ConocoPhillips is Preserving Investor Wealth through Production Cuts

The coronavirus crisis has been challenging for the oil & gas industry as demand slump and price weakness have eroded earnings of upstream, midstream, and downstream operators. ConocoPhillips (NYSE: COP) is a prominent upstream company and generates $36 billion of annual revenues with 1,348 MBD of oil & gas production. The company has announced 115 MBD of production curtailment, nearly 10% of total production, for the third quarter due to continued demand weakness and high operational costs. While the overall macroeconomic environment hinges on a successful vaccine reaching the production phase, the company has hinted towards a slew of measures including suspension of dividend and capex reduction to preserve cash. If crude oil demand does not pick up for a couple of quarters then production curtailment is the only tool in ConocoPhillips armory to preserve investor wealth. Trefis highlights the key drivers of ConocoPhillips Revenues in an interactive dashboard analysis.

Variable bottom line supporting earnings through production cuts

The company broadly incurs three cost heads per unit of oil produced, namely, production cost, direct taxes, and depreciation & amortization. In 2019, COP’s consolidated operations reported production, direct tax, and depreciation cost of $10.99, $2.03, and $13.78 per barrel, respectively. The total cost of production at COP’s U.S and international regions was $28.92 and $23.85 per barrel, respectively. Therefore, curtailing production in the U.S. and Canada is a reasonable measure to support earnings during the times of price weakness. For Q3, the company has planned 115 MBD production cut primarily in the Lower 48 and Canada.

The company burned $993 million in Q2, including $455 million of dividend payout

Despite curtailing production by 225 MBD, ConocoPhillips observed a cash outflow of $993 million during the second quarter. While the 48% sequential reduction in realized prices coupled with 23% contraction in production volume led to just $157 million of cash from operations, the $455 million of dividend payout negatively impacted the company’s cash reserve. With a revision of dividend and share buyback policy on the cards, we believe that the company’s stand to lower production in the Lower 48 and Canada is an appropriate measure to preserve investor wealth until the crude oil prices support favorable unit economics.

Want out-performance? Try guessing the % returns for our Pershing-inspired portfolio – based on billionaire Bill Ackman’s firm Pershing Square – vs. the S&P over the last 1 week, 1 month, 3 months, YTD or even 3 years. Our portfolio combines high growth, quality, and risk mitigation criteria in an interesting way.

See all Trefis Price Estimates and Download Trefis Data here

What’s behind Trefis? See How It’s Powering New Collaboration and What-Ifs For CFOs and Finance Teams | Product, R&D, and Marketing Teams