This year's oil market turbulence torpedoed ConocoPhillips' (COP 4.21%) third-quarter results. It posted an adjusted loss of more than $300 million, or $0.31 per share, a sharp reversal from its year-ago profit of roughly $900 million, or $0.82 per share.
However, while it was a tough quarter financially, the oil giant took advantage of the turbulent market conditions to go on an acquisition spree. That should fuel improved results when market conditions recover.
Drilling down into ConocoPhillips' third-quarter results
While the energy company posted a loss, its results were right in line with analysts' expectations. The main factors driving its weak results were weaker oil and natural gas prices. Overall, ConocoPhillips realized $30.94 per barrel of oil equivalent (BOE) during the quarter, 34% below what it brought in during the year-ago period.
Meanwhile, it produced an average of 1.066 million BOE per day during the quarter, which was well below its year-ago daily average of 1.155 million BOE. That was partially due to asset sales and roughly 90,000 BOE per day of production curtailments during the quarter due to lower oil prices. Adjusting for those volumes, its output declined by 4% year over year due to underinvestment.
ConocoPhillips generated $1.23 billion in cash from operations during the quarter, though after adjusting for operating working capital, cash provided by operating activities was roughly $870 million. It spent $1.1 billion on capital expenses and investments, which included about $400 million for acreage in Canada's Montney shale. That deal added about 15,000 BOE per day of production and more than 1 billion barrels of oil equivalent resources. The company also paid about $500 million in dividends during the quarter.
It bridged the gap between cash flow and spending with its strong balance sheet. Even so, the company ended the quarter with $6.8 billion in cash and short-term investments on the books.
ConocoPhillips has now restored 100% of its shut-in volumes. As a result of that, and the incremental production from its Montney acquisition, the company expects to produce between 1.125 million and 1.165 million BOE per day during the fourth quarter. That should push its full-year production total to an average of 1.115 million to 1.125 million BOE per day.
As mentioned, the company in July picked up a large slice of drillable acreage in Canada's Montney Shale. This month, though, it unveiled a far bigger deal, announcing that it had agreed to acquire Concho Resources (CXO) in an all-stock transaction valuing the target at $9.7 billion. The combined company will produce more than 1.5 million BOE per day and hold about 23 billion BOE in total with an average supply cost of below $30 a barrel. Further, the deal will enhance all its key financial metrics, including free cash flow per share, and should deliver $500 million in annual cost savings by 2022.
ConocoPhillips anticipates that the combined company will return 30% of its cash flow to investors. It recently increased its dividend, and plans to supplement that payout with incremental variable dividends and additional share repurchases.
Taking advantage of the turbulence
ConocoPhillips entered this year's downturn in a position of strength thanks to its strong, cash-rich balance sheet. That allowed it to take advantage of opportunities to add significant low-cost resources in Canada and acquire Concho Resources. Those deals should help fuel significant cash flow growth as market conditions improve, giving the company more money to return to shareholders.