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Why ConocoPhillips Looks Like A Buy

Summary

COP is following a smart strategy of maintaining its production while lowering production costs and capital expenses significantly, which will enhance its return profile.

COP is bringing in new production at a lower cost base and disposing of the less profitable assets, and this is having a positive impact on its free cash flow.

COP generated operating cash flow of $1.26 billion last quarter, which was enough to cover its capital expenditure of $1.13 billion, while it had a deficit in the first quarter.

COP is selling off its less profitable assets, as a result of which it has been able to reduce the debt and also lower the cost profile.

Shares of ConocoPhillips (NYSE:COP) are up a little despite the company posting a higher-than-expected loss in the second quarter. Its losses came in at $0.79 per share, failing to meet the consensus estimates that called for a loss of $0.65 per share for the quarter. This higher loss for the quarter was due to the weakness in the crude oil prices on a year-over-year basis.

However, the encouraging point was that the company was able to minimize its losses sequentially by over 17%. This improvement in Conoco's losses was due to its efforts of reducing costs across its operations, along with better average realized prices of crude oil on a sequential basis. Looking ahead, I believe that Conoco will be able to further improve its financial performance as the company is focused on enhancing its production at a lower cost base. Let's take a look.

Keeping the production intact while reducing costs

ConocoPhillips has been consistently lowering its cost structure during the weakness in the commodity pricing environment. For instance, its production and operating costs last quarter came in at $1.44 billion, down approximately 20% as compared to operating costs of $1.79 billion a year ago. At the same time, the company lowered its SG&A expenses by over 23% on a...


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