ConocoPhillips Reports Third-Quarter Net Operating Income of $456 Million.

Business Editors & Energy Writers

HOUSTON--(BUSINESS WIRE)--Oct. 24, 2002

ConocoPhillips (NYSE:COP)

                         Earnings at a glance

                     Third Quarter                Nine Months
                  2002          2001          2002          2001
----------------------------------------------------------------------
Net operating
 income       $ 456 million $ 373 million $ 820 million $1,474 million
Special items         (572)           (9)         (687)            25
Net income            (116)          364           133          1,499
----------------------------------------------------------------------
Diluted income
 per share
  Net operating
   income            $0.94         $1.33         $1.94          $5.56
  Net income        $(0.24)        $1.30         $0.32          $5.66
----------------------------------------------------------------------
Revenues      $15.7 billion $6.0 billion  $36.5 billion $16.6 billion
----------------------------------------------------------------------

ConocoPhillips (NYSE:COP) today reported third-quarter net operating income (which excludes special items) of $456 million, or 94 cents per share, compared with $373 million, or $1.33 per share, for the same period a year ago. Including special items of $572 million, the company had a loss of $116 million, or 24 cents per share, compared with net income of $364 million, or $1.30 per share, for the same period a year ago. Total revenues were $15.7 billion, versus $6 billion a year ago.

"We are extremely pleased with the progress we've made thus far in integrating the operations of Conoco and Phillips," said Jim Mulva, president and chief executive officer. "We continue to work toward finalizing our operating plans and synergy targets, which we look forward to sharing with the investment community on November 22.

"On the whole, the new company has performed well, especially in the areas of safety and operational consistency. Upstream, we benefited from improved crude oil prices, but at the same time, we have seen difficult market conditions in our downstream businesses."

The ConocoPhillips merger was consummated August 30 and utilized purchase accounting, which reflects the fair value of the Conoco assets and liabilities. Consequently, the results for the third quarter of 2002 include two months' activity for Phillips and one month's activity for ConocoPhillips. Similarly, results for the first nine months of 2002 include eight months' activity for Phillips and one month of activity for ConocoPhillips. Prior periods reflect only Phillips' results, which have been restated for discontinued operations as a result of dispositions required by the Federal Trade Commission (FTC). In order to provide meaningful prior-period comparisons, the company has included pro forma operating information for its upstream and downstream operations. This pro forma information was prepared by combining the historical statistical information of Conoco and Phillips for all reporting periods presented.

The special items of $572 million consisted primarily of $531 million in merger-related and discontinued-operation items as follows:

-- $246 million write-down of fair value associated with Conoco's in-process research and development, in accordance with purchase accounting requirements.

-- $200 million restructuring costs related to Phillips operations. Restructuring costs related to Conoco operations were included as part of the liabilities assumed in the merger, also in accordance with purchase accounting requirements.

-- $62 million, primarily for impairments associated with certain properties held for sale in accordance with the FTC consent decree.

-- $23 million in other merger-related charges.

In addition to these special items, the company experienced an $8 million loss in the third quarter of 2002 from the oil and gas hedging program related to Conoco's July 2001 Gulf Canada acquisition, as well as $2 million in foreign currency exchange gains.

For the first nine months of 2002, net operating income (which excludes special items) was $820 million, or $1.94 per share, versus $1.5 billion, or $5.56 per share, for 2001. Net income was $133 million, or 32 cents per share, compared with $1.5 billion, or $5.66 per share, for the same period a year ago. Total revenues were $36.5 billion, versus $16.6 billion a year ago.

Through the first nine months, the company's cash flows from operating activities were $2.9 billion, compared with $3.3 billion for the same period of 2001. Capital spending was $2.3 billion, versus $2.1 billion a year ago.

Following are the results of ConocoPhillips' businesses:

Upstream

Third-quarter financial results: Exploration and production net operating income was $499 million, up from $360 million in the same quarter of 2001. Net operating income benefited from higher crude oil prices and increased crude oil production, as well as the addition of earnings from the Conoco assets.

ConocoPhillips' third-quarter 2002 average worldwide crude oil sales price was $25.96 per barrel, up from $24.65 in the same period a year ago. The company's U.S. Lower 48 and worldwide natural gas prices averaged $2.65 and $2.49 per thousand cubic feet, respectively, compared with $2.53 and $2.48 in the third quarter of 2001.

