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    ConocoPhillips Maps Short-Term Strategy

    Oil company to cut spending, ups merger savings target.

    HOUSTON -- ConocoPhillips, operator of more than 5,000 convenience stores and gas stations, warned its oil and gasoline production would fall as it cuts capital spending by 25 percent in order to reduce its $20 billion of debt and improve its returns.

    The company, formed by the combination of heavyweight oil companies Conoco Inc. and Phillips Petroleum Corp., also plans to sell anywhere from $3 billion to $4 billion of assets and is preparing to squeeze $500 million more in cost savings from the merger it announced a year ago.

    The goal is to improve the company's return on capital employed to a range of 12 percent to 14 percent over the "next several years and improve its debt-to-capital ratio to 34 percent from 39 percent by 2004," according to Chief Executive Jim Mulva.

    "Companies will have to exercise some capital discipline in order maintain a high level of return. That comes at the expense of production growth," Fadel Gheit, an analyst at Fahnestock & Co., told Reuters.

    ConocoPhillips said its capital spending will be 25 percent lower than the separate spending plans of Conoco and Phillips and that it will cut production to 1.57 million barrels a day next year from 1.62 million barrels a day this year. It also increased its annual cost savings target to $1.25 billion from $750 million and plans to "rationalize" $3 billion to $4 billion of what it calls "lower returning" assets.

    "We feel very strongly that we have the scope and size to compete with the largest companies in the industry," Mulva said in an interview with analysts.

    Despite the production cut, Mulva said 75 percent of the company's capital budget next year is dedicated to expanding its exploration and production business to 65 percent of the company's total asset base from 57 percent. He said ConocoPhillips would try to increase production and reserves and focus on large oil and gas developments that can generate "significant" revenue over long periods of time.

    Maintaining production growth is increasingly difficult for the major oil companies, as oil and gas fields experience a natural production decline and profitable new opportunities are hard to find, according to Gheit. "Companies can't stop drilling. This is the lifeblood of the company. They have to drill to replace production decline," he said. "But all the companies -- BP plc, ChevronTexaco Corp. -- always face the same problem: How to grow production."

    ConocoPhillips also said it will focus on improving returns in its refining and marketing operations, which hurt third-quarter results. The rise in the price of crude oil -- which is used to produce gasoline and other fuels at refineries -- chipped away at profit margins on these products, the report said.

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