BP: Financial Analysis through March 2008

We have analyzed BP's financial statements for the quarter that ended on 31 March 2008. Since 2006, BP has prepared their statements in accordance with International Financial Reporting Standards (IFRS), as adopted for use by the European Union. Earlier financial statements complied with UK Generally Accepted Accounting Principles.

BP p.l.c. (BP), the former British Petroleum, is the Oil and Gas Refiner and Marketer with, by far, the most sales and the largest market capitalization. (If Reuters, our source for industry data, categorized BP as an Integrated Oil and Gas company, BP would rank third by sales and fourth by market capitalization.) BP became a behemoth, in part, by acquiring Amoco and Arco. As a result of these purchases and other investments, BP became the operator of 13 oil fields and four pipelines on Alaska's North Slope.

Despite high prices for energy products, the last few years have been trying ones for BP. The company has attempted, with varying degrees of success, to put tragedies, inadequate maintenance, and market manipulation allegations behind it by acknowledging errors, settling criminal and civil charges, and improving safety.

Reduced production and lower refining margins haven't helped. A chart showing the price of BP ADRs versus the S&P 500 and Exxon Mobil shares says volumes about BP's performance.

When we analyzed BP after the results from 2007's fourth quarter became available, the Overall gauge score was a dismal 17 out of 100 possible points. The Growth, Profitability, and Value gauges all registered scores below 5 of 25 possible points. Revenue Growth, at only 6.9 percent, seemed surprisingly low given the high energy prices with which we are all familiar. However, there were also possible signs of a turnaround in the fourth-quarter results. Revenue and production were up, and Net income perked up significantly in the quarter. Alas, it was still down on a year-over-year basis.

Now, with the available data from the March 2008 quarter, our gauges display the following scores:

• Cash Management: 14 of 25 (up from 10 in December)
  
• Growth: 12 of 25 (up from 1!!!)
  
• Profitability: 5 of 25 (up from 4)
  
• Value: 15 of 25 (up from 3!!!)

• Overall: 47 of 100 (up from 17!!!)
  

Before we examine the factors that affected each gauge, we will compare the latest quarterly Income Statement with our previously communicated expectations.

Please note that the tabular format below, which we use for all analyses, can and often does differ in material respects from company-used formats. A common difference is the classification of income and expenses as Operating and Non-Operating. The standardization is simply for convenience and to facilitate cross-company comparisons.

($M)		March 2008 (actual)	March 2008 (predicted)	March 2007 (actual)
Revenue (1)		87745	80000	61307
Operating expenses
	CGS (2)	(69941)	(64800)	(49159)
	Depreciation (3)	(2782)	(3200)	(2519)
	Exploration	(293)	(240)	(156)
	SG&A (4)	(3896)	(4400)	(3457)
	Other (5)	(730)	(250)	(67)
Operating Income		10103	7110	5949
Other income
	Investments (6)	1200	1000	496
	Asset sales (7)	925	500	680
	Interest, etc. (8)	32	0	62
Pretax income		12260	8610	7187
Income tax		(4509)	(2927)	(2440)
Net Income		7751	5683	4747
		$2.46/ADS	$1.80/ADS	$1.47/ADS

<sup>1. Sales and other operating revenues
2. Purchases + Production and manufacturing expenses + Production and similar taxes
3. Depreciation, depletion and amortization
4. Distribution and administration expenses
5. Impairment and losses on sale of businesses and fixed assets + Fair value (gain) loss on embedded derivatives
6. Earnings from jointly controlled entities + Earnings from associates
7. Gain on sale of businesses and fixed assets
8. Interest and other revenues - Finance costs + Other finance income</sup>


High energy prices led to impressive Revenue growth. First-quarter Revenue was 9.9 percent greater than in the fourth quarter of 2007, and it was a dramatic 43.1 percent greater than depressed levels in the March 2007 quarter. We had expected 0.2 percent and 30.5 percent, respectively.

The surging Revenue also helped the profitability and cost figures that we track as a percentage of Sales. We had expected the Gross Margin to be 19 percent of Revenue in the first quarter, and the actual value was 20.3 percent. This figure translates into a Cost of Goods Sold (CGS) -- which we define to be Purchases, Production and Manufacturing Expenses, and Production and Similar Taxes -- of 79.7 percent of Revenue.

