COP: Gauge Analysis (updated February 28, 2021)

I have analyzed ConocoPhillips's financial statements to determine whether the company's shares can be considered a good value and reasonable risk for prudent investors. My analytical approach was inspired by Benjamin Graham's recommendations in "The Intelligent Investor," which was first published in 1949 and is still one of the best-known books about value investing. I modified Graham's specific suggestions to fit modern times; however, the goal is the same: find stocks that are inexpensive relative to the company's strengths and aren't excessively risky.

The analysis uses gauges to assess how well the company satisfies seven specific investment criteria.  GREEN, YELLOW, and RED grades indicate whether the criteria are fully satisfied, partially satisfied, or not satisfied.  An Overall Score between zero and 100, which takes all gauges into account, is also computed.  While the analysis includes both growth and value criteria, the Overall Score calculation by design favors companies with good value characteristics over fast-growing, but expensive firms.  An Overall Score above 60 signifies the company is worth examining in more detail; a score over 80 is a rare accomplishment.

First, a quick review of the company itself.

ConocoPhillips produced more than 1.1 million barrels of oil equivalent per day (BOE/D) in 2020 making it one the largest independent producers of oil and gas.  In January 2021, ConocoPhillips completed the acquisition of Concho Resources, a top producer in the Permian basin, in an all-stock transaction.  ConocoPhillips got its current name when Conoco merged with Phillips Petroleum in 2002.  A decade later, the company spun off its midstream and downstream assets as a new firm with the moniker, "Phillips 66."  ConocoPhillips manages its operations and reports financial results for the following six geographical regions: Alaska; Lower 48; Canada; Europe, Mideast, and North Africa; Asia Pacific, and Other International.   Earnings at ConocoPhillips (and most other energy companies) fell sharply in 2020 because actions to limit the spread of COVID-19 also suppressed the demand for energy.  Prices for energy products are recovering in 2021 as the economy begins to improve.

ConocoPhillips incurred a loss of $3 billion, $2.52 per share, on revenue of $19 billion during the last 12 months.  In the quarter that ended on December 31, 2020, ConocoPhillips lost $0.72 per share on a GAAP basis, and it lost $0.19 per share after non-GAAP adjustments and exclusions.  See ConocoPhillips's most recent quarterly report and my review of their results relative to expectations for additional information.

Shares of ConocoPhillips now trade for about $52 each, giving the company a market value of $56 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.

Analysis Results:

ConocoPhillips's grades on the seven investment criteria are listed below, along with some of the financial figures that influenced these color assignments

1. The Company's Size is Substantial: GREEN

    Market Value: $55.8 billion (large cap)

2. The Company is Conservatively Financed: YELLOW

    Current ratio = 2.2 (>2.0 is conservative)

    Long-term debt/Working Capital = 220% (<150% is conservative)

3. The Company Generates Stable Earnings: RED

    Twelve positive quarterly earnings reports in last 5 years (scary)

    Earnings variability = N/A (not available)

4. The Company Exhibits Earnings Growth: GREEN

    Owner Earnings growth rate (trailing year) = -92% (poor)

    Owner Earnings growth rate (five-year average) = 1328% (terrific)

    Free Cash Flow growth rate (trailing year) = -98% (poor)

    Free Cash Flow growth rate (five-year average) = 931% (terrific)

5. The Company is Efficiently Profitable: RED

    Cash Flow Return On Invested Capital = 10% (decent)

    Operating Profit/Sales = N/A (excellent)

6. The Company Pays a Healthy Dividend: YELLOW

    Dividends paid for the last 7 years or longer

    Dividend 5-year average growth rate = 14% (good)

    Dividend = 2094% of last year's FCF (sustainability is a significant concern)

7. The Company's Shares are Fairly Valued: RED

    Price/Owner Earnings (last year) = 135.1 (very expensive)

    Price/GAAP Earnings (five-year average) = 45.8 (expensive)

    Free Cash Flow/Market Value = 0.2% (low, less than the five-year average of 3.7%)

    Acquirer's Multiple = 999.0 (very expensive)

    Price/Book Value = 1.9 (about the same as its five-year average)

    Price/Sales = 3.0 (more expensive than the five-year average of 2.2)

In summary, the analysis assigned ConocoPhillips two GREEN, two YELLOW, and three RED grades.  The resulting Overall Score is 24 of the 100 possible points, which is low.  The score is below the 60-point GCFR threshold, and, therefore, ConocoPhillips does not satisfy the GCFR criteria for investment consideration at this time.

The Overall Score would only increase to 34 points if the share price were to fall by 50 percent, from $51.97 to $25.89, all else being equal. It is also possible that ConocoPhillips's future results will push the score up (or pull it down).  Revisit GCFR2 (https://gcfr2.com) occasionally for updates on ConocoPhillips's performance and the latest GCFR gauges and scores.

