2015 Earnings Review: ConocoPhillips Reports Severe Losses Due To Depressed Commodity Prices; Cuts Dividends And Capital Spending For 2016

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ConocoPhillips

In line with the market expectations, ConocoPhillips (NYSE:COP), the world’s largest independent exploration and production company by proved reserves and annual production, reported disappointing  2015 financial results, primarily due to plummeting commodity prices [1]. The Houston-based company saw a significant decline in its revenue and earnings as depressed commodity prices created pressure on its price realizations during the year. Further, in the wake of a challenging outlook for the commodity markets, ConocoPhillips has announced a reduction in its quarterly dividend, as well as its capital spending for 2016, to preserve its cash flows for the tough quarters ahead. Taking a hint from the company’s actions, we expect to see further weakness in the company’s financials at least in the next couple of quarters. Let’s discuss the key highlights of ConocoPhillips’s 2015 earnings release and its outlook going forward.

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Source: Google Finance

Decline In Commodity Prices Drags Down Top Line As Well As Earnings

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The plunge in commodity prices that began in July of 2014 continued to dig a hole in the pockets of large oil and gas producers such as ConocoPhillips through 2015. The company’s total realized price for 2015 stood at $34.34 per BOE, almost 50% lower compared to 2014. Despite the weak price realizations, the company managed to grow its production to 1,589 MBOED in 2015, almost 2% higher compared to the previous year, mainly due to improved results from its major projects and development programs. However, this increase in production could not offset the huge decline in the company’s price realizations. As a result, ConocoPhillips 2015 revenue fell to $30.9 billion, a drop of roughly 45% on a year-on-year basis. On the cost side, the oil and gas producer was successful in curtaining its operating costs by almost 14% in 2015 compared to the previous year. Yet, the company posted a drastic fall in its earnings and margins. ConocoPhillips recorded an operating loss of $7.2 billion in 2015, as opposed to an operating profit of $9.4 billion earned a year ago.

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Reduction In Dividends And Capital Spending Hints At A Weak Outlook Going Forward

Given the scenario in the global commodity markets, the market experts do not foresee a recovery in commodity prices at least in 2016. As a result, companies like ConocoPhillips, which are highly dependent on commodity prices, will continue to face a hard time in the coming quarters, as their cash flows are likely to fall further. Thus, in order to avoid such a situation, ConocoPhillips has cut back its capital spending budget for 2016 to $6.4 billion versus its previous expectation of $7.7 billion. Since the company had already restricted its capital spending to $10.1 billion in 2015, approximately 41% lower compared to 2014, a further reduction of 17% in the capital budget implies that the company is not very optimistic about the recovery in commodity markets. To make things worse, the company also announced a reduction in its quarterly dividend in its latest earnings release. ConocoPhillips has cut its quarterly dividend to 25 cents per share, compared with the previous quarterly dividend of 74 cents per share, to preserve its cash flows and reinvest in its business. Both the decisions seem to be prudent from the company’s viewpoint as they will result in an increment of about $4.4 billion in the company’s cash flows in 2016. However, on the other hand, they are indicative of the company’s weakening financial condition in the ongoing commodity down cycle, which is likely to turn off some investors.

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Going Forward

Just like the market consensus, ConocoPhillips also sees a challenging outlook for the commodity markets in 2016. Thus, the company has reduced its guidance for 2016 capital expenditures to $6.4 billion, 37% lower compared to 2015. Further, the oil and gas producer plans to shut down the rigs in the Lower 48 that are uneconomical at the current commodity prices. Moreover, to keep up with these capital reductions, the company expects to have a flat production growth through 2016, as opposed to 1% to 3% growth according to the company’s earlier plan. Moreover, with the aim to sustain its margins, ConocoPhillips aims to restrict its operating costs to around $7.0 billion in 2016, lower than its previous target of $7.7 billion.

See Our Complete Analysis For ConocoPhillips Here

Overall, assuming a delayed recovery of the commodity markets, we expect to see a further decline in ConocoPhillips’s top line as well as earnings in the coming months, despite the company’s efforts to restrict its operating costs.

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Notes:
  1. ConocoPhillips Announces 2015 Numbers, www.conocophillips.com []