ConocoPhillips Sharpens Focus On Lowering Costs As Oil Prices Eat Into Profits

-2.22%
Downside
127
Market
124
Trefis
COP: ConocoPhillips logo
COP
ConocoPhillips

ConocoPhillips (NYSE:COP) recently announced its 2015 second-quarter earnings. As expected, the company’s profits dropped sharply because of lower price realizations. The company’s earnings per share (EPS), adjusted for non-operating items, declined to just $0.07, compared to $1.61 in the year-ago quarter. [1] Because of the steep decline in benchmark crude oil prices and lower natural gas prices in the U.S., ConocoPhillips’ average price realization for the quarter declined by more than 44% year-on-year to just $39.09 per barrel of oil equivalent (BOE), which is approximately 29% or $15.80 per BOE below its all-inclusive cost of sales for last year, by our estimates. However, during the earnings conference call, the company’s management assured investors that the dividend is safe, as it expects the combined effect of lower costs and a gradual recovery in oil prices to help it achieve cash flow neutrality by 2017. [2]

ConocoPhillips is the world’s largest independent exploration and production company by proved reserves and annual production. Its daily net hydrocarbon production from continuing operations, excluding Libya, averaged 1,532 thousand barrels of oil equivalent (MBOED) last year, and it had proved oil and gas reserves of around 8.91 billion barrels of oil equivalent (BOE) at the end of 2014. Headquartered in Houston, Texas, the company has operations in 27 countries, generating annual sales revenue of more than $52 billion. Based on the second-quarter earnings announcement, we have revised our price estimate for ConocoPhillips to $56/share, which is around 10% above its current market price.

See Our Complete Analysis For ConocoPhillips

Relevant Articles
  1. Up 15% In Last Six Months, Will ConocoPhillips Stock Continue To Grow Post Q3?
  2. ConocoPhillips Q2 Earnings: What Are We Watching?
  3. What’s Next For ConocoPhillips Stock?
  4. ConocoPhillips Stock To Likely Trade Higher Post Q4
  5. This Stock Appears To Be A Better Bet Than EOG Resources
  6. Earnings Beat In The Cards For ConocoPhillips Stock?

Increased Focus On Lowering Costs

Based on the current demand-supply situation, it is reasonable to believe that the oil price rout is not expected to reverse any time soon. We currently forecast a slow, stretched-out recovery to a $100 per barrel levels by 2022. This is expected to have huge implications for the whole oil and gas industry and even more so for the independent upstream players, like ConocoPhillips, that do not have downstream refining, marketing, and petrochemical businesses. In a commodity down cycle, such as this one, these companies see a sharp decline in their operating cash flows, which lowers their capacity to invest in future production growth. Therefore, capital expenditure (which is the biggest single cash expense item in this business and the primary driver for future production and earnings growth) plans of independent exploration and production companies are significantly dependent on the short to medium term outlook for global crude oil prices. This is one of the key reasons behind ConocoPhillips’ capital expenditures guidance revision.

ConocoPhillips first announced its 2015 capital expenditure plan in December last year. The company revealed its plan to cut capital spending by around 20% y-o-y to $13.5 billion, primarily because of the steep fall in oil prices. However, with the 2014 fourth quarter earnings announcement, it further cut its 2015 capital spending budget to just $11.5 billion. [3] Having spent just around $5.7 billion in capital expenditure during the first half of the year, with the second quarter earnings announcement, ConocoPhillips again cut its full-year capital spending guidance for 2015 to just about $11 billion. The company attributed the decline in cost target to efficiency improvements, service cost deflation, and the deferral of some not-so-lucrative projects. In addition, ConocoPhillips also lowered its operating cost guidance for the year from $9.2 to $8.9 billion, and the net corporate segment expense from $1 billion to about $900 million. [2] We believe that the increased focus on lowering costs will greatly benefit ConocoPhillips’ pace of achieving cash flow neutrality, but will also weigh on its production growth in the long run. Our current price estimate for the company includes the impact of lower capital expenditures, slower production growth, and thicker operating margins in the long run.

View Interactive Institutional Research (Powered by Trefis):

Global Large CapU.S. Mid & Small CapEuropean Large & Mid Cap

More Trefis Research

Notes:
  1. ConocoPhillips Reports Second-Quarter 2015 Results, conocophillips.com []
  2. Second-Quarter Earnings Call Presentation, conocophillips.com [] []
  3. ConocoPhillips Q4 2014 Earnings Call Presentation, conocophillips.com []