Why Deficit Spending Is A Big Concern At Conoco Phillips

When ConocoPhillips COP reported its quarterly financials this week, its Q2 earnings per share (EPS) of $0.07, handily beat earnings consensus estimates of $0.04. However, it’s not the earnings that have a pair of Wall Street firms talking -- it’s ConocoPhillips’ deficit spending. Here’s what the firms had to say.

The Numbers

According to Oppenheimer analyst Fadel Gheit, ConocoPhillips will generate cash flow deficits of $5.2 billion in 2015 and $3.1 billion in 2016.

Alarmingly, Oppenheimer projects that the company would need a crude oil price near $90 per barrel, nearly double its recent price, to fully fund its CAPEX and dividend.

For the quarter, ConocoPhillips had a $98 million loss in the U.S., including a $293 million loss in Lower 48. Gheit estimates that the company would need about $60/bbl WTI for its U.S. Lower 48 operations to break even.

Unfairly Punished?

Barclays analyst Paul Cheng points out how harshly the market has treated ConocoPhillips’ stock relative to peers. “We believe the shares have been oversold and [are] also being treated somewhat unfairly compared to other large cap oil and gas companies,” Cheng writes.

The stock is down more than 28 percent year-to-date versus only a 25.8 percent average decline for its peers. ConocoPhillips is also trading at a discount to its peers in terms of P/E, P/CF and EV/EBITDA multiples.

Outlook

Although both firms are worried about ConocoPhillips’ spending, Barclays is more positive on the future.

“We remain optimistic that COP could be close to cash flow neutrality in 2017 under a $60-$65 Brent price environment, assuming they will only reinvest at the sustaining capital requirement level of $8 billion,” Cheng writes.

Barclays maintains its Overweight rating on ConocoPhillips and has a $64 target for the stock. Oppenheimer downgraded ConocoPhillips from Outperform to Perform following Q2 earnings and removed its $80 target.