Conoco Earnings Down, Cevolution Costs Increase

HOUSTON (October 22, 2001) - Conoco (NYSE: COC) today said that weaker worldwide crude oil and North American natural gas prices resulted in lower earnings during the quarter. Net income before special items totaled $404 million, or 64 cents per diluted share, 23 percent below last year’s record third quarter of $523 million, or 83 cents per share. Revenue for the quarter amounted to $9.7 billion, down 9 percent from $10.7 billion last year on lower prices for refined products, crude oil and natural gas.

For the first nine months, net income before special items totaled a record $1.6 billion, or $2.56 per share, up 18 percent versus $1.4 billion, or $2.17 per share, earned last year. Revenue for the first three quarters exceeded $30.7 billion, up 6 percent from $28.9 billion last year.

“Conoco had an excellent quarter despite a struggling economy, suppressed demand and lower prices for crude oil and natural gas. Downstream earnings, aided by solid U.S. refining margins, and higher international upstream production, underpinned the quarter,” said Archie W. Dunham, Conoco’s Chairman and CEO.

“Conoco took another very significant step this quarter to increase shareholder value with the rapid completion of the Gulf Canada acquisition. The transaction vastly expands our long-term growth opportunities in several prolific basins in North America and Southeast Asia by adding 1.2 billion barrels of probable reserves, including syncrude. At the same time, we increased current production by more than one-third. Only three months after the completion of the transaction, significant progress has been made to integrate the two companies and reduce the debt acquired with the acquisition,” he said.

“In addition, we’ve simplified our stock structure by combining Conoco’s two classes of stock under the symbol ‘COC.’ The stock is now easier to locate, easier to understand, more liquid, and, therefore, a more attractive stock for investors to own,” Dunham said.

Special Items

Special items during the quarter totaled $147 million, or 24 cents per share, largely associated with the Gulf Canada acquisition and related actions to reduce debt. These included a net charge of $44 million for assets sold or held for sale; a $24 million premium paid for the early retirement of Gulf Canada debt; and a $38 million currency loss. Additionally, a $41 million charge resulted from an adverse ruling on a patent dispute.

During the same period last year, a $26 million write-off was recorded for disposal of Conoco’s 37.5 percent interest in a Colombian power venture.

Including special items, net income totaled $257 million, or 40 cents per share, down from $497 million, or 79 cents per share, earned during the same period last year. Year-to-date net income was $1.5 billion, up 8 percent from $1.4 billion in 2000.

Gulf Canada Update

The Gulf Canada acquisition was accretive to earnings by about 5 cents per share.

The company reduced debt by approximately $800 million after the acquisition to $9.7 billion, a significant stride toward the commitment to reduce debt by $2 billion to $2.5 billion over the next 18 to 24 months. Much of Gulf Canada’s and Gulf Indonesia Resources Limited’s (NYSE: GRL) high-cost debt assumed with the transaction was retired during the period as part of the company’s recently completed $4.5 billion debt refinancing.

In this regard, a $1 billion asset disposition program was initiated during the quarter, with over $500 million of asset dispositions already sold or announced, including the sale of shallow water Gulf of Mexico crude oil and natural gas properties, the company’s interests in Cit-Con (a base oil and wax manufacturing joint venture with Citgo), and Pocahontas (a coal bed methane and gas gathering system partnership).

Other Key Highlights

The company restructured its dual class of stock into a new, single class of common stock. The combination of Class A and Class B common stock, approved by shareholders on September 21, was completed on October 8, when the new shares first traded on the New York Stock Exchange.

The Castricum-Zee field offshore The Netherlands achieved first production. The field, acquired during the purchase of Gulf Canada, has potential gross recoverable reserves of approximately 70 billion cubic feet of natural gas (35 bcf net).

Development is moving forward on the Clair field, the largest undeveloped field on the U.K. Continental Shelf. Operated by BP, Clair’s first phase will produce recoverable reserves of 250 million barrels (60 million net). Conoco has a 24 percent interest in the field.

Building on the company’s continued success in Southeast Asia, a discovery in shallow water on Block 15-1 offshore Vietnam and a field extension offshore Indonesia added future gross reserves between 130 and 440 million barrels of oil equivalent (33 to 103 mmboe net). Both wells are near fields recently declared commercial or under development.

The Sutu Den discovery, also in Block 15-1, was declared commercial. Production is expected in less than three years from Sutu Den and will be between 200 and 400 gross million barrels of oil (46 to 93 million net). Conoco owns a 23.25 percent interest in the block.

Conoco and its partners have awarded two engineering, procurement, construction and installation contracts for the $1.6 billion Belanak natural gas development offshore Indonesia. The contracts support natural gas sales agreements totaling 2.5 trillion cubic feet (tcf) from the Conoco-operated South Natuna Block B.

