28 July 2010

COP: Income Statement Analysis for the June 2010 Quarter

ConocoPhillips (NYSE: COP) earned $2.77 per diluted share on a GAAP basis in the second quarter of 2010, which ended 30 June.  The company reported earnings of $0.57 per share in 2009's second quarter.

Earnings in the most recent quarter were affected by numerous special items.  Excluding dispositions and an impairment, adjusted earnings were $1.67 per share.

This post examines ConocoPhillips' Income Statement for the latest quarter and compares the entries on each line to our "look-ahead" estimates.  Both reported and adjusted earnings surpassed our $1.54 estimate.

The principal sources for this income statement analysis were the earnings announcement and the conference call presentation [pdf].

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, GrowthProfitability and Value.

Before getting into t
he details, we will take a step back to introduce the subject of today's analysis.

ConocoPhillips is one of the ten biggest Integrated Oil and Gas companies, which produce, refine, transport, and market energy products.  Its market capitalization is approximately $80 billion, and its Revenue was almost $150 billion in 2009.  The company was formed in 2002 when Conoco, Inc., merged with Phillips Petroleum.  It added Burlington Resources, with its extensive natural gas operations, in March 2006 (when gas prices were high).

In March 2010, Conoco publicized its plan to sell half of its 20 percent stake in Russia's Lukoil (OTC: LUKOY).  The most recent earnings announcement stated that the company now intends to sell its entire Lukoil investment by the end of 2011.

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.

Beginning with the first quarter of 2010, Conoco changed how it accounts for its Lukoil investment.  Instead of a quarterly estimate of equity earnings, Conoco now records Lukoil's actual results with a one-quarter lag.  Conoco's financial statements for each quarter in 2009 were revised to conform to the current set of accounting principles, and we have made the necessary adjustments to our spreadsheet.

Sales and other Operating Revenue of $45.7 billion in the second quarter was 29 percent more than last year.  Our $48 billion estimate, which was based on oil and gas prices and global refining margins, was 5.1 percent too high.

Production in the quarter averaged 1.73 million barrel-of-oil equivalents per day, down 7.5 percent from the same period of 2009.  The production figure would rise to 2.18 million boe/day if Conoco's share of Lukoil production is considered.  Conoco stated that production fell because of "normal field decline" and planned maintenance.

Of the various costs and expenses reported by Conoco, we group (for simplicity) two items --  "Purchased crude oil, natural gas and products" and "Production and operating expenses" -- and call the combination Cost of Goods Sold.  In the June quarter, CGS totaled $34.7 billion or 76.0 percent of Revenue.  This equates to a Gross Margin of 24.0 percent, which is 70 basis points more profitable than the 23.3 percent margin in June 2009.

Realized refining margins were much better than last year.  U.S. refinery capacity utilization improved, but the international utilization percentage was lower.

We had estimated the Gross Margin would be 24.5 percent, or 50 basis points higher than the actual percentage. 

The Depreciation (including Depletion and Amortization) expense of $2.28 billion was 3 percent lower than last year's $2.35 billion.  As a percentage of Revenue, this expense declined from 6.6 percent to 5.0 percent.  The reported Depreciation expense was 5 percent less than our $2.4 billion estimate.

Exploration costs in the first quarter of $213 million were down 12.3 percent from the same period last year.  We had estimated $350 million for these costs.

Taxes other than income and Sales, General, and Administrative expenses totalled $4.69 billion, up 12 percent from last year.  The actual amount was 2.4 percent less than our estimate.

Other operating expenses totaled $1.70 billion, much higher than the $200 million we anticipated.  The difference was a $1.53 billion pretax impairment related to the Wilhelmshaven refinery.

Subtracting the various operating expenses from Revenue yields Operating Income of $2.1 billion, up 43 percent from $1.47 billion in 2009's second quarter.  If the impairment charge is excluded, Operating Income rises to $3.63 billion.  The latter amount is 9.4 percent less than our $4.01 billion estimate.  The difference was primarily the result of Revenue being lower than we anticipated, the Gross Margin being less lucrative, offset by lower SG&A/taxes. 

Equity in the earnings of affiliates, $1.09 billion, was 72 percent greater than last year's $632 million.  It was also far more lucrative than our $600 million estimate.  The company also recorded a $2.88 billion gain on the sale of an investment in Syncrude, which produces crude oil from Canadian oil sands.  This sale, which was not included in our earnings model, was part of Conoco's asset disposition program.

Other income less the interest expense surged to a $126 million net gain, where a net loss of about $200 million is more typical.  An unusually large $475 million entry for other income was not explained.

The 32.5-percent effective income tax rate was far less burdensome than our 47-percent estimate.  Perhaps some portion of the investment gains was non-taxable.

Bottom-line Net Income rose to $4.16 billion ($2.77 per diluted share), compared to restated earnings of $859 million ($0.57 per share) in the year-earlier quarter.  Adjusted earnings increased from $982 million ($0.66 per diluted share) to $2.51 billion ($1.67 per diluted share).  Adjusted earnings exceeded our $2.3 billion ($1.54 per share) Net Income estimate by about 9 percent.

Full disclosure: Long COP at time of writing

1 comment:

  1. Wow, Conoco's made a recovery alright- Thanks for posting this data. It's just what I was looking for.