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.

ConocoPhillips to Take $34 Billion Charges, Cut Staff –

  1. mL says

    Hi, Ed.

    What makes you think oil at 30s are extremely low? Can't you remember oil was $10 in 1998?
    There are signs that companies rent supertankers to hoard oil. The spot price is about $36 while the futures at NYMEX $42.57 March & $47.02 April. That is if you can store the oil for two/three months you can gain 16.6-30% minus the rents & running cost. Good return without much risk. buy oil at the spot market now and store it in somewhere for 2-3 months.

    EconomicPic raised why the OPEC not save the oil themselves for two/months and earn the extra 30% more later. He suggested it is because the OPEC countries are desperated to get short money to solve their immediate problems.

    Oil in 1998 in average was $10. Given 3% of annual inflation, oil can get down to $13.5. Of course, it is extreme and unrealistic. I believe mid 20 is the bottom and probably will touch early 20.


  2. Edward Harrison says

    Hi mL, I'm with you on oil prices dropping to the mid 20s (…so I am not really saying that the oil patch is going to rise overnight per se. But I am saying that I see $25 as a cyclically low price.

    The $10 number is an extreme example of a cyclical low. I don't see oil falling to those levels again. (I didn't anticipate $35 either, so what the heck). Interestingly, my bogey for oil, $25, is the midpoint of the old OPEC $22-28 optimal range before oil started to go through the roof.

    Oil is very volatile, but I am a believer in the commodity bull market returning after the emerging economies work their way through this crisis. That includes all industrial commodities and oil as well.

  3. mL says

    my ??

    No economy recovery = no inflation
    no inflation = bear in commodity

    After the house bubble busted in Japan in 1990, there is still no sign that Japan's economy gets any better. Why would you think the U.S., the UK and europe can recover in a few years? China and India without the rest of the world are difficult to recover and push the commodity market up.


Comments are closed.

This website uses cookies to improve your experience. We'll assume you're ok with this, but you can opt-out if you wish. Accept Read More