01 March 2009

COP: Financial Analysis through December 2008 (Update)

GCFR previously analyzed the fourth quarter 2008 results, as reported in this press release, of oil and gas titan ConocoPhillips (NYSE: COP).  

ConocoPhillips subsequently filed a 10-K report for 2008 with the SEC.  We have used the 10-K's Balance Sheet, which had not previously been made available, to update our analysis and gauge scores.

This post identifies the changes to the analysis results.  Since the 10-K did not change our examination of the fourth-quarter Income Statement, those results are not repeated here.


For the original analysis, we approximated the Balance Sheet for 31 December 2009 by adjusting the September version to reflect the $34.5 billion asset impairment charges Conoco recorded in the fourth quarter.

Conoco, Inc., and Phillips Petroleum combined in August 2002 to form ConocoPhillipsBurlington Resources, with its extensive natural gas operations, was added to the mix in March 2006.  The combination produced a behemoth that is number five, when sorted by annual Revenues, on the Fortune 500 list of the largest U.S. corporations.  When stacked up against other global oil and gas major companies, ConocoPhillips has the seventh-most Market Capitalization.

Berkshire Hathaway, Inc. (NYSE: BRK.A), run by super-investor Warren Buffett, and its affiliates owned about 79 million shares of ConocoPhillips on 31 December 2008, up from 17.5 million shares on 31 March 2008.  Buffett recently characterized the purchase of these shares, when energy prices were soaring, as his biggest mistake in 2008.

ConocoPhillips owns 20 percent of LUKOIL (OTC: LUKOY), which is responsible for more than 18 percent of Russia's oil production.  LUKOIL's shrinking market value was responsible for $7.4 billion of the fourth quarter's impairment charges.

Note that the Lukoil charge is significantly greater than the one Conoco recorded in 2007, when troubles with the Venezuelan government resulted in a $4.5 billion for expropriated assets.

The data in the 10-K led to a one-point increase in the Cash Management gauge and a one-point increase in the Overall gauge, from the levels in the original analysis.  The other gauges did not change.  The gauges now read as follows:
  • Overall: 44 of 100 (down from 52)

The latest Balance Sheet slightly modified the values for some Cash Management metrics.

Cash ManagementDecember 20083 months prior12 months prior
Current Ratio1.01.00.9
LTD/Equity 49.1%23.4%22.8%
Debt/CFO 1.2 years0.8 years0.9 years
Inventory/CGS N/A N/A N/A
Finished Goods/Inventory N/A N/A N/A
Days of Sales Outstanding (DSO)21.3 days22.5 days29.7 days
Working Capital/Market Capitalization  -0.9%-0.9%-1.3%
Cash Conversion Cycle Time-1.1 days-0.2 days-2.1 days
Gauge Score (0 to 25)

Note the doubling of the ratio of Long-Term Debt to Shareholders' Equity.  In the fourth quarter of 2008, LTD increased from $21.7 billion to $27.1 billion, and Equity was slashed from $92.9 billion to $55.2 billion.

Most of the debt increase can be attributed to Conoco's decision to issue $4.9 billion of commercial paper in October 2008 to help close a transaction involving the formation of a 50/50 joint venture with Australia's Origin Energy, Ltd., (ASX:ORG ).  The new company, named Australia Pacific LNG "will focus on coalbed methane production from the Bowen and Surat basins in Queensland, Australia, and LNG processing and export sales."

The plunge in Shareholders' Equity is a consequence of the $34.5 billion asset impairment charges Conoco recorded in the fourth quarter.

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