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Tickers in this Article: COP, XOM, MUR, NXY, IMO, COS-UN.TO
Conoco Phillips (NYSE:COP) kicked off second-quarter earnings season for big oil with the release of its interim update. The report provides clues to earnings and operating trends for Conoco and its competitors and, as expected, the company indicated weakness in its refining operations. (For a primer on the oil industry, refer to our Oil and Gas Industry Primer)

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U.S. Driving Still Down
Conoco Phillips also commented on its refinery operations, saying its worldwide refinery utilization parentage rate would fall in the upper 80s. The company didn't give a profit level, but said that significantly compressed inventory levels, compressed light-heavy oil price differentials and low margins would impact results.

Inventories of gasoline rose last week by 2.3 million barrels, as Americans have not yet increased their driving to previous levels. The latest Traffic Volume Trends report for April 2009 released by the Federal Highway Administration showed a slight uptick of 0.6% in miles driven from April 2008.

However, total number of miles driven peaked more than a year ago, and clearly the refining industry could use more than a one-month blip.

Syncrude Shines
The company said that its second-quarter production would be approximately 1.86 million barrels oil equivalent (BOE). This amount includes its production from Conoco's Syncrude operation, but excludes production from its investment in LUKOIL, a Russian oil company. This production number, if confirmed when Conoco Phillips officially releases its earnings on July 29, would be up a little more than 100,000 barrels from the second quarter of 2008.

The Syncrude Project is an operation in the Athabasca Oil Sands in Alberta, Canada that is 9.03% owned by Conoco. In 2008, the entire operation produced an average of approximately 289,000 barrels per day.

Other oil companies with a share of the Syncrude operation include Murphy Oil (NYSE:MUR) with 5%, and Nexen (NYSE:NXY) with 7.23%. The two largest owners are the Canadian Oil Sands Trust (TSX:C.COS.U) with nearly a 37% stake, and Imperial Oil (NYSE:IMO) with 25% ownership. Imperial Oil's majority shareholder is Exxon Mobil (NYSE:XOM), which holds 69.6% of the outstanding shares.

Another problem for big oil earnings is that oil prices peaked in the second quarter of 2008, which will lead to large year over year percentage drops in earnings in the upstream sectors for these companies. Although investors should already be fully anticipating this drop, and not overreact, there is a possibility that the headlines may kick off downward momentum for some of the stocks.

The Bottom Line
Conoco Phillips' interim update had good news for production watchers, but that was offset by bearish talk on refinery operations. This dark outlook for refining will probably be a recurring theme in earnings releases this quarter. (For additional reading, see Four Tips For Buying Stocks In A Recession.)

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