ConocoPhillips’ results show the value in shrinking

The strong profits for the fourth quarter of 2010 reported by ConocoPhillips underline just how much its efforts to slim down and focus on organic growth are paying off. Indeed, the results are so good that the strategy is something other companies might want to consider.

Conoco reported net profit of $2bn in the fourth quarter of 2010, up from $1.3bn in the year-earlier period. Asset sales and organic growth, combined with higher oil prices, improved its bottom line. Excluding gains from asset dispositions, impairments and other items, its adjusted earnings for the quarter were $1.9bn, or $1.32 per share.

Jim Mulva, ConocoPhillilps’ chief executive, summed it up:

We improved our returns, reduced debt and increased shareholder distributions.

For the full 2010 year, Conoco reported $11.4bn in earnings, more than double the $4.4bn reported in 2009. Excluding gains from asset dispositions and other items, 2010 adjusted earnings were $8.8bn.

But, more importantly for those who know the company’s history, Conoco exceeded its goal to replace its 2010 production with new organic reserves, estimating its organic reserve replacement ratio at 138 per cent of 2010 production. Much of that is due to Conoco’s development of north American unconventional resources, including shale and oil sands.

This is quite an accomplishment for a company that for years pursued a growth-through-acquisition strategy – one that got it into trouble. In March 2009, Conoco disclosed a 2008 fourth-quarter net loss of $31.8bn; a $34bn writedown; 1,300 in job losses; and a $2.8bn cut in capital spending. The economic downturn had exposed its weaknesses and the need for it to stop buying assets and focus on growing what it already owned.

Fast forward to now, and Credit Suisse Equity Research is calling the company’s profits “a solid result” noting that the company has $10.4bn of cash and short term investments on hand, which added up to plenty of firepower to buyback stock or raise the dividend.

Conoco said it was targeting about $13bn for capital expenditure this year and could put some of that into exploration acreage in the Gulf of Mexico but is still looking to sell assets rather than buy. Indeed, the company said it would look to unload assets in 2011-2013, depending on what values it can get.

In 2010, it generated $15.4bn from dispositions, with $8.3bn of that from its sale of Lukoil shares and $7.1bn from asset sales.

Paul Sankey, analyst at Deutsche Bank, notes that Conoco, by choice, and BP, by force, have been selling assets and shrinking this past year to strengthen their balance sheets. You can add Devon Energy to that list as well. More from Mr Sankey:

Judging from investor reaction, one questions whether this is the way forward  for some of the other Big Oils, with share prices trading at heavy discounts to implied break up/asset sale values. While I doubt ExxonMobil needs to follow that lead, Chevron, Shell and Total might face increasing investor frustration at their discount valuations. BP sold off more than $7bn in assets to Apache that had been “non core”. The question for Big Oils becomes, “Why are  you holding onto non core assets worth more to other companies?”

It is certainly a question worth thinking about.

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