We are downgrading our recommendation on
) to Underperform from Neutral, on the back of disappointing
first-quarter earnings. Financial leverage also deteriorated with a
higher debt-to-total capital ratio and lower cash balance.
ConocoPhillips' first quarter earnings and revenue came in below
the Zacks Consensus Estimate. The earnings of the Exploration and
Production segment fell year over year mainly on account of reduced
volumes, higher taxes and lower natural gas prices. Additionally, a
dip in refining margins during the quarter pulled down the Refining
and Marketing segment profits.
In May 2012, ConocoPhillips completed the spin-off of its
refining/sales business into a separate, independent and publicly
). This has left ConocoPhillips with a less diversified business.
As a result, the business risk profile of the reorganized
ConocoPhillips is weaker than that of the pre-spin-off company.
Moreover, given the substantial investment required to augment
upstream operations, any strategic change in the composition of
ConocoPhillips' assets will involve considerable capital
expenditures, in addition to the planned outlay. This may be
significantly burdensome for the company's future cash flows and
put pressure on its already strained balance sheet.
Having already divested $20.2 billion of non-strategic assets
last year and $1.1 billion in the first quarter of 2012, and plans
to offload $10 billion worth of properties this year, the company's
output is likely to be affected with production shrinking
Our bearish investment thesis on ConocoPhillips also takes into
consideration ConocoPhillips' sensitivity to changes in the crude
oil price, as well as geopolitical risks associated with
international operations and operational challenges. In fact, the
pessimism around the stock is well reflected through its estimate
Currently, the Zacks Consensus Estimate for ConocoPhillips'
second-quarter 2012 earnings stands at $1.49 per share, down 38%
year over year. Of the 8 estimates, 2 moved downward in the last 30
days, while no upward revision was witnessed. For 2012, the Zacks
Consensus Estimate is pegged at $6.40 per share, down 27% year over
Given these concerns, we expect ConocoPhillips to perform below
its peers and industry levels in the coming months. As such, we see
little reason for investors to own the stock. Our long-term
Underperform recommendation is supported by a Zacks #5 Rank
(short-term Strong Sell rating).
CONOCOPHILLIPS (COP): Free Stock Analysis
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