This analysis reported here is a limited evaluation of the subject company.  It does not consider all material facts about the company's operations, finances, or future prospects.  The analysis relies on publicly available financial data assumed, but not guaranteed, to be accurate and consistent.  Readers are strongly encouraged to verify all data and perform their own independent analyses.  Other analytical approaches and screening criteria will be more applicable to investors having different goals, circumstances, and tolerance for investment risk.  This post is not and should not be considered investment advice, nor does it constitute an offer or solicitation to buy or sell any security. The author might have a long or short position in the subject company and/or its competitors. The analytical approach, the criteria used, and all calculations are subject to change without notification.

---------------

 #conocophillips    #cop    #gauges  #gcfr  #gcfr2 #valueinvesting   #nac_financialanalysis

COP: Earnings Report for the Quarter Ending December 31, 2020

ConocoPhillips reported before the market opened on February 2, 2021, it lost $0.72 per diluted share in the quarter that ended on December 31, 2020, down from earnings of $0.65 in the same 3 months of the previous year. These figures are the earnings determined in accordance with U.S. Generally Accepted Accounting Principles (GAAP). 

Adjusted earnings, a non-GAAP figure, fell  percent to ($0.19) per share from $0.76 one year earlier. The exclusions responsible for the $0.53 per share difference in the latest quarter between the GAAP and Non-GAAP earnings were: Impairments [$0.81 per share], Exploration and other expenses [$0.13 per share], and Unrealized gain on CVE shares [($0.41) per share].  Non-GAAP earnings, by excluding unusual and non-cash items that could obscure the results of a business's principal, ongoing operations, are intended to be cleaner measures of corporate profits.

This post compares the quarterly Income Statement published by ConocoPhillips to the estimates I made in a previous “Look Ahead” post.  My estimates were based on publicly available guidance provided by ConocoPhillips's management to financial analysts, news reports, and trends in the company's historical results.  Unless otherwise mentioned, all reported values mentioned below are GAAP figures.

First, a little background about the company:  ConocoPhillips is the largest independent producer of oil and gas in the U.S.   The company 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."  Earnings at ConocoPhillips (and most other energy companies) fell sharply in 2020 because the COVID-19 pandemic significantly reduced demand for energy products. The industry has been consolidating in response to these challenges, and ConocoPhillips has been no exception. In January 2021, ConocoPhillips completed the acquisition of Concho Resources, a top producer in the Permian basin, in an all-stock transaction. 

The following table is a simplified version of ConocoPhillips's Income Statement for the quarter that ended in December 2020, with company-reported numbers along side my predictions.  Figures from the year-earlier quarter are also provided to facilitate comparisons.

Revenue in the December 2020 quarter totaled $5.5 billion, 29 percent less than last year. I was expecting ConocoPhillips to report revenue of $5.4 billion for the quarter.  The actual amount surpassed my estimate by $91.0 million (1.7 percent).

The Cost of Revenue (also known as Cost of Goods Sold) was $3.6 billion in the latest quarter, which translates into a Gross Margin of 34.3 percent of revenue. Since it was lower than the 47.0 percent Gross Margin achieved in the year-earlier quarter, it's a sign that ConocoPhillips sold its products and services at less profitable prices relative to production costs. I was expecting the Gross Margin to be 42.0 percent in the December 2020 quarter, and ConocoPhillips missed that prediction by 7.7 percent.

ConocoPhillips spent $1.0 billion on exploration in the latest quarter, up from $151 million one year ago. I had estimated that R&D expenses would be $150 million.  R&D was 19.1 percent of Revenue.

Sales, General, and Administrative expenses totaled $365 million in the December 2020 quarter, down 15.9 percent from one year ago.  SG&A expenses increased from 5.6 percent to 6.6 percent of quarterly revenue, which shows ConocoPhillips spent more per dollar of sales on indirect operational costs, such as marketing. I had estimated that SG&A expenses would be 5.6 percent of revenue, and the actual percentage turned out to be higher than the prediction.

The last operating expense line on the Income Statement is where the sum of other operating income and charges, such as restructuring, may be listed.  For ConocoPhillips the amount listed on this line was a $292 million loss in the latest quarter.  I was expecting a net loss of $100 million.

ConocoPhillips's Operating Income was ($1.4) billion in the quarter,   Operating Income fell short of my $318 million estimate by $1.7 billion.

Interest and other non-operating items summed to a net  income of $191 million.  My estimate for non-operating items was $100 million.

The effective income tax rate fell by 20.1 percent to 26.8 percent, which had a positive effect on net income.  I expected the tax rate to be 29.8 percent.

