27 January 2010

COP: Income Statement Analysis for the December 2009 Quarter

ConocoPhillips (NYSE: COP) earned $0.81 per diluted share, on a GAAP basis, in the fourth quarter of 2009, which ended 31 December.  This result includes non-cash impairment charges totaling $573 million ...

"primarily related to certain mature natural gas properties in western Canada and the company’s equity investment in Naryanmarneftegaz."

If these charges and a small gain are excluded, adjusted earnings in the quarter were $1.16 per share. 

In the fourth quarter of 2008, charges of almost $35 billion caused Conoco to report a GAAP loss over $21 per share.

This post examines ConocoPhillips' Income Statement for the latest quarter and compares the entries on each line to our "look-ahead" estimates.  Our target for Net Income in the latest quarter was $1.22 per share, $0.06 more than actual adjusted earnings.

The principal sources for the income statement analysis were the earnings announcement and the post-release conference call presentation (transcript available from Seeking Alpha).

In a second article, we will report Conoco's scores as measured by the GCFR financial gauges.  The follow-up post will also provide the latest figures for the various financial metrics we use to analyze Cash Management, Growth, Profitability and Value.

ConocoPhillips is the major Integrated Oil and Gas firm formed in 2002 when Conoco, Inc., merged with Phillips PetroleumBurlington Resources, with its extensive natural gas operations, was added in March 2006.  Additional background information about ConocoPhillips and the business environment in which it is currently operating can be found in the look-ahead.

Please click here to see a full-sized, normalized depiction of the actual and projected results for the just-concluded quarter, as well as the quarterly Income Statements for the last couple of years.  Please note that our organization of revenues, expenses, gains, and losses, which we use for all analyses, can and often does differ in material respects from company-used formats.  The standardization facilitates cross-company comparisons.

Revenue of $43.0 billion in the December quarter was 3.4 percent less than last year. After considering energy prices and refining margins, we estimated that Revenue would be $45 billion. Our estimate was, therefore, 4.7 percent too high.

Production in the quarter, including Conoco's share of LUKOIL (OTC: LUKOY), averaged 2.259 million barrel-of-oil equivalents per day.  This was 2.5 percent less than daily production of 2.318 million BOE in the same quarter of last year.  Full-year production increased 2.4 percent compared to 2008.

Conoco indicated that production in the most recent quarter was negatively affected by reduced demand for natural gas in North America.

Of the various costs and expenses reported by Conoco, we group "Purchased crude oil, natural gas and products" and "Production and operating expenses" and call the combination Cost of Goods Sold.  In the December quarter, CGS was 76.2 percent of Revenue.  Therefore, the company achieved a Gross Margin of 23.8 percent, which was more profitable than the 23.5 percent we had estimated.

"[L]ower refining and marketing margins, volumes, and natural gas prices ... [were only] partially offset by ...  improved crude oil prices, as well as lower costs across the company."

Refinery utilization in the fourth quarter was 76 percent.  Conoco's Refining and Marketing business segment lost money in the quarter.

Depreciation (including Depletion and Amortization) expenses essentially matched our $2.4 billion estimate. The reported figure was 5.6 percent of Revenue.

Exploration costs in the third quarter were 6.3 percent less than our $350 million estimate.  The company noted it "had three potentially significant discoveries in 2009." 

We lump non-income taxes together with Sales, General, and Administrative expenses.  In the December quarter, the combination totalled $4.6 billion, which was 11.2 percent less than our estimate.

Other operating expenses (i.e., impairments, accretion on discounted liabilities, and foreign currency changes), in the aggregate, were $521 million, much more than our $100 million placeholder.

These various operating items combined to produce Operating Income of $2.4 billion, which fell short of our $2.55 billion estimate by 6 percent.  The difference was primarily the result of lower-than-expected Revenue and greater-than-expected impairment charges.

Equity in the earnings of affiliates was less than half our $1 billion estimate, a big miss. We did better with other income and interest expenses, which exceeded our estimate of $200 million target by only $4 million.

The 53.3-percent effective income tax rate was much more than our 45-percent estimate.

Bottom-line Net Income rose to $1.2 billion ($0.81 per diluted share), compared to a staggering $31.8 billion ($21.38 per share) loss in the year-earlier quarter.  Net Income was much lower than our $1.82 billion estimate for the reasons discussed above and the higher income tax rate. 

In summary, Conoco's Revenue fell 3 percent and was 4.5 percent below our estimate.  The Gross Margin was a little better than our target, and other operating costs were also.  On the other side of the ledger, impairment costs were substantial, Conoco's share of earnings of affiliates was much less than our forecast, and income taxes were more burdensome. 

Full disclosure: Long COP at time of writing

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