DALLAS (Reuters Breakingviews) - ConocoPhillips is stuck in a rut. Only asset sales kept the company’s earnings out of the red in the first three months of the year. The cash from such deals will help Conoco cut its high debt load, but Chief Executive Ryan Lance is still pushing ahead with buybacks and has started increasing the dividend rather than boosting investing. Such methods to buoy the stock have a limited lifespan.
Like oil majors that reported late last week, Conoco’s earnings were in part helped by rising oil prices. The company’s realized price – the total revenue on oil sales divided by the number of barrels - was $36.18, a 58 percent increase over the same period last year. As a result, the net loss for the quarter, after stripping out one-off gains, was just $19 million compared to a loss of $1.2 billion last year.
All told, Conoco sold some $16 billion of assets over the past two months, though one deal involves being partly paid with stock in the buyer, Cenovus Energy. Conoco intends to use most of the cash proceeds to pay off some of its borrowings. That was enough to prompt Moody’s and S&P to improve Conoco’s ratings outlook. And it should take its debt load down from around three times EBITDA to a level closer to the 1.2 times multiple of its peers by the end of the year, reckon analysts at Raymond James.
It also intends to return some $3 billion of sale proceeds to shareholders using buybacks. Along with a 6 percent dividend increase in February – a year after slashing it by two-thirds – that might sound like actions investors should applaud. Yet shares fell as much as 2 percent after Tuesday’s earnings.
That’s because Lance’s short-term patches come at the expense of future projects. He is holding the capital-spending budget at $5 billion. And while Conoco built four new rigs in the Eagle Ford and Permian Basin regions in the first four months of the year, it’s a blip compared to the 111 new platforms up over that period, according to Baker Hughes. With asset sales ahead of schedule and depleting earnings, Lance needs to put more money to work to keep the cash spigot flowing.
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