Optimism In ConocoPhillips Despite Poor Earnings Report

Multinational oil company ConocoPhillips (NYSE:COP) (COP) once again posted a higher than expected quarterly loss for Quarter 2. They have been forced to cut down their budget yet again from $5.7 billion to $5.5 billion. Earnings misses and the ongoing oil slump resulted in the stock’s poor performance in 2016, falling 13.9% year-to-date. However, ConocoPhillips remains an optimistic company that should be kept on the radar.

Earnings and Financial Position

ConocoPhillips reported a second quarter 2016 adjusted loss of $0.79 per share, steeping lower than Zacks Consensus Estimate of $-0.62. Revenues also missed the Zacks Consensus Estimate by nearly 16% and dropped $8.67 billion in comparison to 2015 Quarter 2. The company put up a 2016 second half net loss of $2.5 billion, freefalling down from the $93 million in earnings made in the same period a year ago.

A positive indicator in the company’s current financial position is their achievement in reducing debt levels by $800 million. The oil giant has also generated $200 million in asset sales, remaining on track for the planned $1 billion in asset sales proceeds for the year.

The company has cut its dividend down to $0.25 from $0.74 to further aid their financial position in successfully escaping the current oil climate.

Increasing Efficiencies in Operations

ConocoPhillips is in the midst of selling off its costly offshore exploration projects in favor of more efficient domestic operations. Drilling is taking place primarily in Texas through the Permian Basin and Eagle Ford, with lower costs and higher production being the catalyst behind this focus. While the oil giant plans to greatly reduce capital expenditure in the region, production is expected to persist on the same level. Management expects a margin growth of 3-5%.

The firm is setting forth an exit strategy to abandon its massive deepwater exploration projects for more cost efficient North American unconventional projects. It will still allow them significant access to inventory while greatly slashing costs of operations. Most recently, ConocoPhillips successfully exited their Senegalese offshore exploration project in a $350 million interest sale to Woodside Petroleum (WOPEY). The company will also exit their joint Nova Scotia offshore drilling venture with Suncor Energy (SU) and Royal Dutch Shell (LON:RDSa) (RDS.A). By 2017, ConocoPhillips will free $800 million which will allow better access to cash and flexibility with the aforementioned North American drilling operations.

Safe Haven for Oil Bulls

The company’s stock performance highly correlates with crude oil pricing. There is minimal risk outside of the commodity’s pricing that will have damaging effects on the stock price. Following crude oil’s bottom out in February, ConocoPhillips made a fantastic recovery with oil, as the stock shot up 28% to date since then.

The U.S. rig count is recovering rapidly as well, jumping from 11 to 341 rigs now online. This is a strong indication of where oil is headed, as major oil producers believe the bottom has already passed and now is the time to restart drilling activity. The general consensus of analysts suggests oil must rise above its current $40 range. As long as oil prices steadily increase, we are likely to see an extended rally in the stock price.

Hess Corporation (NYSE:HES) (HES) is another major oil player with a stock price strongly correlating with oil prices, riding the February oil rebound to a 47% increase in share price to date. The company is ranked as a “Buy” by Zacks.com.