ConocoPhillips (NYSE:COP) did what most proclaimed wasn't going to happen. The energy exploration and production company made several necessary cuts though very late in the process.
The stock sits near the lows at $35 after a sharp decline in the last couple of months. My ongoing recommendation for months was to avoid the stock until the company addressed two key issues: production growth and cash flows. The question is whether or not these moves solve those problems.
ConocoPhillips made a couple of key moves that places the company in a better position to survive the current low commodity price environment and eventually thrive in the future.
The first big move was to slash the dividend by 66% to $0.25 per quarter. The new dividend offers a respectable yield of 2.7% and saves the company somewhere around $600 million in quarterly payouts.
The second big move was to finally move away from production growth. The Q4 earnings release spends an incredible amount of time discussing production startups at numerous locations, instead of a lengthy discussion on production cuts.
During Q4, the company actually grew production by an incredible 3% into the slump in energy prices. ConocoPhillips now forecasts flat production for 2016, yet the company still doesn't give any indication of reducing production if prices were to slump further.
Other moves include further slashing expenses and capital expenditures. Operating expenses are now targeted at $7.0 billion for the year, down from $7.7 billion. Capital expenditures were slashed by $1.3 billion to $6.4 billion for the full year.
Cash Flow Neutrality
With the huge $1.1 billion loss for Q4, the appearance is that ConocoPhillips is being forced to make the spending cuts. Instead of being proactive, the energy production firm now must make these moves because of credit tightening and likely weak pricing for asset divestitures. The ability to obtain cash is a big problem for a company with only $2.4 billion in cash to end 2015.
As the company suggests, the moves help improve cash flows by $4.4 billion for 2016. During Q4, ConocoPhillips generated $1.8 billion in operating cash flows and spent $2.1 billion on capital expenditures. The full $0.9 billion paid out in dividends was directly from the coffers of the company.
The dividend cut saves $600 million in cash quarterly, but the first key is moving towards operating cash flows surpassing capital expenditures. At this point, the company has an easier process in paying the dividend with quarterly capital spending down to $1.6 billion. ConocoPhillips should come close to at least covering the new capex level with possibly enough cash to help with the dividend.
These moves are the first big steps in making ConocoPhillips an attractive investment. The company is finally close to the point of making decisions in the best interest of shareholders rather than the necessary steps for paying unsupportable dividends.
ConocoPhillips is still not cutting production or making the necessary statements regarding the unwillingness to sell oil and natural gas at the current prices. The cuts were deep, but the question still remains on whether enough energy firms will reduce production in order to stabilize prices. My view on the stock is now neutral with a negative view on oil and natural gas still in place.
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