10 August 2009

COP: Financial Gauge Analysis for the June 2009 Quarter

In an earlier post, we examined ConocoPhillips's (NYSE: COP) Income Statement for the June quarter and compared the figures to our "look-ahead" estimates.  Earnings in this period, the second quarter of the year, fell from $3.50 to $0.87 per share. 

We have since mined Conoco's 10-Q financial statements to update the metrics we use to assess Cash Management, Growth, Profitability and Value. This post reports on these metrics and the Financial Gauge scores.

In summary, Conoco's latest GCFR gauge scores are as follows:

  • Overall: 27 of 100 (down from 44)

The current and historical values for the financial metrics that determine the gauge scores are listed below, with some brief commentary.

Cash ManagementJun 2009
Mar 2009Jun 20085-Yr Avg
Current Ratio1.
Debt/CFO (years)
Inventory/CGS (days)N/AN/AN/AN/A
Finished Goods/InventoryN/AN/AN/AN/A
Days of Sales Outstanding (days)33.323.128.223.6
Working Capital/Invested Capital0.0%-0.1%-1.2%-1.3%
Cash Conversion Cycle Time (days)-1.2-0.1-1.60.9
Gauge Score (0 to 25)10121011

Conoco is clearly able to run its business with a Current Ratio of 1.0, which we would consider too low for a smaller firm.  With Current Assets more or less equal to Current Liabilities, Working Capital, in the sense we use, it roughly zero.

In the fourth quarter of 2008, Conoco increased its long-term debt from $22 billion to $27 billion, and the balance is now about $29 billion.  At about the same time, intangible asset impairment charges totaling $35 billion eliminated about 40 percent of Shareholders' Equity.  The combination of these actions explains the rise in Long-term Debt to Equity, relative to last year's level.

The increase in Days Sales Outstanding looks more like a temporary aberration, resulting from the huge Revenue decline, than any particular problem with receivables.

GrowthJun 2009Mar 2009Jun 20085-Yr Avg
Revenue growth-19.7%7.8%26.2%7.9%
Operating Profit growth-5.7%6.4%19.0%9.7%
CFO growth-39.5%-26.0%6.0%7.3%
Net Income growthN/AN/A61.0%103.9%
Gauge Score (0 to 25)092114
Revenue, CFO, and Net Income growth rates compare the last four quarters to the four previous quarters.
The Operating Profit rate is the annualized rate of growth in Operating Profit after Taxes over the last 16 quarters.

The big drop in energy prices since the middle of 2008 has, of course, negatively affected Revenue.  The limited oil-price recovery in the second quarter helped with comparisons to the first quarter, but not with the second quarter of last year.

Cash Flow has fallen precipitously, and GAAP Net Income growth is N/A because the company recorded a huge loss in 2008.

The decline in Revenue/Assets would have been greater if last year's impairment charges had not reduced Total Assets by about 20 percent.

ProfitabilityJun 2009Mar 2009Jun 20085-Yr Avg
Operating Expenses/Revenue91.0%89.4%88.6%88.6%
Free Cash Flow/Invested Capital
Accrual Ratio
Gauge Score (0 to 25)6899

The first quarter's improved Gross Margin limited the growth  in the Operating Expense ratio when Revenue declined.  However, the margin (including the refining margin) was less profitable in the second quarter, causing the rise in the Operating Expense ratio and, secondarily, in the lower ROIC.

The much lower Accrual Ratio would ordinarily be interpreted as a signal of higher quality earnings.  However, it's more a result of last year's non-cash charges, which hit Net Income but not Cash Flow.

ValueJun 2009Mar 2009Jun 20085-Yr Avg
P/E vs. S&P 500 P/E N/AN/A0.50.5
Enterprise Value/Cash Flow (EV/CFO)
Gauge Score (0 to 25)81227

The price of ConocoPhillips shares rose 7.4 percent, from $39.16 to $42.06, in the second quarter.  However, since GAAP earnings were hugely negative in the fourth quarter of 2008, we don't learn anything from our normal trailing-year Price/Earnings ratio. 

If we back out $35 billion in fourth-quarter 2008 charges, the P/E multiple, on a trailing-twelve-months basis, would be about 6.3.  This figure is a small fraction of current S&P 500 multiple, and the PEG ratio would be a tiny 0.3.

Conoco's valuation ratios can be compared with other companies in the Major Integrated Oil and Gas industry.

OverallJun 2009Mar 2009Jun 20085-Yr Avg
Gauge Score (0 to 100)27443036

Conoco's gauge scores are down across the board, which reflects the effects of lower energy prices and refining margins on the company's Revenue, Earnings, and Cash Flows.  Comparisons with prior periods are made more difficult by Conoco's decision in 2008 to mark down the value of its intangible assets and investments by approximately $35 billion (about 19 percent of total assets.)  Although the company moved up a notch in the Fortune 500 list, Shareholders have much less Equity.

Full disclosure: Long COP at time of writing

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