Conoco Phillips’ $34 billion writedown makes me bullish

I read about ConocoPhillips taking a massive $34 billion writedown and my first reaction was glee.  Why?  Not because I hate big oil. Rather, this type of draconian response demonstrates that the glut of oil we now see will soon be a deficit. I see a buying opportunity.

The oil patch is notoriously volatile, with massive boom and bust cycles endemic to the industry.  But a vertical move to $147 per barrel followed by a crash to $33 is unprecedented — and so is the reaction.

ConocoPhillips, the third-largest U.S. oil company, said it will write down an estimated $34 billion of previous acquisitions including a stake in OAO Lukoil, and cut 4 percent of its workforce, after energy prices plunged.

The company plans to reduce the value of its equity investment in Russia’s Lukoil by $7.3 billion, Houston-based ConocoPhillips said today in a statement. Other asset writedowns totaling $1.3 billion will be recorded.

The biggest writedown, a $25.4 billion impairment charge in the oil and gas business, amounts to 87 percent of all the goodwill the company had on its balance sheet as of Sept. 30, according to Bloomberg data. The company plans to report its actual fourth-quarter results Jan. 28.

“It’s a pretty big number,” Jason Gammel, an analyst at Macquarie Securities USA Inc. in New York, said in a telephone interview. “It sounds like they’re writing almost the whole thing off.”

ConocoPhillips’s writedown exceeds the $30.2 billion in combined losses incurred by General Motors Corp. and Ford Motor Co. during the first three quarters of 2008, according to data compiled by Bloomberg.

In the third quarter of 2007, Detroit-based GM posted a record $39 billion loss after it wrote down the value of future tax benefits.

Oil futures in New York have fallen more than $110 since topping $147 a barrel in July, after recessions in some of the world’s largest economies crimped demand for diesel, gasoline, furnace fuel and chemicals.

Living Within Means

“We are positioning ourselves in the current business environment to live within our means in order to maintain financial strength,” Chief Executive Officer Jim Mulva said in the statement.

ConocoPhillips had about 33,800 workers at the end of 2008, said Becky Johnson, a company spokeswoman. Four percent of the company’s workforce is 1,352 employees. The company also expects to reduce its contractor headcount, Mulva said in the statement.

The announcement was made after the close of regular trading on U.S. stock markets. ConocoPhillips fell 40 cents, or 0.8 percent, to $48.98 at 5:44 p.m. in after-hours trading.

ConocoPhillips said it will have a 2009 capital expenditure budget of $12.5 billion, 18 percent less than the $15.3 billion authorized for 2008.

The new budget includes loans to affiliates and contributions to a venture with Canada’s EnCana Corp. The budget includes about $10.3 billion for exploration and production and some $2 billion for refining and marketing. ConocoPhillips and EnCana are expanding an Illinois refinery to boost Canadian heavy-oil processing.

These are huge cuts in capex that are bound to be a constraint when the economy turns. Far from viewing this as a negative, I see a temporary supply glut that is likely to swing massively in the other direction when reflation takes hold. Oil prices in the 30s is as extreme a low as oil prices at $140 were an extreme bubble high. The consensus is that low prices are here to stay because most oil stocks are trading at ridiculously low multiples. ConocoPhillips sports a P/E of 4x earnings.

However, in my view, low prices have invited cuts in oil sector investments, which means higher prices down the line.

Source
ConocoPhillips to Take $34 Billion Charges, Cut Staff – Bloomberg.com