ConocoPhillips' (NYSE: COP) second quarter numbers sent shockwaves among the investors, who were clearly expecting a better set of numbers given that the energy prices had rebounded from Q1 lows. But, the company reported its fifth straight quarterly loss, and missed the EPS estimate by a steep -$0.18.
COP revealed that the total average realized price was $27.79/boe, compared to $39.06 in the year-ago quarter, reflecting the impact of the lower energy prices on the company's results. It also slashed its capex guidance to $5.5 billion, for the third time this year, which further disheartened the investors.
Now, when talks of lower oil prices for a longer period of time are gaining traction, it becomes imperative for ConocoPhillips's investors to gain an insight into what the management is thinking. The Q2 earnings call provided important indications which will re-affirm the investors' quivering faith in the management.
The company discussed a range of topics including the dividend payout, the debt burden, the breakeven level, asset sales, and possible anti-dilution of shares.
Capital Return Plan - The management has set itself a target of returning 20% - 30% of the total operating cash flows to the shareholders, in the form of dividends and share buybacks. The company recognized that the current dividend payouts do not represent enough capital return to the shareholders, and emphasized that they are aiming to grow their quarterly dividend when the cash flows from operations more than cover the dividend and capex for flat volumes.
The share buyback will depend on three major factors: commodity prices, future expectations of commodity prices, and market price of shares. The company has not set a specific target for the buyback, but expects to offset the dilution from the employee stock options in a bare minimum.
Such actions can be more envisioned when the prices are higher from the company's cost of capital.
Debt Below $25B - The management reaffirmed that the second highest priority remains bringing the balance-sheet debt below $25 billion. Some analysts have been misinterpreting this figure for the net debt (=debt-cash). The management reiterated that they would accelerate some of the debt reduction with asset sales, and are targeting an A-rated balance sheet.
Apart from the asset sales, the company is confident that the future cash flows from operations will be sufficient to meet the maturing debt obligations, and the cash may not need to be touched.
Invest in Low Cost of Supply Resources - The company has said that the final priority of cash flows will be to invest in large, low cost of supply captured resource base.
Breakeven Below $45 - The management affirmed that the company is progressing on all fronts to drive down the breakeven cost of capital - which it considers sufficient enough to cover capex and dividends.
Al Hirshberg, EVP Production, Drilling & Projects, ConocoPhillips said, "We're higher on volumes; we're lower on capex; and we're lower on opex. So all those things are moving in the right direction to help drive down our breakeven cost of capital."
Realizing that the low-price environment will probably stretch on for a year-and-a-half, Ryan Lance, CEO said,
"We're not satisfied with where the numbers are at today, and we've got a lot of effort to continue to drive them down to get the same scope done for less capital and less cost as well. Because we've got to continue to attack that breakeven and make sure we get the breakeven for the company down as low as we possibly can and be as competitive as we can."
An important point that the management revealed was that the cost of supply from Bakken and Eagle Ford has dropped down to 30s. But, they do not want to add too many rigs quickly in the absence of a conducive environment.
Asset Sales - About the potential asset sales to meet the debt requirements, the company cleared that they are in no rush. Ryan Lance said that there are certain considerations such as the fair value of the assets which can be better realized when the market starts recovering. So, they will be selling their non-core assets but there is no urgency as of now as the company feels comfortable with the debt situation.
The management clearly said that the company was well suited to bring down the cost of supply, maintain or even increase its dividend, offset share dilution, manage its debt, and time the asset sales. Some support from the commodities market will definitely be a big positive for this stock, and will bring good rewards for the investors.
Even if the oil prices were to remain depressed, the management has given indications that it would be willing to buy back its shares, however, more details about the same are expected to be divulged on Analyst Day in November.
Investors are advised to hold their shares, and add on only when the valuations become highly compelling.
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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.