ConocoPhillips (NYSE: COP), a global energy behemoth, recently announced its results for the fourth quarter of 2008. This post provides the GCFR analysis of the financial statements.The operating results were overshadowed by almost $35 billion of asset impairment and other charges. The write-downs were due to the "substantial decline in global equity markets, commodity prices, and margins."
On 30 September 2008, ConocoPhillips had total assets of $184.6 billion. Therefore, the company erased about 19 percent of its assets.
The earnings announcement included Income and Cash Flow statements, and a plethora of data for each business segment, but it did not include a current Balance Sheet. We would normally, to compute preliminary gauge scores, assume that the Balance Sheet didn't change materially in the last three months; however, the huge impairment charges are certainly material changes. Instead, we decremented ConocoPhillips' assets and retained earnings by the impairment amounts. This produces a rough approximation, at best, for the Balance Sheet as of 31 December 2008. Our assumption is that the approximation is close enough for ratio analysis.
When ConocoPhillips files a 10-K, we will recalculate the gauge scores using the actual Balance Sheet data.
ConocoPhillips is the seventh-largest Major Integrated Oil & Gas company by market capitalization. Holding the fifth spot on the Fortune 500 list, Conoco's heft was achieved with mergers and acquisitions. Most notably, Conoco, Inc., and Phillips Petroleum combined in August 2002. In March 2006, ConocoPhillips purchased Burlington Resources, which had extensive natural gas operations in North America, for $33.9 billion.
Berkshire Hathaway, Inc. (NYSE: BRK.A), run by super-investor Warren Buffett, and its affiliates owned about 84 million shares of ConocoPhillips on 30 September 2008. The company's stake increased from 17.5 million shares on 31 March 2008.
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's shrinking market value was responsible for $7.4 billion of the fourth quarter's impairment charges.
Three months ago, the GCFR Overall Gauge of ConocoPhillips rose to 52 of the 100 possible points -- not a bad score. Our analysis report explained this result in some detail.
Now, with the actual and estimated data for the fourth quarter, our gauges display the following scores:
- Cash Management: 13 of 25 (down from 15 in September)
- Growth: 13 of 25 (down from 23)
- Profitability: 8 of 25 (up from 7)
- Value: 11 of 25 (down from 14)
- Overall: 43 of 100 (down from 52)
Please note that the tabular format below, which we use for all analyses, can and often does differ in material respects from company-used formats. A common difference is the classification of income and expenses as Operating and Non-Operating. The standardization is simply for convenience and to facilitate cross-company comparisons.
http://sheet.zoho.com/public/ncarvin/template-income-statement-1?mode=html
Revenue in the fourth quarter was 15.5 percent less than in the year-earlier period. We had expected Revenue drop 16.5 percent. We're thrilled that our estimate was only off by 1.1 percent.
Conoco's Revenue in all of 2008 was greater than that in 2007 by 28 percent. High energy prices earlier in the year was the principal reason for the Revenue surge.
The Cost of Goods Sold [i.e., purchased crude oil, natural gas and products + Production and operating expenses] was 74.1 percent of Revenue in the fourth quarter, which equates to a Gross Margin of 25.9 percent. Our forecast for the margin had been a sliver higher at 26 percent, so this was another good projection.
In the December 2007 quarter, the Gross Margin was 27.8 percent.
Depreciation expenses were 5.1 percent of Revenue. We had predicted 4.5 percent. The asset write-downs might have led to accelerated depreciation.
Exploration costs were $73 million more than the $400 million we had assumed based on the company's guidance. The reason for the discrepancy isn't yet clear.
Sales, General, and Administrative (SG&A) expenses, which in our categorization is dominated by non-income taxes, were 10.4 percent of Revenue, which compares favorably to our 11 percent estimate.
Alas, all our good work to estimate Operating results were nullified by the billions of goodwill impairments and other non-recurring operating costs.
Operating Income, therefore, was a monumental loss. However, if the relevant impairment charges are ignored, Operating Income is $3.95 billion. This figure is only 1.8 percent less than our $4.02 billion estimate.
