COP: Look Ahead to December 2020 Quarterly Results

This "look-ahead" post discusses how I came up with an estimate for ConocoPhillips's earnings for fiscal 2020's fourth quarter, which ended on December 31, 2020, by predicting each element of its Income Statement, from top-line Revenue to bottom-line Earnings Per Share (EPS) and everything in between.

Once the company’s official results become available later this month, I will compare the published Income Statement to the prediction and identify any surprises, positive or negative.  Examining these differences can identify what factors (e.g., profit margins, non-GAAP expenses, tax rates, share buybacks) are driving changes to a company's financial performance.

But, before we get into the details, let's take a step back and start with background information about ConocoPhillips.

ConocoPhillips is the biggest U.S.-based firm focused solely on energy exploration and production. It assumed its current name when it merged with Phillips Petroleum in 2002.  A decade later, the midstream and downstream assets were spun off as "Phillips 66." ConocoPhillips, like many in the industry, is now struggling with low oil and gas prices, which reduce the company's earnings and cash flows. The industry has been consolidating as a result, and ConocoPhillips has been no exception.  ConocoPhillips announced an agreement in October 2020 to acquire Concho Resources, which is a top producer in the Permian basin, in an all-stock transaction worth (when the deal was made) $9.7 billion plus $3.9 billion of debt assumed.

Shares of ConocoPhillips now trade for about $47 each, giving the company a market value of $50 billion. These shares can be found in the Standard and Poors 500, Standard and Poors 100, New York Stock Exchange Composite, and Russell 1000 stock indices.

ConocoPhillips incurred a loss of $1 billion on revenue of $21 billion during the last year. In the quarter that ended on 30 September 2020, ConocoPhillips lost $0.31 per share (excluding certain items), which significantly beat the -$0.58 Wall Street consensus forecast. See https://tinyurl.com/y5m9cbjq for ConocoPhillips's most recent quarterly report.

Revenue in the September 2020 quarter totaled $4.4 billion, 43 percent less than last year's $7.8 billion. The Crude Oil business was responsible for 53 percent of overall revenue, and this unit's revenue percent fell by 49.7 percent compared to the year-earlier result. The Natural Gas business contributed 34 percent of revenue, and this unit's revenue decreased by 16.1 percent. The Natural Gas Liquids and Other unit supplied 13 percent of revenue, and the value fell by 58.7 percent.

My starting point, if available, when estimating earnings is guidance provided by the company's management to financial analysts.  It's true that the company may downplay expectations somewhat to avoid disappointments, but the top managers ought to know better than anyone else how well their products and services are selling.  I also look for other information about the company in the news, and I take advantage of trends in the company's historical results.  While it makes my task a little more difficult, I also try to estimate earnings that conform to Generally Accepted Accounting Principles (GAAP).  Non-GAAP results, which most professionals focus on, are somewhat arbitrary and often exclude meaningful items.

ConocoPhillips management described their expectations for the fourth quarter of 2020 in October after they last reported quarterly results.

Outlook

Fourth-quarter 2020 production is expected to be 1,125 to 1,165 MBOED, resulting in full-year 2020 production guidance of 1,115 to 1,125 MBOED. This guidance excludes Libya.

Operating plan capital for 2020 is expected to be $4.3 billion. This guidance excludes approximately $0.5 billion for opportunistic acquisitions completed during the year.

The company's production (ex-Libya) was 1066 thousand Barrels of Oil Equivalent per Day (MBOED) in the September 2020 quarter.  The estimate of 1125 to 1165 MBOED equates to a sequential gain between 5.5 percent and 9.3 percent.

ConocoPhillips's revenue in any given period of time is determined by the production level during that period and by the selling price of the oil and gas produced.  In the fourth quarter of 2020, the price of West Texas Intermediate oil increased by 4 percent, from $40.89 in the third quarter to $42.45, according to the EIA.  The Henry Hub price of natural gas went up much more, almost 27 percent.

(See https://www.eia.gov/dnav/pet/pet_pri_spt_s1_m.htm and https://www.eia.gov/dnav/ng/hist/rngwhhdm.htm)

Starting with third quarter revenue of $4.386, and assuming a 7.5 percent production increase, and 15 percent average price increase, I come up with an estimate for fourth-quarter revenue of $5.4 billion.  Obviously, there's a fair degree of uncertainty with this estimate.

Margins should also improve with higher selling prices.  The Gross Margin was 36 percent in the third quarter, and between 46 and 49 percent in 2019.  I've assumed 42 percent for the fourth quarter.  

The Depreciation expense, while somewhat variable, is usually around $1.4 billion per quarter.  The exploration expense is usually over $100 million, so I've assumed $150 million.  Sales, General, and Administrative (SG&A) expenses are also variable, but 5 percent of Revenue isn't a bad benchmark.  I bumped the number up to $300 million to cover expenses related to the planned Concho merger.

For the other lines of the Income Statement, I tried to choose values consistent with historical results.  This was a bit of challenge in some cases, and a few numbers are little more than guesses.

I end up with an earnings estimate of $253 million, or $0.23 per share.

The following Income Statement summarizes the figures discussed above.

Please note that my organization of revenues, expenses, gains, and losses, which I use for all analyses, can and often does differ in material respects from company-used formats.  The standardization facilitates cross-company comparisons.

#conoco  #cop  #gauges #gcfr  #gcfr2 #lookahead #nac_financialanalysis