Summary
- ConocoPhillips recently reported quarterly results.
- Earnings missed estimates, spending came in higher than expected, and the company increased CapEx guidance.
- But ConocoPhillips generated robust levels of free cash flows and it could get even better in the future.
ConocoPhillips (COP) may have disappointed some investors with the latest quarterly results but the company has shown, yet again, that it is a free cash flow machine. The Houston-based oil producer will likely continue generating tons of excess cash and use that to reward investors with buybacks and dividends.
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ConocoPhillips produced 1.29 million boe per day in the second quarter, excluding production from Libya, showing an increase of 79,000 boe per day from the year-ago quarter. Increase in production from the Big-3 shale oil plays in the US and other projects in Alaska, Europe, and the Asia Pacific helped offset the impact of normal field decline and planned maintenance work. However, oil prices averaged $59.80 a barrel (WTI crude) in the second quarter, down from almost $68 a year earlier. The dip in oil prices pushed ConocoPhillips’s earnings down to $1.14 billion (as adjusted), or $1.01 per share, from $1.29 billion, or $1.09 per share, a year earlier. The profit missed analysts’ consensus earnings estimate of $1.03 per share, as per data from Thomson Reuters.
Not only did the company miss analysts’ consensus earnings estimate but its capital expenditure also came in much higher than my expectation. As a reminder, ConocoPhillips forecasted capital expenditure of $6.1 billion for 2019 which implied that it would spend around $1.53 billion in each quarter. The company spent $1.64 billion in the first quarter and I was expecting lower levels of spending for the second quarter. Instead, the actual expenditure clocked in at $1.73 billion. On top of this, ConocoPhillips also increase its capital expenditure guidance for 2019 to $6.3 billion as it increased drilling work at Eagle Ford and Alaska. That’s coming at a time when oil producers are facing growing pressure from shareholders to rein in spending.
The good thing was that ConocoPhillips generated tons of excess cash and returned that to shareholders as dividends and buybacks, even with higher levels of spending. The company generated $3.4 billion of cash flow from operations, ahead of changes in working capital, which was well above the capital expenditure. As a result, ConocoPhillips delivered free cash flows of $1.67 billion ($3.4Bn-$1.73Bn). The company then used the free cash flows to reward investors by spending $1.5 billion on buying back shares and dividends.
