Conoco, Occidental's Dismal Q1 Brightened by Cutting Costs, Increased Production

ConocoPhillips and Occidental Petroleum reported their first quarter earnings today and as expected the results were pretty abysmal as lower prices for oil and gas pushed net incomes for both companies down about 80 percent from the same period last year.

And yet there were a few bright spots for both companies among all the gloom and doom.

For one, Conoco and Occidental beat analyst estimates by 10 cents a share, meaning they did not do as badly as expected. Their bottom lines were propped up largely by cutting costs – an obvious step to take in light of plunging oil and gas prices – and increasing output.

Major and independent oil and gas companies alike will prove their worth in the coming months by how effectively they manage costs while maintaining or even increasing production.

Occidental played their cost-cutting strategy pretty well. The Los Angeles-based company reported its production increased 6.7 percent from the first quarter of 2008. CEO Ray Irani cut capital spending by one-fourth this year and turned the company’s focus on its “sure things” — long-established fields in the Middle East, Africa and the U.S.

It hasn’t ignored adding new reserves either. Occidental made some big investments in 2008, about $4 billion on acquisitions for rights to drill in the U.S., Canada and Libya. It currently has about 10,000 drilling locations in the U.S. alone, Bill Albrecht said during today’s earnings conference call.

Irani also has set his sights on Iraq and hopes to either buy minority stakes in Iraqi fields containing more than 10 billion barrels or bidding on rights to operate small to mid-sized fields, he said during the conference call. This move is in line with Occidental’s commitment to adding new reserves. In 2008 it added new reserves at three times the pace from the year before and increased its untapped deposits nearly 4 percent.

Houston-based Conoco also cut its capital spending budget for 2009 by 18 percent to $12.5 billion and said it is on track to reduce its controllable costs by $1.4 billion this year.

Conoco benefited by better-than-expected earnings aided by lower costs and increased production. Conoco’s production rose 3 percent from the previous quarter to 1.93 million barrels of oil-equivalent and 7 percent higher than the same period last year.

Much of the increased production came from new developments in Russia, Vietnam and China. Conoco also was able to take advantage of its production-sharing contracts with foreign countries, which increases its shares of oil and gas when prices fall. Conoco, which posted a massive $17 billion loss last year and cut its staff by 4 percent in January, has smartened up this past quarter by keeping costs under control.

Chevron and Exxon will report their first quarter earnings next week and it will be interesting to see if the two super majors achieved the same balance.