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Is Conoco Sending Us A Warning About BP?

 March 18, 2009 10:04 AM


I am not the type of investor that puts a lot of faith into weak correlations and other far flung events or crazy theories. However, after reading the news coming out of international oil giant ConocoPhillips (COP: 37.60, I started thinking. As many of you know, ConocoPhillips has taken the worst beating out of any of the oil majors since the global recession started. This isn't earth shattering news, but what I do find interesting are the comments that are coming from management, and how it could potentially relate to one of their competitors, BP (BP: 39.35).The reason Conoco got me thinking about BP is the stark similarities between the two majors; I believe the companies are potentially the most similar of all the oil majors. Both companies have a larger than average exposure to natural gas in relation to crude oil. In particular, in the United States both are top 3 producers and have been for some time. Both of the companies also have joint venture exposure in Russia that has caused significant headaches in the past and probably will cause migraines in the future. This exposure has led to large multi-billion dollar losses for Conoco and could even result in the loss of assets due to nationalization.

Last week, Conoco announced that it will be lowering its capital expenditure budget for the fiscal year of 2009 from $15.3B to $12.5B in order to preserve capital that presumably will be needed to make reliable dividend payments throughout the upcoming year. Conoco also assured investors that "spending this year would adequately fund projects offering growth and developmental potential," (Courtesy of the Financial Times article from March 12th). The scary thing to me is how Conoco may have mismanaged its assets so poorly that it has become potentially cash strapped the year after crude oil prices doubled their previous all time high (at least in terms of nominal dollars). Obviously, the exposure to natural gas hurt Conoco more than the crude exposure, but natural gas prices mirrored crude prices closely on both the way up and down. This, in fact, is probably worse news for Conoco, as natural gas prices have not shown any haste in their recovery as opposed to crude oil prices.

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