ConocoPhillips Posts An Earnings Surprise For 4Q’16; Will Focus On Returning Value To Shareholders With Steady Production Growth

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ConocoPhillips (NYSE:COP), one of the largest independent oil and gas companies, has emerged as a dark horse in this earnings season. In a quarter where most of the big names in the oil and gas industry, such as Exxon Mobil and Chevron, have reported an earning miss, the US-based company has posted better-than-expected earnings for the December quarter as well as for full year 2016, [1] taking the market by surprise. This stellar performance by the company was driven by the strong rebound in commodity prices in the last few months and the company’s incessant cost control measures which reaped great results. While the exploration and production company did not witness a spike in its stock price despite solid results, we believe that the company’s strategy to weather the commodity downturn is working well and is likely to revive the company back to its historical levels in the near future.

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Key Highlights Of ConocoPhillips’ 4Q’16 Results

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ConocoPhillips saw a strong growth in its December quarter revenue, backed by the recovery in oil and gas prices in the last few months. Higher commodity prices led to better price realizations, which boosted the oil and gas producer’s top line for the quarter. However, the impact of the upswing in oil and gas prices was partially offset by the drop in the company’s production that was a result of normal field decline and dispositions. For the fourth quarter, ConocoPhillips posted revenue of $7.25 billion, 11% and 7% higher on a quarterly and annual basis, respectively. Yet, the company fell short of the market’s expectation by a small margin.

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Data Source: Google Finance; US Energy Information Administration (EIA)

On the cost side, the US-based company managed to bring down its adjusted operating costs to $1.6 billion, 16% lower compared to the same quarter of 2015. The key performing region for the company in the fourth quarter was Asia Pacific and Middle East (APME), as opposed to Alaska, which has been the one of the outperforming regions for the company throughout the downturn. For the full year 2016, the oil and gas major exceeded its operating costs (adjusted) guidance of $6.6 billion by reporting operating costs of $6.5 billion for the year, 19% less than the prior year. Thus, the company’s consistent efforts to enhance its cost structure enabled it to shrink its adjusted net loss to $318 million, or 26 cents per share, drastically lower than $1.1 billion, or 90 cents per share.

In terms of cash flows, ConocoPhillips generated $1.4 billion from its operations, which were sufficient to meet its quarterly capital expenditures and dividend payments. In fact, this was the second quarter when the company managed to remain cash neutral in a low price environment. Since the company has a goal to pay 20% to 30% of its cash from operations to shareholders through dividend and share buybacks, it announced a 6% rise in its quarterly dividend rate earlier this week, reaffirming investor confidence in the company. Further, in mid-November, ConocoPhillips repurchased shares for $126 million under its initial $3 billion repurchase authorization. This is first instance since 2012 that the company has repurchased its shares. Thus, it is indicative of the company’s willingness to improve its capital structure to maximize shareholder returns. In addition, the E&P company repaid $1.4 billion of its long term debt during the quarter, steadily moving towards its objective of reducing its debt to $20 billion by the end of 2019 to optimize its balance sheet.

Going Forward

ConocoPhillips will continue to focus on maintaining its steady production growth, and growing its existing dividend, subject to the recovery in commodity markets and its cash flows. With crude oil prices at $50 per barrel, ConocoPhillips estimates its cash flows to be around $6.5 billion for the year 2017. For the year 2017, the company aims to grow its production (excluding full year impact of dispositions) by up to 2% compared to 2016. To this front, the oil and gas producer will invest $5 billion of capital in shorter-cycle low-cost projects, primarily in the Lower 48, funded mostly from its operational cash flows. Further, ConocoPhillips expects to close asset sales of $5-$8 billion in 2017, and plans to utilize the proceeds to pay down its debt, and repurchase its own stock. COP-Q&A-4Q16-3

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Notes:
  1. ConocoPhillips Announces December Quarter 2016 Results, 2nd February 2017, www.conocophillips.com []