Net income attributable to ConocoPhillips was ($772) million, ($0.72) per share in the quarter ending December 2020.  The figures for the year-earlier quarter were $720 million, $0.65/share. My earnings estimate for  the latest quarter was $253 million ($0.23/share), so ConocoPhillips earned $0.95 per share less than I had expected.

Because ConocoPhillips has repurchased a significant quantity of its own shares, the average number of shares outstanding during the last quarter was 2.4 percent lower than one year ago. The smaller share count boosted earnings per share by $0.02.

In conclusion, the following list shows where the reported results differed from my expectations:

      – Better than expected:  Misc non-operating items + Income tax rate 

      – Worse than expected:  Gross Margin + Depreciation + R&D + SG&A + SG&A/Revenue + Special operating items + Non-controlling interests 

      – Near expectations:  Revenue growth + Interest 

This post is not investment advice, and the accuracy of the information, tables, charts, and any commentary presented is not guaranteed.  Readers are encouraged to independently verify all data using information from original sources. The Income Statements discussed in these blog posts have not been audited and may differ in material respects from those published by the subject company.  These differences are intended to facilitate analysis and cross-company comparisons. Complete financial statements with notes can usually be found in the 10-Q and 10-K filings companies submit to the Securities and Exchange Commission (SEC).

 #conocophillips   #cop   #gauges  #gcfr  #gcfr2 #QtrlyRpt   #nac_financialanalysis

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

ConocoPhillips: Earnings Report for the Quarter Ending September 30, 2020

ConocoPhillips reported (https://tinyurl.com/y5m9cbjq) before the market opened on 29 October 2020 it lost $0.42 per diluted share in the quarter that ended on 30 September 2020, down from earnings of $2.75 in the same 3 months of the previous year. These figures are the earnings determined in accordance with U.S. Generally Accepted Accounting Principles (GAAP). 

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.

Adjusted earnings, a non-GAAP figure, fell  to ($0.31) per share from $0.82 one year earlier. Adjusted earnings, by excluding unusual and non-cash items that could obscure the results of a business's principal, ongoing operations, are intended to be cleaner measures of corporate profits. However, caution is warranted when analyzing these figures because management has considerable leeway in choosing which GAAP-required items to exclude.

The principal exclusions contributing to the $0.11 per share difference in the latest quarter between GAAP earnings and Adjusted earnings were: Pending claims and settlements [($0.06) per share], Unrealized loss on CVE shares [$0.14 per share], and Pension settlement expense [$0.02 per share].

Because ConocoPhillips has repurchased a significant quantity of its own shares, the average number of shares outstanding during the last quarter was 3.2% lower than one year ago. The smaller share count boosted earnings per share by $0.02.

Adjusted earnings of ($0.31) per share in the latest quarter significantly beat the ($0.58) average ("consensus") of estimates made by Wall Street analysts. See https://tinyurl.com/uej9csu for ConocoPhillips's earnings record and forecasts.

Stock market traders reacted positively to ConocoPhillips exceeding expectations. The price of the company's shares rose 1.3% during the trading day following the report.

Looking deeper into the GAAP results, "top-line" revenue in the September 2020 quarter totaled $4.4 billion, 43% less than last year's $7.8 billion. The Crude Oil business was responsible for 53% of overall revenue, and this unit's revenue fell by 49.7% compared to the year-earlier result. The Natural Gas business contributed 34% of revenue, and this unit's revenue fell by 16.1%. The Natural Gas Liquids and Other unit supplied 13% of revenue, and the amount fell by 58.7%.

The gross margin weakened from 47.9% of revenue to 36.1%, a sign that ConocoPhillips sold its output and services at less profitable prices relative to production costs. Sales, general, and administrative expenses increased from 4.2% to 6.3% of quarterly revenue, which shows the company spent more per dollar of sales on other operational costs, such as marketing.

ConocoPhillips's operating activities generated $868 million in cash during the last quarter, down 62.9% from $2.3 billion in the year-earlier period.  Notable uses for cash included $454 million to pay dividends to shareholders,  and $1.1 billion to acquire property, plant and capital equipment. 

Free cash flow over the last 12 months totaled $860 million, or $0.80 per share using the latest share count. At the current market price per share of $29.35, this translates into a modest Free Cash Flow Yield of 2.7%.

The accompanying charts illustrate several trends in ConocoPhillips's financial results, taken from data in regulatory filings. The text and the charts are intended to provide some limited historical context for readers interested in the company’s finances. No investment advice is provided, and no investment offer of any kind is made or solicited. The accuracy of the information presented is not guaranteed, and readers are encouraged to independently verify all data.

#conocophillips    #cop    #earnings    #nac_financialanalysis