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COP AT A GLANCE

P/E ► -3.08   EV/EBITDA ► 96.3 VERY HIGH ROA ► -11.8% LOW ROE ► -28.1% LOW Debt to Equity ► 1.60 AVG Current Ratio ► 0.994 AVG Interest Coverage Ratio ► -7.71 LOW

 

 

 

 

 

 

Revenue, Net Income, and Net MarginRevenue, Gross Profit, and Gross MarginOperating IncomeEbitIncome Before TaxesNet Income from Continuing OpsInterest vs Continuing IncomeInterest CoverageOperating ExpensesSG&AAmortization & Depreciation

ConocoPhillips is one of the six oil majors - the largest publicly-traded, vertically integrated oil companies in the world. It operates in all sectors of the oil and natural gas industry: exploration and production, midstream, refining and marketing, and petrochemicals, and supplements its own operations with a 20% share in Russian oil giant, Lukoil.^[1]

From the middle of 2007 to the middle of 2008, oil prices rose to record highs. Though this crunched margins for COP's refining segment, which made up 45% of the company's revenues^[2], it pushed E&P margins through the roof, taking the company to record revenues and profits. Because oil prices were so high, and because the bulk of the company's production occurred in the maturing North American and European regions, ConocoPhillips sped up its international expansion. This exposed the company to significant risk, however, as many of its most lucrative international reserves are in politically turbulent countries. In 2007, Venezuela's leader, Hugo Chavez, expropriated COP's assets within the country, forcing the company to take a $4.5 billion loss.^[3] With billions invested in Lukoil, the company faces a similar risk in Russia from Dmitry Medvedev. ConocoPhillips also faces domestic risks from environmental regulation, which sometimes causes the company to have to pay millions of dollars in reparations (for example, $423 million in damages for contaminating groundwater with methyl tertiary butyl ether^[4]), as well as from the growth of renewable energy worldwide.

Due to steep declines in oil prices at the end of 2008 and the beginning of 2009 COP net income dropped by up to 80% (in the first quarter of 2009) as compared to periods of one year earlier . With oil prices back on the decline, ConocoPhillips, like its major competitors Exxon Mobil, Chevron, Shell, BP, and Total, are facing increased pressure.

[edit] Business and Financials

ConocoPhillips was formed by the merger of Conoco Inc. (Conoco) and Phillips Petroleum (Phillips) in 2001. It is a vertically integrated petroleum company with operations in more than 40 countries.^[5] The company earned 80% of its revenues from Oil & Gas Drilling & Exploration and Refining & Marketing in 2007.^[6]

Source: 2007 Annual Report^[6]‎

ConocoPhillips had a loss of nearly $17 billion in 2008 because of the damage caused by falling oil and gas prices. The company wrote-down $25.4 billion of goodwill attributed to its E&P segment, and faced a $7.4 billion reduction in the carrying value of its LUKOIL investment.^[17] In addition, shrinking reserves forced the company to lower its production volume, all the while selling at a lower price.

In the first quarter of 2009 net income was $840 million, this was down 80% compared to the same time in 2008. This large decline was contributed primarily to dropping crude oil and natural gas prices.^[18]

[edit] Exploration and Production

The E&P segment is mainly involved in the exploration and production of oil and natural gas, as well as the marketing of natural gas and natural gas liquids. ConocoPhillips' 2008 proved reserves contained 10 billion barrels of oil equivalents.^[19] It's oil production averaged 804 MBbl per day, its LNG production averaged 153 MBbl per day, and its natural gas production averaged 4.8 Bcf per day.^[20] In 2008 the E&P segment accounted for 67% of the company's total assets of $143 billion.^[21]

[edit] Lukoil Investments

ConocoPhillips owns a 20% share of Russian oil major, Lukoil. Its share of Lukoils's upstream production included 401 MBbl per day of oil, 256 MMcf of natural gas per day, and 214 MBbls of refined petroleum per day.^[22] Lukoil has been hit hard been falling oil and natural gas prices. In its fourth quarter of 2008, net income fell $1.62 billion.^[23]

