06 March 2010

COP: Financial Gauge Analysis for the December 2009 Quarter

This post provides updated Cash Management, Growth, Profitability and Value metrics and our Financial Gauge scores for ConocoPhillips (NYSE: COP).  The metrics were calculated using data in Conoco's financial reports, including the latest earnings announcement and the 10-K for 2009.

We have already examined the Income Statement for the quarter that ended on 31 December 2009.  Conoco earned $0.81 per diluted share, on a GAAP basis, compared to a massive $21 per share loss in the year-earlier quarter.

ConocoPhillips, a major Integrated Oil and Gas firm, was created in its current form 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.

The latest quarterly results produced the following changes to the gauge scores:
The current and historical values for the financial metrics that determine the gauge scores are listed below, with some brief commentary.

Cash Management31 Dec 200930 Sep 200931 Dec 20085-Yr Avg
Current Ratio0.
Debt/CFO (years)
Inventory/CGS (days)N/AN/AN/AN/A
Finished Goods/InventoryN/AN/AN/AN/A
Days of Sales Outstanding (days)29.631.125.125.1
Working Capital/Revenue-0.8%-0.6%-0.7%-0.8%
Cash Conversion Cycle Time (days)1.31.4-1.10.7
Gauge Score (0 to 25)14131715

Long-Term Debt, $26.9 billion in December, has declined modestly in each of the last three quarters.  It peaked at $29.3 billion in March 2009.  Long-Term Debt to Equity is still higher than its 5-year average value because of the $35 billion hit to Equity in the fourth quarter of 2008 when Conoco recorded massive intangible asset impairment charges.

Much lower Cash Flow from Operations in the last year makes the Debt seem more burdensome, although Cash Flow bounced back somewhat in the fourth quarter of 2009.

Although negative Working Capital can be a significant concern for a weaker firm, in Conoco's case it can viewed as sign of efficient cash management.  The company invests in the business rather than tying up more cash than necessary in low-yielding bank accounts.

Growth31 Dec 200930 Sep 200931 Dec 20085-Yr Avg
Revenue growth-38.0%-39.4%28.5%0.5%
Operating Profit growth-15.7%-13.0%13.8%-5.6%
CFO growth-44.9%-60.3%-7.7%2.1%
Net Income growthN/AN/AN/A96.9%
Gauge Score (0 to 25)301312
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.

We had expected Conoco's fourth-quarter Revenue to be higher, given that crude oil prices had risen after the previous year's plunge.  However, Revenue was negatively affected by low natural gas prices and refining margins and by reduced production.  Reduced demand for natural gas in North America was one cause for decreased production.  (Production was up modestly for the full year.)

Net Income during the four quarters of 2009 was a modest $4.86 billion.  Still, when compared to the loss in 2008, the improved result was enough to lift the Growth gauge score off zero.

Profitability31 Dec 200930 Sep 200931 Dec 20085-Yr Avg
Operating Expenses/Revenue94.2%93.4%88.7%89.1%
Free Cash Flow/Invested Capital1.9%-6.1%3.7%6.8%
Accrual Ratio1.5%-15.6%-15.4%1.0%
Gauge Score (0 to 25)25108

The Profitability gauge lost a few of its remaining points because of the Accrual Ratio's surge, which signals lower earnings quality.  However, the Accrual Ratio, which compares Net Income to Cash Flow, might not be reliable because of 2008's huge non-cash charges have skewed the figures.

The Operating Expense ratio increased less and the ROIC decreased less than in recent quarters.  Perhaps, they are bottoming.

Free Cash Flow turning positive is also encouraging.  It is, by and large, the result of a significant reduction in capital expenditures.

Value31 Dec 200930 Sep 200931 Dec 20085-Yr Avg
P/E vs. S&P 500 P/E 0.9N/AN/A0.5
Enterprise Value/Cash Flow (EV/CFO)
Gauge Score (0 to 25)14126
Share Price $)$51.07$45.16$51.80-

The Value gauge reacted negatively to the rapid recovery in Conoco's share price from a low near $35 in March 2009, while Revenue and Cash Flow were down substantially.

Positive Net Income got the P/E ratio out of the N/A category, but the GAAP-based value is somewhat high for Conoco.

Overall31 Dec 200930 Sep 200931 Dec 20085-Yr Avg
Gauge Score (0 to 100)16234936

Conoco's gauge scores continue to fall.  The decline primarily reflects the effects of lower energy prices and refining margins on the company's Revenue and Cash Flows, while the share price was rebounding.

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.)

Conoco is taking steps to reduce Capital Spending and to sell "non-strategic" assets.

Full disclosure: Long COP at time of writing

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