Exploration costs in the first quarter were $53 million (22 percent) greater than our forecast of $240 million. Depreciation was 3.2 percent of Revenue, compared to our expectation of 4.0 percent. Sales, General, and Administrative (SG&A) expenses, what BP calls Distribution and Administration Expenses, were 4.4 percent of Revenue, which compares very favorably to our prediction of 5.5 percent of Revenue.

The one potential exception to this positive story was Other Operating Expenses, in which we lump losses on derivatives and asset impairment charges. Items of this sort are erratic and, as far as we can tell, unpredictable from quarter to quarter. In the first quarter, these other costs, mostly losses on embedded derivatives, were significantly over their average value, which was the basis for our forecast. We suspect, however, that energy price gains reflected elsewhere on the Income Statement offset the derivative losses included here.

Nevertheless, the higher Revenue easily won out over the unexpected special costs, resulting in Operating Income, as we define it, 69.8 percent above last year's value. We had expected a far more modest 19.5 percent increase.

Non-operating income, such as gains on investments, gains on asset sales, and net interest income, was $657 million more than our $1.5 billion forecast. This resulted helped raise pre-tax income 42.4 percent above the $8.6 billion forecast. Some of this increase was eaten up by higher taxes. The income tax rate for the quarter was 36.8 percent, whereas we had expected 35 percent. Net Income still exceeded our forecast by 36.4 percent.


Cash Management. This gauge increased from 10 points in December to 14 points now.

	March 2008	3 mos. ago	12 mos. ago
Current Ratio	1.1	1.0	1.0
LTD/Equity	16.3%	16.7%	14.3%
Debt/CFO	1.1 yrs	1.3 yrs	0.9 yrs
Inventory/CGS	N/A	N/A	N/A
Finished Goods/Inventory	N/A	N/A	N/A
Days of Sales Outstanding (DSO)	48.5 days	49.2 days	54.3 days
Working Capital/Market Capitalization	2.5 %	0.6%	-0.7%
Cash Conversion Cycle Time	17.9 days	19.8 days	13.9 days

The changes to the Cash Management metrics were minor. Higher profits increased Working Capital and reduced the debt measures.


Growth. This gauge soared from only 1 point in December to 12 points now.

	March 2008	3 mos. ago	12 mos. ago
Revenue growth	17.8%	6.9%	5.3%
Revenue/Assets	123%	121%	122%
CFO growth	1.5%	-12.3%	3.6%
Net Income growth	13.7%	-5.1%	-2.9%

Growth rates are trailing four quarters compared to four previous quarters.

Revenue and Net Income grew at accelerated rates. Much higher Cash Flow in the first quarter turned the year-over-year figure positive: no small feat.


Profitability. This gauge increased from 4 points in December to 5 points now.

	March 2008	3 mos. ago	12 mos. ago
Operating Expenses/Revenue	89.8%	90.5%	90.6%
ROIC	16.9%	14.9%	15.0%
FCF/Equity	9.1%	7.3%	13.8%
Accrual Ratio	4.7%	4.8%	2.1%

Profitability clearly improved in the first quarter, but not dramatically. A lower Accrual Ratio would attest to higher quality earnings, but at least the 2007 increase in this parameter was finally stemmed.


Value. The price of BP ADRs dropped precipitously over the course of the first quarter from $73.17 to $60.65. The Value gauge, based on the latter price, increased from 3 points to 15 points.

	March 2008	3 mos. ago	12 mos. ago
P/E	7.9	10.9	9.8
P/E to S&P 500 average P/E	48%	61%	62%
Price/Revenue	0.6	0.8	0.8
Enterprise Value/Cash Flow (EV/CFO)	7.8	10.5	8.5

The average P/E for the Oil & Gas Refining & Marketing industry is 17.6, and the average Price/Sales is 1.0.


We first saw some positive signs for BP in the fourth quarter of 2007, but the party began in earnest in the latest quarter. The improvements are mostly due to the effects higher oil prices have had on Revenue. Production levels are, more or less, flat, and refining margins remain compressed. Now at 47 out of 100 possible points, the Overall gauge is finally back to a respectable, if still modest, level. We'll need to see to improved Profitability to get the gauge to the next level (unless a surging stock price interrupts the Value Gauge's recovery).

