18 September 2008

COP: Look Ahead to September 2008 Quarterly Results

The GCFR Overall Gauge measure of ConocoPhillips has been stuck at less than 30 of the 100 possible points for more than a year.  The score was 27 points when we assessed ConocoPhillips after the second quarter 10-Q report became available.

More positively, the Growth gauge jumped in the June quarter to an excellent 21-point score.  However, a dismal one-point score on the double-weighted Value gauge had a greater effect, and it kept the Overall score weak.  The Value gauge indicated that the second quarter's 24 percent price rise in ConocoPhillips shares, to $94.39 on 30 June, was too much too fast. 

As things turned out, energy prices -- see lots of interesting data at wtrg.com  -- peaked in July, and the price of ConocoPhillips shares took a deep dive.  The shares at one point in the third quarter sold for less than $70.

We're now getting ready for the results from the nearly complete third quarter.

ConocoPhillips (COP) is the seventh-largest Major Integrated Oil & Gas company by market capitalization.  Holding the fifth spot on the Fortune 500, Conoco's heft was achieved with mergers and acquisitions.  Most notably, Conoco, Inc., and Phillips Petroleum combined in August 2002.  The resulting behemoth in March 2006 purchased Burlington Resources, which had extensive natural gas operations in North America, for $33.9 billion.

Troubles with the Venezuelan government last year led ConocoPhillips to record "a complete impairment of its entire interest in its oil projects in Venezuela of approximately $4.5 billion, before- and after-tax."

Berkshire Hathaway, Inc. (BRK.A), run by super-investor Warren Buffett, owned about 17.5 million shares of ConocoPhillips on 31 March 2008.  However, Berkshire's public 13-F disclosure for the second quarter didn't indicate whether its ConocoPhillips position increased, decreased, or was eliminated.  The 13-F stated that information regarding this position was included in a separate confidential filing.  One observer suggested that the Berkshire's stake in ConocoPhillips might have increased substantially.

On 22 October 2008, ConocoPhillips will announce its third quarter results.  In anticipation of this report, we've modeled ConocoPhillips' Income Statement for the quarter.  The intent of this exercise was to produce a baseline for identifying any deviations, positive or negative, in the actual data.  GCFR estimates are derived from trends in the company's historical financial results and guidance provided by company management.

ConocoPhillips' second-quarter earnings announcement included some guidance for the third quarter. 

The company does not directly provide Revenue guidance.  ConocoPhillips stated that the output in the third quarter of its Exploration and Production business segment "will be similar to the second quarter."  The company also identified Refining and Marketing segment challenges.  Given this guidance, the drop in oil prices, and stormy weather, we assume Revenue in the third quarter will fall below that of the second quarter.  Our target is $63 billion, which is about midway between the Revenue figures for 2008's first and second quarters.  This amount is 37 percent above Revenue in the September 2007 quarter.

ConocoPhillips' Gross Margin is typically between 26 and 32 percent, but it has been in the lower part of this range recently.   Our target for the third quarter is 27.5 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 - 0.275) * $63.0 billion or $45.7 billion.

We'll also assume, based on historic data, a Depreciation expense of 3.5 percent of Revenue, or $2.2 billion.  Similarly, we'll estimate SG&A expenses at 11 percent of Revenue, or $6.9 billion.  We will then add $375 million for Exploration expense per company guidance and $150 million for non-recurring operating charges.

These figures would result in an Operating Income of $7.7 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 $1.55 billion.  This pushes our estimate of pre-tax income to $9.2 billion

ConocoPhillips' effective income tax rate is quite variable from quarter to quarter.  A rate of 44.0 percent would lead to provision for income taxes of $4.05 billion.  This should be close if there aren't too many special tax matters in the quarter.

Our estimate for Net Income is, therefore, $5.16 billion ($3.38 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.


September 2008
September 2007
Revenue (1)

Op expenses

CGS (2) (45,675)

Depreciation (2,205)

Exploration (378)

SG&A (3) (6,930)

Operating Income
Other income

Equity income (4)

Interest, etc. (5)
Pretax income

Income tax

(4,053) (2,691)
Net Income

Shares outstanding

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

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