[edit] Midstream

COP's midstream segment "gathers" natural gas, moving it from the well to the pipeline, and processes it, breaking it down into individual components and purifying it for use. On April 8th, 2008, COP announced that it would build a pipeline, in partnership with Chevron and Exxon Mobil, that would span from the North Slope of Denali in Alaska through Canada and into the U.S. The total cost of the project is estimated at $20 billion, and will require over 1000 government permits in both countries, but the returns could be massive, as the gas shipped by the line has the potential to meet 8% of total U.S. gas demand^[24].

[edit] Refining and Marketing

Petroleum refining operations turn crude oil into the petroleum products that people use everyday, like gasoline and diesel. ConocoPhillips is the second largest petroleum refiner in the U.S and the fourth largest refiner in the world. The company owns 12 refineries in the U.S and either owns or has an interest in six European refineries. At the end of 2007, ConocoPhillips' total refining capacity was 3.245 million barrels per day, down from 2006 levels of 3.476 million barrels daily.^[25] This decline could be linked to the Venezuelan seizure of ConocoPhillips refineries. The company has a distribution network of 13,600 branded outlets in the U.S, Europe, and the Asia Pacific. Its products are marketed under brand names Phillips 66, 76 and Conoco brand in the U.S and under the Jet and ProJet brands in Europe and the Asia Pacific region. In August 2008, ConocoPhillips announced it would sell 600 of its U.S. gas stations to PetroSun LLC for $800 million, in response to shrinking downstream margins.^[26]

[edit] Chemicals

COP's chemicals segment is essentially the company's 50% share in Chevron Phillips Chemical Company LLC, a JV between ConocoPhillips and Chevron. It processes petroleum into petrochemicals.^[27]

[edit] Coal-Seam Methane Beds

In September 2008, COP entered a, $8 billion, 50/50 joint venture with Australian energy company Origin to develop coal-seam methane beds.^[28]

[edit] Trends and Forces

[edit] Falling Oil Prices Are a Double-Edged Sword to Vertically Integrated Oil Companies like ConocoPhillips

Since the middle of 2008, oil prices have been trending downwards, to levels not seen since 2004. These falling oil prices have driven down COP's E&P margins. However, the company earns about 45% of its revenue, not including its Lukoil investment, from its Refining & Marketing segment.^[29] Since oil is the primary input for a refiner, when oil prices rise, refining costs rise. In the first quarter of 2008, right after oil prices hit $100/barrel for the first time, COP's oil refining (downstream) business saw productivity decline. Capital utilization dropped 6% year on year. U.S. refining margins fell $3.56 per barrel from the fourth quarter of 2007, while international refining margins fell $0.30 per barrel (international demand for refined products is rising, while U.S. demand is falling).^[30] Q3 earnings reflect a similar situation, during which crude oil prices for West Texas Intermediate averaged $117.83. Earnings estimates for the first quarter of 09 are a little less than 50% earnings for Q3 08, taking into consideration the new, low price of oil.^[31]

[edit] International Growth Presents Opportunities for Reserve Expansion - and the Risk of Massive Losses

As one of the oil majors, ConocoPhillips control oil resources in countries around the world; with oil prices soaring, the company's E&P segment has a strong incentive to push forward and explore in countries that are less politically stable Most of COP's petroleum comes from North America and Europe, two regions where oil production is declining; expanding around the globe allows the company to keep growing its average reserve life.

An international presence makes the company highly vulnerable to terrorism. In early July, 2008, the company penned a $10 billion deal to develop the Shah natural gas field and build a one bcf gas-processing facility in the United Arab Emirates.^[32] Just a month earlier, however, the U.S. released a high-alert warning for its citizens living and working in the region - after the UK did the same.^[33] A terrorist attack on one of COP's facilities would halt production and hurt employees, leading to higher costs and lower margins.

