Is ConocoPhillips (COP) Fairly Valued?

ConocoPhillips (NYSE:COP) has reported fourth-quarter earnings for 2012, and this offers another opportunity to take a closer look at the company after it separated its downstream operations from its upstream ones. The company spun off its downstream business on April 2012 as Phillips 66, and the latest quarterly results provide a detailed insight into the exploration and production business as it currently stands.

ConocoPhillips reported fourth quarter 2012 earnings of $1.4 billion, or $1.16 per share, compared to fourth quarter 2011 earnings of $3.4 billion, or $2.56 per share. The fourth quarter 2011 report included downstream results before the separation of Phillips 66 (NYSE:PSX) in April 2012. With the exclusion of special items, fourth quarter 2012 adjusted earnings amounted to $1.8 billion, or $1.43 per share, compared to fourth quarter 2011 adjusted earnings of $2.1 billion, or $1.55 per share.

Following recently concluded agreements to sell the company’s interests in the Kashagan Field, Algeria and Nigeria business units, the earnings and production impacts for these assets have been shown as discontinued operations, and the decreased adjusted earnings for fourth quarter 2012 amounted to $27 million, or $0.02 per share.

For the full year 2012, earnings were $8.4 billion, or $6.72 per share, compared to 2011 earnings of $12.4 billion, or $8.97 per share. Reported earnings for 2012 and 2011 included four months and 12 months of downstream results, and adjusted earnings were $6.7 billion, or $5.37 per share, compared with full-year 2011 adjusted earnings of $8.0 billion, or $5.75 per share.

Reserves and Operations

Preliminary year-end 2012 proved reserves amounted to 8.6 billion barrels of oil equivalent (BOE). Proved organic reserve additions for 2012 are projected to be 942 million BOE, which is an organic reserve replacement ratio of 156% of the production for the year including fuel gas. Sales for 2012, net of purchases, diminished reserves by 83 million BOE working out to a total reserve replacement ratio of 142%. Organic reserves were added across the portfolio including Canada, the Lower 48, Asia-Pacific and Europe.

Fourth-quarter production was 475,000 barrels of oil equivalent per day (MBOED) in the Lower 48 and Latin America an increase of 31 MBOED compared to the corresponding period of 2011. Significant growth continues to be generated from the ramp up of core shale plays in the Eagle Ford and Bakken, which produced approximately 113 MBOED, a 71% growth over the fourth quarter of 2011.

During the quarter, Eagle Ford averaged 89 MBOED, achieving a peak daily rate of more than 100 MBOED, while Bakken averaged 24 MBOED. Quarterly production in Canada increased by 17 MBOED over the same quarter in 2011, to 281 MBOED.