ConocoPhillips Returns To Profitability Driven By Its Alaska Operations; Cuts Capex Guidance For 2017

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ConocoPhillips

Taking the market by surprise, ConocoPhillips (NYSE:COP), one of the largest independent oil and gas companies, reported a strong set of financial performance for its June quarter 2017 on 27th July 2017((ConocoPhillips Announces Its June Quarter Results, 27th July 2017, www.conocophillips.com)). Despite the slowdown in recovery of commodity prices in the second quarter, the US-based company posted a remarkable revenue growth, both annually as well as sequentially, driven by its Alaska operations. Further, the oil and gas producer continued to reduce its break-even costs by improving its operational efficiency, which resulted in adjusted profit of 14 cents, as opposed to a loss of 2 cents anticipated by the analysts. In addition, the company made solid progress in restructuring its capital structure and enhancing shareholders’ return by paring down its debt and repurchasing its own stock.

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Operational Highlights

  • ConocoPhillips reported 2Q’17 revenue of $8.88 billion, almost 60% higher compared to the revenue of the same quarter of last year, beating the market expectations by a notable margin. The 7% drop in the company’s production volume was more than offset by higher price realizations across commodities compared to the year ago quarter, resulting in this sharp rise in the company’s top-line.
  • While the oil and gas producer continued to control its operating costs, its earnings  (GAAP) more than tripled to $3.4 billion in the quarter. This was largely driven by one-time special items such as impairment of its Australian LNG project, impairment charge on San Juan and Barnett dispositions, and premiums on early debt retirement, partially offset by gains from the Canada sale.
  • The company’s operating cash flows of $1.75 billion for the quarter exceeded its capital spending and dividend payments of $1.35 billion. This is the fourth consecutive quarter when the company has managed to generate enough cash flows to fund its dividend and capital spending needs.

Enhancing Capital Structure & Shareholders’ Return

  • During the quarter, ConocoPhillips closed the sale of its Canadian oil sand assets to Cenovus for $13.3 billion. In addition, the E&P company announced the sale of its San Juan Basin assets and Barnett assets to further shrink its exposure to North American gas markets. Further, the company also signed an agreement in July for the sale of Panhandle. Cumulatively, these deals will allow the company to close divestments of more than $16 billion by the end of 2017.
  • ConocoPhillips utilized the proceeds of its asset sales to reduce its long term debt by $3 billion during the second quarter, bringing down the overall debt balance to $23.5 billion at the end of the quarter. The company plans to retire another $2.4 billion of debt in the third quarter and reduce the long term debt to less than $20 billion by the end of 2017.
  • Apart from paring down its debt, the company repurchased $1 billion of its shares in the June quarter, reducing the share count by 2% from the previous quarter. The company is on track to achieve its share repurchase target of $3 billion by the end of the year.

Guidance Revision

  • Following the footsteps of its competitor, Anadarko Petroleum, ConocoPhillips reduced its capital spending budget from $5 billion to $4.8 billion for the current fiscal year. This decision is driven by the uncertainty regarding the pace of recovery of commodity prices in the near term.
  • Further, considering the aggressive asset sales announced in first half of the year and the efficiency gains experienced by the company, it has increased the full year 2017 production guidance from 1,145-1,175 MBOED to 1,340-1,370 MBOED. Also, the company expects its adjusted operating costs and depreciation to come in lower-than-expected due to the impact of its divestment program.

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