ConocoPhillips Needs A Catalyst. Revenue Buyers Beware.


  • Q2-fifteen earnings are down ninety six%, but ConocoPhillips is well-positioned to weather the strength value storm.
  • Sharp focus on controllable costs will aid, but will get time to employ.
  • Dividend expansion stays a "top precedence," but Q2-fifteen dividend elevate of only one%.

ConocoPhillips (NYSE:COP) documented Q2-fifteen earnings some 96% reduced y/y, mostly due to its predominantly upstream actions becoming sharply impacted by low crude oil costs. That said, COP has a sturdy reserve base and a thirty-12 months provide of crude at or beneath $sixty for each barrel extraction cost. However, cashflow is likely to continue being unfavorable for the foreseeable foreseeable future. The dividend remains a "top priority," according to the CEO, but the careful 1% improve highlights management’s issue.

Higher high quality resource foundation, with 30 many years of low value source offered

On ConocoPhillips’ Q2-fifteen convention phone, CEO Ryan Lance reminded investors that COP is extremely well-positioned to weather the power cost cycle, even with its 96% fall in documented 2nd quarter earnings y/y. COP has all around forty four billion barrels of discovered assets, and around fifty% of this has an desirable source cost profile. COP’s confirmed reserves furthermore crude oil quantities in whole to around 16 billion barrels, which signifies 30 several years of manufacturing at present prices. This unquestionably will increase the predictability of COP’s oil & gasoline creation profile heading forward and ought to preserve COP rewarding if crude oil costs continue to be at existing amounts. The chart under summarizes how COP’s earnings profile has been impacted by the adjust in crude oil costs given that Q2-fourteen.

Focus on controllable charges, but cash stream neutrality is a lengthy way off if crude rates continue being reduced

International vitality prices stay a significant, but uncontrollable aspect for all power companies. COP continues to concentrate on the elements it can management, such as capex, opex and shareholder distributions. Getting adaptable in its cost handle actions is a essential theme running by means of the organization. Factors this sort of as deflation seize, deficiency enhancements and a reduction in deep-water actions all contribute to the value handle measures COP is adopting. That said, COP has no different in the confront of this kind of a sharp drop in crude oil prices and the company’s higher exposure to upstream routines. COP is concentrating on money stream neutrality by 2017, which may possibly be achievable if crude costs enhance by that time. Even so, COP’s cashflow profile will continue to be firmly negative for the rest of this year and past.

Marginal dividend expansion

COP raised its Q2-15 dividend by one% y/y and sequentially to $.seventy four for every share, which is more of a gesture than a sign that management thinks a more robust dividend is justified. COP’s web debt situation is about $twenty billion, and I visualize this increasing more than the system of 2015 to all around $25 billion, assuming no significant asset income are concluded. On the assumption of entire year EBITDA of all around $ten.six billion, this would elevate COP’s protection ratio to in excess of two.3x. This is an not comfortable numerous as an investor, particularly if relying on a increasing dividend profile.

DCF valuation indicates worth of $53 for each share

On the assumption that crude oil prices do not get well in the near time period from about $fifty per barrel nowadays and that any restoration is sluggish thereafter, my DCF design illustrates a reasonable price of about $53 for every share. Although my valuation demonstrates a good margin of security, unfavorable sentiment is hampering the company’s share price. The marginal dividend boost coupled with its higher E&P publicity in relation to some of its equivalent Oil & Gas peers is not supporting possibly.