Adjusted earnings rose from $0.95 to $1.50 per share. One-time gains on asset dispositions are among the larger special items excluded from adjusted earnings.
A previous article examined Conoco's Income Statement for the September quarter. Adjusted earnings were $0.06 more than our $1.44 EPS estimate.
We have now updated the various financial metrics we use to analyze Cash Management, Growth, Profitability and Value. This post reports on the metrics for ConocoPhillips and the associated financial gauge scores. The metrics were calculated using data from Conoco's current and historical financial statements, including those in the latest 10-Q.
Before getting into the details, we will take a step back to introduce the subject of today's analysis.
ConocoPhillips is one of the ten biggest Integrated Oil and Gas companies, which produce, refine, transport, and market energy products. ConocoPhillips has business interests in 26 countries around the world, from Algeria to Vietnam.
In 2009, ConocoPhillips earned $4.86 billion ($3.24 per share) on revenue of $152.8 billion. In 2008, the roller-coaster rise and fall of crude oil prices resulted in record-high annual revenue of $246.2 billion. However, $33 billion in charges slashing the carrying value of intangible assets and investments led to a $17 billion loss in 2008.
ConocoPhillips announced in October 2009 it would "improve returns and deliver long-term organic growth from a reduced, but more strategic, asset base." The company signaled it would sell assets worth approximately $10 billion over the next two years, and it would trim capital expenditures in 2010 to $11 billion, from $12.5 billion in 2009. ConocoPhillips has since sold equity investments in Lukoil, Syncrude and CFJ Properties.
Additional background information about ConocoPhillips and the business environment in which it is currently operating can be found in the look-ahead.
In summary, Conoco's latest quarterly results produced the following changes to the gauge scores:
- Cash Management: 11 of 25 (up from 8 in June)
- Growth: 19 of 25 (up from 4)
- Profitability: 9 of 25 (up from 5)
- Value: 3 of 25 (down from 5)
- Overall: 32 of 100 (up from 22)
The current and historical values for the financial metrics that determine the gauge scores are listed below, with some brief commentary. Readers are encouraged to verify these figures and calculate others as they see fit using the filings available at the SEC's web site and elsewhere.
| Cash Management | 30 Sep 2010 | 30 Jun 2010 | 30 Sep 2009 | 5-Yr Avg |
| Current Ratio | 1.4 | 1.0 | 0.9 | 0.9 |
| LTD to Equity | 33.2% | 35.2% | 45.0% | 32.8% |
| Debt/CFO (years) | 1.5 | 1.8 | 2.9 | 1.4 |
| Inventory/CGS (days) | N/A | N/A | N/A | N/A |
| Finished Goods/Inventory | N/A | N/A | N/A | N/A |
| Days of Sales Outstanding (days) | 26.3 | 26.9 | 31.1 | 26.2 |
| Working Capital/Revenue | 0.3% | -0.8% | -0.6% | -0.9% |
| Cash Conversion Cycle Time (days) | 3.3 | 2.4 | 1.4 | 0.6 |
| Gauge Score (0 to 25) | 11 | 8 | 13 | 14 |
The Cash Management gauge score added three points primarily as a result of the improved Current Ratio and the reduction in the number of Days of Sales Outstanding.
During the third quarter, ConocoPhillips received $6.2 billion by selling 113 million shares of Lukoil. Current Assets increased from $26.7 billion to $35.3 billion, which led to the sharply higher Current Ratio.
Net Accounts Receivable rose by 7.6 percent in the last year to $13.5 billion. However, this increase was much more modest than the 20-percent rise in trailing-year Revenue. This difference explains the nearly five-day reduction in Days of Sales Outstanding.
The ongoing efforts to sell assets, such as the remainder of the Lukoil investment, and to trim capital spending should enable Conoco to reduce its debt level further.
| Growth | 30 Sep 2010 | 30 Jun 2010 | 30 Sep 2009 | 5-Yr Avg |
| Revenue Growth | 19.8% | -3.9% | -39.4% | 0.3% |
| Revenue/Assets | 117.4% | 115.2% | 89.5% | 119.0% |
| Operating Profit Growth | -15.9% | -17.7% | -7.2% | -15.3% |
| CFO Growth | 51.8% | -3.6% | -60.3% | -8.0% |
| Net Income Growth | N/A | N/A | N/A | 4.8% |
| Gauge Score (0 to 25) | 19 | 4 | 0 | 10 |
The Operating Profit rate is the annualized rate of growth in Operating Profit after Taxes over the last 16 quarters.
The Growth gauge rose a remarkable 15 points because of dramatic improvements in many of the pertinent trailing-year metrics.
Net Income in the last four quarters was $10.6 billion, but the growth rate is N/A because of a loss in the four previous quarters.
With the weakest quarters of 2009 now part of the year-earlier period, Cash Flow growth appears especially robust. The growth rate will almost certainly moderate going forward.
| Profitability | 30 Sep 2010 | 30 Jun 2010 | 30 Sep 2009 | 5-Yr Avg |
| Operating Expense/Revenue | 92.4% | 92.7% | 93.4% | 89.6% |
| ROIC | 9.1% | 8.2% | 5.8% | 11.4% |
| Free Cash Flow/Invested Capital | 7.8% | 5.9% | -6.1% | 6.0% |
| Accrual Ratio | -5.6% | -1.8% | -15.9% | -1.0% |
| Gauge Score (0 to 25) | 9 | 5 | 5 | 8 |
A slightly better Operating Margin has also helped. Operating Expenses as a percentage of Revenue are still high when compared to Conoco's history.
Free Cash Flow has benefited from a significant reduction in capital expenditures.
The recent decline in the Accrual Ratio is also welcome. It often signals improved quality of earnings.
| Value | 30 Sep 2010 | 30 Jun 2010 | 30 Sep 2009 | 5-Yr Avg |
| P/E | 8.1 | 8.2 | N/A | 9.0 |
| P/E vs. S&P 500 P/E | 0.6 | 0.6 | N/A | 0.5 |
| PEG | N/A | N/A | N/A | 1.2 |
| Price/Sales | 0.5 | 0.4 | 0.4 | 0.5 |
| Enterprise Value/Cash Flow (EV/CFO) | 6.4 | 6.6 | 9.3 | 6.8 |
| Gauge Score (0 to 25) | 3 | 5 | 4 | 5 |
| Share Price $) | $57.43 | $49.09 | $45.16 | - |
The Price/Earnings ratio held steady, and the P/E remains below its long-term average. Gains on asset sales, which boosted Net Income, helped earnings keep up with the share price rise.
The Price/Sales ratio also remained steady at about 50 percent.
| Overall | 30 Sep 2010 | 30 Jun 2010 | 30 Sep 2009 | 5-Yr Avg |
| Gauge Score (0 to 100) | 32 | 22 | 23 | 34 |
Although the Overall score is still modest, three of the four category gauges registered improvements. The Growth gauge exhibited strength for the first time in several years.
Some scores benefited from recent one-time gains on asset sales. Reductions in capital spending and a recovery in energy prices has also helped. Lower production, on the other hand, has been a slightly negative factor.
Full disclosure: Long COP at time of writing
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