Exploitation of natural resources in other countries also puts COP at risk of property loss from nationalization. For example, ConocoPhillips' 3Q07 income of $3.7 billion appears to be many times higher than the 2Q07 income of $301 million. In 2Q07, however, the company's Venezuelan assets were seized by Hugo Chavez, causing the company to lose $4.5 billion of expected income.^[34]

COP's investment in Lukoil is another example of the benefits and possible risks of international expansion. Lukoil has the second-largest reserves of any publicly-traded oil company^[35], and ConocoPhillips has a 20% share of the value generated by them. Russia, however, has gone through numerous upheavals in the last century, and, with Vladmir Putin in power, is less friendly about its resources than it has been in years. In 2006, the Kremlin forced Shell to cede 50% of its share of the lucrative Sakhalin-2 gas field to Gazprom, the state-controlled oil company, at below-market prices by using "environmental concerns" to pressure the company.^[36] In early 2008, the Kremlin made multiple raids of BP and TNK-BP's Moscow offices, supposedly for investigating allegations of industrial espionage; a little over a year before, Gazprom expressed interest in the $40 billion TNK-BP project.^[37] All these events indicate that the Russian government has no problem with pressuring companies into ceding their interests in Russian petroleum projects, especially at lower price, after significant capital has been sunk into the projects. With a 20% stake in Lukoil, ConocoPhillips is risking significant losses, especially if the Kremlin decides to nationalize Lukoil and its assets.

[edit] Legislation Supporting the Development of Renewable Energy Threatens the Long-Term Strength of Hydrocarbons in the U.S.

Whether it’s because of the desire for energy independence, the rising price of oil, or fears of climate change, public opinion has turned away from petroleum, and it is driving government policy changes that encourage the adoption of alternative fuels. Environmentalists have been calling for a shift to renewable energy for years, and though the river of change is running slow, it is running deep. The Energy Independence and Security Act of 2007 is the first step towards a grander series of changes. By forcing automakers to achieve 35 mpg by 2020 and setting a Renewable Fuel Standard of 36 billion gallons of biofuels in 2022^[38], the Act has potential to get the ball rolling to greatly reduce American dependence on hydrocarbons.

Already, 26 states across the country have adopted Renewable Energy Standards to increase the share of renewables in their energy mixes, while the Democratic candidate for President has pledged to reduce carbon emissions 80%, to below 1990 levels by 2050.^[39] While the Republican candidate isn't so tough on climate action, he still supports a strong cap-and-trade system. In emerging markets like China and India, the drive for economic growth supersedes environmental concerns, but in the first quarter of 2008 ConocoPhillips sold 74% of its petroleum in the U.S.^[40] A changing American environmental and energy legislation landscape would be disastrous to COP's business without the development of some effective carbon sequestration technology.

[edit] ConocoPhillips Often has to Pay Recompense for Environmental Damages

Every stage of oil production, refining, and use have aspects that are damaging to the environment. Drilling leads to deforestation and groundwater contamination on land and coastal ecosystem damage offshore, refining leads to chemicals being released into groundwater and harmful fumes being released into the air, and the burning of oil and its products leads to the release of particulate emissions and greenhouse gases into the air. When the environmental damages caused by COP's operations occur to the extent that they break environmental protection laws, the company is sued by NGOs or government agencies like the Environmental Protection Agency. These lawsuits are usually settled out of court; on May 7th, 2008, for example, ConocoPhillips, Shell, BP, Chevron, Marathon Oil, Valero, and Sunoco agreed to pay $423 million in damages for contaminating groundwater with methyl tertiary butyl ether^[41], an oxygenate used to increase octane levels in gasoline that has been replaced in recent years with ethanol. Exxon Mobil, along with five other companies named in the lawsuit, are not settling and will continue to contest.

