ConocoPhillips (COP) reported second-quarter earnings of $0.87 per share, above the Zacks Consensus Estimate of $0.83 per share.

However, earnings per share were well below from the year-earlier figure of $3.50. This significant downfall was mainly due to significantly lower commodity prices and a steep decline in worldwide marketing margins, which more than offset production improvements and lower costs.

The Exploration and Production segment reported earnings of $725 million during the quarter, down nearly 82% year over year. The fall was mainly due to lower commodity prices, partially offset by higher volumes and lower operating costs. Daily production from the E&P segment including Canadian Syncrude averaged 1.87 million barrels of oil equivalent per day (MMBOE/d), up from 1.75 MMBOE/d in the year-ago quarter.

The year-over-year increase in production from new developments in the U.K., Russia, Norway, Vietnam, China and Canada more than offset the impact of normal field decline. To some extent, production also increased due to less unplanned downtime and the impact of production-sharing contracts.

The Refining and Marketing segment reported a loss of $52 million, compared to a profit of $664 million in the year-ago quarter. The year-over-year decrease was primarily due to reduced refining volumes and worldwide lower marketing margins.

The domestic refining crude oil capacity utilization rate for the quarter averaged 93%, compared to 94% a year earlier. International capacity utilization rate averaged 72%, versus 88% last year. Worldwide utilization averaged 88%, compared to 93% in the year-ago period.

The Midstream segment (which includes the company’s 50% interest in DCP Midstream LLC) contributed $31 million to net income during the quarter, down approximately 81% year over year. The decline was due to lower realized prices and volumes.

ConocoPhillips’ earnings from its LUKOIL Investment segment came in at $682 million as against $774 million in the prior-year quarter. The year-over-year decrease came from lower realized prices, partially offset by lower taxes and higher volumes. LUKOIL’s estimated contribution to the company’s quarterly E&P volumes was 442,000 barrels of oil equivalent per day.

The Chemicals unit reported earnings of $67 million as against earnings of $18 million a year ago. The year-over-year improvement was mainly driven by lower operating costs.

At the end of the quarter, ConocoPhillips had $0.9 billion in cash and $30.4 billion in debt, with a debt-to-capitalization ratio of 34%. During the quarter, the company paid $700 million in dividends. ConocoPhillips generated $2.6 billion in cash from operations during the quarter and invested $2.9 billion in capital expenditures. The company maintained its total 2009 capital budget at $12.5 billion.

While turnaround in crude oil prices is beneficial to the entire sector, we are maintaining our Hold recommendation on ConocoPhillips shares given the company’s competitive disadvantages relative to its super major peers. These disadvantages include a high-cost OECD-centric asset base and heavy exposure to the relative tentative outlook for U.S. natural gas (more than a third of total volumes) and refining markets. Our preferred names in the integrated space remain ExxonMobil (XOM) and Chevron (CVX).

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