Production for the quarter was adversely affected by OPEC-related cuts totaling 9,600 barrels-of-oil-equivalent (BOE) per day, a decline in U.S. Lower 48 output, and a late-2001 Denmark property sale. In addition, during the quarter, daily production was reduced by approximately 19,000 BOE per day as a result of operating interruptions at Prudhoe Bay in Alaska and Britannia in the United Kingdom, as well as from tropical storms in the Gulf of Mexico. ConocoPhillips' daily production for the month of September averaged 1.56 million BOE, including Canadian Syncrude, but excluding production from the Netherlands assets held for sale.

In the company's midstream segment, net operating income was $11 million, down slightly from the second quarter of 2002, and down from $30 million in the third quarter a year ago. This quarter's earnings reflect one month of Conoco midstream operating results, while all periods include the company's 30.3 percent interest in Duke Energy Field Services (DEFS) and Phillips' natural gas liquids operations. Compared with the third quarter of last year, earnings from DEFS declined due to higher operating expenses, hedging losses and gas imbalance adjustments.

Third-quarter pro forma operations: During the quarter, the company's worldwide BOE production was 1.55 million per day, down 3 percent from the same period last year due to asset dispositions in the United States and Europe, the previously mentioned operating interruptions in Alaska and the United Kingdom, OPEC curtailments, and normal field declines. These declines were partially offset by additional volumes in Norway, Indonesia and Venezuela. Liquids production, including Syncrude, was down 25,000 barrels per day (BPD), while natural gas production was down 161 million cubic feet per day (MMCFD).

Compared with the previous quarter, worldwide BOE production was down 5 percent. Liquids production decreased 23,000 BPD and natural gas production was down 302 MMCFD. The fall in natural gas production was due primarily to seasonal fluctuations, as well as downtime at Britannia as mentioned above.

Nine-months financial results: Exploration and production net operating income for the first nine months of 2002 was $1.1 billion, down from $1.4 billion in 2001, primarily because of lower worldwide crude oil and U.S. Lower 48 natural gas prices.

ConocoPhillips' average worldwide crude oil price was $23.43 per barrel for the first nine months of 2002, compared with $25.48 a year ago. The company's U.S. Lower 48 and worldwide natural gas prices averaged $2.42 and $2.37 per thousand cubic feet, respectively, versus $4.24 and $3.57 in the same nine-month period last year.

Midstream net operating income was $35 million, compared with $101 million in the same period a year ago. The decline was primarily due to a 28 percent drop in DEFS' average natural gas liquids index price, and higher operating expenses.

Downstream

Third-quarter financial results: Refining and marketing (R&M) net operating income was $79 million, down from $111 million in the previous quarter and $100 million a year ago. The periods are not directly comparable due to the addition of one month's earnings from Conoco in the current quarter and the late-third-quarter 2001 acquisition of Tosco.

Excluding the impact of the Conoco and Tosco transactions, R&M earnings this quarter were affected by lower refining and marketing margins and volumes, partly offset by lower costs. The refinery crude oil utilization rate for the total company averaged 90 percent, compared with 95 percent in the previous quarter, primarily due to maintenance turnarounds at the Borger (Texas) and Bayway (N.J.) refineries, and to the impact of tropical storms on the company's Gulf Coast refineries.

After-tax turnaround costs incurred during the quarter reduced earnings by approximately $30 million, versus approximately $20 million in the second quarter of 2002.

The chemicals segment, which reflects the company's 50 percent interest in Chevron Phillips Chemical Company LLC, reported net operating income of $5 million, compared with a net operating loss of $27 million in the third quarter a year ago.

Third-quarter pro forma operations: During the third quarter, the company's worldwide refinery crude oil capacity utilization rate was 91 percent. This was even with the same period a year ago, and down from 94 percent from the previous quarter as a result of the previously mentioned downtime at the Borger and Bayway refineries.

Compared with the previous quarter, refining crude oil throughput was down 77,000 BPD, or 3 percent, while U.S. petroleum products sales were down slightly.

Nine-months financial results: R&M operating results decreased to $100 million from $340 million. However, the periods are not comparable due to the inclusion of one month's earnings from Conoco in the current period and the mid-September 2001 acquisition of Tosco. Excluding these factors, earnings were down as lower refining controllable costs were more than offset by lower refining and marketing margins and volumes.

The chemicals business remains depressed due to weak economic conditions. However, margins and production volumes across most product lines were somewhat improved compared with the same period last year. This resulted in net operating income at breakeven for the first nine months of 2002, compared with a net operating loss of $89 million for the comparable period in 2001.

