Conoco's Ups and Downs

• Email
• Share
• Print

At this point, I could probably write Big Oil's quarterly earnings releases in my sleep.

With the price of oil on everybody's mind, and gas prices not far behind, there aren't a whole lot of surprises left in oil-company earnings. ConocoPhillips (NYSE: COP) led off earnings season for the major integrated companies with a thoroughly predictable release Thursday.

If you back out a $4.5 billion impairment charge related to Hugo Chavez helping himself Conoco's --and Total's (NYSE: TOT), and StatoilHydro's (NYSE: STO), and those of a trio of other companies last year -- Conoco's net income rose 13%.

In the upstream sector -- that's exploration and production -- adjusted earnings rose almost 90%. However, if you look at the production of 1.75 barrels of oil equivalent per day, the level dropped about 8.4% from the June 2007 period. Unfortunately, that's generally been the trend for Big Oil during the past few years, and if it's not reversed, it portends nothing good for the industry in the long term. For those curious about Russian developments, Conoco's LUKOIL investment yielded $774 million in net income in the quarter.

Downstream (in refining and marketing), the ongoing squeeze on margins -- essentially crude costs versus gasoline prices -- pushed the unit's income down 72%. The refinery utilization rate didn't move an inch compared to last year, but it rose 400 basis points sequentially.

That's just the first salvo this quarter from Big Oil. It's telling to note that, despite a near doubling of crude prices in the past year, Conoco's shares are essentially flat with their year-ago price. (You reckon the company's volume declines and refining squeeze are having an impact?)

In oil, I'd give majors like Conoco a wide berth for a while. Instead, I'd put my shekels into oilfield-services players like Schlumberger (NYSE: SLB) or Weatherford (NYSE: WFT), or the more focused independents, such as hot and successful gas producer Chesapeake Energy (NYSE: CHK).

For related Foolishness:

• Conoco's Making Friends Abroad
• Chesapeake Scores
• Schlumberger: Stronger for Longer