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If Wall Street is to be believed, battered oil giant ConocoPhillips (COP) is quietly working towards a turnaround.

The Houston-based company last week warned investors that its third-quarter earnings would be significantly lower than last year - but its oil and gas production would grow, surprising analysts who expected output to stagnate.

Among some analysts, the unexpected outlook sparked suspicions that the oil giant is going through a crucial transformation to quell discontent among investors, which have seen the company's stock price plummet 50% from its peak above $95 in June 2008. ConocoPhillips is the third-largest U.S. oil company by market value behind Exxon Mobil (XOM) and Chevron Corp. (CVX)

Analysts at Deutsche Securities on Monday upgraded ConocoPhillips' stock to "Buy" in part because they are "increasingly convinced" that as Conoco Chief Executive Jim Mulva approaches retirement within the next two years, the potential for a major positive restructuring of the company "is clear."

Mulva, 63 years old, who has been chief executive officer of ConocoPhillips since 2002, has said he plans to retire at 65.

"We believe that a restructuring process may be underway," said Paul Sankey in a note to clients.

Sankey didn't provide details of the possible restructuring, but other analysts said ConocoPhillips will need to substantially reduce its cost structure and improve its production profile by finding more oil and natural through exploration efforts and not through acquisitions.

ConocoPhillips didn't respond to requests for comment.

The stocks of all major oil companies have felt the pinch of last year's drastic drop of commodity prices. But ConocoPhillips' shares have been hit the hardest, as the company is the most vulnerable among its peers to the low natural gas prices and tight refining profits currently pressuring the industry.

More importantly, investors have punished Conoco for the multi-billion dollar buyout of natural gas provider Burlington Resources in 2005 and more recently for having agreed to pay $8 billion for a 50% share of the coal seam gas assets of Australia's Origin Energy Ltd. The purchases, done at a time of high commodity prices are currently perceived as badly timed. At the end of last year, ConocoPhillips had to write down $34 billion related to earlier acquisitions.

But investor sentiment seems to be shifting, spurred by expectations of change. In the interim report, ConocoPhillips said its third-quarter production would grow 1.7% to 1.78 million barrels per day. On Friday, shares rose 2% to $46.41. Conoco shares on Tuesday closed at $48.41, up 1.15%.

Analysts at financial advisory firm Collins Stewart also upgraded the Conoco's stock to "buy" last week making the case that the company could sell its 20% position in OAO Lukoil (LKOH.RS) in order to pay some of its debt.

"In our view, it makes sense for Conoco to free up the substantial capital currently tied up in Lukoil," said Collins Stewart analyst Katherine Lucas in a note to clients.

Conoco' move to invest almost half of its $2 billion 2009 exploration budget in high-risk, high-reward frontier exploration fields in Australia, Deepwater Gulf of Mexico and the North Sea is also helping buoy confidence in its future. The company has so far reported exploration successes in Australia with a large natural gas discovery at Poseidon. The company is also a partner with BP PLC (BP) in the high-profile Tiber discovery in the U.S. Gulf of Mexico.

But some analysts remain cautious about the ability of Conoco to improve performance unless natural gas prices substantially improve. Pavel Molchanov, an analyst with Raymond James, said in a note to clients that the investors should remain on the sidelines for the time being until an improved outlook for North American gas becomes apparent.

ConocoPhillips will report third-quarter earnings Oct. 28.

-By Isabel Ordonez, Dow Jones Newswires; 713-547-9207; isabel.ordonez@dowjones.com