ConocoPhillps Down 30% But Could Recover Fast

The Oil & Gas industry has been hit two-ways this year. First, transportation, which accounts for nearly 70% of oil consumption in the U.S., came to a halt due to the Covid-19 pandemic. Second, Oil prices fell drastically amid a supply glut and over-production before recovering recently. No wonder that ConocoPhillips (NYSE:COP) stock is down nearly 30% (as of June 18, 2020). Where does it go from here? Surely, as demand recovers, oil prices and sales will go up and the stock will eventually recover. But there is a chance of a second wave of pandemic disrupting efforts to restart the economy. The critical thing is to have enough liquidity and financial flexibility to deal with changing market conditions until the demand normalizes. Where does ConocoPhillips stand from a liquidity perspective? What could be the impact on full year cash flows? We answer this question in our dashboard Does ConocoPhillips Have Enough Liquidity To Survive Covid-19 Demand Shock. Our overall assessment is that ConocoPhillips can manage $3.8 billion in cash flow, net of capital expenditures, and has sufficient liquidity cushion to ride further shocks. While this is good news from a stock recovery stand point, the ongoing shift to renewable energy sources will put long-term pressure on the oil & gas sector, and ConocoPhillips will be no exception to it.

How Much Revenue Hit Can ConocoPhillips Take Before It Starts Losing Money? 

In 2019, ConocoPhillips posted net income of $7.3 billion on revenue of $37 billion, and free cash flow from operations (FCFO) of $11 billion. We estimate that variable operating expenses were $19.4 billion, representing 70% of total operating expenses. Based on this we calculate that variable operating expenses represent 53% of revenues and determine that the company could post operating losses if revenues decline by more than -52% vs 2019.  ConocoPhillips has enough margin cushion to absorb a significant demand shock. However, even at the break even point, it needs to cover its interest expenses and capital expenditures. As of March 2020 end, the company had outstanding debt of roughly $15 billion.

Impact On ConocoPhillips Cash Flows In 2020

Consider a case where the demand slump takes until Q3/Q4 to rebound, and results in a 30% decline in ConocoPhillips’s annual revenue vs 2019. However, the company has capital expenditure as a lever to stem cash outflow and we assume that in case of a sharp revenue decline, it will cut capex by at least 50%. We further assume no share repurchases and use of cash only for operational purposes. Even in this pessimistic scenario, we find that ConocoPhillips is capable of generating $3.3 billion in net income on $26 Bil of total revenue. This will result in $7.1 billion in free cash flow from operations (FCFO) assuming capex reduction to $3.3 billion. In fact, the company can still maintain its 2019 dividend levels when it distributed nearly $1.5 billion to shareholders.

ConocoPhillips Has 7 Months Of Runway In Case Of No Demand 

But what about an extreme case where operations completely stop and there is no demand? In this case ConocoPhillips has nearly 7 months of runway according to our estimates. In conclusion, even though demand has fallen sharply, the company’s margin structure will allow it to stay cash flow positive this year.

It is not just the oil companies, but also the vendors which depend on them, that have been severely impacted by the Covid-19 crisis. Contract drilling services companies are suffering as oil producers cut down capital expenditures, delay due payments, and push back new projects. Helmerich & Payne is one such company. Check out how well it is positioned to survive while demand slowly recovers.

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