Summary
ConocoPhillips increased its dividend by 6% and announced that capital expenditures will be cut back to $11 billion in 2010, down from $12.5 billion in 2009. This lower level will support exploration, production and reserve replacement. The project portfolio will be preserved for future development. Reserves will be replaced through organic growth. Upstream growth will occur from a reduced base. the company plans to sell $10 billion in assets over two years, reducing debt/capital ratio.
Analysis
ConocoPhillips has seen the handwriting on the wall and it is written in the cautionary yellow letters "Go Slow". In an earlier presentation, the company revealed that refinery utilization had dropped to 85% in 2009, down from 90.2% in 2008. The company has interests in 15 refineries worldwide with 12 in the U.S. It is in the U.S. where gasoline sales are down the most and logical assets marked for sale could be a refinery or two. The company has already said that it would continue the sale of marketing assets that began in 2003. From 2003 through 2008, marketing assets valued at $4.4 billion were sold. In the U.S., ConocoPhillips has 8,000 retail outlets and they may very well follow plans reported by ExxonMobil and other majors to keep on selling gasoline stations. There is plenty of room to sell them in regions of high unemployment where business activity may be depressed for several years. Reducing debt appears to have a high priority and it is exactly the right thing to do in the face of continued uncertainty. The announced 2010 budget should easily allow reserve replacement which, in the final analysis, is all that you have to do during periods of financial turbulence. This is not going to be the only announcement of 2010 budget cutbacks. All oil and gas companies, large and small, domestic or international will be looking at their hole cards between now and year end. For some of the smaller ones, it is a matter of survival. For the international majors with rosier overseas prospects, now is the time to prepare for what could be a long period of slow or no growth.
Michael Lynch consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
