ConocoPhillips Tanks On Earnings Miss But Is On Track To Meet Its Operational Targets For 2017

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ConocoPhillips

Having exceeded the consensus estimate in 4Q ’16, the market had expected ConocoPhillips (NYSE:COP), one of the largest independent oil and gas companies, to return to profitability, and report an adjusted profit of 3 cents in the first quarter of 2017. However, contrary to this, the US-based company posted an adjusted loss of $19 million, or 2 cents, excluding the impact of one-time gains related to the sale of its Canadian assets, for its March quarter of 2017((ConocoPhillips Announces March Quarter 2017 Results, 2nd May 2017, www.conocophillips.com)). That said, the E&P company did show a strong improvement in its performance both annually as well as sequentially, driven by the recovery in the commodity prices and the company’s cost reduction measures. However, the investors did not react positively to the earnings miss, causing the company’s stock to fall almost 2% post the earnings release. We see this surprise loss as a short term hitch, and believe that the investors have over-reacted to ConocoPhillips’ 1Q’17 performance. We figure that ConocoPhillips is progressing well in meeting its strategy of streamlining its operations and optimizing its balance sheet, and is likely to recover sharply in the coming quarters.

See Our Complete Analysis For ConocoPhillips Here

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Here’s a look at ConocoPhillips’ 1Q’17 results and why we believe that the company performed better than it appears.

Higher-Than-Expected Production Growth To Drive Top Line

As expected, ConocoPhillips experienced a steep rise in its oil and gas price realizations in the first quarter, backed by the surge in commodity prices over the last few months. However, the oil and gas company’s overall production stood at 1,593 thousand barrels of oil equivalent per day (MBOED) for the quarter, representing an increase of only 1% compared to the same quarter of 2016. That said, the company exceeded its production guidance of 1,540-1,570 MBOED for the quarter by almost 2%, excluding the impact of the asset sales made during the quarter. This higher-than-expected production was driven by the ramp up of several major projects, multiple development programs, and improved well performance, partly offset by normal field decline and dispositions. Improved price realizations, coupled with higher production, allowed ConocoPhillips to post 1Q’17 revenue of $7.77 billion, 55% higher compared to the year ago quarter. Going forward, the company expects to focus on its drilling program in the Lower 48 region, and produce about 250 MBOED by operating 11-12 rigs in the area.

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Aggressive Assets Sales To Streamline Operations

ConocoPhillips had announced the sale of its Canadian assets and San Juan Basin assets in March and April respectively, in order to meet its divestment targets for the year. The company aims to close the Canada transaction in the second quarter quarter, and the San Juan Basin deal in the third quarter of this quarter. While the two deals will generate proceeds of over $16 billion, they will reduce the company’s operations, and, in turn, production for the coming quarters. For instance, ConocoPhillips’ Canadian assets produced roughly 280 MBOED, while the San Juan play contributed 115 MBOED to the company’s output. Consequently, the company has revised its production guidance for 2Q’17 as well as for full year to reflect the impact of these deals.

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That said, the divestment of non-core and low-margin production will enable the company to improve its operating costs and enhance its profits for the next few quarters. In line with this strategy, ConocoPhillips has lowered its operating cost guidance from $6 billion to $5.3 billion for the year. This will allow the company to return to profitability as quickly as in the next quarter. However, the company will continue to spend $5 billion on its capital and exploration activities to achieve its production targets.

Improving Cash Flows To Enhance The Balance Sheet

As mentioned earlier, ConocoPhillips has raised roughly $16 billion from the sale of its Canadian and San Juan Basin assets. In order to improve its capital structure, the company will utilize these proceeds to reduce its long term debt obligations, and augment its share buyback program. In fact, the Houston-based company pared $800 million of its debt and repurchased 2.2 million shares for a sum of $100 million in the first three months of the year. In addition to this, the oil and gas company increased its quarterly dividend to 26.50 cents per share, an increase of 6% from the previous quarter.

Furthermore, ConocoPhillips now aims to bring down its debt to $15 billion by year-end 2019, as opposed to its previous expectations of $20 billion. Also, the company increased its share repurchase authorization from $3 billion to $6 billion, post the announcement of the asset sales. With higher shareholder returns and lower debt on the books, both S&P and Moody’s have improved their rating outlook for ConocoPhillips. This is expected to reinstate investor confidence in the company and its ability to weather the current downturn.

Thus, based on the above discussion, we figure that ConocoPhillips is on track to achieve, or even exceed, its strategic targets for the year, and is likely to return to profitability soon.

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