12 April 2008

COP: Look Ahead to 2008 First Quarter Results

Our last financial analysis of ConocoPhillips (COP), computed after 2007's full-year and fourth-quarter results became available, yielded an Overall Gauge score of only 24 points out of a possible total of 100. This was much lower than what might have been expected given the soaring crude oil prices.

Conoco's Net Income in 2007 was 23.5 percent lower in 2007 than 2006. Earnings were hurt by lower natural gas prices, compressed refining margins, and loss of its Venezuelan operations. When combined with a stock price that rose 22.7 percent in 2007, it isn't too surprising that the Overall Gauge registered such a disappointing figure.

However, since the start of the new year, natural gas prices have risen and higher gasoline prices should eventually improve refining margins. In addition, Conoco shares are trading for about $10 less than at the end of 2007, which improves our Value metrics. To be sure, caution is warranted as recent oil and gas price increases may be due to seasonal factors, and a slowdown in worldwide economic activity would reduce energy demands.

We struggled to estimate the first-quarter results Conoco will report next week, which we do to establish a baseline for determining the source of any deviations in the actual data from reasonable expectations. To guide us, we had only the limited information Conoco provided in the 2007 fourth-quarter report and a subsequent update published in early April on first-quarter market and operating conditions. Unfortunately, the difficulty begins with the top line because Conoco does not directly provide Revenue guidance.

In the update, Conoco announced "Worldwide production of approximately 1.8 million BOE [Barrel of Oil Equivalent] per day." The equivalent BOE figure in the fourth quarter of 2007 was apparently (the announcement was not clear on this point) 1.84 million. If we're making an apples-to-apples comparison, production declined by 2.2 percent. However, average energy prices were up during the quarter between 1 and 8 percent, depending on the product. As an estimate for Conoco's Revenue during the first quarter, we will take the $52.7 billion recorded in the December 2007 quarter, decrement it by 2.2 percent to reflect the production decline and increment it by a 6 percent wag to reflect higher prices. The resulting figure $52.7 * (1 - 0.022) * (1 + .06) = $54.6 billion.

Conoco's Gross Margin was 27.8 percent in the fourth quarter of 2007. The update published in early April makes it clear that certain margins dropped in the first quarter, although there wasn't enough information to be sure of the magnitude of the aggregate decline. We'll guess it was about 1 percent to 26.8 percent. In other words, we're guessing the Cost of Goods Sold [i.e., purchased crude oil, natural gas and products + Production and operating expenses] will be (1 - .0268) percent of $54.6 billion or $40.0 billion.

We'll also assume, based on historic data, a Depreciation expense of 4.5 percent of Revenue, or $2.5 billion. Similarly, we'll estimate SG&A expenses at 11 percent of Revenue, or $6.0 billion. We will also add $325 million for Exploration expense per company guidance and $250 million for non-recurring operating charges.

These figures would result in an Operating Income of $5.6 billion.

We then need to consider non-operating income and expenses, such as equity in the earnings of affiliates, minority interests, and interest. Considering past results, we will set our expectation for net non-operating income at $1.15 billion. This pushes our estimate of pre-tax income to $6.75 billion

Conoco's effective income tax rate is quite variable from quarter to quarter. A rate of 42.5 percent ($2.9 billion) should be close if there weren't too many special tax matters in the quarter.

Our estimate for Net Income is, therefore, $3.9 billion ($2.45 per share).

Please note that the table format below, which we use for all analyses, can and often does differ in material respects from company-used formats. A common difference is the classification of income and expenses as Operating and Non-Operating. The standardization is simply for convenience and to facilitate cross-company comparisons.


March 2008
March 2007
Revenue (1)

Op expenses

CGS (2) (39989)

Depreciation (2458)

Exploration (325)

SG&A (3) (6009)

Operating Income
Other income

Equity income (4)

Interest, etc. (5)
Pretax income

Income tax

(2868) (2520)
Net Income


1. Revenue = Sales and other operating revenues.
2. CGS = Purchased crude oil, natural gas and products + Production and operating expenses
3. SG&A = SG&A expenses + Taxes other than income taxes
4. Equity income = Equity in earnings of affiliates - Minority interests
5. Interest, etc. = Other income - Interest and debt expense

No comments:

Post a Comment