CSCO: Look Ahead to April 2008 (3Q FY08) Results

After the U.S. stock markets close on Wednesday, 6 May 2008, Cisco Systems will report its results for the quarter that ended 26 April 2008. The quarter was the third of Cisco's 2008 fiscal year, which will end in July.

Cisco Systems, Inc. (CSCO), the proud plumber of the Internet, has a commanding position in the market for enterprise networking devices. After acquiring Linksys and, more recently, Scientific Atlanta, Cisco now also sells devices intended for home use.

Our analysis of the January quarter found that Cisco performed well: Revenue grew at the upper end of the company's long-term target, and Net Income in the trailing four quarters grew by nearly 25 percent. However, Cash Flow from Operations, an important GCFR metric, rose at less than half that pace. Net Income expectations have been met, to some extent, by greater Interest and other Non-operating Income and by a lower Income Tax Rate.

Despite these few concerns, the Overall Gauge advanced in January to 47 (of 100 possible) points from 29 points the previous October. The increase was aided by Cisco shares falling in price from $33.06 to $24.50 during the November-to-January quarter. The share price decline caused the Value Gauge to increase from 0 points (a prescient warning of overvaluation) to a more appealing 12 (of 25 possible) points. January's results also resulted in Cash Management, Growth, and Profitability gauges scores between 10 and 13 points.

Cisco shares have bounced off the low prices hit in February and are now trading at over $25.

We've made estimates for Cisco's Income Statement in the April 2008 quarter. The intent of this exercise was to produce a baseline for identifying any deviations, positive or negative, in the actual data, which the company will publish on 6 May 2008. Our estimates are derived from trends in the company's historical financial results and guidance provided by company management.

When discussing January's results, Cisco management reported that product order growth was strong in the beginning of the quarter but then slowed to weaker-than-expected levels. Management said they believe the slowdown to be a short-term phenomenon. Nevertheless, Cisco lowered its Revenue forecast for the April 2008 quarter to 10 percent growth "year-over-year." [The GCFR definition of "year-over-year" is "the last four quarters compared to the four previous quarters." We learned the hard way a few quarters a ago that Cisco uses an alternative definition of "this quarter compared to the year-earlier quarter."] Since Revenue in the April 2007 quarter was $8.9 billion, the company's forecast for the quarter just concluded is $9.75 billion.

The 10 percent rate is below the company's long-term (and frequently stated) growth objective of 12 to 17 percent. Quarter-to-quarter deviations outside this range are not unusual.

Management's guidance for Gross Margin is 65.0 percent, a figure that seems a little high given the order slowdown and the fact that the margin in recent quarters has been closer to 64.5 percent. We're more comfortable with the lower number and will use it as our target. Therefore, our forecast for Cost of Goods Sold (CGS) is 35.5 percent of $9.75 billion, which is $3.5 billion.

Cisco stated that they expect the quarter's Operating Expenses to be about 37 percent of Revenue. On Cisco's Income Statement, Operating Expenses include Research and Development (R&D) and Sales, General, and Administrative (SG&A) costs, but not CGS. Based on past results, we expect R&D expenses will be 12.5 percent of Revenue. This would equate to $1.2 billion, given the $9.75 billion Revenue estimate. Similarly, we expect SG&A expenses to be 26 percent of Revenue, which would be about $2.5 billion.

The R&D and SG&A estimates combine to 38.5 percent of Revenue, 1.5 points above the guidance. We might be too conservative, Cisco might be too optimistic, or the guidance might exclude some non-recurring costs: we will find out on 6 May. (Is there a seasonal factor that would explain lower costs in April quarters?) Cisco executives certainly know their business infinitely better than we so; however, lacking a reason to believe costs will drop substantially, we will stick with the GCFR methodology of using corporate guidance to modulate extrapolations of past results, not replace them.

Cisco always reports various other operating changes, including payroll tax on stock options, amortization of deferred compensation, amortization of purchased intangible assets, and the mysterious in-process research and development. We don't know how to forecast these costs, but $120 million seem reasonable given past results.

