Oil and gas industry bigwig ConocoPhillips (NYSE: COP) finally — finally! — managed to post an adjusted quarterly profit instead of a loss in Q2 2017. And the stock market responded with…well, not euphoria, but at least a small boost of 2.8%.
So, is this an outlier quarter or the beginning of a trend? Here are the most important things you need to know from Conoco’s second quarter.
The financials look great for a change
From a fiscal standpoint, ConocoPhillips’ second quarter was — comparatively speaking — fantastic. It certainly performed better than rival Apache (NYSE: APA), which posted an adjusted net loss in Q2.
Not only did Conoco post positive net earnings, but it was able to do so at an average realized price per barrel of oil equivalent that was lower than it was in Q1 2017, when the company posted a small net loss. So, even though Conoco made less revenue per barrel of oil equivalent it sold, it was able to retain more of that money.
Conoco generated more than $1.6 billion in operating cash flow, making this the fourth consecutive quarter in which the company’s operating cash flow more than covered its capital spending and dividend. Once you factor in the cash from the company’s asset sales during the quarter, it finished Q2 with $6.9 billion more cash on hand than it started with.
That cash is coming in handy as the company pays down its sizable debt load. Conoco’s proceeds from Q2 asset sales were $10.7 billion for the quarter, and it used $3.2 billion of that to retire debt, which brought the company’s debt balance to $23.5 billion.
In other debt-related news, management predicted a further $2.5 billion reduction in debt during the third quarter, with even more debt reduction to occur before the end of the year. All told, Conoco expects to have less than $20 billion in total debt by the end of 2017, down from $27.3 billion at the end of 2016. That’s a major improvement.
Production’s also looking up
The flip side of the financial numbers for an oil and gas production company is the production numbers. Here too ConocoPhillips is looking stronger than it has in recent quarters (again in contrast to Apache, which saw reduced Q2 production).
Excluding its operations in Libya — which have been upended by ongoing violence and unrest in the region — Conoco’s daily production rate for the quarter was 1.43 million barrels of oil equivalent, which was above the high end of its guidance. After adjustments for the asset sales, that amounted to production that was 3% higher than the year-ago quarter.
That’s good enough by itself, but the company also increased its full-year production guidance by 25,000 boe/d to 1.34 million to 1.37 million boe/d. More importantly for investors, it’s simultaneously lowering its 2017 capital guidance by $200 million to $4.8 billion. In other words, the company is producing more oil and gas, and spending less capital in order to do it.
“More with less” is a winning formula in the oil sector these days.
Rewarding shareholders seems to be a priority
So here we have a company that — at least in the most recent quarter — is seeing positive earnings, strong cash flow, increased production, and lowered capital costs. Management is projecting that this trend will continue, and is even looking at further asset sales that will provide even more cash flow for the company. So shareholders are justifiably wondering what Conoco is going to do with all that cash.
On the earnings call, CEO Don Wallette, Jr. promised $1 billion in share buybacks in both Q3 and Q4 of 2017, with an additional $3 billion in buybacks over the next two years.
And interestingly, he hedged a bit when directly asked whether the company would prioritize driving its debt load down to $15 billion as Wallette had previously suggested was a long-term goal. Here’s what he had to say:
“Well…we fully intend to do both: continue with the debt reduction beyond 2017 and to continue with our buyback programs. The question as to whether $15 billion is the right number: you point out that the cash flows from the company are very strong, and we continue to look at that. And of course our plans to expand cash flow as we go forward will factor into our thinking, but right now, $15 billion is our target, and we’ll stay on that course.”
That seems to signal that he plans to balance the need to reduce debt with the desire to reward shareholders (who, let’s face it, could use a little rewarding after years of patience with the stock).
This quarter’s results seem to clearly indicate that ConocoPhillips is headed in the right direction. And while it would be nice to see an additional quarter or two of sustained positive adjusted net earnings, the market will likely have bid up the stock by that point.
So, investors who want to cautiously dip their toes into the oil industry waters can probably safely consider taking a small stake in the company, as long as they understand that one quarter doesn’t necessarily make a trend.
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About Oklahoma Minerals Founder GIB KNIGHT
Gib Knight is a private oil and gas investor and consultant, providing clients advanced analytics and building innovative visual business intelligence solutions to visualize the results, across a broad spectrum of regulatory filings and production data in Oklahoma and Texas. He is the founder of OklahomaMinerals.com, an online resource designed for mineral owners in Oklahoma.