Outlook For Changes At Conoco Sparks Optimism Among Analysts
October 06 2009 - 6:14PM
Dow Jones News
If Wall Street is to be believed, battered oil giant
ConocoPhillips (COP) is quietly working towards a turnaround.
The Houston-based company last week warned investors that its
third-quarter earnings would be significantly lower than last year
- but its oil and gas production would grow, surprising analysts
who expected output to stagnate.
Among some analysts, the unexpected outlook sparked suspicions
that the oil giant is going through a crucial transformation to
quell discontent among investors, which have seen the company's
stock price plummet 50% from its peak above $95 in June 2008.
ConocoPhillips is the third-largest U.S. oil company by market
value behind Exxon Mobil (XOM) and Chevron Corp. (CVX)
Analysts at Deutsche Securities on Monday upgraded
ConocoPhillips' stock to "Buy" in part because they are
"increasingly convinced" that as Conoco Chief Executive Jim Mulva
approaches retirement within the next two years, the potential for
a major positive restructuring of the company "is clear."
Mulva, 63 years old, who has been chief executive officer of
ConocoPhillips since 2002, has said he plans to retire at 65.
"We believe that a restructuring process may be underway," said
Paul Sankey in a note to clients.
Sankey didn't provide details of the possible restructuring, but
other analysts said ConocoPhillips will need to substantially
reduce its cost structure and improve its production profile by
finding more oil and natural through exploration efforts and not
through acquisitions.
ConocoPhillips didn't respond to requests for comment.
The stocks of all major oil companies have felt the pinch of
last year's drastic drop of commodity prices. But ConocoPhillips'
shares have been hit the hardest, as the company is the most
vulnerable among its peers to the low natural gas prices and tight
refining profits currently pressuring the industry.
More importantly, investors have punished Conoco for the
multi-billion dollar buyout of natural gas provider Burlington
Resources in 2005 and more recently for having agreed to pay $8
billion for a 50% share of the coal seam gas assets of Australia's
Origin Energy Ltd. The purchases, done at a time of high commodity
prices are currently perceived as badly timed. At the end of last
year, ConocoPhillips had to write down $34 billion related to
earlier acquisitions.
But investor sentiment seems to be shifting, spurred by
expectations of change. In the interim report, ConocoPhillips said
its third-quarter production would grow 1.7% to 1.78 million
barrels per day. On Friday, shares rose 2% to $46.41. Conoco shares
on Tuesday closed at $48.41, up 1.15%.
Analysts at financial advisory firm Collins Stewart also
upgraded the Conoco's stock to "buy" last week making the case that
the company could sell its 20% position in OAO Lukoil (LKOH.RS) in
order to pay some of its debt.
"In our view, it makes sense for Conoco to free up the
substantial capital currently tied up in Lukoil," said Collins
Stewart analyst Katherine Lucas in a note to clients.
Conoco' move to invest almost half of its $2 billion 2009
exploration budget in high-risk, high-reward frontier exploration
fields in Australia, Deepwater Gulf of Mexico and the North Sea is
also helping buoy confidence in its future. The company has so far
reported exploration successes in Australia with a large natural
gas discovery at Poseidon. The company is also a partner with BP
PLC (BP) in the high-profile Tiber discovery in the U.S. Gulf of
Mexico.
But some analysts remain cautious about the ability of Conoco to
improve performance unless natural gas prices substantially
improve. Pavel Molchanov, an analyst with Raymond James, said in a
note to clients that the investors should remain on the sidelines
for the time being until an improved outlook for North American gas
becomes apparent.
ConocoPhillips will report third-quarter earnings Oct. 28.
-By Isabel Ordonez, Dow Jones Newswires; 713-547-9207;
isabel.ordonez@dowjones.com