These figures would result in Operating Income of $2.4 billion, compared to $2.2 billion in the year-earlier quarter.

Cisco indicated that interest and other income would be $200 million in the April quarter. This might be a little conservative. We will set the target for $220 million. Pre-tax income would, therefore, be about $2.6 billion.

Management forecasts a 24 percent rate for income taxes, which we have no reason to doubt. As a result, provisions for income taxes are estimated at $633 million.

Therefore, we're looking to see Net Income in the quarter of $2.00 billion. This would equate to $0.32 per share, depending on the number of shares outstanding.

Please note that the tabular format below, which we use for all analyses, can and often does differ in material respects from company-used formats. A common difference is the classification of income and expenses as Operating and Non-Operating. The standardization is simply for convenience and to facilitate cross-company comparisons.

($M)		April 2008 (predicted)	April 2007 (actual)
Revenue		9753	8866
Op expenses
	CGS	(3462)	(3219)
	R&D	(1219)	(1144)
	SG&A	(2536)	(2208)
	Other	(120)	(98)
Operating Income		2416	2197
Other income
	Investments	0	0
	Interest, etc.	220	222
Pretax income		2636	2419
Income tax		(633)	(545)
Net Income		2003	1874
		$0.32/sh	$0.30/sh
Shares outstanding		6175	6244

PEP: Financial Analysis through March 2008

We have analyzed PepsiCo's 10-Q financial statements for the 12-week quarter that ended on 22 March 2008. PepsiCo submitted the 10-Q to the SEC when they announced their results publicly, which gave us early access to a full set of financial statements and notes.

PepsiCo, Inc. (PEP) is a leading global purveyor of beverages and snacks. The company is known for good management, steady growth, significant international exposure, and the defensive characteristics of the food and beverage industries. While famously locked in a battle with Coca-Cola (KO) for the soft-drink market, PepsiCo's snack food business diversifies the company. The Frito-Lay North America division takes in more Revenue, and it contributes more to Operating Profit, than the PepsiCo Americas Beverages unit.

When we analyzed PepsiCo after 2007's fourth-quarter and full-year results became available, the Overall gauge score dropped to a weak 23 points. The decline was the product of slowing income growth and a stock price that soared 21 percent in 2007. Of the four individual gauges that fed into the composite result, Profitability was the strongest at 12 points. Value was weakest at 0 points.

Now, with the available data from the March 2008 quarter, our gauges display the following scores:

• Cash Management: 8 of 25 (unchanged from December)
• Growth: 3 of 25 (down from 5)
  
• Profitability: 10 of 25 (down from 12)
• Value: 2 of 25 (up from 0)
  

• Overall: 23 of 100 (unchanged)
  

Before we examine the factors that affected each gauge, let's compare the latest quarterly Income Statement to our previously announced expectations.

Please note that the table format below, which we use for all analyses, can and often does differ in material respects from company-used formats. A common difference is the classification of income and expenses as Operating and Non-Operating. The standardization is simply for convenience and to facilitate cross-company comparisons.

($M)		March 2008 (actual	March 2008 (predicted)	March 2007 (actual)
Revenue		8333	8000	7350
Op expenses
	CGS	(3834)	(3680)	(3285)
	SG&A	(2934)	(2840)	(2635)
	Amortization, etc.	(12)	(15)	(11)
Operating Income		1553	1465	1419
Other income
	Equity income	70	100	74
	Interest, etc.	(57)	(25)	(20)
Pretax income		1566	1540	1473
Income tax		(418)	(424)	(377)
Net Income		1148	1117	1096
		$0.70/sh	$0.68/sh	$0.66/sh
Shares outstanding		1632	1640	1673

Revenue beat our estimate by 4.2 percent. We expected Revenue to exceed its value in the year-earlier quarter by 8.8 percent, and the actual increase was 13.4 percent. On a year-over-year basis, Revenue grew by 13.1 percent, which surpassed our 12.2 percent estimate. International operations, aided by the weak dollar, contributed mightily to the sales surge. Revenues at PepsiCo's three business units that operate outside North America grew by an average of 30 percent. Revenue at the three other units that operate in North America grew by 6.7 percent.

