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) | (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 |
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
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% |
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 |
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.
Posts
No comments:
Post a Comment