Emerging Businesses

The emerging businesses segment had a net operating loss of $16 million in the third quarter of 2002, versus a loss of $2 million a year ago. This segment's activities include gas-to-liquids, carbon fibers, fuels technology and power generation. Both periods include a full quarter's results for fuels technology, while the third quarter of 2002 also includes September results for gas-to-liquids, carbon fibers and power generation.

Corporate

Third-quarter corporate expenses on a net operating basis were $122 million, compared with $99 million in the previous quarter and $88 million for the third quarter a year ago. The increase was primarily due to higher interest expense and expenses associated with one month of Conoco activity.

At the end of September, the company's debt-to-capital ratio was 40 percent, compared with 39 percent at the end of June 2002. Total debt at the end of the third quarter was $20.5 billion, up from $9.6 billion at the end of the second, as a result of the debt assumed in the merger with Conoco, including a $550 million increase for fair value.

Outlook

Mr. Mulva concluded:

"We have created an exciting new company with significant opportunities for the enhancement of shareholder value. As we execute our integration plans, we will focus on improving financial returns through capturing synergies and optimizing our portfolio. We also will continue to emphasize the importance of capital discipline and a strong balance sheet. We plan to address these and other topics in more detail at the company's November 22 analyst meeting.

"Upstream, we expect our fourth-quarter 2002 production to be approximately 8 percent above third-quarter pro forma. Improvements are expected to come from seasonal increases in the North Sea and Alaska, and new production in the North Sea and China. We continue to move forward with legacy projects in the deepwater Gulf of Mexico, Bohai Bay, the Timor Sea, Venezuela, Indonesia and the Caspian Sea.

"In our downstream business, we are seeing improved market conditions through better margins and lower inventory levels. Our after-tax planned turnaround costs are expected to impact fourth-quarter earnings by approximately $15 million. Despite the impact of Hurricane Lili in the Gulf of Mexico and a power interruption at the Humber refinery in the United Kingdom, we expect our fourth-quarter crude oil utilization rate to be comparable with the third-quarter pro forma rate of 91 percent."

ConocoPhillips is an integrated petroleum company with interests around the world. Headquartered in Houston, the company had approximately 58,000 employees and $77 billion of assets as of Sept. 30, 2002. For more information, go to www.conocophillips.com.

ConocoPhillips' quarterly conference call is scheduled for noon Central today. To listen, go to www.conocophillips.com and click on the "Third-Quarter Earnings" link.

For financial and operational tables, go to www.conocophillips.com/news/nr/earnings/highlights/3q02earnings.html

For detailed supplemental information, go to www.conocophillips.com/news/nr/earnings/detail/3q02summary.xls

CAUTIONARY STATEMENT FOR THE PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This update contains forward-looking statements within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements, such as "we expect our fourth-quarter production to be approximately 8 percent above third-quarter pro forma"; "after-tax planned turnaround costs are expected to impact fourth-quarter earnings by approximately $15 million"; and "we expect our fourth-quarter crude oil utilization rate to be comparable with the third-quarter pro forma rate of 91 percent," are based on management's expectations, estimates and projections about ConocoPhillips and the petroleum industry in general on the date this statement was released. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Further, certain forward-looking statements are based on assumptions as to future events that may not prove to be accurate. Therefore, actual outcomes and results may differ materially from what is expressed or forecast in such forward-looking statements. Economic, business, competitive and regulatory factors that may affect ConocoPhillips' business are generally as set forth in ConocoPhillips' filings with the Securities and Exchange Commission (SEC). ConocoPhillips is under no obligation (and expressly disclaims any such obligation) to update or alter its forward-looking statements whether as a result of new information, future events or otherwise.

Cautionary Note to U.S. Investors -- The SEC permits oil and gas companies, in their filings with the SEC, to disclose only proved reserves that a company has demonstrated by actual production or conclusive formation tests to be economically and legally producible under existing economic and operating conditions. Production is distinguished from oil and gas production because SEC regulations define Syncrude as mining-related and not part of conventional oil and natural gas reserves. We use certain terms in this release, such as "including Syncrude" that the SEC's guidelines strictly prohibit us from including in filings with the SEC. U.S. investors are urged to consider closely the disclosure in the company's periodic filings with the SEC, available from the company at 600 North Dairy Ashford Road, Houston, Texas 77079. This information can also be obtained from the SEC by calling 1-800-SEC-0330.