[edit] Competition

The major competitors of ConocoPhillips are the oil majors: BP, Exxon Mobil, Valero, Chevron, Royal Dutch Shell, Total S.A., etc.

The table provided below compares the operational metrics for ConocoPhillips vis-à-vis its competitors in 2008.

(1) Latest data is for 2007 (2) Does not include reserves of equity affiliates

(1) Latest data is for 2007

The oil majors face intense competition from national and state-owned oil and energy companies. Governments in oil-rich countries support these companies and give them preferential access to reserves by prohibiting direct foreign investment in oil exploration and production projects. Further, investments made by foreign companies are made unattractive by the government through taxation and other measures. Oil and gas companies, such as ConocoPhillips, thus face problems in gaining access to oil reserves and commencing operations in spite of their large size.

[edit] References

1. ↑ COP 2007 10-K, Page 66
2. ↑ COP 2007 10-K, Page 53
3. ↑ COP 2007 10-K, Page 11
4. ↑ The New York Times: " Oil Giants To Settle Water Suit "
5. ↑ COP 2007 10-K
6. ↑ ^{6.0 6.1} COP 2007 10-K, Page 53
7. ↑ COP 2008 10-K, Item 6, Page 32
8. ↑ ^{8.0 8.1} COP 10Q 1Q 2009, Page 1
9. ↑ COP 2008 10-K, Item 6, Page 38
10. ↑ COP 2008 10-K, Item 6, Page 52
11. ↑ COP 10Q 1Q 2009, Page 3
12. ↑ ^{12.0 12.1 12.2} COP 2008 10-K, Item 6, Page 42
13. ↑ ^{13.0 13.1 13.2 13.3} COP 10Q 1Q 2009, Page 31
14. ↑ COP 2008 10-K, Item 6, Page 47
15. ↑ COP 10K 2008 Page 41
16. ↑ COP 10Q 1Q 2009 Page 30
17. ↑ COP 2008 10-K, Item 6, Page 34
18. ↑ COP 1Q 2009 Pg. 29
19. ↑ COP 8-K · For 2/19/08
20. ↑ COP 2007 10-K
21. ↑ [/http://www.sec.gov/Archives/edgar/data/1163165/000136231009002769/c81244e10vk.htm#105 COP 2008 10K Page 2]
22. ↑ COP 2007 10-K, Page 66
23. ↑ Wall Street Journal - 3rd UPDATE: Lukoil Posts 4Q Loss; May Cut 2009 Capex Further
24. ↑ MarketWatch: "BP, Conoco team up on major Alaska gas pipeline"
25. ↑ COP 2007 10-K
26. ↑ Reuters: "UPDATE 2-ConocoPhillips selling U.S. gas stations for $800 mln"
27. ↑ COP 2007 10-K
28. ↑ MarketWatch: "ConocoPhillips bids $8B for Origin Energy assets"
29. ↑ COP 2007 10-K
30. ↑ Seeking Alpha: "ConocoPhillips Q1 2008 Earnings Call Transcript" Page 2
31. ↑ BusinessWeek - Investing:ConocoPhillips (COP:NYSE)
32. ↑ MarketWatch: "ConocoPhillips joins $10 billion Abu Dhabi project"
33. ↑ The National Terror Alert Response Center: "US Puts Citizens In UAE on Terrorism High Alert"
34. ↑ COP 2007 10-K, Page 11
35. ↑ http://www.lukoil.com/
36. ↑ BBC News: "Shell yields to Gazprom pressure"
