ConocoPhillips 2006 reserves replacement disappoints analysts

The ConocoPhillips announcement that it added three times as much oil and gas to its reserves as it produced last year did little to impress Wall Street analysts, largely because the gains occurred through acquisitions.

At least three major brokerage houses A.G. Edwards, Deutsche Bank and Citigroup said Thursday they were disappointed with ConocoPhillips' 2006 reserves replacement figures, released by the oil company after Wednesday's closing bell.

ConocoPhillips shares dropped $2.71, or 4.2 percent, to close at $61.82 on the New York Stock Exchange. The shares have traded in a range of $54.90 to $74.89 in the past year.

ConocoPhillips said Wednesday it likely ended 2006 with the equivalent of 11.1 billion barrels of oil in proved reserves, a key asset for the company. That's up from 9.4 billion barrels in 2005, but the growth was largely tied to ConocoPhillips' $35.6 billion (Ђ27.4 billion) purchase of Burlington Resources Inc., completed last spring, and its increased stake in Russian oil producer OAO Lukoil.

The company said 2006 production likely totaled 880 million barrels, including fuel gas.

"With a low-profile exploration program that has offered little in the way of exploration success, (ConocoPhillips) has pursued acquisitions to bolster reserve additions that in this environment, we believe, will likely come with a high price tag and (put) further pressure on the balance sheet," Citigroup analyst Doug Leggate said in a research note Thursday.

Leggate, who maintained his "hold" rating on ConocoPhillips stock, estimated the company's organic reserves replacement has averaged only 73 percent in the past five years. Some analysts say a company's reserves replacement should average around 130 percent over a three-year period if it expects to grow production.

A.G. Edwards' Bruce Lanni said that ConocoPhillips reserves replacement likely amounted to only 10 percent to 15 percent last year excluding purchases, and 2006 marked the third straight year of reserves replacement below 100 percent. He also reiterated his hold rating on ConocoPhillips shares.

"In our opinion, this announcement, along with the company's dependence on acquisitions and joint ventures, further suggests that ConocoPhillips' future organic growth opportunities remain somewhat limited," the A.G. Edwards note said.

ConocoPhillips has said its goal is to replace production 100 percent as part of a three-year rolling average, reports AP.

Last week, in a filing with the U.S. Securities and Exchange Commission, ConocoPhillips said its fourth-quarter refining and marketing margins are expected to be significantly lower than in the third quarter. The company also said its crude oil prices were weaker in the final three months of 2006 versus the third quarter.

ConocoPhillips is scheduled to report fourth-quarter and full-year earnings Jan. 24.

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