The set of non-operating gains and losses is dominated by the write-down of the LUKOIL investment.
The official bottom-line for the quarter is a Net Loss of $31.8 billion (minus $21.37 per share). Again, if impairment charges are ignored, Net Income is $2.7 billion ($1.81 per share). Our estimate for Net Income had been $2.95 billion ($1.97 per share).
| Cash Management | December 2008 | 3 months ago | 12 months ago |
| Current Ratio | 1.0 | 1.0 | 0.9 |
| LTD/Equity | 36.9% | 23.4% | 22.8% |
| Debt/CFO | 1.0 yrs | 0.8 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) | 25.3 days | 22.5 days | 29.7 days |
| Working Capital/Market Capitalization | -1.2% | -0.9% | -1.3% |
| Cash Conversion Cycle Time | -0.6 days | -0.2 days | -2.1 days |
| Gauge Score (0 to 25) | 13 | 15 | 10 |
The Cash Management metrics are likely to change when an up-to-date Balance Sheet is published. The big increase in Long-term Debt to Equity is indicating a surge in the debt; it's a consequence of the the impairment charges taking a huge bite out of Shareholders' Equity.
| Growth | December 2008 | 3 months ago | 12 months ago |
| Revenue growth | 28.5% | 41.3% | 2.1% |
| Revenue/Assets | 147% | 139% | 109% |
| CFO growth | -7.7% | 13.7% | 14.1% |
| Net Income growth | N/A | 78.6% | -23.5% |
| Gauge Score (0 to 25) | 13 | 23 | 3 |
The steep rise in energy prices, now dramatically reversed, powered sharp Revenue growth most of the year. Revenue/Assets rose because the impairment charges cut deeply into Assets.
Net Income growth is N/A because the company recorded a huge loss in 2008.
| Profitability | December 2008 | 3 months ago | 12 months ago |
| Operating Expenses/Revenue | 100.2% | 88.5% | 90.6% |
| ROIC | N/A | 14.1% | 8.2% |
| FCF/Equity | 4.8% | 13.4% | 14.9% |
| Accrual Ratio | -14.6% | 3.4% | -2.3% |
| Gauge Score (0 to 25) | 8 | 7 | 12 |
The Profitability figures are thrown into disarray by the large fourth-quarter impairment and other charges. It's ironic that non-cash charges make the company's earnings appear to be of higher quality, as indicated by the much lower Accrual Ratio.
| Value | December 2008 | 3 months ago | 12 months ago |
| P/E | N/A | 5.8 | 12.0 |
| P/E to S&P 500 average P/E | N/A | 33% | 67% |
| Price/Revenue | 0.3 | 0.4 | 0.8 |
| Enterprise Value/Cash Flow (EV/CFO) | 4.3 | 5.0 | 6.6 |
| Gauge Score (0 to 25) | 11 | 14 | 0 |
Conoco shares fell 29 percent during the fourth quarter, $73.25 to $51.80. During 2008, the price per share dropped 41 percent. The price has been trimmed a little more in early 2009, but, in keeping with the normal GCFR practice, we used the quarter-end share price to compute the Value gauge score.
If the impairment charges are excluded, Conoco's P/E ratio is about 4 on a trailing-twelve-months basis.
Conoco's valuation ratios can be compared with other companies in the Major Integrated Oil and Gas industry.
| Overall | December 2008 | 3 months ago | 12 months ago |
| Gauge Score (0 to 100) | 43 | 52 | 24 |
The fourth-quarter of 2008 will be remembered at ConocoPhillips as the one during which the historic decline in energy prices led the company to mark down the value of its intangible assets and investments by approximately $35 billion (about 19 percent of total assets.) Discontinuities of this magnitude make year-to-year and quarter-to-quarter comparisons difficult. However, when the analytical challenge is more difficult, an analyst discover opportunities hidden to investors that rely solely on bottom-line figures.
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