How Sensitive Is ConocoPhillips To EBITDA Margin Changes?

ConocoPhillips (NYSE: COP), an independent oil and gas company, has a notable exposure to crude oil and thus its share price movement remains highly correlated to the changes in the price of crude oil. Consequently, the recent alteration of the supply plan of the Organization of the Petroleum Exporting Countries (OPEC) and the non-OPEC allies has increased the risk for oil producing companies and hence impacted their valuation estimates. A significant decline in oil prices due to such a geopolitical development might impair expected margins for such companies and thus have a detrimental impact on their price estimates.

The OPEC and its Non-OPEC allies announced they would release an additional million barrels of oil per day (bpd) into the oil markets in the coming months, altering its previously agreed output cuts until the end of 2018 as oil prices have gained considerable strength recently. This move was largely driven by Saudi Arabia and Russia and was also administered by Pres. Trump’s recent concern about keeping fuel cost low. Although such an increase in output may not have a significant impact on crude oil prices in the near term due to the simultaneous supply concerns over Venezuela and Iran, volatility with respect to the direction of crude oil prices has certainly increased. This is likely to increase the uncertainty with respect to the future performance of oil producing companies as lower oil prices would impair their expected margins.

ConocoPhillips had made a conscious effort last year to limit their capital spending and repair their balance sheet over the next 3 years, to operate more efficiently in an environment of lower crude oil prices. However, a lower price realization for their crude sales volume is expected to have a significant impact on their valuation. Per our analysis, a 1% decline in the company’s expected EBITDA margin would imply nearly a 6% reduction in its fair price estimate. Thus, this illustrates the fact that the company is highly sensitive to its EBITDA margin and hence would be materially disadvantaged in case crude oil prices decline abruptly.

Our key inputs for this analysis are outlined in our interactive dashboard. In case you do not agree with our estimates, you can use our interactive dashboard How Sensitive Is ConocoPhillips To EBITDA Margin Changes to have a visual representation of a change in key inputs on the company’s overall valuation.

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