ConocoPhillips (NYSE:COP) is the largest independent oil and gas company in the world based on production and proved reserves. It also sports a behemoth-sized balance sheet with over $121.6 billion in assets and another $19.6 billion in debt as of the end of the second quarter. While the size of its balance sheet is certainly impressive, what's more important to investors is if the company's balance sheet strength matches its gargantuan size. Let's drill down a little bit deeper. 

The numbers that matter
ConocoPhillips' assets are broken down into two parts: current assets and noncurrent assets.

Source: ConocoPhillips 10-Q for the second quarter of 2014. 

Here we see that ConocoPhillips was sitting on just over $6.1 billion in cash as of the second quarter of 2014, out of a total $19 billion in current assets. Current assets, those that are typically turned into cash within one year, help to ensure the company can meet its current year expenses. This substantial resource allows ConocoPhillips to meet its annual spending of $16 billion just on capital projects. 

Next up are ConocoPhillips' liabilities. Here's a snapshot from the second quarter of 2014:

Source: ConocoPhillips 10-Q for the second quarter of 2014.

Here we see that ConocoPhillips had $16.1 billion in current liabilities, $2.6 billion less than its current assets. This is a good sign of financial health as it means the company's quick ratio (current assets excluding inventory/current liabilities) is 1.08. That's a solid number, as anything over 1 tells us the company has enough cash and liquid assets to cover its short-term debt liabilities. Even better, this is well above the industry average of 0.80.

Another good sign is that the company's $19.5 billion debt load has actually fallen by $1.5 billion over the past year. This shows the company is not piling on debt in spending $16 billion each year on capital projects.

What does ConocoPhillips' balance sheet tell us?
Overall, the company's balance sheet is strong and getting stronger. As the following slide illustrates, the balance sheet is investment grade and ConocoPhillips' debt actually trades better than AA-rated debt.

Source: ConocoPhillips Investor Presentation..

ConocoPhillips views its balance sheet as both strong and flexible. The company has plenty of cash in reserve to operate, along with plenty of capacity to add additional debt if it sees a strategic benefit to doing so, as debt reduction isn't a priority for the company.

Investor takeaway
Despite holding nearly $20 billion in debt, ConocoPhillips' balance sheet is rock-solid. The company has plenty of cash to pay the bills and more than enough capacity to add debt to make a compelling acquisition or to accelerate its growth. That being said, investors should still keep an eye out to make sure the company doesn't get too aggressive in adding debt, as an overleveraged balance sheet could burn investors if oil and gas prices fall for an extended period of time.