ConocoPhillips: Updated Q3 Financial Gauge Analysis

We previously posted ConocoPhillips's (COP) preliminary financial gauge scores for the third quarter of 2009. To obtain those results, the financial statements in Conoco's latest earnings announcement were used to calculate Cash Management, Growth, Profitability and Value metrics.

Conoco later filed a more detailed 10-Q report, which included an updated Balance Sheet, and we have now revised the metrics and scores to take advantage of the latest information.


The net effect of the changes was to trim one point each from the Cash Management and Overall gauge scores:

• Cash Management: 8 of 25 (down from 10 in June) -- initial estimate was 9
• Growth: 0 of 25 (unchanged)
• Profitability: 5 of 25 (down from 6)
• Value: 4 of 25 (down from 8)

• Overall: 18 of 100 (down from 27) -- initial estimate was 19

For the record, current and historical figures for the financial metrics that determine the gauge scores are listed below. Numbers that changed from the preliminary analysis are highlighted. 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	Sep 2009	Jun 2009	Sep 2008	5-Yr Avg
Current Ratio	0.9	1.0	1.0	0.9
LTD/Equity	45.0%	49.1%	23.4%	30.9%
Debt/CFO (years)	2.9	2.0	0.8	1.2
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)	35.7	33.3	22.5	24.4
Working Capital/Invested Capital	-2.6%	0.0%	-1.0%	-1.5%
Cash Conversion Cycle Time (days)	1.4	-1.2	-0.2	0.7
Gauge Score (0 to 25)	8	10	12	11

Because a Balance Sheet for 30 September 2009 was not available prior to the release of the 10-Q, the preliminary analysis assumed no change to Assets and Liabilities since June. Not surprisingly, the actual data included numerous small and a few not-so-small changes.

For example, Long-Term Debt was trimmed from $28.9 billion in June to a little under $27.7 billion in September. In addition, activity during the third quarter increased Shareholders' Equity from $58.9 billion to $61.5 billion. As a result of these two changes, Long-Term Debt to Equity fell during the quarter from 49.1 percent to 45.0 percent.

The positive effect of lower debt leverage was partially offset by Working Capital changing from nil to negative $2.4 billion, which is about 2.6 percent of Invested Capital. The gauge lost one point to 8, from the initial estimate of 9.

Growth	Sep 2009	Jun 2009	Sep 2008	5-Yr Avg
Revenue growth	-39.4%	-19.7%	41.3%	2.6%
Revenue/Assets	89.5%	106.2%	139.1%	130.3%
Operating Profit growth	-13.0%	-5.7%	20.2%	0.5%
CFO growth	-60.3%	-39.5%	13.7%	1.1%
Net Income growth	N/A	N/A	77.9%	93.8%
Gauge Score (0 to 25)	0	0	22	13

Revenue, CFO, and Net Income growth rates compare the last four quarters to the four previous quarters.
The Operating Profit rate is the annualized rate of growth in Operating Profit after Taxes over the last 16 quarters.

The $2.35 billion increase in Total Assets during the third quarter was enough to lower the Revenue-to-Assets ratio from 90.2 percent to 89.5 percent. This trivial change had no effect on the gauge score.

Profitability	Sep 2009	Jun 2009	Sep 2008	5-Yr Avg
Operating Expenses/Revenue	93.4%	91.0%	88.3%	88.9%
ROIC	5.8%	9.7%	14.8%	13.4%
Free Cash Flow/Invested Capital	-6.1%	-2.8%	10.9%	5.4%
Accrual Ratio	-15.6%	-15.2%	3.4%	1.8%
Gauge Score (0 to 25)	5	6	9	9

The changes to the Balance Sheet during the third quarter resulted in minor revisions to several Profitability metrics. The score did not change.

Value	Sep 2009	Jun 2009	Sep 2008	5-Yr Avg
P/E	N/A	N/A	5.8	8.1
P/E vs. S&P 500 P/E	N/A	N/A	0.3	0.5
PEG	N/A	N/A	0.3	0.8
Price/Revenue	0.4	0.3	0.4	0.5
Enterprise Value/Cash Flow (EV/CFO)	9.3	6.1	5.0	6.9
Gauge Score (0 to 25)	4	8	15	6

The updated Balance Sheet led to a small change in Enterprise Value and, therefore, the EV-to-Cash Flow ratio. The change was not significant enough to change the gauge score.

