ConocoPhillips: Time for a Comeback

ConocoPhillips (COP) announced fourth quarter ended December 31, 2015 total revenue and other income of $6.7 billion, down 10 percent sequentially from $7.5 billion in third quarter of 2015 and a decline of 43 percent year-over-year from $11.8 billion in fourth quarter of 2014.

ConocoPhillips declared fourth quarter of 2015 net loss of $3.5 billion or $2.78 of loss per share compared to net loss of $1.1 billion or $0.87 of loss per share in third quarter of 2015 and as against net loss of $39 million or $0.03 of loss per share in fourth quarter of 2014.

The key energy company reported continued decline in both its top and bottom lines sequentially and year-over-year, mainly due to the ongoing weaker global commodity demand pricing environment along with the expanding well exploration and development expenses, negatively impacting the company’s key margins for the quarter.

Making smart moves

ConocoPhillips is continuing to minimize its capital expenditure and it is expected to lower capital expense to $6.4 billion in 2016 as against a significant $10.1 billion of capital expenditure during 2015 through cutting optional schedules across its portfolio and preserving prospective optionality and acreage.
Moving ahead, the company is forecasted to deliver 2016 total production in the range of 1,500 to 1,540 MBOED with key project expansions successfully offsetting fall. In addition, ConocoPhillips has a healthy backup of inventory required for up-cycle. The company also targets to strategically lower its operating expenditures significantly from $8.0 billion in 2015 to $7.0 billion during 2016 while successfully sustaining major capabilities and driving sustainable cost control.

The global macroeconomic environment is depicting continued decline in short-term pricing forecast with a major imbalance in supply/demand which is estimated to remain for a longer term. In general, there’s larger concern regarding international oil demand and economic growth. Certain external factors impacting the global environment include, falling debt capacity in ratings all through the industry, notable credit downgrade is estimated for industry credit ratings and rating agencies hugely lowering the long-term price estimates.

The well-planned approach of ConocoPhillips to maximize high-quality energy production and to minimize the core and non-core capital expenditures is believed to help the company sustain healthy cash position and thus, benefit the key stakeholders over a longer term.

What next?

ConocoPhillips is continuing to deliver significant cash flows all through 2015 and at each of the three key pricing indices including, Brent, WTI and Henry Hub each at $52.46/BBL, $48.72/BBL and $2.67/MMBTU respectively. Further, the company has uniquely controlled its debt structure with year-ending 2015 total debt of $24.98 along with debt-to-capital ratio of about 38%. ConocoPhillips received non-strategic disposition receipts of $2.2 billion and uniquely declared planned exit from non-core deepwater projects.

The Board of Directors at ConocoPhillips recently declared to reduce the company’s dividend for the quarter to $0.25 per share as against the earlier dividend of $0.74 per share for the quarter payable March 1, 2016 to key stakeholders as of Feb. 16, 2016.

The key rating agencies are believed to downgrade industry-wide credit rating with total debt capacity estimated to shrink compared to the industry’s average. The strategic reduction in dividends minimizes the usage of balance sheet. ConocoPhillips is expected to have $8 billion of total liquidity by the concluding year 2015 with no notable short-term debt maturities. The company has a solid balance sheet with no notable extra debt during 2016 with approximately $40/Bbl of crude pricing for the complete fiscal year and no requirement for the sale of non-core assets to fund the entire operations.

The strategic cost control initiatives of ConocoPhillips along with the year-over-year growth of free cash flows is forecasted to induce confidence in the company to continue with its daily operations profitably while gradually benefiting the key stakeholders.

Conclusion

Overall, the investors are advised to “Hold” their position in ConocoPhillips considering notable long-term growth prospects of the company as the international macroeconomic environment improves gradually with better commodity pricing and demand. The PEG ratio of 0.67 signifies healthy company growth.
Published on Feb 22, 2016
By Vinay Singh

Copyrighted 2016. Content published with author's permission.

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