Last January, I wrote that 2012 could turn out to be disastrous for Big Oil companies. My reason for saying so was that some of these companies were banking on higher crude oil prices to drive up revenue while their underlying fundamental growth languished. Last week, Goldman Sachs (NYSE: GS) downgraded ConocoPhillips (NYSE: COP), which is now an independent exploration and production company, following the spin-off of the company's refining and marketing segment into Phillips 66 (NYSE: PSX).
Smacked with a "sell"
Goldman's Arjun Murti slapped a "sell" on to Conoco's shares from a previously "neutral" rating, while placing a price target of $58. Murti questions the company's ability to continue paying dividends and also meet its capital expenditures after the spin-off, especially in an environment where oil prices continue to remain depressed.
In hindsight, the downgrade shouldn't come as a surprise to Foolish investors, given that Conoco's production volumes have been faltering during the last couple of years. Last year, total production fell almost 8% to 1.62 million barrels of oil equivalent per day. Liquids production fell nearly 32%, which is over and above the 11% drop in 2010 production. Additionally, liquids production constitutes just a little more than half of the total production. A major part of Conoco's production portfolio consists of natural gas, which is another cause of concern given the lousy market for this commodity.
Conoco has ample reserves to develop; however, the problem with a cash balance of $4 billion is that there isn't enough to meet the average capital expenditure of $10 billion. Free cash flow over the trailing 12 months stood at $3.5 billion. On top of that, meeting average dividend payments of $3.5 billion a year is another concern management cannot ignore. Conoco's dividend yield stands at 4.8%.
The Foolish bottom line
All in all, things don't look too rosy for Conoco. Goldman's downgrade seems apt. Companies that were riding the oil price boom aren't so well-placed now. However, if prices should go up, Conoco might be able to get out of the mess. Meanwhile, you can keep up with the situation by adding ConocoPhillips to your free personalized watchlist.
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