AJOC EDITORIAL: Wielechowski blows it again on ConocoPhillips
If there is one thing Anchorage Democrat Sen. Bill Wielechowski is good for, it is providing column material with his reactions to ConocoPhillips earnings reports.
This quarter is no different, and he definitely isn’t making the task any more difficult.
• “Yesterday ConocoPhillips announced $627 million in 2nd quarter profits from their Alaska operations or nearly $7 million per day from Alaska alone. On an hourly basis that equates to almost $300,000 in profits each and every hour.”
So? Here Wielechowski is simply trying to appeal to the dark impulse of envy in his audience. According to the report, the company paid an effective tax rate of 50.3 percent in Alaska for the quarter, so the government also made about $7 million per day and $300,000 per hour.
Unlike ConocoPhillips, however, it didn’t have to do anything to make that money other than sit back and collect the checks.
• “At the same time, they announced Lower 48 profits of only $265 million from a greater volume of crude oil production – 191,000 barrels per day in the Lower 48 compared to 170,000 in Alaska.
“This proves beyond a shadow of a doubt that Alaska remains one of the most profitable places in the world. Oil profits in Alaska are more than double what they are in the Lower 48.”
It’s difficult to know where to begin with all the wrong here. The $265 million in profits for the Lower 48 does not just count profits from crude oil production; it also includes less profitable natural gas and natural gas liquids that account for nearly two-thirds of ConocoPhillips’ global production.
More on this to come as Wielechowski erroneously compares per barrel oil profits versus per barrel of oil equivalent profits.
Wielechowski also doesn’t tell you that Alaska North Slope crude fetched about $109 per barrel in the second quarter compared to about $94 per barrel in the Lower 48. You don’t have to be much of a financial guru to understand that a greater price can bring more revenue even at a lower production level.
On a gross revenue level, ConocoPhillips made about $1.63 billion from oil in the Lower 48 and about $1.68 billion in Alaska.
It will not take much of an increase in Lower 48 crude oil production before the gross revenue exceeds Alaska even with the North Slope price premium.
Add in that the effective tax rate for Lower 48 operations is 38.7 percent compared to 50.3 percent in Alaska and it isn’t difficult to figure which jurisdiction is more profitable for oil production, as you’ll see below.
• “Conoco’s Alaska profits per barrel rose from $29 in 2012 to $31 in 2013 to $34 so far in 2014. ‘While Alaskans face growing deficits and cuts to essential public services, the industry’s profits swell,’ said Senator Bill Wielechowski. ‘In the Lower 48 and Latin America, they make about $6 per barrel of oil equivalent. In Canada, they make about $10.50 per barrel. In Alaska this year, they are making $34 per barrel.’”
Wielechowski continues to ignore the price for natural gas and liquids on a barrel of oil equivalent basis as if “equivalent” means gas and crude oil sell for the same price or have the same margins.
There are 6,000 cubic feet, of 6 mcf, in one barrel of oil equivalent. At a price of $4.43 per mcf for the Lower 48 in the second quarter, ConocoPhillips received $26.58 per barrel of oil equivalent for natural gas sales.
The only true comparison is the profit per barrel in Alaska versus the profit per barrel of oil in the Lower 48. According to a ConocoPhillips presentation to investors May 27, the company makes more than $40 per barrel from Lower 48 production.
So, no, Alaska is not more profitable.
He is also ignoring the capital expenses and the depreciation, depletion and amortization, or DD&A, that reduce ConocoPhillips’ Lower 48 taxable income.
Out of ConocoPhillips’ daily global production of nearly 1.6 million BOE, 605,000 barrels per day was from crude oil and about 6 billion cubic feet per day was from natural gas products.
Boosted by more than $1.6 billion in oil revenue, the company spent more than $1.3 billion on capital expenditures in the second quarter and took DD&A of $939 million in the Lower 48, where it produced about 1.5 billion cubic feet of natural gas per day.
Those deductions based on large capital expenditures reduced its Lower 48 taxable income to about $434 million.
Again, you don’t have to be an accountant to see that ConocoPhillips mostly a gas company, so comparing oil profits in Alaska with natural gas profits in the Lower 48 is nonsensical.
• “Wielechowski noted that Conoco’s Alaska profits rose even as their Alaska production fell. ConocoPhillips produced six thousand barrels per day more in the same quarter last year, but made $42 million more this 2nd quarter than last.”
Wielechowski must have really, really hoped nobody else read the earnings report.
In fact, ConocoPhillips’ income in the second quarter last year was $682 million compared to the $627 million this year.
It is only after a one-time settlement writedown of $97 million in that same quarter last year that net income decreases relative to this quarter.
One-time expenditures are irrelevant to a year-to-year income comparison, so he is just full of it on this one.
• “’They call it the More Alaska Production Act, but really it should be called the Make Alaska Poor Act,’ he said. Had Senate Bill 21 been in effect for the past six years, Alaskans would have lost $8.5 billion, according to the Parnell Administration.”
Alaska lost a cumulative 80 million barrels of production in the past six years, also according to the Parnell Administration.
• “Despite television commercials ConocoPhillips and others have been running trying to convince Alaskans they plan to increase oil production in Alaska, ConocoPhillips recently told a group of investors it actually plans on continued decreasing production in Alaska. In that same presentation, ConocoPhillips touted plans for skyrocketing production in the Lower 48, Latin America, Canada and Europe. (see attached slide)”
Yet again, Wielechowski was really hoping nobody fact-checked him.
On Page 2 (yes, Page 2), of the ConocoPhillips earnings release it states relative to Alaska:
“In an effort to increase production and as part of the increasing investment in Alaska, we signed a contract to build a new rotary drilling rig for the Kuparuk River Unit with drilling expected to commence in early 2016.”
Even in the slide he cites, it shows ConocoPhillips planning to add about 40,000 barrels per day in new projects in Alaska to keep production close to 200,000 barrels of oil equivalent per day (this includes the resumption of LNG exports from Nikiski, which accounts for about 23,000 BOE per day in its earnings in the second quarter).
• “Meanwhile, as Alaska’s savings accounts are being rapidly depleted, Wielechowski noted that ConocoPhillips just this month announced a 6% increase in its quarterly dividend to shareholders. ‘It would appear that instead of reinvesting in Alaska to increase oil production, the windfall profits are simply going back to ConocoPhillips’ shareholders,’ Senator Wielechowski lamented.”
Aww, he lamented. Sad face. If he’d bothered to do any math whatsoever, he could have calculated that the dividend increase amounts to an additional $50 million per quarter.
Meanwhile, ConocoPhillips’ capital spending in Alaska has increased by $260 million in the first half of 2014 compared to the first half of 2013.
What that means is that even if ConocoPhillips made an extra $42 million this quarter compared to last (which it didn’t), the company has invested more than six times that much into Alaska projects this year versus what it spent last year.
And they didn’t even need a law telling them to do it.
The only thing worth lamenting is that Wielechowski and his ilk are trying to sway an election with this kind of garbage.
Andrew Jensen can be reached at email@example.com.