37. ↑ Energy Business Review: " Gazprom confirms TNK-BP interest, more gas deals"
38. ↑ WhiteHouse.gov, Fact Sheet: Energy Independence and Security Act of 2007
39. ↑ Washington Post: "A Green(er) Obama"
40. ↑ COP 1Q08 10-Q
41. ↑ The New York Times: " Oil Giants To Settle Water Suit "
42. ↑ COP 2008 10-K, Item 8,Page 149
43. ↑ COP 2008 10-K, Item 8,Page 152
44. ↑ ^{44.0 44.1} RDS’A 2008 20-F, Supplementary Information, Crude oil and natural gas liquids
45. ↑ ^{45.0 45.1} XOM 2008 10-K, Item 1, Page6
46. ↑ ^{46.0 46.1} CVX 10-K 2009, Item 1, Page 7
47. ↑ ^{47.0 47.1} BP 2008 20-F, Item 1, Page 16
48. ↑ Lukoil Investor Relations – Fact Book 2008, Page 11
49. ↑ ^{49.0 49.1 49.2 49.3} ENI S.p.A. – Fact Book 2007, Page 11
50. ↑ ^{50.0 50.1} TOT 2008 20-F, Item 4, Page 10
51. ↑ COP 2008 10-K, Item 8, Page 151
52. ↑ ^{52.0 52.1} RDS’A 2008 20-F, Supplementary Information, Natural gas
53. ↑ Lukoil Investor Relations – Fact Book 2008, Page 12
54. ↑ ^{54.0 54.1} COP 2008 10-K, Item 6, Page 42
55. ↑ ^{55.0 55.1} XOM, 2008 10-K, Item 6, Page 36
56. ↑ ^{56.0 56.1} CVX 2008 10-K, Item 1, Page 5
57. ↑ ^{57.0 57.1} BP 2008 20-F, Item 1, Page 14
58. ↑ Lukoil Investor Relations – Fact Book 2008, Page 13
59. ↑ ^{59.0 59.1} TOT 2008 20-F, Item 4, Page 12
60. ↑ Lukoil Investor Relations – Fact Book 2008, Page 14
61. ↑ E 2007 Annual Report
62. ↑ SUN 2008 10-K, Item 7, Page 35
63. ↑ ^{63.0 63.1} CVX 10-K 2009, Item 1, Page 24
64. ↑ VLO 2008 10-K, Item 1, Page 3
65. ↑ ^{65.0 65.1} XOM 2008 10-K, Item 6, Page 43
66. ↑ RDS’A 2008 20-F, Results, Refining Data
67. ↑ Sinopec Investor Relations, Operational Statistics for 2008
68. ↑ WNR 2008 10-K, Item 7, Page 34
69. ↑ ^{69.0 69.1} COP 2008 10-K, Item 1, Page 16
70. ↑ ^{70.0 70.1} BP 2008 20-F, Item 1, Page 29
71. ↑ Lukoil Investor Relations – Fact Book 2008, Page 15
72. ↑ Conversion factor is 1 BPD = 50 tonnes per year
73. ↑ ^{73.0 73.1 73.2} TOT 2008 20-F, Item 4, Page 36
74. ↑ SUN 2008 10-K, Item 1, Page 1
75. ↑ ^{75.0 75.1} VLO 10-K 2008, Item 1, Page 1
76. ↑ RDS’A 2008 20-F, Results, Manufacturing
77. ↑ Sinopec Refining Overview
78. ↑ WNR 2008 10-K, Item 1, Page 19
79. ↑ Lukoil Investor Relations – Fact Book 2008, Page 16
80. ↑ SUN 2008 10-K, Item 1, Page7
81. ↑ CVX 10-K 2008, Item 1, Page 25
82. ↑ CVX 10-K 2008, Item 1, Page 26
83. ↑ XOM 2008 10-K, Item 2, Page 25
84. ↑ RDS’A 2008 20-F, Results, Marketing
85. ↑ Sinopec 2008 Annual Report, Business Review and Prospects, Page 20
86. ↑ WNR 2008 10-K, Item 1, Page 3
87. ↑ COP 2008 10-K, Item 1, Page 18
88. ↑ BP 2008 20-F, Item 1, Page 30
89. ↑ Lukoil Investor Relations – Fact Book 2008, Page 60