The U.K. government’s quick approval is being sought for development of a recent natural gas discovery in Block 49-16 offshore Lincolnshire. The discovery, known as the Vanguard Extensions prospect, is another success for Conoco’s “snuggle” exploration and development program.

In separate transactions, Norsk-Hydro USA Oil & Gas Inc. and AEC Gulf of Mexico, Inc. farmed-in to Conoco’s deepwater exploration programs in the Gulf of Mexico, mitigating risk while reducing the company’s future spending requirements.

Conoco Canada, as part of the Mackenzie Delta Producers Group, signed a memorandum of understanding with the Aboriginal peoples of Canada’s Northwest Territories that allows progress toward economic and timely development of a Mackenzie Valley pipeline. Existing discoveries in the Mackenzie Delta are estimated at 5.8 tcf of natural gas, of which Conoco has about 50 percent.

The company entered into two service contracts designed to promote efficiency and reduce costs. Jacobs Engineering Group, Inc. was selected as the single general contractor to perform supplemental maintenance, turnarounds, and minor capital construction work at Conoco’s four U.S. refineries. Also, worldwide information technology services were consolidated under one contractor, Schlumberger, for the next six years.

For the second consecutive year, Conoco was listed on the Dow Jones Sustainability World Index. Covering more than 30 criteria, the index rates a company’s economic, environmental and social performance. Last week, Conoco was named the "Best Place To Work" in Houston by the Houston Business Journal.

The following commentary compares segment results for the third quarter with the results for the same period in 2000, excluding the earnings impact of special items. Third quarter 2001 earnings, prices and volumes include Gulf Canada.

Upstream

Upstream earned $370 million, 20 percent lower than last year, as a result of lower worldwide crude oil and North American natural gas prices, as well as increased operating costs, DD&A, and exploration expenses associated with the Gulf Canada transaction. Increased production partially offset the fall in prices and higher costs. Gains on natural gas and crude oil hedges associated with the acquisition totaled $122 million, of which $54 million was recognized in underlying earnings. Given quarter-end prices, the remainder would be recognized through future production beginning in the fourth quarter through 2002. Currently, the hedging program covers approximately 40 percent of Conoco’s worldwide crude oil production and 20 percent of North American natural gas production through the end of 2002. Exploration expense totaled $109 million, up 35 percent, reflecting the addition of Gulf Canada and higher dry hole costs.

U.S. upstream earned $152 million, down 27 percent, while international upstream earnings decreased 13 percent to $218 million.

The company’s worldwide net realized crude oil price decreased 20 percent to $21.65 per barrel. Worldwide net realized natural gas price declined 14 percent to $2.87 per thousand cubic feet (mcf), resulting from a 28 percent decrease in U.S. natural gas prices to $2.81 per mcf, partially offset by international gas prices of $2.91 per mcf, a rise of 12 percent.

Overall, total production for the quarter, including syncrude, of 831,000 barrels of oil equivalent (BOE) per day rose 34 percent from 619,000 BOE per day during the same period last year. The acquisition added about 209,000 BOE per day, in line with previous expectations. Elsewhere, mature field decline in the United States and the North Sea, asset dispositions and an extended maintenance turnaround at the U.K. Britannia field resulted in flat production during the quarter.

Including syncrude, worldwide petroleum liquids production of 475,000 barrels per day (bpd) was up 30 percent over the previous year.

Worldwide natural gas production was 2.1 bcf per day, up 40 percent from last year. U.S. natural gas volumes fell 4 percent to 790 million cubic feet (mmcf) per day due to Lobo maintenance and natural field decline in Lobo and the shallow water Gulf of Mexico. International natural gas production averaged 1.3 bcf per day, up 93 percent, reflecting an additional 629 mmcf per day from the acquisition. Elsewhere, production increases in Indonesia and the Norwegian North Sea were partly offset by the impact of natural decline and summer maintenance in the U.K.

Downstream

Downstream earnings of $185 million increased $25 million, or 16 percent, due to improved refinery optimization and stronger U.S. inland refining margins. For the first nine months, earnings totaled $536 million, up 50 percent from last year’s earnings of $358 million, eclipsing downstream’s previous record for an entire year.

U.S. downstream earnings of $104 million improved versus last year’s earnings of $73 million by 42 percent. U.S. operations benefited from strong margins in inland markets and the fall in crude oil prices, which strengthened co-product margins. Domestic refinery throughputs declined 4 percent, to 559,000 bpd, due to downtime at the Ponca City, Okla., refinery.

