COP: Financial Analysis through September 2008 (Update)

The press release from ConocoPhillips, a Major Integrated Oil & Gas company, announcing earnings in the third quarter of 2008 did not include a Balance Sheet.   When we analyzed these results and computed gauge scores, we assumed that the Balance Sheet did not change between 31 March 2008 and 30 June 2008.

ConocoPhillips (NYSE: COP) has now submitted a 10-Q report that includes a current version of each financial statement with appropriate footnotes.

We updated our analysis to incorporate the latest information.  This post identifies the revisions.  The 10-Q did not change our examination of the third-quarter Income Statement.

The data in the 10-Q led to a two-point increase in the Cash Management gauge and a two-point increase in the Overall gauge, from the levels in the pre-10-Q analysis.  The other gauges did not change.  The full and up-to-date set of scores are as follows:

• Cash Management: 15 of 25 (up from 10 in June)
  
• Growth: 23 of 25 (up from 21)
  
• Profitability: 6 of 25 (down from 8)
  
• Value: 13 of 25 (up from 1)

• Overall: 50 of 100 (up from 27)

As explained below, replacing the 30 September share price with the 31 October share price would bring the Value gauge up to 23 points and the Overall gauge up to a very appealing 66 points.


The updated Balance Sheet slightly modified the values for some Cash Management metrics.

Cash Management	September 2008	3 mos. ago	12 mos. ago
Current Ratio	1.0	1.0	1.0
LTD/Equity	23.4%	23.3%	24.7%
Debt/CFO	0.8 yrs	0.9 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)	22.5 days	28.2 days	27.8 days
Working Capital/Market Capitalization	-0.9%	-0.8%	-0.3%
Cash Conversion Cycle Time	-0.2 days	-1.6 days	-0.1 days
Gauge Score (0 to 25)	15	10	13

The GCFR standard practice is to compute the Value gauge metrics and scores using the share price at the end of the quarter.  On 30 September, the closing price of Conoco shares was $73.25.  However, by the end of October, the share price was $52.01.

The following table shows how the big drop in the price per share affected the Value metrics:

Value	October 2008	September 2008	June 2008	September 2007
Share price	$52.01	$73.25	$94.39	$87.77
P/E	4.2	5.8	8.3	13.5
P/E to S&P 500 average P/E	25	35%	45%	79%
Price/Revenue	0.3	0.4	0.7	0.8
Enterprise Value/Cash Flow (EV/CFO)	3.8	5.0	6.7	7.1
Gauge Score (0 to 25)	23	13	1	0

There is much other interesting information in the 10-Q report.

This year, ConocoPhillips implemented Financial Accounting Standards Board Statement of Financial Accounting Standards (SFAS) No. 157, "Fair Value Measurements."  This standard provides a framework for measuring the fair value of financial instruments and for disclosing the extent to which the value is determined by transactions in the marketplace (as compared to models and assumptions).

Of $9.2 billion in financial assets, ConocoPhillips determined the fair price of 67.5 percent using a method following the Level 1 method closest to direct observation of the market price.  Only 0.2 percent were determined with Level 3's "significant unobservable inputs."  The remainder of the assets were value using a Level 2 method.


ConocoPhillips owned 20 percent of LUKOIL (OTC: LUKOY), which is responsible for more than 18 percent of Russia's oil production, on 30 September 2008.  Lukoil ADRs declined from $98.75 on 30 June 2008 to $59.75 on 30 September to $38.80 on 31 October 2008.  Conoco decided to treat the decline in market value ($10 billion in September, about $6.5 billion now) for this investment below book value ($12.9 billion) as a temporary impairment.  Should Conoco decide that the difference is other-than-temporary, they would recognize an impairment charge for the difference.

A $7.5 billion revolving credit facility was reduced to $7.35 billion due to the bankruptcy of Lehman Commercial Paper.  It matters not since Conoco had no outstanding borrowings under this credit facility.