ConocoPhillips Hunkers Down
Oil and gas companies are starting to announce fourth-quarter results, and those released to date have been as bad as one might expect given the recent oil and gas prices. But the producers are doing what they must in order to survive.
ConocoPhillips (NYSE: COP) is the world’s largest non-integrated oil and gas producer. For the fourth quarter it reported a net loss of $3.5 billion, compared with a fourth-quarter 2014 net loss of $39 million. For the year, the company reported a net loss of $4.4 billion.
COP had net revenue of $6.3 billion in Q4, and a cost of goods sold of $4.3 billion. This gave it a gross profit margin of $2 billion. How does that then turn into a $3.5 billion net loss? It’s important to break down some key line items in order to appreciate whether the company has shored up its defenses against the risk that oil prices will remain low for an extended period.
Charged against that $2 billion gross profit was an impairment in oil and gas properties I have been warning investors about for months. In Ready, Set, Noncash Charge I previously highlighted EOG Resources’ (NYSE: EOG) $6.3 billion impairment in Q3, which was the biggest factor in its reported $4.1 billion net loss for that quarter.
ConocoPhillips reported a similar impairment for Q4 as expected, but at $1.3 billion it wasn’t that bad given the level of oil and gas prices during the quarter. Also subtracted from COP’s gross profit was $2.4 billion in depreciation and amortization and $838 million in drilling costs. There were a couple of other charges, but these three items totaling some $4.5 billion account for much of the gap between the $2 billion gross profit and the $3.5 billion net loss for the quarter. These charges also explain why reported EBITDA for the quarter was $540 million, despite the net loss of $3.5 billion.
COP’s production for Q4 2015 was 1,599 thousand barrels of oil equivalent per day (MBOED), an increase of 32 MBOED from the same period a year ago. But the reason for the drastically lower earnings relative to a year ago was that the company’s total realized price was $28.54 per barrel of oil equivalent (BOE), compared with $52.88 per BOE in the fourth quarter of 2014.
COP had previously advertised its intent to maintain the dividend despite the plunge in commodity prices, even if it had to sell off assets to do so. Many argued that it would be better to slash the dividend instead of selling assets at rock bottom prices, and the company has finally come around to this view.
It cut its quarterly dividend from 74 cents to 25 cents per share. The action reduced the annualized yield to 3% at the current share price.
ConocoPhillips also cut its previously disclosed 2016 spending plan. The company lowered capital expenditure guidance from $7.7 billion to $6.4 billion and operating cost guidance from $7.7 billion to $7.0 billion. It also announced that it expects production in 2016 to be flat relative to 2015.
While it is possible that the current quarter will be as bad as the one recently reported, I think COP suffered through as bad a quarter as it’s likely to see. The dividend cut should save the company about $2.4 billion per year. How else does ConocoPhillips plan to shore up its finances? A look at this slide that accompanied its earnings release tells the tale:
The company burned through nearly $3 billion in cash during 2015 (despite adding $2.4 billion of debt), so the $2.4 billion reduction in the dividend should go a long way toward stemming the cash burn in 2016. Capital expenditure guidance for 2016 is nearly $4 billion less than the capex last year. On the other hand, current oil and gas prices are significantly lower than the average price the company received during 2015. Further, the cuts in capital expenditures will reduce the production outlook in future years.
One other item of significance is that COP produced 610 million BOE during the year, but only booked 523 million BOE in reserves. Further, because of price-related writedowns, another 460 million BOE of reserves was removed from the books. The net impact was that COP started the year with 8.9 billion BOE of proved reserves and ended the year with 8.2 billion BOE of proved reserves.
ConocoPhillips has addressed its most pressing issues, taking the steps needed to survive an extended period of low prices. The company will tough it out until market conditions improve. The same can’t be said of some of its competitors. This week Linn Energy (NASDAQ: LINE) showed what happens to a producer balance sheet overloaded with debt when commodity prices crash. The partnership is teetering on the verge of bankruptcy. There are many other oil and gas companies in similarly dire straits, but COP isn’t one of them.
In this week’s Energy Strategist, I will continue to review and analyze results from the biggest oil and gas companies that have thus far reported earnings. My analysis will include results from BP (NYSE: BP), ExxonMobil (NYSE: XOM), Royal Dutch Shell (NYSE: RDS.A) and Chevron (NYSE: CVX).
Energy Transfer’s Lousy Timing
What did we learn yesterday about Energy Transfer Equity (NYSE: ETE)? Not much more than what it would trade like in the depths of the MLP crash, immediately after the mysterious departure of its chief financial officer, in the home stretch of a massive merger, on the day the market was vividly reminded that the merger partner’s largest customer is very likely headed for bankruptcy reorganization. A daily loss of 42% was the unpalatable answer.
Even at today’s modestly higher price, ETE is now trading at a market cap of less than three times the past year’s distributions from affiliates, and at a standalone enterprise value-to-EBITDA multiple of 7, which figures to decline below 6 over the next year even under the most bearish scenario.
That’s the current price for a well-diversified collection of mostly natural gas focused assets that are levered to America’s steady energy demand rather than its gradually declining crude production. It’s far below the multiples accorded to midstream general partners in the past, and even more of a shocking comedown for ETE, which retains multiple growth avenues tied to value-added gas processing, shipping and liquids exports.
As for that Chesapeake bankruptcy threat, let’s do some simple math. Chesapeake currently accounts for roughly 20% of Williams (NYSE: WMB) revenue, which would get diluted to approximately 10% of the Energy Transfer family’s if ETE is able to complete its pending acquisition of Williams.
And this 10% for the most part would not go away if Chesapeake were to file for bankruptcy. The company’s economic wells will keep pumping no matter how their ownership gets parsed. And because Williams owns the gathering infrastructure built for Chesapeake by its own midstream affiliate, whoever comes to control the big producer would likely have no ready alternative for moving its gas.
I have no idea why Energy Transfer’s CEO left abruptly, His departure was disclosed in a terse SEC filing late Friday, followed by another Monday clarifying that the exit “was not based on any disagreement with respect to any accounting or financial matter.”
My working theory is that the CFO was canned because ETE founder and CEO Kelcy Warren is angry about what’s happened to the unit price and his personal wealth. But no one knows. What I do strongly suspect is that the reasons for the CFO’s departure won’t matter two years from now, when crude and natural gas prices are highly likely to be materially higher that they are today, along with ETE’s unit price,
Painful as its recent performance has been, ugly as the market and sector sentiment now look, this is what a big opportunity looks like. Buy #3 Best Buy ETE below $15.
— Igor Greenwald