06 March 2011

COP: Financial Gauge Analysis for the December 2010 Quarter

We have updated the various financial metrics we use to analyze ConocoPhillips's (NYSE: COP) Cash Management, Growth, Profitability and Value.  This post reports on the metrics and the associated financial gauge scores. 

The metrics were calculated using data from Conoco's current and historical financial statements, including those in the new 10-K for fiscal 2010.

A previous article examined in some detail ConocoPhillips's Income Statement for the December-ending fourth quarter of 2010.  The company earned $1.39 per diluted share on a GAAP basis, up 63 percent from $0.86 in the same three months of 2009. 

Before getting into the details, we will take a step back to introduce the subject of today's analysis.

ConocoPhillips is one of the largest Integrated Oil and Gas companies, which produce, refine, transport, and market energy products.  ConocoPhillips 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 much higher than they are now).

The market value of ConocoPhillips is now approximately $110 billion, on a fully diluted basis.  This amount is double its low in March 2009 but below the $150 billion all-time high.

ConocoPhillips has business interests in 30 or so countries around the world, from Algeria to Vietnam.

For financial data reporting, ConocoPhillips has six operating segments:  Exploration & Production, Midstream, Refining & Marketing, Lukoil Investment, Chemicals, and Emerging Businesses.  The Chemical segment consists of a joint venture with Chevron (NYSE: CVX).

ConocoPhillips earned $11.4 billion on revenue of $189 billion in 2010, with the Exploration & Production business generating $9.2 billion of the reported profits.  Earnings were $4.86 billion on revenue of $152.8 billion in 2009

The company made a significant strategic change in October 2009, when it announced it would:

"improve returns and deliver long-term organic growth from a reduced, but more strategic, asset base." 

ConocoPhillips signaled it would sell assets worth approximately $10 billion over a two-year period, and it would trim capital expenditures in 2010 to $11 billion, from $12.5 billion in 2009. 

A key component of ConocoPhillips's strategic plan was the sale of its equity investment in Lukoil (OTC: LUKOY).  At the end of 2009, the investment in the Russian oil producer represented a 20 percent stake, with a book value of $6.4 billion.  Most of the Lukoil shares were sold in 2010, and the remaining one were sold by early February 2011.

The cash received from the Lukoil and other asset dispositions has been used by ConocoPhillips to repurchase its own shares, pay dividends to shareholders, and fund capital investments.

ConocoPhillips produced 1.75 million barrel-of-oil equivalents per day in 2010, excluding Lukoil, down from 1.85 million BOE/day in 2009.   The decrease, which was expected, was blamed on field decline and asset disposals.  ConocoPhillips estimated it had 8.3 billion BOE of proven reserves at the end of 2010, down 2.2 billion BOE.

Now we turn to the financial gauges.  The latest quarterly results produced the following changes to the scores:
  • Overall: 31 of 100 (down from 33)

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 Dec 201030 Sep 201031 Dec 20095-Yr Avg
Current Ratio1.
LTD to Equity32.8%33.2%43.0%33.4%
Debt/CFO (years)
Inventory/CGS (days)N/AN/AN/AN/A
Finished Goods/InventoryN/AN/AN/AN/A
Days of Sales Outstanding (days)26.326.329.626.5
Working Capital/Revenue1.3%0.3%-0.8%-0.8%
Cash Conversion Cycle Time (days)
Gauge Score (0 to 25)9111414

The Cash Management gauge score slipped a couple of points, but none of the underly metrics deteriorated substantially.

The Current Ratio edged down slightly, but it is still higher than it was one year earlier.  The latest value is also substantially above the five-year average for this ratio.

Cash received from asset disposals ($3.1 billion during the fourth quarter, $15.4 billion during the year) allowed ConocoPhillips to reduce its Long-term Debt from $26.9 billion in 2009 to $22.7 billion at the end of 2010.  The debt level is back to historic norms and is by no means excessive for the industry.

The incoming cash has also increased Working Capital.

Net Accounts Receivable rose by nearly 20 percent in the last year to $15.8 billion.  However, this increase was more modest than the 27-percent rise in trailing-year Revenue.  This difference explains the reduction in Days of Sales Outstanding over the last four quarters.

Growth31 Dec 201030 Sep 201031 Dec 20095-Yr Avg
Revenue Growth26.9%19.8%-38.0%-0.2%
Operating Profit Growth-14.0%-16.8%-27.5%-15.1%
CFO Growth36.6%51.8%-44.9%-7.9%
Net Income Growth154.2%N/AN/A-12.4%
Gauge Score (0 to 25)2219310
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 Growth gauge continued a strong upward rise, and is now within 3 points of a perfect score.

Revenue growth was robust in each quarter of 2010, when compared to the same period in 2009.  Higher energy prices get most of the credit for increasing revenue.  Production in barrel-of-oil equivalents terms declined because of asset disposals and operational factors.

Net Income grew from $4.4 billion to $11.4 billion, an impressive result.  Excluding 2010's $4.6 billion after-tax gain on asset dispositions (including the Lukoil investment), Net Income increased 53 percent to $6.8 billion.

Cash Flow from Operations has rebounded nicely from 2009.

The Operating Profit growth rate is the laggard because it is based on a longer-term average that will take longer to turn around.

Profitability31 Dec 201030 Sep 201031 Dec 20095-Yr Avg
Operating Expense/Revenue92.3%92.4%94.2%89.8%
Free Cash Flow/Invested Capital8.4%7.8%1.9%6.5%
Accrual Ratio-6.6%-5.6%1.2%-1.7%
Gauge Score (0 to 25)12928

The Profitability gauge benefited from the lower Accrual Ratio and the higher Return on Invested Capital.

A slightly better Operating Margin has also helped.  Operating Expenses as a percentage of Revenue are still high when compared to Conoco's history.

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

The recent decline in the Accrual Ratio is also welcome and may signal improved quality of earnings.

Value31 Dec 201030 Sep 201031 Dec 20095-Yr Avg
P/E vs. S&P 500 P/E
Enterprise Value/Cash Flow (EV/CFO)
Gauge Score (0 to 25)0315
Share Price ($)$68.10$57.43$51.07-

Conoco's share price has surged in anticipation of future profits driven by higher energy prices.  The Value gauge, which looks backward, suffers.

Surging growth in revenue, earnings, and cash flow will tend to lower the corresponding price multiples, and make the Value gauge rise.  Conoco's metrics are more somewhat more attractive than they were last year, but the comparisons with the five-year averages are not sufficiently favor to trigger a rise in the gauge score.

Note that the drop in the Price/Earnings was amplified by gains on asset sales.

Overall31 Dec 201030 Sep 201031 Dec 20095-Yr Avg
Gauge Score (0 to 100)31331632

The Growth gauge registered a top-notch score, and the Cash Management and Profitability scores are decent enough; however, the weak double-weighted Value gauge is dominating the Overall score.

Some scores benefited from recent one-time gains on asset sales.  Reductions in capital spending and a recovery in energy prices has also helped.  Lower production, on the other hand, has been a slightly negative factor. 

Full disclosure: Long COP at time of writing

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