Seeking Alpha
Profile| Send Message|
( followers)  

ConocoPhillips (NYSE:COP) recently closed a transaction for the divestiture of its stake in its Russian joint venture in NaryanMarNefteGaz (NMNG), to LUKOIL, which is in line with the company's policy to divest non-core assets and target high growth investments.

The company's recent earnings announcement is also of keen interest, and provides a key insight into the future profitability of COP. We maintain our positive stance on the stock; however, we highlight the increasing CAPEX and decreased cash flow from operations as a red flag.

Company Overview

ConocoPhillips is the largest independent exploration and production (E&P) company in the United States, on the basis of production. The company has operations in 19 countries, including the U.S., and is based in Houston, Texas.

COP completed the spinoff of its refining and marketing business in the second quarter of 2012, which emerged as Phillips 66 (NYSE:PSX).

Earnings Review

As mentioned above, the company completed the spinoff of its refining and marketing business, and the result for the outgoing quarter included one month's operational performance of the refining business.

COP reported revenues of $13.9 billion for 2Q2012, beating the revenue consensus estimates. COP reported adjusted EPS of $1.22 for the second quarter of 2012, showing a decrease of 25.6% as compared to EPS of $1.64 in the same period last year. The reported EPS for the outgoing quarter beat the mean adjusted EPS consensus of $1.17 by 4.36%.

The production of hydrocarbons for COP reached 1.54 million barrels of oil equivalent (NYSE:BOE), as compared to a production of 1.64 million boe in the same period last year. The decrease in production was due to normal field depletion and dispositions, which were partially offset by new production from new projects.

The average realized prices for oil and natural gas moved in opposite directions in 1H2012. The average realized price for crude oil in the first half was $108.95/bbl, showing an increase of 3.4% compared to $105.42/bbl realized in 1H2011. The average realized price of natural gas for the first half of 2012 was $4.61/MCF, indicating a decrease of 14% as compared to an average realized price of $5.36/MCF in the first half of 2011.

The lower production of hydrocarbons and lower average realized price of natural gas more than offset the impact of the higher realized price of crude oil, reducing COP's revenue and profitability.

Cash Flow from Operations, Capital Expenditures, Divided Paid and Share Repurchase

The cash flow from operations for 2Q2012 was $2.2 billion, showing a decrease of 30% as compared to the same period last year. The lower cash flow from operations was due to reduced earnings.

The capital expenditures (CAPEX) and investments of the company were recorded at $3.8 billion.

The dividend paid out for the quarter was $818 million, indicating a decrease of 11% as compared to the same period last year. COP continued with its share buyback program and repurchased shares worth $3 billion in the outgoing quarter, meaning a decrease of 3% from the shares repurchased in the same period last year.

During the last 4 quarters, COP paid total dividends of $3.4bn. Its cash flow from operations was $18bn and capex was $15bn. It disposed $4.4 bn of fixed assets and was able to meet the dividend payments.

COP currently has $6 billion in cash, comprising of $5 billion in restricted cash to be used for dividend payout and debt reduction, and $1 billion in cash and cash equivalent. Even though COP has ample restricted cash, which can be directed towards paying out dividend, a continuation of the trend of an increasing CAPEX and lower cash flow from operations will hamper the company in the long term.

Sale of Stake in Joint Venture

COP recently announced that it had sold its indirect interest of 30% in its Russian joint venture NaryanMarNefteGaz (NMNG), and certain related assets to LUKOIL, at undisclosed price and terms of sale. COP also announced that it expected to recognize an after tax gain of $400 million for the sale of its stake.

The management expressed that the above-mentioned transaction was an important step to the divestiture program of the company for 2012, as COP repositions its asset base. The company announced last month that it was on the path to complete asset sales in the range of $8-$10 billion by mid-2013.

The aforementioned transaction is an essential component of COP's plan to increase shareholder value through better capital investment, higher returns on capital, and shareholder distribution.

Outlook

COP is pursuing a targeted growth approach to improve its profitability and growth going forward. It has completed the spinoff of its refining business, and is continuing with its share repurchase program, high dividend payout policy and divestiture of non-core assets.

The stock is trading at cheaper multiples as compared to its peers, as shown in the table below; the stock offers the highest dividend yield of 4.6% and earns the highest return on equity of 20.3%. We maintain a positive stance on COP.

However, we highlight the cash flow situation and increasing CAPEX as a red flag with regards to the ability of the company to maintain its dividend yield going forward.

Name

P/E

EV/EBITDA

Dividend Yield

ROE

P/B

P/S

ConocoPhillips

10x

3.1x

4.6%

20.3%

1.5x

0.3x

Anadarko Petroleum Corp (NYSE:APC)

16x

5.9x

0.5%

-5.8%

1.7x

2.5x

Occidental Petroleum Corp (NYSE:OXY)

12x

5.3x

2.4%

16.9%

1.8x

2.9x

For a detailed report, please visit our previous report "Buy ConocoPhillips: A Dividend Gem In The E&P Industry".

Source: Buy ConocoPhillips: Highest Dividend Yield In E&P Sector, Focus On Targeted Growth