18 January 2009

COP: Preliminary Data on 4Q-2008

Although investors have to wait another 10 days for ConocoPhillips (NYSE: COP) to announce its 2008 fourth-quarter results, the company has reported some observations on what transpired in the energy industry during this period.

Conoco stated that crude oil prices were "significantly lower" in the fourth quarter than the third quarter, natural gas prices were "significantly lower" in the U.S., and realized refining margins were "lower" worldwide.  While there were some mitigating factors, these statements (of the obvious) indicate that Revenue for most energy companies in the fourth quarter will be much less than in the third quarter.

ConocoPhillips is the seventh-largest Major Integrated Oil & Gas company by market capitalization.  Holding the fifth spot on the Fortune 500 list, Conoco's heft was achieved with mergers and acquisitions.  Most notably, Conoco, Inc., and Phillips Petroleum combined in August 2002.  In March 2006, ConocoPhillips purchased Burlington Resources, which had extensive natural gas operations in North America, for $33.9 billion.

We previously suggested that Conoco's fourth-quarter Revenue might be 35 to 40 percent lower than the third quarter's Revenue of $70 billion.  Our, um, crude estimate was $44 billion.  The price of Light Sweet Crude Oil continued to fall after we made our projection, so our figure might ultimately prove to be optimistic.

ConocoPhillips owned 20 percent of LUKOIL (OTC: LUKOY), which is responsible for more than 18 percent of Russia's oil production, on 30 September 2008.  Lukoil ADRs declined from $98.75 on 30 June 2008 to $33.10 on 31 December 2008.  We remarked after the third quarter that Conoco had decided to treat the decline in the market value of its Lukoil investment as a temporary impairment, but that it might have to record an impairment charge if the price remained below book value.

This has now happened.  In its latest announcement, ConocoPhillips states that it will recognize an after-tax impairment charge of $7.3 billion to reflect the reduced value of Lukoil.

The Lukoil charge, however, almost seems minor because ConocoPhillips will also writedown in the fourth quarter $25.4 billion of goodwill in its Exploration and Production segment, and it will record other asset impairments of $1.3 billion.  Both of these figures are after-tax and are a consequence of falling commodity and equity prices.

The $4.5 billion charge in 2007 related to troubles with the Venezuelan government seems much less signicant now.

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