We predicted correctly that the Gross Margin would slip to 54.0 percent of Revenue in the first quarter because of rising raw material prices. The Cost of Goods Sold (CGS) was equal to 46 percent of Revenue.

We did almost as well with Sales, General, and Administrative (SG&A) expenses, which were 35.2 percent of Revenue, compared to our estimate of 35.5 percent. Amortization of intangible assets was $3 million less than we expected.

The greater-than-expected Revenue, with costs as predicted, enabled Operating Income, as we define it, to exceed the forecast value by 6.0 percent and to top the year-earlier value by 9.4 percent. PepsiCo indicated that "foreign currency [changes] contributed almost 3 percentage points to operating profit growth."

Bottling equity income can be erratic. The latest value fell below our unreliable prediction by $30 million (30 percent). Management attributed the decrease to "lower pre-tax gains on our sale of [Pepsi Bottling Group, Inc. ] PBG stock." Net Interest Expense was also $32 million more than we expected. In this case, the expense was greater than anticipated because of losses on investments used to hedge a deferred liability. Poor results for the two non-operating values (equity income and interest) nearly canceled out the amount Operating Income bested our prediction.

The Income Tax Rate was 26.7 percent, instead of the predicted 27.5 percent. The rate has been surprisingly volatile from quarter to quarter, and rate changes can have a significant effect on reported income. The lower rate helped Net Income beat our prediction by 2.8 percent.


Cash Management. This gauge remained at 8 points.

	March 2008	3 mos. ago	12 mos. ago
Current Ratio	1.3	1.3	1.2
LTD/Equity	29.2%	24.4%	11.8%
Debt/CFO	0.9 yrs	0.6 yrs	0.4 yrs
Inventory/CGS	44.8 days	42.7 days	44.9 days
Finished Goods/Inventory	47.0%	47.0%	48.8%
Days of Sales Outstanding (DSO)	40.3 days	37.5 days	39.6 days
Working Capital/Market Capitalization	2.0%	1.9%	1.1%
Cash Conversion Cycle Time	-45 days	-60 days	-48 days

PepsiCo has taken on more debt, but the level is easily affordable. The debt is mostly likely used to fund capital spending and share repurchases. Inventory, something we watch very closely for signs of problems, is clearly under control. We know that a low and decreasing CCCT is one sign of cash management efficiency, but we've never had time to figure out if negative values are especially desirable or whether they invalidate the measurement.


Growth. This gauge decreased from 5 points in December to 3 points now.

	March 2008	3 mos. ago	12 mos. ago
Revenue growth	13.1%	12.3%	9.4%
Revenue/Assets	113%	114%	120%
CFO growth	4.5%	14.0%	23.9%
Net Income growth	-1.4%	0.3%	40.8%

Growth rates are trailing four quarters compared to four previous quarters.

Revenue has grown as the dollar has weakened, but Cash Flow and Net Income growth has decelerated or reversed direction. A major contributor to the drop in earnings is that the Income Tax rate increased from 19.0 percent to 26.1 percent in the last year. [One-time factors led to an abnormally low tax rate last year.]


Profitability. This gauge slipped from 12 points in December to 10 points now.

	March 2008	3 mos. ago	12 mos. ago
Operating Expenses/Revenue	81.8%	81.7%	81.0%
ROIC	25.8%	26.1%	32.1%
FCF/Equity	26.1%	26.1%	29.3%
Accrual Ratio	6.1%	7.1%	-0.1%

Operating expenses have edged up, but by very minor amounts. We're concerned that the Accrual Ratio is indicating that less of the company's Net Income is due to Cash Flow from Operations (CFO), and, therefore, more is due to changes in non-operational Balance Sheet accruals.


Value. PepsiCo's stock price slid from $75.90 to $72.20 during the first three months of 2008. The drop was only enough to increase this gauge from 0 to 2 points from December until March.

	March 2008	3 mos. ago	12 mos. ago
P/E	20.6	22.1	18.4
P/E to S&P 500 average P/E	125%	124%	116%
Price/Revenue	2.9	3.2	3.0
Enterprise Value/Cash Flow (EV/CFO)	17.8	18.3	16.4

The average P/E for the Non-alcoholic Beverages industry is 21.8, and the average Price/Sales is 3.2.


