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ConocoPhillips (NYSE: COP) earned $2.05 per diluted share on a GAAP basis in the September-ending third quarter of 2010, more than double earnings of $0.98 in the same three months of last year.

Adjusted earnings rose from $0.95 to $1.50 per share. One-time gains on asset dispositions are among the larger special items excluded from adjusted earnings.

A previous article examined Conoco's Income Statement for the September quarter. Adjusted earnings were $0.06 more than our $1.44 EPS estimate.

We have now updated the various financial metrics we use to analyze Cash Management, Growth, Profitability and Value. This post reports on the metrics for ConocoPhillips and the associated financial gauge scores. The metrics were calculated using data from Conoco's current and historical financial statements, including those in the latest 10-Q.

Before getting into the details, we will take a step back to introduce the subject of today's analysis.

ConocoPhillips is one of the ten biggest Integrated Oil and Gas companies, which produce, refine, transport, and market energy products. ConocoPhillips has business interests in 26 countries around the world, from Algeria to Vietnam.

The company was formed in 2002 when Conoco, Inc., merged with Phillips Petroleum. It added Burlington Resources, with its extensive natural gas operations, in March 2006 (when gas prices were high). The company's market value is now around $95 billion.

In 2009, ConocoPhillips earned $4.86 billion ($3.24 per share) on revenue of $152.8 billion. In 2008, the roller-coaster rise and fall of crude oil prices resulted in record-high annual revenue of $246.2 billion. However, $33 billion in charges slashing the carrying value of intangible assets and investments led to a $17 billion loss in 2008.

ConocoPhillips announced in October 2009 it would "improve returns and deliver long-term organic growth from a reduced, but more strategic, asset base." The company signaled it would sell assets worth approximately $10 billion over the next two years, and it would trim capital expenditures in 2010 to $11 billion, from $12.5 billion in 2009. ConocoPhillips has since sold equity investments in Lukoil, Syncrude and CFJ Properties.

Additional background information about ConocoPhillips and the business environment in which it is currently operating can be found in the look-ahead.

In summary, Conoco's latest quarterly results produced the following changes to the gauge scores:


The current and historical values for the financial metrics that determine the gauge scores are listed below, with some brief commentary. 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 Management30 Sep 201030 Jun 201030 Sep 20095-Yr Avg
Current Ratio1.41.00.90.9
LTD to Equity33.2%35.2%45.0%32.8%
Debt/CFO (years)1.51.82.91.4
Inventory/CGS (days)N/AN/AN/AN/A
Finished Goods/InventoryN/AN/AN/AN/A
Days of Sales Outstanding (days)26.326.931.126.2
Working Capital/Revenue0.3%-0.8%-0.6%-0.9%
Cash Conversion Cycle Time (days)3.32.41.40.6
Gauge Score (0 to 25)1181314

The Cash Management gauge score added three points primarily as a result of the improved Current Ratio and the reduction in the number of Days of Sales Outstanding.

During the third quarter, ConocoPhillips received $6.2 billion by selling 113 million shares of Lukoil. Current Assets increased from $26.7 billion to $35.3 billion, which led to the sharply higher Current Ratio.

Net Accounts Receivable rose by 7.6 percent in the last year to $13.5 billion. However, this increase was much more modest than the 20-percent rise in trailing-year Revenue. This difference explains the nearly five-day reduction in Days of Sales Outstanding.

The ratio of Long-term Debt to Shareholders' Equity jumped in late 2008 when Conoco recorded massive asset impairment charges. Total assets fell from $185 billion to $143 billion, and Shareholders Equity dropped from $93 billion to $55 billion. The ratio has been since whittled down to 33 percent, thanks to asset dispositions, debt repayments and retained earnings. Nevertheless, a Google Finance stock screen indicates that Conoco's current LTD-to-Equity ratio is still high compared to many of its U.S.-based peers.

The ongoing efforts to sell assets, such as the remainder of the Lukoil investment, and to trim capital spending should enable Conoco to reduce its debt level further.

Growth30 Sep 201030 Jun 201030 Sep 20095-Yr Avg
Revenue Growth19.8%-3.9%-39.4%0.3%
Revenue/Assets117.4%115.2%89.5%119.0%
Operating Profit Growth-15.9%-17.7%-7.2%-15.3%
CFO Growth51.8%-3.6%-60.3%-8.0%
Net Income GrowthN/AN/AN/A4.8%
Gauge Score (0 to 25)194010
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 Growth gauge rose a remarkable 15 points because of dramatic improvements in many of the pertinent trailing-year metrics.

In each of the last three quarters, Revenue was far more than in the respective year-earlier period. For example, in the September 2010 quarter, Sales and other Operating Revenues of $47.2 billion were 17.5 percent more than last year. Since production in barrel-of-oil equivalents terms has been lower, it's fair to say that higher energy prices get the credit for the Revenue rise.

Net Income in the last four quarters was $10.6 billion, but the growth rate is N/A because of a loss in the four previous quarters.

With the weakest quarters of 2009 now part of the year-earlier period, Cash Flow growth appears especially robust. The growth rate will almost certainly moderate going forward.

Profitability30 Sep 201030 Jun 201030 Sep 20095-Yr Avg
Operating Expense/Revenue92.4%92.7%93.4%89.6%
ROIC9.1%8.2%5.8%11.4%
Free Cash Flow/Invested Capital7.8%5.9%-6.1%6.0%
Accrual Ratio-5.6%-1.8%-15.9%-1.0%
Gauge Score (0 to 25)9558

The Profitability gauge gained some lift from the lower Accrual Ratio and the higher Return on Invested Capital.

A slightly better Operating Margin has also helped. Operating Expenses as a percentage of Revenue are still high when compared to Conoco's history.

Free Cash Flow has benefited from a significant reduction in capital expenditures.

The recent decline in the Accrual Ratio is also welcome. It often signals improved quality of earnings.


Value30 Sep 201030 Jun 201030 Sep 20095-Yr Avg
P/E8.18.2N/A9.0
P/E vs. S&P 500 P/E 0.60.6N/A0.5
PEGN/AN/AN/A1.2
Price/Sales0.50.40.40.5
Enterprise Value/Cash Flow (EV/CFO)6.46.69.36.8
Gauge Score (0 to 25)3545
Share Price $)$57.43$49.09$45.16-

The Value gauge sagged under the weight of the 17-percent increase in the share price during the most recent quarter.

The Price/Earnings ratio held steady, and the P/E remains below its long-term average. Gains on asset sales, which boosted Net Income, helped earnings keep up with the share price rise.

The Price/Sales ratio also remained steady at about 50 percent.


Overall30 Sep 201030 Jun 201030 Sep 20095-Yr Avg
Gauge Score (0 to 100)32222334

Although the Overall score is still modest, three of the four category gauges registered improvements. The Growth gauge exhibited strength for the first time in several years.

Some scores benefited from recent one-time gains on asset sales. Reductions in capital spending and a recovery in energy prices has also helped. Lower production, on the other hand, has been a slightly negative factor.

Full disclosure: Long COP at time of writing
Source: ConocoPhillips: Financial Gauge Analysis for the September 2010 Quarter