Conoco Nets $5.44 Billion In Global Oil Boom

ConocoPhillips reported a $5.44 billion net profit, kicking off a quarter of gargantuan earnings from global oil companies that some believe could be the top of the current cycle.

The second-quarter earnings release sounded notes of caution that are likely to be repeated next week when Exxon Mobil Corp., BP PLC and other large oil companies report: a weak refining environment, rising costs and falling production of crude oil and natural gas.

Oil companies face another issue: oil prices have risen so fast and so far that demand is eroding. This could send prices down and turn second-quarter earnings into a “peak” for the sector, notes Lehman Brothers. The bank pointed out that the cost of oil is 7% of global gross domestic product, the same as when oil prices topped out in the 1970s.

For the companies, the toughest challenge remains the struggle to increase the amount of oil and natural gas they produce. Western oil companies are having trouble gaining access to new resources while existing fields continue to decline. ConocoPhillip’s output fell 7.8% from the same period a year earlier.

Record-setting oil prices continued to fatten the bottom line of Texas-based ConocoPhillips, the third-largest U.S. oil company by market capitalization behind Exxon and Chevron Corp. It sold the crude it produced for an average of $118.01 a barrel, nearly twice the level of a year before.

Signs that global demand is weakening in the face of high oil and gas prices have led energy prices to fall this month, further clouding the outlook for the rest of the year. After hitting a record in early July of $145.29 on the New York Mercantile Exchange, oil prices have lost 14% and closed Wednesday at $124.44.

What to expect from other major companies — including analyst forecasts for profit and revenue — as they report quarterly earnings.

As expected, income from ConocoPhillip’s refining segment was down significantly as the company, along with other refiners, had difficulty raising gasoline prices to keep pace with high crude-oil costs, squeezing profit margins. Operating income from refining and marketing, which includes refining operations as well as sales at retail gas stations, was $664 million, down 72%.

Chevron Corp., meanwhile, already has warned investors that it would report a second-quarter operating loss in its refining segment of at least $250 million, marking the first time since its 2001 merger with Texaco that this segment lost money.

While the companies remain strong generators of profits and cash flows, there are increasing signs that cost inflation is eating away at the companies’ ability to carry high crude prices to their bottom lines. ConocoPhillips reported $71.41 billion in revenue, up 51% from a year earlier. By comparison, its adjusted earnings were up only 13%. The company reported a $301 million profit in the second quarter last year, but that was impacted by a $4.51 billion impairment charged for exiting Venezuela after the country sought to grab a controlling interest in its properties. Earnings without the one-time charge were $4.81 billion.

In a recent note, Moody’s Investors Service warned that the industry’s capital and cash operating costs have increased steadily in recent years, with the average cost of producing oil and gas more than doubling to $22.97 a barrel in 2007, from $9.94 in 2002.

ConocoPhillips and the rest of the industry are still reaping the benefits of investments made in past years, when both oil prices and costs were significantly lower. With ample cash on hand, the company spent $2.5 billion in the second quarter purchasing its own stock and reiterated plans to spend $10 billion on share buybacks this year. It also reported $3.6 billion in capital spending, mostly for drilling wells, upgrading and expanding its refineries and related costs.

J.P. Morgan analyst Michael LaMotte noted that the company’s production guidance for the third quarter “echoes the familiar challenges around production declines” and said he expected refining earnings to remain weak.

Shares of ConocoPhillips were down $2.48, or 2.9%, at $81.83 in 4 p.m. composite trading on the New York Stock Exchange.

Write to Russell Gold at [email protected] and Guy Chazan at[email protected]

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