PepsiCo's international operations have boosted Revenue, but other costs have prevented the higher sales from reaching the bottom line in a big way. This situation is reflected in the Overall Gauge score of 23 points. It's true that last year had more substantial non-recurring tax benefits, which skews the comparisons. We should also acknowledge that management is deftly handling increases in raw material costs, and they are returning profits to shareholders via share repurchases. Nevertheless, current financial results don't explain why PepsiCo shares are commanding a more significant premium to the market multiple.

COP: Financial Analysis through March 2008

We have analyzed ConocoPhillips's preliminary financial results for the quarter that ended on 31 March 2007. The report included a plethora of data about the performance of Conoco's various business segments, but the report did not include a current Balance Sheet. This omission is not unusual in a Conoco preliminary report, and we can be certain the data will be included in the 10-Q the company will file with the SEC. Since the GCFR analysis methodology requires Asset, Liability, and Equity data to compute Gauge scores, the evaluation describe below assumed that the Balance Sheet did not change materially from 31 December 2007.

ConocoPhillips (COP) is the third-largest integrated oil and gas company in the U.S. Holding the fifth spot on the Fortune 500, Conoco's heft was achieved with mergers and acquisitions. Most notably, Conoco, Inc., and Phillips Petroleum combined in August 2002. The resulting behemoth in March 2006 purchased Burlington Resources, which had extensive natural gas operations in North America, for $33.9 billion.

Conoco sharessurged from $72 in early 2007 to $90 per share in mid-July of that year. The shares generally traded at a price between the upper $70's and upper $80s during the remainder of the year. The stock market correction in early 2008 knocked the price down into the low $70's, but the price has since recovered. Berkshire Hathaway (BRK.A ), run by super-investor Warren Buffett, owned about 17.5 million shares of Conoco on 30 September 2007.

In an early April update, Conoco announced that oil and gas production was down in the first quarter of 2008, relative to the fourth quarter of 2007. Production was impaired by problems at a natural gas plant in the San Juan Basin, which is primarily in New Mexico. The company also indicated that refining and marketing margins were significantly lower.

Our last financial analysis of Conoco, computed after 2007's full-year and fourth-quarter results became available, yielded an Overall Gauge score of only 24 points out of a possible total of 100. This was much lower than what might have been expected given the soaring crude oil prices. Of the four individual gauges that fed into this composite result, Profitability was the strongest at 12 points. Value was weakest at 0 points.

Now, with the Income and Cash Flow data from the March 2008 quarter, our gauges display the following scores:

• Cash Management: 10 of 25 (unchanged from December)
  
• Growth: 14 of 25 (up from 3)
  
• Profitability: 10 of 25 (down from 12)
  
• Value: 1 of 25 (up from 0)

• Overall: 28 of 100 (up from 24)
  

Before we examine the factors that affected each gauge, let's compare the latest quarterly Income Statement to our previously communicated expectations.

($M)		March 2008 (actual)	March 2008 (estimated)	March 2007 (actual)
Revenue (1)		54883	54630	41230
Op expenses
	CGS (2)	(40511)	(39989)	(29027)
	Depreciation	(2209)	(2458)	(2024)
	Exploration	(309)	(325)	(262)
	SG&A (3)	(5681)	(6009)	(4901)
	Other	(67)	(250)	(79)
Operating Income		6106	5598	4847
Other income
	Equity income (4)	1340	1000	908
	Interest, etc. (5)	103	150	311
Pretax income		7549	6748	6066
Income tax		(3410)	(2868)	(2520)
Net Income		4139	3880	3546
		$2.62	$2.45/sh	$2.12/sh
Shares outstanding		1582	1582	1669

<sub>1. Revenue = Sales and other operating revenues.
2. CGS = Purchased crude oil, natural gas and products + Production and operating expenses
3. SG&A = SG&A expenses + Taxes other than income taxes
4. Equity income = Equity in earnings of affiliates - Minority interests
5. Interest, etc. = Other income - Interest and debt expense</sub>


Revenue exceeded our $54.6 billion target by a mere 0.5 percent. We thought that Revenue in the recent quarter would be 3.7 percent greater than in the December 2007 quarter, but the actual increase was 4.2 percent. Similarly, we expected Revenue to increase 32.5 percent from its March 2007 value, and the actual increase was 32.8 percent.