International downstream earnings decreased $6 million to $81 million due to weaker refining margins in Europe and Asia. The decline in refining margins was partly offset by improved refinery operations and marketing margins. International throughputs were up slightly to 341,000 bpd, reflecting the return of the U.K. Humber refinery to full capacity during the quarter.

Worldwide refined product sales were a record 1.4 million bpd, up 4 percent, with increases in all three downstream regions -- U.S., Europe and Asia Pacific.

Emerging Businesses

The cost of expanding the company’s Emerging Businesses increased as expected to $21 million during the quarter. This was due to higher research and development costs for Cevolution™, the company’s carbon solutions business, and expenses incurred to construct the natural gas refining pilot plant in Ponca City, Okla.

Corporate

Corporate operating and non-operating expenses totaled $130 million, up $44 million, as increased interest expense on debt was incurred to finance the Gulf Canada acquisition.

Other Financial Highlights

For the first nine months of the year, the company generated $2.7 billion of cash provided by operations, $400 million more than last year. For the quarter, capital expenditures (excluding the Gulf Canada acquisition) totaled $784 million, bringing year-to-date spending to $1,755 million. To date, proceeds from asset sales totaled $261 million. Cash at quarter-end was $214 million, while debt was $9.7 billion. The net debt ratio at quarter-end was 56 percent.

Conoco recently refinanced, at a current average pre-tax rate of 5.5 percent, the $4.5 billion bridge facility used for the acquisition. The refinancing, along with excess cash, allowed the company to retire the bridge facility and pay off a majority of the high-cost debt assumed from Gulf Canada.

Outlook

In the fourth quarter, production (including syncrude) is expected to be up about 8 to 10 percent over the third quarter. “Fourth quarter earnings continue to be under price pressure with demand impacted by market uncertainty associated with recent events,” Dunham said. “Crude prices have continued to slide pending further OPEC action, but natural gas prices have strengthened from their early September lows, reversing some of the third quarter decline. Global refined product demand is expected to remain weak due to seasonal patterns, compounded by slowing economies,” he said.

“Exploration in the fourth quarter remains very active with 17 wells drilling, including 5 appraisal wells, in the U.S., Canada, Vietnam, Indonesia and Venezuela,” he said.

“I am extremely pleased with the diversity, integration value and strength of Conoco’s assets, even in the current environment. We have added significantly to our North American production and reserve positions, and the acquisition has provided better balance to our global operation and increased our natural gas position. Downstream continues to perform at record levels, confirming our commitment to integration. The company is flexible. We will perform regardless of business or geopolitical developments, and we remain on track for another excellent earnings year,” he said.

“As we move into 2002, we have the pleasant task of choosing from an unprecedented number of opportunities -- ranging from development of exploration successes to new business development projects around the world,” he concluded.

Conoco is a major, integrated energy company active in more than 40 countries. For more information, the company’s financial teleconference will be broadcast live today on the Internet at www.conoco.com at 1:30 p.m. Central time (2:30 p.m. Eastern). Posted on the company’s website are additional financial and operating results, along with quarterly pro-forma data for 2000 and the first two quarters of 2001 that incorporate Gulf Canada’s results of operations.

This release contains forward-looking statements about Conoco’s exploration, production, refining, and other operating and financial plans and earnings results. These statements are not guarantees of future performance, involve certain risks, uncertainties, and assumptions that are difficult to predict, and are based upon assumptions as to future events that may not prove accurate. Among the factors that could cause actual outcomes and results to differ materially are changes in crude oil and natural gas prices; changes in refining and marketing margins; potential failure to achieve, and potential delays in achieving, expected reserve or production levels from existing and future oil and gas development projects due to operating hazards, drilling risks, and the inherent uncertainties in interpreting engineering data relating to underground accumulations of oil and gas; unsuccessful exploratory drilling activities; unexpected delays or difficulties in constructing company manufacturing facilities; general domestic and international economic and political conditions; the ability to meet government regulations; potential disruption or interruption of the Company’s facilities due to accidents or political events and other matters detailed in Conoco’s publicly available filings with the Securities and Exchange Commission.

Cautionary Note to U.S. Investors -- The United States Securities and Exchange Commission 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. Syncrude proven reserves are distinguished from proved oil and natural gas reserves because SEC regulations define syncrude as mining-related and not part of conventional oil and natural gas reserves. We use certain terms in this press release, such as “probable reserves”, “potential net recoverable reserves”, “barrels of oil”, “cubic feet of natural gas”, and “recoverable reserves” 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 our Form 10-K, File No. 1-14521, available from us at 600 North Dairy Ashford Road, Houston, Texas 77079. You can also obtain this form from the SEC by calling 1-800-SEC-0330.

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