The oil sector has been reeling under pressure since crude oil prices started its downtrend. With the volatile oil index, the fate of the oil companies are looking quite dull. One such oil company adversely affected by the oil prices is Conoco Phillips (COP, Financial). They released their third quarter results which speak strongly about the heavy bleeding that the oil companies are going through. Let's take a look at what the numbers have to say.
Conoco Phillips' Numbers
The company reported revenues of $12.1 billion, which declined by nearly 11.45% from what it reported in the same quarter last year. Despite the better product mix and expansion in production, ConocoPhillips reported a dip in its revenue owing to oil price downtrend in the international markets.
However, this dip in revenue did not translate into lower earnings for the company. Earnings for the company stood at $2.7 billion, up by 8% from last year's third quarter when earnings were reported at $2.5 billion. Earnings per share amounted to $2.17; 8.5% higher than the $2 EPS that were reported in the third quarter last year. Adjusted earnings for the company worked out at $1.6 billion, or $1.29 per share. These were 11% and 12.2% lower respectively, relative to the adjusted results reported in the previous year, though it managed to beat street expectations of $1.20 EPS.
The company reported a 25% increase in production from continuing operations, excluding Libya. The company cited the reason for lower adjusted earnings as the decline in realized prices due to global oil prices drop and higher operating costs, but added that these were offset by the increases in volumes.
The company managed a net margin of 23% and cash flow for continuing business operation stood at $4.15 billion.
2014 Guidance
In the third quarter report, management issued its guidelines for the rest of 2014 assuring investors that the company was right on track to achieve its yearly targets of 3-5% growth in the current fiscal year. The production target excluding Libya would be 1,525 to 1,535 million barrels of oil equivalent per day. The total production guidance for the fourth quarter is expected at 1,545 to 1,575 million barrels of oil equivalent per day.
Earnings Postmortem
Even though the volumes and production saw an improvement, the major contributor towards the incremented earnings was the sale of the company's Nigerian business which accounted for approximately 40% of the EPS in the last quarter. This move was to actually reduce its share of global holdings in lower margin assets and to channel its focus towards more lucrative projects like the Eagle Ford and Bakken formation, in the wake of IEA declaring that these areas hold nearly 3.4 billion barrels and 3.2 billion barrels of proved oil reserves. The company managed to up its productions from these areas by 33% last quarter. This has been a welcome move by Conoco Philllips and creates a positive vibe amongst analysts and investors about the company’s long term prospects.
Furthermore, the company has declared a dividend of $0.73 per share for the recently concluded quarter, which is a 5.8% increase from the dividend of $0.69 last quarter.
Global oil prices taking a toll on ConocoPhillips
The declining oil prices, which is likely to continue for some time has, compelled Conoco Phillips to trim its capital expenditure. Owing to the low profitability of drilling functions in the North American fields, the company intends to lower annual spending to the tune of less than $16 billion by cutting operations in West Texas and Rocky Mountains. The exploration activity for new resources is also likely to see a cut.
Conclusion
The current dip in Conoco Phillips' earnings can be attributed to the drop in global oil prices, however even after facing these adversities, the company has successfully met and exceeded the street expectations with higher EPS and dividend payout. This speaks to the company’s rock solid management and fundamentals. Considering it in your portfolio would be a good idea in the long run.
The share prices of the company have seemingly been volatile for the last 12 months owing to the oil sector volatility. Share prices have dipped from $86.11 on July 1 to an all-time low at $66.20 on October 14. Share prices have recovered since then and are currently hovering around the $72 mark. According to forward earnings estimates for a year, the share price should touch the $87.89 mark. The shares currently trade at about 9.78 times its earnings, offering investors a 4% dividend yield. Judging all the aspects of the company and taking into consideration the current sectorial performance, we strongly recommend a hold in Conoco Phillips.
