It's been a month since the three biggest U.S.-based oil and gas producers told us about their second quarters. As you know, the results from ExxonMobil (XOM +0.73%), the kingpin, were especially disappointing, given a 57% year-over-year free fall in earnings.
However, the third-largest member of the trio, ConocoPhillips (COP +1.41%), saw its adjusted earnings catapult by about 20%, in the process topping the consensus expectation by fully $0.12 a share. The primary reasons for the differences? The Houston-based company is in the final stages of a major restructuring that's allowed it to jettison its occasionally erratic downstream operations, eliminate upstream properties that no longer fit its proverbial pistol, and focus on plays with the highest potential, both at home and abroad.
Please take these stations
As you know, nigh onto 18 months ago, Conoco gifted its shareholders with a spinoff of its refining and marking operations. The result was the creation of Phillips 66 (PSX +1.15%), which became the corporate home of 15 refineries, 10,000 branded marketing outlets, and 15,000 miles of pipeline. Phillips shares have been good to their holders, advancing by more than 70% since the company's birth.
At the same time, Conoco has been actively pruning its upstream assets. In the process it's added billions of dollars to its balance sheet and induced more than a little head scratching among energy investors. Many in that group had long accepted the integrated approach as a perfectly acceptable way for major oil and gas companies to conduct their businesses.
Far fatter margins
ConocoPhillips hasn't stopped at laying a comparative earnings hit on Exxon during reporting season. If you examine the two big companies' results over the past four quarters you'll note that the newly independent producer has chalked up an average operating margin of 24.6%, more than twice that of its bigger, integrated Texas neighbor.
I'm attributing that startling differential primarily to two factors: First, while Phillips 66 shares have obviously done nicely since they were created, that company's operating margins barely top a 3% 12-month average. Obviously, then, Conoco has benefited by no longer being dragged down by puny downstream returns. And second, the company has been levitated by having trimmed marginal properties and pushed increased capital at those that are more promising.
Pruning properties
In early 2013, ConocoPhillips unloaded its Cedar Creek Anticline properties to enhanced oil recovery specialist Denbury Resources (DNR +0.00%) for $1.7 billion. Beyond that, once the second half of the year has become history another $9 billion or so will have been dropped into the company's coffers from sales of assets in Algeria, Nigeria, and Kazakhstan.
Beyond that, in August Conoco announced another pair of sales. For $720 million, it's selling its stake in 226,000 acres of undeveloped Alberta tar sands properties to a partnership consisting of ExxonMobil and Calgary-based Imperial Oil (IMO +1.60%). In addition its Trinidad and Tobago holdings will soon be transferred to the National Gas Company of Trinidad and Tobago for $600 million.
Making hay at home
Conversely, ConocoPhillips' attention to the U.S. onshore has borne fruit. Onshore, where it is well positioned, its operations in the Eagle Ford, Bakken, and Permian Basin collectively yielded 47% more barrels of oil equivalent in the second quarter than in the same period of 2012. That followed 42% year-over-year improvement for the prior quarter.
Conoco also continues to be active in the Gulf of Mexico. You may recall that the company's first quarter of 2013 yielded two significant Gulf discoveries. And then in March, it was high bidder on 30 blocks -- representing about 172,000 acres -- in a Gulf lease sale. Just last week it also paid more than $30 million in a western Gulf sale for the rights to explore a tract about 200 miles south of Galveston, Texas.
Internationally, largely through its efforts in Bohai Bay and in the Panyu project offshore China, along with the Gumusut in Malaysia, its production in Asia-Pacific and the Middle East increased by 20% from a year earlier. It's also been busy in the Kwanza Basin of Angola, a hot new play that has turned out to be a deepwater mirror of Brazil's Santos Basin.
Misplaced skepticism
There are those who maintain that the dearth of major acquisitions of late among what are typically referred to the Big Three (Exxon, Chevron, and ConocoPhillips) is attributable to the encumbrances created by the size of the companies. As Oppenheimer's energy analyst Fadel Gheit was quoted as saying recently, "They have to reinvent themselves. These companies are too big to grow."
Foolish bottom line
I'd contend that that's precisely what ConocoPhillips has been up to, likely to the ongoing benefit of its shareholders.
