ConocoPhillips’ Stock Surges After 3Q’16 Earnings; Company Revises Its 2016 Opex and Capex Guidance

ConocoPhillips (NYSE:COP), the leading independent oil and gas producer, released a mixed set of financial results for the September quarter on 27th October 2016 ^[1]. While it missed the consensus estimate for both revenue and earnings by a huge margin, the oil and gas producer reported a notable improvement in its top line as well as bottom line on a sequential basis. Further, due to the constant efforts over the last few quarters, the company has managed to improve its operational and capital efficiency, enabling it to further revise its guidance for operating costs and capital expenditure for the full year 2016. This is the second downward revision since the beginning of this year, which implies that the company is on track to improve its financials in the ongoing commodity slump. Consequently, the market rewarded the company’s stock, causing it to rise more than 5% post the announcement of the results.

Source: Google Finance

Despite the recovery in commodity prices during the third quarter, particularly natural gas prices, ConocoPhillips’ price realizations came in lower than the second quarter. However, the oil and gas company’s production for the quarter stood at 1,557 MBOED, showing a marginal increase over the previous quarter. Thus, the company managed to improve its top line to $6.52 billion, nearly 17% higher than the June quarter. Yet, the revenue remained depressed compared to the same quarter of last year, as the commodity prices were significantly lower than a year ago.

On the cost front, ConocoPhillips has made significant progress in its efforts to reduce its operating costs and sustain its margins in this downturn. The company achieved an 18% reduction in adjusted operating cost compared to the same quarter of 2015, bringing down the overall break-even price of its business. Furthermore, the company’s largest market, Alaska, continued to play a key role in its earnings growth in the quarter. In the last six out of the seven quarters, the oil and gas company has reported positive earnings from the Alaska region. As a result, the company aims to invest heavily in the region to pursue new opportunities while increasing oil produced from legacy fields. Additionally, the European and the Asia Pacific markets have also remained resilient in this commodity trough, helping the company to cope with the weakness in its other regions.

However, on the cash flow front, ConocoPhillips disappointed its investors. Despite no significant increase in its debt repayment, stock repurchase or dividend payments, the company’s cash flows from operations for the year-to-date were around $3 billion, more than 50% lower compared to the same period in 2015.

Revised Guidance

As described before, ConocoPhillips has been proactively working towards improving its operational efficiency to remain afloat in the current low price environment. The company’s efforts have been bearing strong results, backed by which it has revised its operating costs guidance for the second time this year. In the first quarter of the year, the oil and gas giant expected to record operating costs of around $7 billion for the full year 2016. But, in the second quarter, the company revised this target to $6.8 billion, based on the progress of its cost reduction program. However, in the latest quarter, the company has further cut its target to $6.6 billion, implying that its cost control initiatives are progressing in the right direction.

On similar lines, ConocoPhillips has also reduced its 2016 capital spending budget from $5.7 billion at the beginning of the year to $5.5 billion in the last quarter, and finally to the current guidance of $5.2 billion. This revision is based on the capital efficiencies derived by the company due to the use of the latest technology and focused drilling, and the recovery in the commodity prices. The management has highlighted its plans to employ four rigs each in the Eagle Ford and the Bakken region in the December quarter, as due to the favorable pricing offered by the oilfield contractors in the two basins. While this may not add much to the company’s portfolio in the 4Q’16, it is likely to give the company an edge over its peers in 2017.

On the strategic front, ConocoPhillips has entered into an agreement for the sale of three of its exploration blocks offshore Senegal, as a part of its ongoing exit from deepwater exploration. The company also reached an agreement on the sale of its Block B assets in Indonesia. Both these asset sales are expected to be closed before the end of the year. This sale proceeds will enable the company to fund its strong pipeline of projects, which will provide an upside to the company’s stock, as and when the commodity markets rebound.

Have more questions about ConocoPhillips (NYSE:COP)? See the links below:

• Key Trends To Watch For In ConocoPhillips’ 3Q’16 Earnings
• ConocoPhillips’ 2Q’16 Earnings Remain Depressed; Revises 2016 Production And Capex Guidance
• ConocoPhillips’ 2Q’16 Earnings To Remain Depressed Due To Persistently Low Commodity Prices
• Why Are We Bullish On ConocoPhillips?
• Why Is OPEC An Important Determinant Of Crude Oil Prices?
• Why Is China A Key Factor In Determining Crude Oil Prices?
• How Are Crude Oil Prices And Global Oil Rig Count Correlated?
• How Are Natural Gas Prices And Global Gas Rig Count Correlated?
• How Have Plummeting Crude Oil Prices Impacted Merger And Acquisitions In The US Oil And Gas Industry?
• How Will ConocoPhillips’ Revenue And EBITDA Grow Over The Next Five Years?
• How Has ConocoPhillips’ Production Mix And Price Realizations Changed Over The Last 6 Years?
• How Will ConocoPhillips’ Revenue Move If Crude Oil Prices Rebound To $100 Per Barrel By 2018?
• How Will ConocoPhillips’ Revenue Move If Crude Oil Price Average At $50 Per Barrel In 2018?

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for ConocoPhillips

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1. ConocoPhillips Announces Third Quarter Results, 27h October 2016, www.conocophillips.com [↩]