When major integrated energy stock ConocoPhillips (COP) spun-off its refining division as Phillips 66 (PSX) a few years back, the idea was that the refining arm was holding back the faster moving production business. With crude racing towards $150 per barrel, that seemed like it was definitely the case.
But with crude hitting lows not seen in a decade? Not so much.
Since the spin-out of the division that would have thrived in the era of low oil, COP stock has pretty much bust as well. And that bust should continue with ConocoPhillips latest round of earnings this week.
Oil prices have hit some rough patches over the last three months, and things aren’t going to be pretty.
But that’s a well-known fact at this point. All matter of energy stocks are going to do badly: For COP and its investors, the question is whether this is the end of the hurt or just the latest round?
Poor Numbers at ConocoPhillips
There’s no secret to it. COP is going to report terrible numbers on Thursday. In fact, this should be the third straight quarter of losses for the large independent producer. Analysts peg that COP stock should lose about $1.05 per share as well as see a decrease in revenue.
The reason simply comes down to energy prices.
Prices for an equally-mixed basket of Brent, West Texas Intermediate and Dubai benchmarked crude oil averaged around $32 per barrel over the last three months. The telling nature of this number is that this amount per barrel is less than what producers got for their production in the fourth quarter of 2015. About $10 per barrel less.
Likewise, natural gas hasn’t been making new record either. So it stands to reason that ConocoPhillips should earn less this quarter than the last quarter, or even versus the year-ago period.
On top of this, COP has been flying through cash relatively fast to cope with the downturn.
To cope with its lack of profits and cash, ConocoPhillips cut its CAPEX spending hard. COP reduced its 2016 CAPEX budget to just $6.4 billion — down from $7.7 billion. Furthermore, ConocoPhillips spent $10.1 billion last year, and it decided to spend that money more wisely by shifting production to the low-cost Eagle Ford and Bakken. Cutting its rich dividend by 66% didn’t hurt either.
But none of these efforts are going matter in the near-term or when it reports earnings in a few days. But in the long-term, perhaps is a different story.
Better Next Quarter for COP
So, we know that this quarter is going to be a bust, but what about next quarter? The answer is a tad bit rosier. That’s because the oil patch is being pretty generous.
Oil prices have finally started to move higher in recent weeks. After bottoming in January, prices for crude oil have rallied more than 60%. We’re now looking at prices at around $46 per barrel for Brent crude and $45 for WTI. That’s awesome news for energy producers, and even better for ConocoPhillips.
That’s also right around COP’s new breakeven point for crude oil production — thanks to its cost cutting moves. Secondly, any slight bump in oil prices from here actually benefits ConocoPhillips in a big way.
Every time prices for Brent jump by only a $1 per barrel, COP’s profits will improve by $100 to $120 million. For WTI, that $1 per barrel increase nets Conoco an extra $35 to $45 million. With production cuts continuing and energy in storage dropping, crude oil has a pretty good chance for finishing higher throughout the year.
That’s huge news for ConocoPhillips’s bottom line.
As for production itself at COP, the firm has decided to maintain output at current levels. That should save it about a $1 billion in operating costs. Plus, the dividend savings is being used to attack its relatively high debt load head-on. Ultimately, that move will bear fruit during the next down in prices.
ConocoPhillips’ next earnings release almost doesn’t matter.
The markets and investors already know the outcome — another loss. What’s key is that oil prices are finally moving in COP’s direction. That means that next quarter or the one that we are currently conducting business in should be much better, assuming that oil doesn’t breakdown again and fall back to January’s record lows.
There are a lot of things that could go wrong over the next 3 months, but it looks like COP stock will be a survivor of the downturn. The firm has enough liquidity to ride out the storm. And it finally looks like that storm is ending.
For investors, its latest earnings report is inconsequential.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
