20 May 2010

COP: Financial Gauge Analysis for the March 2010 Quarter

ConocoPhillips (NYSE: COP) earned $1.40 per diluted share on a GAAP basis in 2010's first quarter, which ended 31 March.  Conoco's latest EPS was 2.6 times the $0.54 it made in the same quarter of 2009.

In our earlier review of Conoco's Income Statement, we compared the actual results to our "look-ahead" estimates.

We have now updated the various financial metrics we use to analyze Cash Management, Growth, Profitability and Value.  This post reports on the metrics for ConocoPhillips and the associated financial gauge scores.  The metrics were calculated using data from Conoco's current and historical financial statements, including the latest 10-Q report.

ConocoPhillips is a large Integrated Oil and Gas company with global reach.  Its market capitalization is over $80 billion, and its Revenue was almost $150 billion in 2009.  The company was formed in 2002 when Conoco, Inc., merged with Phillips Petroleum.  Additional background information about ConocoPhillips and the business environment in which it is currently operating can be found in the look-ahead.

In summary, Conoco's 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.  Readers are encouraged to verify these figures and calculate others as they see fit using the filings available at the SEC's web site and elsewhere.

Cash Management31 Mar 201031 Dec 200931 Mar 20095-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)27.329.625.925.5
Working Capital/Revenue-1.0%-0.8%-0.6%-0.8%
Cash Conversion Cycle Time (days)2.21.3-0.60.6
Gauge Score (0 to 25)14141415

ConocoPhillips' Long-term debt jumped to $26 billion (36 percent of Shareholders Equity) in 2006 in the wake of the $35.6 billion acquisition of Burlington Resources.  The debt load was subsequently whittled down to $20 billion (23 percent of Equity) before soaring again to a $29 billion record in March 2009.  Part of the additional debt financed the formation of a joint venture with Australia's Origin Energy, Ltd., (ASX:ORG).

Separately, in the fourth quarter of 2008, Shareholders Equity was slashed from $185 billion to $143 billion when Conoco recorded massive asset impairment charges.  This reduction caused the Long-term Debt/Equity ratio to leap over 50 percent.  In the last year, the ratio has been pruned to 41 percent.

Total Debt (long and short) reached a high of 2.9 years of Cash Flow from Operations in September 2009, when the energy prices and refining margins were especially weak. Debt is now 2.1 years of CFO.

A Google Finance stock screen indicates that ConocoPhillips has the fifth-highest Long-term Debt/Equity ratio among the 20 energy companies with the greatest market capitalization.

Current plans to sell assets, including half the company's stake in Lukoil (OTC: LUKOY), and trim capital spending would give Conoco the means to reduce its debt level further and improve its Morningstar single-A credit rating. 

Conoco has a Current Ratio below 1.0, which translates into negative Working Capital.  These figures might raise a liquidity concern for a smaller, weaker company; however, in Conoco's case it can be viewed as sign of efficient cash management.  The company does not tie up more cash than necessary in low-yielding bank accounts.

Growth31 Mar 201031 Dec 200931 Mar 20095-Yr Avg
Revenue growth-24.6%-38.0%7.8%1.8%
Operating Profit growth-11.7%-16.0%6.4%-4.7%
CFO growth-24.1%-44.9%-26.0%4.9%
Net Income growthN/AN/AN/A105.6%
Gauge Score (0 to 25)43911
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.

Revenue bounced back in the March 2010 quarter, rising 46 percent over the year-earlier equivalent figure.  The trailing-year growth rate is still deeply in the red, but it should become more favorable later this year when the comparisons become easier. 

This assumes that Conoco's production will resume an upward trajectory as an improving economy in the U.S. increases demand for oil and gas.  Production in the most recent quarter averaged 1.83 million barrel-of-oil equivalents per day, down 5 percent from the same period of 2009.

Cash Flow from Operations and Net Income have also started to rise.  The Net Income growth rate is now N/A because the company had a large loss in the earlier period.

Profitability31 Mar 201031 Dec 200931 Mar 20095-Yr Avg
Operating Expenses/Revenue93.7%94.2%89.4%89.1%
Free Cash Flow/Invested Capital4.1%1.9%-0.7%5.7%
Accrual Ratio0.8%1.2%-14.5%0.6%
Gauge Score (0 to 25)4288

The Profitability gauge added a couple of points because of recent, modest improvements in the Return on Invested Capital and the Free Cash Flow to Invested Capital.  However, the score remains weak.

The Operating Margin improved with the latest quarterly results, but it is still 4.3 percent below its level one year earlier.

Free Cash Flow has benefited from a significant reduction in capital expenditures.

Value31 Mar 201031 Dec 200931 Mar 20095-Yr Avg
P/E vs. S&P 500 P/E 0.80.9N/A0.5
Enterprise Value/Cash Flow (EV/CFO)
Gauge Score (0 to 25)21126
Share Price ($)$51.17$51.07$39.16-

Earnings of $2.10 billion ($1.40 per share) quarter, in the March quarter, up from $800 million ($0.54 per share), reduced the trailing year Price to Earnings ratio.  This reduction would tend to improve the Value gauge.  However, in this case, the gauge barely stirred because the P/E is high compared to a 5-year average. 

The P/E is also high compared to its typical multiple to the market.

Overall31 Mar 201031 Dec 200931 Mar 20095-Yr Avg
Gauge Score (0 to 100)21164535

Although the Overall score is still very low, it ended a streak of five consecutive declines.  Three of the category gauges showed small improvements. 

It's hard for Conoco to look good when the year-earlier period included a stretch where energy prices and refining margins were much higher.  The comparisons should start to improve soon.  Reductions in Capital Spending and sales of "non-strategic" assets should also improve results going forward.

Full disclosure: Long COP at time of writing

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