ConocoPhillips shrinks to increase profitability (COP)

By: InvestorGuide Staff, dated July 28th, 2010

Yesterday, United States energy company ConocoPhillips (COP: Charts, News, Offers) reported a huge increase in second quarter earnings. Total earnings were $4.2 billion and significantly dwarfing 2009 2Q earnings of $0.9 billion. ConocopPhillips great quarter was in large part due to several asset divestments, but even after adjusted for the sale income, earnings were $2.5 billion or $1.67 per share. ConocoPhillips believes that the key to continuing and increasing profitability rests with the execution of the $10 billion asset divestiture program.

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Stock Analysis

In 2001, a merger of Conoco Inc. and Phillips Petroleum (Phillips) created ConocoPhillips which now ranks number three in terms of the largest oil companies in the world. Based in Houston, TX, ConocoPhillips operates in over 30 countries and provides the gasoline for brands such as Conoco, Phillips 66, and 66. ConocoPhillips also owned a major (20 percent) stake in the huge Russian oil company, Lukoil. That is until this week when ConocoPhillips announced an agreement to sell all of the shares that it owns in Lukoil. The first stage of the sale is a 7.6 percent stake that ConocoPhillips is selling back to Lukoil for $3.44 billion. ConocoPhillips will then use the proceeds in order to buy back much of its own stock. The 7.6 percent stake represents approximately 40 percent of all of the Lukoil shares owned by ConocoPhillips. The remaining 60 percent of ConocoPhillips’ Lukoil holdings will be sold on the open market.

ConocoPhillips chairman and CEO, Jim Mulva said about the move, “Over the past five years, ConocoPhillips and LUKOIL have worked closely together to develop opportunities in and out of Russia. Our experience with LUKOIL and the Russian authorities has been positive, and we look forward to a productive relationship in the future. However, given the expected business environment and our stated strategy to enhance returns and increase distributions, we have made the decision to sell our entire stake in LUKOIL. We expect to accomplish this by the end of 2011, with the proceeds used primarily to repurchase ConocoPhillips shares.”

ConocoPhillips has been executing the strategy to “enhance returns and increase distributions” all year. The Lukoil sale is only the latest in a large number of asset reduction strategies on the part of ConocoPhillips this year. In all, ConocoPhillips hopes to divest itself of $10 billion in assets this year. One of the first moves announced by the company was the decision to drop plans to upgrade its German refinery, Wilhelmshaven. ConocoPhillips has also put into place some production cuts that will help the company to realize a non-cash asset impairment of approximately $1.1 billion after taxes. Shortly after the decision to slow operations at Wilhelmshaven, ConocoPhillips completed a $4.65 billion sale of the company’s interest in Syncrude. The holdings were primarily composed of an oil sands mining operation in Alberta, Canada.

Another major move on the part of ConocoPhillips is the sale of its interest in Flying J truck stops. ConocoPhillips had a 50 percent partnership with Pilot Travel Centers in order to operate Flying J truck stops. Earlier this month, ConocoPhillips sold the $626 million concern to Pilot, while also agreeing to a long-term agreement to continue providing gasoline products to the travel centers.

There is an old saying in business that say, “you have to spend money to make money.” In some ways, ConocoPhillips is flying in the face of that adage; however, a sleek, efficient ConocoPhillips could be the ticket for steady profits in the future.

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