Why ConocoPhillips Could Be a Good Bet

ConocoPhillips (COP) released its second quarter 2016 result on 28th July. The company reported a net loss of $ 1.1 billion compared with a second-quarter 2015 net loss of $ 179 million. On a per share basis, the loss was $ 0.86 compared to $ 0.15. These earnings include special items like non-cash impairments especially in the Gulf of Mexico, pension settlement expenses, deferred tax adjustments and gains on asset sale.

After adjusting for special items, the earnings were ($ 985 million) or ($ 0.79) per share compared to positive $ 81 million or $ 0.07 per share earned in the same quarter last year. So the loss seen from any perspective was several times worse than the loss incurred a year ago.

The company produced 1,546 thousand barrels of oil equivalent per day (MBOED) during the quarter which was 49 MBOED less than Q2 2015. However, this exceeded the company’s own guidance for the quarter. And after adjusting for asset sales, it meant an increase of 1.5 % from the year ago period. But even after the slight increase in production, the revenues fell 35.6 % to $ 5.57 billion thanks to a big difference in the total realized price for all commodities sold by ConocoPhillips from $ 39.06 to $ 27.79 per barrel of oil equivalent over the last one year. That bad is the commodity market situation.

The total cash generated by operating activities during the second quarter was $ 1.26 billion while excluding a change in operating working capital, ConocoPhillips generated $ 1.23 billion. Asset sales fetched $ 0.2 billion while $ 1.1 billion went toward capital expenditures and investments. The company has lowered its 2016 CAPEX guidance from $ 5.7 billion to $ 5.5 billion due to efficiency improvements across all business lines.

The company also used the cash in repaying debt of $ 800 million and purchasing $ 1.0 billion of short-term investments. The debt reduction was only meagre and didn’t change the leverage by any significant amount. But it was anyway, a slight improvement in the financial health of the company. Now, the total debt stands at $ 28.68 billion. Finally, ConocoPhillips paid out dividends totalling $ 0.3 billion.

ConocoPhillips has fought out well:

We know the market situation. And we also know what it has done to all the oil and gas companies, big and small. But ConocoPhillips is one of those companies that has the resources needed to fight out these extreme circumstances.

An important differentiating factor that was witnessed in the company’s second quarter results was that it generated enough cash to fully fund its capital spending plus 40 % of its dividends. That was in contrast with the cash deficits of the preceding as well as the year ago quarter.

Free cash flow has been a rare sight to be seen in this sector of late. While most others are busy fighting with their collapse, this company is thinking of creating higher shareholder value. It is now targeting to achieve 20 % to 30 % total shareholder pay-out of cash flow from operations through a combination of ordinary dividend and flexible share repurchases. And it is this ability of ConocoPhillips that made its stock rise steadily and appreciate 20 % in value ever since oil prices hit bottom earlier this year.

It’s in the portfolio:

ConocoPhillips has got some superstar assets in its portfolio. Especially those that it operates in the Lower 48 states, which provide a great bit of strength to the company’s operational performance. More importantly, ConocoPhillips knows this and is focusing on accelerating its production from the Lower 48 plays such as the Eagle Ford and the Permian basin.

This is a key step it is taking in the direction of improving its margins in the long run. At present, only 3 of its rigs are running in that region (down from 13 at the end of last year). Despite that, the production from Lower 48 region was only 3 % down compared to the second quarter of 2015. This gives the company further room for reducing CAPEX and improving margins without impacting production volumes much. There is only a minimal decline in production expected even after a large cut in the CAPEX planned by the company for the full year 2016.

ConocoPhillips has therefore decided to exit from deep-water exploration in a phased manner in order to invest more resources in the highly efficient Lower 48 assets. This will make the overall portfolio efficient and ensure lower capital expenditure and thus higher free cash flows.


ConocoPhillips is living in the same commodity environment as any other company in the industry. But its internal strength that comes from its highly efficient portfolio and cash generating ability is a differentiating factor that investors must recognize. In fact they are aware of this which is why the stock has performed so well this year. At the current oil price level, ConocoPhillips has been able to fund most of its cash requirements. So going forward, even if the oil and gas recover slowly, the company will be able to generate more and more cash and also reduce its debt as planned. Therefore, there is a lot of upside on the cards for this stock.

Published on Aug 26, 2016
By Subhen Mittra

Copyrighted 2016. Content published with author's permission.

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