Overall	Sep 2009	Jun 2009	Sep 2008	5-Yr Avg
Gauge Score (0 to 100)	18	27	54	35

Originally estimated at 19, the one-point reduction in Cash Management gauge was carried through to the Overall gauge score.

Full disclosure: Author is long COP at time of writing.

Comments

[mbkelly75:]

Another good analysis - thank you for your work on this. A couple of comments though. I use the Quick Ratio rather than the Current Ratio. It does not include inventories so it is a more conservative view of the financial outlook of the company. The Quick Ratio is terrible at 0.65 (>1 is what I look for), BUT (and it is a big but) the Price/Sales Ratio is 0.51 and shows that they may be undervalued at this price (<1 shows undervalue in an otherwise solid company). Their Operational Cash Flow is $7.10/Share so the Price/CFO Ratio = 7.44 (<15 is good) so that is attractive also. Their Piotroski Score (nine criteria that give a look at the stock's potential over the next 2 to 3 years) is 5 which is good (5-9 is the good area where an 8 or 9 shows that the stock will do better than the market as a whole by 13% historically) but the Altman Z score (a purely financial look at the stock) is only 2.11 and shows a good chance of bankruptcy within 2 (two) years of the financial data date. (this information is located and explained at:
www.grahaminvestor.com... - the articles area explains them, and the charts and quotes show them). The stock is trending up since it formed a Golden Cross on 9/04 so it is worth holding on to or even buying at THIS point. I would keep an eye on the MAs though and if it starts trending down (shown by a Death Cross) it would be a good time to sell, especially if the financial information has not improved. If the Altman Z score drops below 1.8 - you will NOT want to be in this stock. If the Piotroski Score drops down to 4 - you will NOT want to be in this stock. It is a good (or at least okay) stock right now and I really like the P/S Ratio but it bears watching.

Nov 15 10:21 AM

[Michael Fit...:]

your scoresheet tracks standard financial metrics. however, as we saw during 2007/2008, geopolitical risks and the inconvenient truth that worldwide oil supply won't keep up with worldwide oil demand over the coming years propelled oil stocks like COP much higher than standard metrics predicted. these two issues (geopolitical risk, and worldwide oil supply/demand) are still very much in play today (as evidence - just look at $70-$80/barrel oil prices in the midst of the greatest economic contraction since the great depression). add to these issues the bearish US dollar scenario, and my gut tells me that standard financial metrics, though important, don't tell the whole story. oil stocks like BP, COP, XOM, and STO are very attractive at today's prices. not only do they pay out nice dividends (although XOM's is very skimpy), but despite all the "oil company earnings are down" articles in the media, well, sure, their earnings are down, but they are still making very nice profits. hell, it was only 4 or 5 years ago that current oil prices would have been viewed as profit gushers for oil companies. and you know what? they are...

Nov 15 12:01 PM

[Tom Armistead:]

An analysis based on historical financial information needs to be seasoned with an awareness of management's current strategy, which involves the sale of underperforming assets, with the proceeds used to reduce debt and increase production from the remaining assets. They also plan to improve the effectiveness of their exploration efforts.

The extreme bubble in oil and natural gas prices, followed by the rapid deflation, created unusual financial results which are no indicative of long term potential.

Long COP, target 72.

Nov 15 02:59 PM

[optionsgirl:]

So your z score shows a possibility that COP will be bankrupt in 2 years, MB Kelly? You don't think that is a remote possibility?

Nov 15 04:34 PM

[Profinity:]

Your study is grossly flawed. You use metrics that are not relevant. The one thing that oil analysts and Wall Street overlooks is the ability of an oil company like Conoco or any other major, is the ability to control profit almost unlike any other industry. An oil company can decide at any time to spend less on drilling and exploration and concentrate on selling oil instead of finding it. Such behavior has significant impact upon earnings.

Nov 15 10:07 PM

[mbkelly75:]

Actually, I do think it is a remote possibility, but until the Altman Z score goes back up, the stock will need watching. It is simply something that you need to keep in mind. That score is a look at the financial health only. It does not take anything note of anything else that might modify that chance. However, that the finances have that much of a possible problem is something to keep in mind.


On Nov 15 04:34 PM optionsgirl wrote:

> So your z score shows a possibility that COP will be bankrupt in
> 2 years, MB Kelly? You don't think that is a remote possibility?

Nov 15 10:33 PM