ConocoPhillips (COP +1.67%) reported expectation-trouncing third-quarter results before the market opened on Thursday, surpassing analysts' expectations once again. That's after the U.S. oil giant posted an adjusted profit of $198 million, or $0.16 per share, which was twice the $0.08 per share that analysts anticipated and $0.02 per share ahead of last quarter. That surprisingly strong result came despite the facts that oil remains low, the company closed the sale of several assets this year, and Hurricane Harvey forced a temporary shut-in of some production in Texas.
A gusher of production
Heading into the quarter, ConocoPhillips anticipated that it would produce between 1.17 million and 1.21 million barrels of oil equivalent per day (BOE/D) during the quarter. However, despite losing 15,000 BOE/D due to the impact from Hurricane Harvey, output was near the high end of that guidance range at 1.202 million BOE/D. After adjusting for asset sales, underlying production for its retained assets increased 16,000 BOE/D, or 1.4%, from the year-ago quarter, thanks to the ramp-up of several major projects and development programs.
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Even more impressive was production per debt-adjusted share, which considers the impact of the company's asset sales and the use of the cash proceeds to reduce its share count and outstanding debt. After ConocoPhillips repurchased another 2% of its shares during the quarter for $1 billion and redeemed $2.4 billion of debt, underlying output on a debt-adjusted per-share basis rose a remarkable 19%.
Financially thriving despite continued oil weakness
Also fueling ConocoPhillips' expectation-beating earnings was its ability to keep driving down costs. The company noted that year-over-year production and operating expenses are down 20% while adjusted operating expenses decreased 15%. That decline came in the face of improving oil and gas prices, which had started to reinflate some costs.
Not only are operating costs falling, but so are capital expenses. The company once again lowered its full-year capital-expense guidance, this time to $4.5 billion, 10% less than its initial estimate. That ability to stretch its capital dollars even further allows the company to generate more cash flow. As a result, cash provided by operating activities has exceeded capital and dividend expenses this year, an impressive feat considering that oil has been under $50 a barrel for most of the year.
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ConocoPhillips' strategic repositioning plan is producing tangible results, enabling the company to deliver improved performance in the wake of persistently low oil prices. For perspective, just two quarters ago the company reported an adjusted loss of $19 million, or $0.02 per share, despite producing at a higher rate on an absolute basis and realizing slightly higher oil prices.
Another factor driving the company's financial improvement is that it has unloaded several of its less profitable assets this year, helping to boost overall profitability. For example, it sold its stake in a Canadian oil-sands joint venture, and some natural gas assets in the country, to Cenovus Energy (CVE +2.87%). At $50 oil, those assets generate about $300 million in cash flow from operations. However, ConocoPhillips estimates that it can completely offset the lost income from those properties by using a portion of the proceeds from Cenovus to retire debt, which will cut its interest expenses. Meanwhile, it can boost per-share earnings by using the balance of its cash infusion to repurchase stock, which is also helping increase production on a per-share basis, further muting the impact of the asset sale.
Just starting to gain some momentum
Thanks to noticeable improvements in its results, and those still to come, ConocoPhillips has momentum as it delivers on its aims to generate free cash flow and produce the strong financial returns which will create value for shareholders. That said, investors have yet to give the company much credit for this progress, considering that the stock is only up 2% this year, even though the price of the global oil benchmark has risen nearly 5%. That underperformance despite producing tangible results makes ConocoPhillips a compelling oil stock to buy, since it's built to thrive amid the storms, whether they be figurative or literal.
