreement to take a minority stake in Russia's Lukoil.

It is investing an initial $3bn in its Russian expansion, securing a 10 per cent stake which it plans to double, and securing changes to Lukoil's charter which would allow it to book its share of the Russian group's earnings, production and reserves. Lukoil contributed $74m in earnings in the quarter and 150,000 barrels a day in production, and Conoco said it would make selective purchases to increase its stake towards the ceiling of 20 per cent agreed between the companies.

It also committed a further $500m to develop the Timan-Pechora joint venture with Lukoil, more than doubling the commitment it made to secure a 30 per cent share in the northern Russian project.

Conoco is the most leveraged of the US majors to refining margins, which declined sharply in the final quarter in all regions bar Asia while remaining well above year-ago levels. Profits from refining and marketing almost quadrupled over the year to $753m, and were $45m higher than in the prior quarter.

Profits from its chemicals business climbed from $11m to $83m in the quarter, just above the level in the prior quarter.

In its upstream business, earnings rose from $991m to $1.67bn as a result of higher oil and gas prices, and compares with the $1.42bn earned in the prior quarter. Production averaged 1.6bn barrels of oil equivalent in the quarter, with the completion of maintenance in Alaska and the North Sea compensating for the continuing shut-in of platforms in the Gulf of Mexico affected by Hurricane Ivan.

Production from Venezuela was also reduced by a change in the government's royalty rate, and the company remains in discussion with the Venezuelan authorities after a contract to develop the Comoro offshore field was unexpectedly cancelled.

"We expect 2005 production, including Canadian syncrude, to increase to approximately 1.62m BOE per day, excluding the impacts of Lukoil,” said Jim Mulva, chairman and chief executive officer, in a prepared statement. “Production increases are anticipated through the continued ramp-up of Magnolia, Hamaca, Bayu-Undan and Belanak. Further increases also are expected as expansion projects in the UK and Alaska are completed during the year.”

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