ConocoPhillips is Gaining Momentum

Shares of ConocoPhillips (NYSE: COP) rose 3% last week following the release of 3rd quarter earnings. Because ConocoPhillips is the world’s largest publicly traded pure exploration and production (E&P) company, I always pay close attention to the company’s quarterly results for insight into the health of the oil and gas industry.

In the interest of full disclosure, I should also mention that I formerly worked for ConocoPhillips, on both the upstream side and on the downstream side that eventually became Phillips 66 (NYSE: PSX) — and my retirement plan holds shares in both companies. 

ConocoPhillips reported third-quarter 2017 earnings of $0.4 billion, compared with a third-quarter 2016 loss of $1.0 billion. The company generated $1.1 billion in cash from operations (CFO) and another $3.0 billion in asset sales, which was used to reduce debt, buy back shares, and fund capital expenditures.  

Excluding Libya and disposed of assets, production for the quarter came in at 1.2 million barrels of oil equivalent (BOE) per day, up 1.4% year-over-year (YOY). But because of share buybacks and debt reduction, production on a debt-adjusted share basis was up 19% YOY.

Prices for Brent crude (international benchmark), West Texas Intermediate (U.S. benchmark), and Henry Hub natural gas (U.S. benchmark) all improved significantly YOY. Averaged across all oil and gas production, YOY realized prices increased from $29.78/BOE a year ago to $39.49/BOE.

During the quarter, the company spent:

  • $2.5 billion to reduce debt
  • $1.1 billion in capital expenditures and investments
  • $1.0 billion in buying back shares
  • $324 million to pay dividends

The company began the quarter with $10.3 billion in cash, primarily a result of the sale of its Canadian oil sands properties earlier in the year. But for the first time in more than a year, quarterly CFO wasn’t enough to cover capital expenditures and the dividend (although YTD CFO remains sufficient to meet those expenses). So cash on hand declined during the quarter to $9.6 billion.

The $1.0 billion share buyback during the quarter reduced the share count by 2% (following a 2% reduction in Q2 as well), and the company announced it is on track to buy back a total of $3 billion in shares in 2017. 

With the $2.5 billion in debt reduction, the company ended the quarter with total debt of $21 billion, a decline of more than $6 billion since the beginning of the year. This reduction has lowered interest expenses by more than $60 million per quarter since year-end 2016. ConocoPhillips said it expects to end the year with debt below $20 billion.

ConocoPhillips guided toward lower capital expenditures of 10% to $4.5 billion for the full year but said it should meet its previous production guidance despite some impact from Hurricane Harvey. 

Oil prices have risen since the end of Q3, so ConocoPhillips is tracking toward an even better Q4. The share price has made a move in the past two months, rising by more than 20% since August 22nd. 

ConocoPhillips may be the biggest pure E&P company, but there are two oil companies that we like even better. Consider a trial subscription to Real World Investing for a look at these companies, as well as all the energy, gold, and commodity companies in our portfolio. 

 

 

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