ConocoPhillips Earnings: Weak Oil Prices Mask Strong Performance

Source: ConocoPhillips.

One of the pitfalls of being an energy company is that you can do everything right, but weak commodity prices can still wreck what would have been a strong quarter. That's exactly what happened to ConocoPhillips in the first quarter -- it lost money as weak oil prices gouged out its bottom line. The company isn't yet sure when oil prices will improve, so it's working to get its costs down so it can be in an even better position to drive profitable growth when conditions do improve.

Drilling down into the numbersFor the first quarter ConocoPhillips' production averaged 1,610 MBOED, which was a robust 5% year-over-year increase in adjusted production. Helping to drive this growth were the first results of major project completions at Eldfisk II, the Brodgar H3 subsea tie-back, and Bayu Undan Phase III. The company also enjoyed strong production growth from its Eagle Ford and Bakken plays as production from those areas was up 26% over the prior year. This helped offset normal field decline, including weakness in Alaska.

Despite strong production growth, ConocoPhillips lost $222 million, or $0.18 per share. While that was a penny better than analysts expected, it was well below the $2.3 billion, or $1.81 per share the company earned in the first quarter of 2014. This weakness was driven by the collapse in commodity prices over the past year, evident from the fact that ConocoPhillips' realized price was just $36.96 per BOE in the first quarter, well off of the $71.21 it realized in the first quarter of 2014.

ConocoPhillips was able to partially offset weaker commodity prices through lower costs. Its operating costs fell to $2.1 billion, which was down from $2.3 billion in the first quarter of last year -- and after adjusting for restructuring costs, its operating costs actually improved by 12% over the prior year.

Further, despite the accounting loss, ConocoPhillips is actually still making money on oil and gas production. The company generated $2.1 billion in cash from operations during the quarter. It did spend $3.3 billion in capital expenditures and another $900 million on dividends, but it's still well positioned to fund its business through the weakness, as it still has $2.7 billion of cash in the bank and an investment grade balance sheet with a debt-to-capital ratio of 31%. Moreover, its capital spending per quarter is expected to decline as additional major projects kick off, and the company is said to be exploring asset sales to fill the gap between cash flow and capex.

A look aheadThanks to its strong first quarter showing, ConocoPhillips remains on track to meet its targeted production guidance of 2%-3% growth in 2015. This is as the company maintains its plan to spend $11.5 billion on capex this year. Capex spending, however, is expected to decline throughout the year as its five major projects, including Surmont 2 and APLNG, are expected to come online by year's end. Further, the company is ramping down its activity levels in North American unconventional plays like the Eagle Ford and Bakken shale. The company's cost guidance also remains unchanged, and operating costs and other expenses are all expected to be within its previous guidance.

Investor takeawayIf oil prices hadn't collapsed ConocoPhillips' first quarter results would have been exceptional. The company delivered on its growth targets, cut its costs and moved forward on all of its programs and projects, which are expected to drive future returns. Because of what the company was able to accomplish in the first quarter, it is set up for strong growth when conditions improve.

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Matt DiLallo owns shares of ConocoPhillips. The Motley Fool has no position in any of the stocks mentioned. 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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