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.
In last year's second quarter, a troubles with the Venezuelan government led Conoco to record "a complete impairment of its entire interest in its oil projects in Venezuela of approximately $4.5 billion, before- and after-tax."
Conoco shares have had a roller-coaster ride in 2008 to date, moving from the low-$70s to mid-$90s and back down to the low-$80s. Berkshire Hathaway, Inc. (BRK.A), run by super-investor Warren Buffett, owned about 17.5 million shares of Conoco on 31 March 2008.
In an update earlier this month, Conoco announced that oil and gas production was lower in the second quarter of 2008 than the first quarter due to planned maintenance. The company also indicated that refining and marketing margins were higher, but that Conoco didn't expect to be able to take full advantage of the higher margin because of its particular product mix.
Our last financial analysis of Conoco, performed after the first quarter's 10-Q report became available, yielded an Overall Gauge score of only 27 points out of a possible total of 100. This figure was lower than we expected given soaring crude oil prices. Of the four individual gauges that fed into the composite result, Growth was the strongest at 14 points. Value was weakest at 1 point.
Now, with the Income and Cash Flow data from the June 2008 quarter, our gauges display the following scores:
- Cash Management: 12 of 25 (up from 10 in March)
- Growth: 21 of 25 (up from 14)
- Profitability: 8 of 25 (down from 11)
- Value: 0 of 25, using the quarter-end share price of $94.39
3 of 25 using the current share price (1 in March)
- Overall: 27 of 100, using the quarter-end share price of $94.39 (unchanged)
33 of 100, using the current share price
| ($M) | | June 2008 (actual) | (actual) |
| Revenue (1) | | 71,411 | 47,370 |
| Op expenses | | | |
| | CGS (2) | (54,325) | (33,377) |
| | Depreciation | (2,178) | (2,016) |
| | Exploration | (288) | (259) |
| | SG&A (3) | (6,425) | (5,301) |
| | Other | (115) | (4,588) |
| Operating Income | | 8,080 | 1,829 |
| Other income | | | |
| | Equity income (4) | 1,795 | 1,487 |
| | Interest, etc. (5) | (80) | 202 |
| Pretax income | | 9,795 | 3518 |
| Income tax | | (4,356) | (3217) |
| Net Income | | 5,439 | 301 |
| | | $3.50 | $0.18/sh |
| Shares outstanding | | 1555 | 1658 |
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 the value in the June 2007 quarter by a staggering 50.8 percent. Revenue in the last four quarters grew by 26 percent compared to the previous four quarter.
The Gross Margin in the quarter was 23.9 percent of Revenue, meaning the Cost of Goods Sold (CGS) was 76.1 percent of Revenue. The Margin was 29.5 percent in the prior-year quarter.
Exploration costs were up a minor $29 million. Depreciation expenses were 3.0 percent of Revenue, down from last year's average of 4 percent. Sales, General, and Administrative (SG&A) expenses were 9 percent of Revenue, compared to 11 percent in the last four quarters.
Non-recurring operating costs seem trivial when compared to last year's $4.6 billion charge due to the Venezuelan expropriation.
Operating Income was 3.4 times the June 2007 value. Removing non-recurring gains and losses, to make the results more comparable, Operating Income rose 27.7 percent.
Non-Operating Income was $26 million better than last year, and the Income Tax Rate was 44.5 percent, down for last year's odd 91 percent. Net Income surpassed the year-earlier value by 1700 percent.
Cash Management. This gauge moved up from 10 points in March to 12 points now. However, this score is likely to change when we analyze an up-to-date Balance Sheet.
| June 2008 | 3 mos. ago | 12 mos. ago | |
| Current Ratio | 0.9 | 0.9 | 1.0 |
| LTD/Equity | 23.6% | 23.6% | 25.6% |
| 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) | 25.5 days | 28.2 days | 27.5 days |
| Working Capital/Market Capitalization | -1.5% | -1.8% | 0.3% |
| Cash Conversion Cycle Time | -1.1 days | -2.5 days | -0.9 days |
Growth. This gauge moved up smartly, from 14 points in March to 21 points now.
| June 2008 | 3 mos. ago | 12 mos. ago | |
| Revenue growth | 26.2% | 12.9% | -8.1% |
| Revenue/Assets | 123% | 110% | 104% |
| CFO growth | 6.0% | 2.9% | 15.2% |
| Net Income growth | 61.4% | -21.0% | -32.0% |
Rising energy prices have powered Revenue growth.
The June 2008 quarter was be the first one in the last year in which trailing four-quarters Net Income doesn't include the $4.5 billion charge related to Conoco's loss of its Venezuelan operations.
Profitability. This gauge decreased from 10 points in March to 8 points now.
| June 2008 | 3 mos. ago | 12 mos. ago | |
| Operating Expenses/Revenue | 88.6% | 88.1% | 86.5% |
| ROIC | 13.3% | 11.0% | 10.5% |
| FCF/Equity | 13.1% | 13.4% | 12.3% |
| Accrual Ratio | 2.3% | -1.0% | -0.9% |
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 increasing Accrual Ratio indicates that less of the company's Net Income is due to CFO, and, therefore, more is due to changes in non-operational Balance Sheet accruals.
Value. Conoco shares rose from $76.21 to $94.39 during the quarter, before giving back a good chunk of the gain in July. In keeping with the normal GCFR practice, we used the quarter-end share price to computer the Value gauge score of xx points, up from 1 point in March.
| June 2008 | 3 mos. ago | 12 mos. ago | |
| P/E | 8.3 | 9.7 | 11.9 |
| P/E to S&P 500 average P/E | 49% | 56% | 72% |
| Price/Revenue | 0.7 | 0.6 | 0.7 |
| Enterprise Value/Cash Flow (EV/CFO) | 6.7 | 5.8 | 6.4 |
The figures for the Value metrics suggest an inexpensive 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 half can be sustained in the rest of the year, and as the Venezuelan expropriation fades into the rear-view mirror.
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