Houston-based CononoPhillips (NYSE: COP) recently announced its quarterly numbers. As with other energy companies, the results were disappointing to an extent, but I believe the market should appreciate the steps being taken by the Ryan Lance-led company to weather the low oil price storm.
Here are the key takeaways from the results.
- Fourth quarter net loss of $2.78 per share. Excluding special items, the loss reduces to $0.90 per share. Analysts had expected a loss of $0.64 per share.
- For complete-year 2015, earnings were a net loss of $4.4 billion, compared to $6.9 billion for full-year 2014.
- Capex plans for 2016 have been slashed from $7.7 billion to $6.4 billion, a reduction of 17 percent.
- Debt, as of Dec 31, 2015 stood at $24.9 billion, about 38 percent of the total capital.
- CononoPhillips has changed its fat dividend policy. The dividends have been sliced to one-thirds of the previous quarterly dividend of 74 cents per share. The Board of Directors approved the new quarterly dividend of 25 cents per share as the company seeks to preserve cash in the face of fresh losses.
- On cutting the dividend, Chairman and Chief Executive Officer Ryan Lance said,
The decision to reduce the dividend was a difficult one. The dividend has been, and will continue to be, a top priority. We still intend to provide a competitive dividend, while significantly lowering the breakeven price for the company and substantially reducing the level of borrowing in 2016.
Now, there are two scenarios to consider here. One, if the prices of crude oil and natural gas rebound in 2016, then ConocoPhillips (NYSE: COP) would likely adopt a wait-and-watch approach before increasing its production. Second, if the prices of hydrocarbons remain suppressed or head lower, then the management will be forced to further cut its dividend payout.
The Company said in its earnings report that the total realized price was $28.54 per barrel of oil equivalent (BOE) in the fourth quarter, while that for full-year 2015, the total realized price was $34.34 per BOE. The Company would like to see some stability returning to the oil markets before they consider ramping up the production.
In case of the second scenario coming into play, investors can expect shrinkage in quarterly dividends to 10 - 15 cents per share in 2016.
Market Should Appreciate Management's Prudence
I have always believed that paying out dividends in an adverse environment is not a healthy decision. And the Board of Directors have rightfully reduced the dividends and set out a strategic cost-cutting plan which would improve the cash flow by $4.4 billion in 2016.
Times are incredibly tough for the energy companies, and it can be well argued that ConocoPhillips is doing nothing out-of-the-box with its conservative approach. But, reducing dividends is definitely a great step forward in strengthening the balance sheet, and positioning the Company for a bright future. The market should do away with its madness for dividends, and appreciate what the management is trying to accomplish for investors in longer term.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.