ConocoPhillips, the largest U.S. refiner, said third-quarter profit jumped 54 percent as oil prices surged and margins widened on diesel and other fuels.

Net income rose to $2.01 billion, or $2.86 a share, from $1.31 billion, or $1.90, a year earlier, the Houston-based company said in a statement. Sales climbed 31 percent to $34.7 billion. Per-share profit was 29 cents higher than the average estimate from 21 analysts surveyed by Thomson Financial.

Exploration and production earnings jumped 47 percent to $1.42 billion as crude-oil futures surged to a record quarterly average of $43.89 a barrel in New York. Third-quarter refining profit rose 46 percent to $708 million as diesel, jet-fuel and heating-oil prices rallied.

“They aren’t making a fortune, they’re making a king’s ransom,” said George Morgan, who manages the $5 billion Templeton Growth Fund Ltd., including shares of BP Plc and Shell Transport & Trading Co., for Franklin Resources Inc. in Nassau, Bahamas.

Chief Executive James Mulva, 58, expanded in countries with growing oil production, such as Vietnam, Russia and Venezuela, as output declined from older fields in the U.S. and the North Sea. Mulva, who succeeded Archie Dunham as chairman on Oct. 1, is using gains in cash flow spurred by record prices to boost shareholder dividends and pay off debt.

Shares of ConocoPhillips, which rose as much as 34 cents after the earnings statement was released, fell 37 cents to $86.06 at 10:35 a.m. in New York Stock Exchange composite trading. The stock had climbed 32 percent this year.

Production Declines

Third-quarter oil output fell 7.6 percent from a year earlier, and natural-gas production slid 5.9 percent, partly because of asset sales, ConocoPhillips said.

Oil production rose from wells in Vietnam and the Timor Sea and declined everywhere else, the company said. Gas output fell everywhere the company did business except Norway and Vietnam.

The company was paid an average of $38.77 per barrel of oil, up 44 percent from a year earlier. Its average gas price climbed 17 percent to $4.48 per thousand cubic feet.

ConocoPhillips agreed last month to pay $1.99 billion for the Russian government’s 7.6 percent stake in OAO Lukoil, a transaction that will probably increase ConocoPhillips’s proved reserves by the equivalent of 800 million barrels of oil, or 10 percent.

Lukoil Agreement

Under the transaction, ConocoPhillips agreed to help negotiate restoration of Lukoil’s contract to develop Iraq’s West Qurna field. The contract was rescinded by the Saddam Hussein regime before last year’s U.S.-led invasion of Iraq.

ConocoPhillips would receive a 17.5 percent stake in the field, compared with 51 percent for Lukoil and 25 for the Iraqi government.

The company’s debt-to-capital ratio declined to 28 percent at the end of the third quarter from 29 percent three months earlier, ConocoPhillips said. Cash on hand increased to $3.3 billion from $804 million in preparation for the Lukoil stake purchase.

BP, Europe’s largest oil company, yesterday said third- quarter profit climbed 53 percent to $3.46 billion on record oil prices. Valero Energy Corp., the No. 3 U.S. refiner, said third- quarter net income more than doubled as fuel prices soared.

Irving, Texas-based Exxon Mobil Corp., the world’s largest publicly traded oil company, is expected to report tomorrow that third-quarter profit rose 58 percent from a year earlier to 87 cents a share, based on the average estimate from 25 analysts surveyed by Thomson Financial.

Margins Widen

U.S. refining margins, the gap between what processors pay for crude oil and how much they’re paid for gasoline, heating oil and other refined fuels, averaged $7.95 per barrel in the third quarter, according to data compiled by Bloomberg. The average, based on futures contracts traded in New York, was the highest on record for a third quarter.

Retail diesel prices in the U.S. averaged $1.83 a gallon during the third quarter, up 25 percent from a year earlier, according to Energy Department figures. Gasoline prices averaged $1.89 a gallon, a 17 percent increase.

Refining margins “really blew out again,” said Bryan Caviness, a senior director and oil analyst at Fitch Inc., a credit-rating company. “They did remarkably well by inching up prices at the pump to keep pace with the rise in the price of crude.”

The company’s 4 3/4 percent notes maturing in October 2012 rose 0.78 cent on the dollar to 102.87 cents on the dollar, according to Trace, the bond price reporting service of the NASD. The yield fell to 4.32 percent.

Refining Edge

ConocoPhillips, created through Phillips Petroleum Co.’s August 2002 acquisition of Conoco Inc., benefits more from widening refining margins than larger rivals, such as Exxon Mobil and ChevronTexaco Corp., which generate a bigger share of their profits from producing oil and gas.

Refining generated 21 percent of ConocoPhillips’s net income in 2003, compared with 10 percent for Exxon Mobil and 6.7 percent for ChevronTexaco.

Every 25-cent increase in per-barrel refining margins boosts ConocoPhillips annual net income by $125 million, according to company filings with the U.S. Securities and Exchange Commission.

The company also is benefiting from increasing discounts for cheaper grades of oil, which some competitors aren’t equipped to process. High-sulfur crude, known as sour oil, was a record 27 percent less expensive than low-sulfur oil earlier this month.

ConocoPhillips is the third-largest U.S. oil and gas producer by sales, ranking behind Exxon Mobil and ChevronTexaco. The company owns 12 U.S. refineries that can process 2.2 million barrels of crude oil a day.

To contact the reporter on this story:
Joe Carroll in Chicago [email protected].

To contact the editor responsible for this story:
Robert Dieterich at [email protected].