The metrics were calculated using data from Conoco's current and historical financial statements, including those in the new 10-K for fiscal 2010.
A previous article examined in some detail ConocoPhillips's Income Statement for the December-ending fourth quarter of 2010. The company earned $1.39 per diluted share on a GAAP basis, up 63 percent from $0.86 in the same three months of 2009.
Before getting into the details, we will take a step back to introduce the subject of today's analysis.
ConocoPhillips is one of the largest Integrated Oil and Gas companies, which produce, refine, transport, and market energy products. ConocoPhillips was formed in 2002 when Conoco, Inc., merged with Phillips Petroleum. It added Burlington Resources, with its extensive natural gas operations, in March 2006 (when gas prices were much higher than they are now).
ConocoPhillips has business interests in 30 or so countries around the world, from Algeria to Vietnam.
For financial data reporting, ConocoPhillips has six operating segments: Exploration & Production, Midstream, Refining & Marketing, Lukoil Investment, Chemicals, and Emerging Businesses. The Chemical segment consists of a joint venture with Chevron (NYSE: CVX).
ConocoPhillips earned $11.4 billion on revenue of $189 billion in 2010, with the Exploration & Production business generating $9.2 billion of the reported profits. Earnings were $4.86 billion on revenue of $152.8 billion in 2009.
"improve returns and deliver long-term organic growth from a reduced, but more strategic, asset base."
ConocoPhillips signaled it would sell assets worth approximately $10 billion over a two-year period, and it would trim capital expenditures in 2010 to $11 billion, from $12.5 billion in 2009.
A key component of ConocoPhillips's strategic plan was the sale of its equity investment in Lukoil (OTC: LUKOY). At the end of 2009, the investment in the Russian oil producer represented a 20 percent stake, with a book value of $6.4 billion. Most of the Lukoil shares were sold in 2010, and the remaining one were sold by early February 2011.
ConocoPhillips produced 1.75 million barrel-of-oil equivalents per day in 2010, excluding Lukoil, down from 1.85 million BOE/day in 2009. The decrease, which was expected, was blamed on field decline and asset disposals. ConocoPhillips estimated it had 8.3 billion BOE of proven reserves at the end of 2010, down 2.2 billion BOE.
Now we turn to the financial gauges. The latest quarterly results produced the following changes to the scores:
- Cash Management: 9 of 25 (down from 11 in September)
- Growth: 22 of 25 (up from 19)
- Profitability: 12 of 25 (up from 9)
- Value: 0 of 25 (down from 3)
- Overall: 31 of 100 (down from 33)
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 | 31 Dec 2010 | 30 Sep 2010 | 31 Dec 2009 | 5-Yr Avg |
| Current Ratio | 1.3 | 1.4 | 0.9 | 1.0 |
| LTD to Equity | 32.8% | 33.2% | 43.0% | 33.4% |
| Debt/CFO (years) | 1.4 | 1.5 | 2.3 | 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 | 26.3 | 29.6 | 26.5 |
| Working Capital/Revenue | 1.3% | 0.3% | -0.8% | -0.8% |
| Cash Conversion Cycle Time (days) | 1.9 | 3.3 | 1.3 | 0.6 |
| Gauge Score (0 to 25) | 9 | 11 | 14 | 14 |
The Cash Management gauge score slipped a couple of points, but none of the underly metrics deteriorated substantially.
Cash received from asset disposals ($3.1 billion during the fourth quarter, $15.4 billion during the year) allowed ConocoPhillips to reduce its Long-term Debt from $26.9 billion in 2009 to $22.7 billion at the end of 2010. The debt level is back to historic norms and is by no means excessive for the industry.
The incoming cash has also increased Working Capital.
Net Accounts Receivable rose by nearly 20 percent in the last year to $15.8 billion. However, this increase was more modest than the 27-percent rise in trailing-year Revenue. This difference explains the reduction in Days of Sales Outstanding over the last four quarters.
| Growth | 31 Dec 2010 | 30 Sep 2010 | 31 Dec 2009 | 5-Yr Avg |
| Revenue Growth | 26.9% | 19.8% | -38.0% | -0.2% |
| Revenue/Assets | 122.8% | 117.4% | 101.2% | 123.8% |
| Operating Profit Growth | -14.0% | -16.8% | -27.5% | -15.1% |
| CFO Growth | 36.6% | 51.8% | -44.9% | -7.9% |
| Net Income Growth | 154.2% | N/A | N/A | -12.4% |
| Gauge Score (0 to 25) | 22 | 19 | 3 | 10 |
The Operating Profit rate is the annualized rate of growth in Operating Profit after Taxes over the last 16 quarters.
The Growth gauge continued a strong upward rise, and is now within 3 points of a perfect score.
Net Income grew from $4.4 billion to $11.4 billion, an impressive result. Excluding 2010's $4.6 billion after-tax gain on asset dispositions (including the Lukoil investment), Net Income increased 53 percent to $6.8 billion.
Cash Flow from Operations has rebounded nicely from 2009.
The Operating Profit growth rate is the laggard because it is based on a longer-term average that will take longer to turn around.
| Profitability | 31 Dec 2010 | 30 Sep 2010 | 31 Dec 2009 | 5-Yr Avg |
| Operating Expense/Revenue | 92.3% | 92.4% | 94.2% | 89.8% |
| ROIC | 9.8% | 9.1% | 4.7% | 11.7% |
| Free Cash Flow/Invested Capital | 8.4% | 7.8% | 1.9% | 6.5% |
| Accrual Ratio | -6.6% | -5.6% | 1.2% | -1.7% |
| Gauge Score (0 to 25) | 12 | 9 | 2 | 8 |
A slightly better Operating Margin has also helped. Operating Expenses as a percentage of Revenue are still high when compared to Conoco's history.
Free Cash Flow has benefited from a significant reduction in capital expenditures.
The recent decline in the Accrual Ratio is also welcome and may signal improved quality of earnings.
| Value | 31 Dec 2010 | 30 Sep 2010 | 31 Dec 2009 | 5-Yr Avg |
| P/E | 8.8 | 8.1 | 17.4 | 9.2 |
| P/E vs. S&P 500 P/E | 0.6 | 0.6 | 0.9 | 0.6 |
| PEG | N/A | N/A | N/A | 1.3 |
| Price/Sales | 0.5 | 0.5 | 0.5 | 0.5 |
| Enterprise Value/Cash Flow (EV/CFO) | 6.6 | 6.4 | 8.4 | 6.6 |
| Gauge Score (0 to 25) | 0 | 3 | 1 | 5 |
| Share Price ($) | $68.10 | $57.43 | $51.07 | - |
Surging growth in revenue, earnings, and cash flow will tend to lower the corresponding price multiples, and make the Value gauge rise. Conoco's metrics are more somewhat more attractive than they were last year, but the comparisons with the five-year averages are not sufficiently favor to trigger a rise in the gauge score.
Note that the drop in the Price/Earnings was amplified by gains on asset sales.
| Overall | 31 Dec 2010 | 30 Sep 2010 | 31 Dec 2009 | 5-Yr Avg |
| Gauge Score (0 to 100) | 31 | 33 | 16 | 32 |
The Growth gauge registered a top-notch score, and the Cash Management and Profitability scores are decent enough; however, the weak double-weighted Value gauge is dominating the Overall score.
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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