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A Look At ConocoPhillips Heading Into Q1 Earnings

Summary

ConocoPhillips reports its Q1 2016 earnings on April 28, which will be followed up by its annual shareholders meeting in May.

With its revised spending position, investors should look out for what management plans to do with FCF generation in the event of a recovery.

After the comedy of errors that is the Gorgon LNG facility hit yet another hurdle, shareholders will want to know how construction of the second APLNG train is going.

ConocoPhillips' pivot to shale is worth taking a note of, including whether or not the company decides to focus more attention towards the Permian Basin.

When ConocoPhillips (NYSE:COP) reports its first quarter earnings on April 28, the super independent will be able to showcase why its focus on fiscal discipline is the best move going forward. After making waves since slashing its dividend payments, ConocoPhillips no longer needs $60 Brent to achieve cash flow neutrality. That means the company won't have to take on nearly as much debt to fund its outspend during the downturn, as cash flow neutrality is achievable around $45 Brent. These should be seen more so as rough benchmarks than definite breakeven levels.

Brent is the benchmark for international crude prices, which as many of you know collapsed from over $100/barrel back around the later part of 2014 to $42.86/barrel as of this writing. The meeting in Doha on April 17 may yield some sort of agreement among OPEC, Russia, Mexico, and other major crude exporters, but a production cap at record output doesn't change the near term situation, that there is still a material amount of excess crude output relative to demand. ConocoPhillips has recognized that oil prices will remain subdued, even in the event of a recovery, throughout 2016, 2017, and possibly longer.

Understanding the reality of crude markets

Management's guidance to achieve cash flow neutrality at $45 Brent came after ConocoPhillips slashed its forecasted capital expenditures for 2016 to $6.4 billion versus $10.1 billion in capex last year. The start up and ramp up of major developments will keep Conoco's production base relatively flat year-over-year. During the fourth quarter of 2015, ConocoPhillips generated $1.8 billion in cash flow (excluding a negative working capital impact of $200 million) when Brent and WTI averaged $43.67 and $42.10, respectively, and Henry Hub traded around $2-$2.20/Mcf.

ConocoPhillips spent $3.7 billion on dividend payments in 2015, which should come down by $2.45 billion this year to ~$1.25 billion. Add in its $6.4 billion capex budget and $900 million in non-capitalized interest expenses, and Conoco aims to spend around $8.55 billion in 2016. When the super independent updates shareholders, look for comments from management on whether the $45 Brent guidance is still in play and what the company would do with future FCF generation.

Not having to cannibalize the balance sheet is a big plus during the downturn and will enable Conoco to start generating much needed free...


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