Image source: ConocoPhillips.
ConocoPhillips' third-quarter financial results were clearly affected by lower oil prices. However, the company is making progress to right-size its business for the current environment. That was the clear message on the company's conference call discussing those results. CFO Jeff Sheets took the reins of this call, detailing five areas where the company had made significant progress.
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1. The business is performing wellOn operational performance, Sheets said:
One of ConocoPhillips' main themes for 2015 is winding down several major projects that had been under development for the past several years. All of this year's projects have not only been delivered on time and on budget but are performing at or above expectations.
2. Our budget is flexibleBecause the company is in the finishing stages on most of its major projects, it has a lot more capital flexibility going forward. COO Matt Fox chimed in on this one, noting:
Moreover, future spending could be a lot less, with Sheets pointing out that the capex budget will likely be a moving target:
In other words, if oil prices stay in the range of $45-$50 per barrel, the company's spending could drop below $8 billion thanks to its flexibility going forward.
Overall, capex spending in the industry is well off its peak. One noteworthy example is French oil giant Total , which is bringing spending down to $20 billion-$21 billion next year and to $17 billion-$19 billion in 2017 and beyond. Those levels are well below Total's peak spending of $28 billion in 2013 and $23 billion-$24 billion this year.
3. We've really made progress on our costsAs for progress made on reducing costs, Sheets pointed out that the "operating costs were down 18% when adjusted for special items." That's better than the expected performance for the company. In fact, COO Matt Fox noted that:
Not only is the company ahead of its cost reduction target, but it sees further operating cost cuts that can be achieved. This will offset more of the impact weak commodity prices are having on its margins.
One thing producers have discovered is that the longer oil prices stay low, the more cost deflation they can capture. That's why Total recently raised its operating cost reduction target by 50% and now expects to trim $3 billion fromoperating expenses by 2017.
4. We're in strong shape financiallyOn the balance sheet, Sheets said:
While weak prices have reduced the company's cash flow, it has other levers to pull to stay financially strong. One of the key points Sheets made is that ConocoPhillips can handle more debt on its balance sheet and still maintain a strong investment grade credit rating. That's a huge competitive advantage given that a lot of its peers are focused on reducing debt to stay afloat.
5. We're minding the gapConocoPhillips' ultimate goal is to be cash flow neutral in 2017 no matter the oil price. As Sheets reiterated:
In other words, the company has clear line of sight that the gap between its cash flow and cash outflows for capex and the dividend will be fully closed by 2017. Furthermore, that gap can be closed under a range of commodity price scenarios, suggesting that it can be attained even if prices stay in the current range. That's a better scenario than at some rivals, with Total needing a $60 oil price to cover its dividend and capex in 2017, even with all the cost reductions.
Investor takeawayWhile higher oil prices are not yet in sight, ConocoPhillips is facing the challenge head-on. The company is controlling what it can, which are its production, capital, and operating costs. This has it positioned for long-term sustainability even if oil prices stay lower for a lot longer.
The article 5 Things ConocoPhillips' CFO Wants You to Know originally appeared on Fool.com.
Matt DiLallo owns shares of ConocoPhillips. The Motley Fool recommends Total (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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