As for Operating Expenses, we thought the Gross Margin would be 26.8 percent of Revenue, and the actual value was 26.2 percent. In other words, the Cost of Goods Sold (CGS) in the quarter was 73.8 percent of Revenue. Exploration costs were $16 million less than our $325 million estimate.

Depreciation expenses were only 4.0 percent of Revenue, below our 4.5 percent estimate. Sales, General, and Administrative (SG&A) expenses were 10.4 percent of Revenue, compared to our forecast of 11 percent. Our biggest miss was in non-recurring operating costs, which were $183 million less than our $250 million estimate

Lower costs enabled Operating Income to soar 9.1 percent above the forecast value. [We should mention at this point that our definition of Operating Income, which we use for all the companies we analyze, is not identical to Conoco's definition. The differences can be discerned from the footnotes above.]

Non-Operating Income was a substantial $293 million better than expected. However, the Income Tax Rate was 45.2 percent, when we forecast 42.5 percent. The hefier tax bill was not enough to prevent Net Income from surpassing our prediction by a healthy 6.7 percent.


Cash Management. This gauge remained at the 10 point level. However, this is the score mostly likely to change when an up-to-date Balance Sheet is made available.

	March 2008	3 mos. ago	12 mos. ago
Current Ratio	0.9	0.9	0.9
LTD/Equity	22.8%	22.8%	25.9%
Debt/CFO	0.9 yrs	0.9 yrs	1.0 yrs
Inventory/CGS	N/A	N/A	N/A
Finished Goods/Inventory	N/A	N/A	N/A
Days of Sales Outstanding (DSO)	27.5 days	29.7 days	27.3 days
Working Capital/Market Capitalization	-1.5%	-1.3%	-1.7%
Cash Conversion Cycle Time	-4.0 days	-2.1 days	-1.7 days

Growth. This gauge moved up sharply from 3 points in December to 14 points now.

	March 2008	3 mos. ago	12 mos. ago
Revenue growth	12.9%	2.1%	-5.6%
Revenue/Assets	113%	105%	103%
CFO growth	2.9%	14.1%	28.6%
Net Income growth	-21.0%	-23.5%	12.8%

Growth rates are trailing four quarters compared to four previous quarters.

It's easy to see that Revenue growth was the major reason for the increase in the gauge score.

The March 2008 quarter will be the last one in which trailing four-quarters Net Income includes the $4.5 billion charge related to Conoco's loss of its Venezuelan operations.


Profitability. This gauge decreased from 12 points in December to 10 points now.

	March 2008	3 mos. ago	12 mos. ago
Operating Expenses/Revenue	88.1%	87.9%	85.7%
ROIC	11.1%	10.6%	13.1%
FCF/Equity	13.5%	14.3%	11.4%
Accrual Ratio	-1.0%	-2.3%	2.9%

A lower Gross Margin (i.e., higher CGS) was the main reason Operating Expenses as a percentage of Revenue increased in the last four quarters. The decreasing Accrual Ratio indicates that more of the company's Net Income is due to CFO, and, therefore, less is due to changes in non-operational Balance Sheet accruals.


Value. This gauge increased from 0 points in December to 1 point now.

	March 2008	3 mos. ago	12 mos. ago
P/E	9.7	12.0	7.2
P/E to S&P 500 average P/E	59%	67%	45%
Price/Revenue	0.6	0.8	0.6
Enterprise Value/Cash Flow (EV/CFO)	5.8	6.6	5.8

The average P/E for the Integrated Oil & Gas industry is 11.8, and the average Price/Sales is 1.2.

During the first quarter, the price of Conoco shares dropped from $88.3 to $76.21. The price has since rebounded over $80. In keeping with the normal GCFR practice, the Value gauge score is computed with the quarter's closing share price.

The figures for the Value metrics do not suggest an expensive stock, especially when compared with the industry averages. However, Net Income and Cash Flow have not increased enough, relative to the increase in the share price, to excite the Value gauge. This may change soon if the good results of the first quarter can be sustained in the rest of the year, and as the Venezuelan expropriation fades into the rear-view mirror.