What does ConocoPhillips’s (NYSE:COP) Balance Sheet Tell Us About Its Future?

Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as ConocoPhillips (NYSE:COP) a safer option. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. However, the health of the financials determines whether the company continues to succeed. I will provide an overview of ConocoPhillips’s financial liquidity and leverage to give you an idea of ConocoPhillips’s position to take advantage of potential acquisitions or comfortably endure future downturns. Note that this information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into COP here.

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Does COP Produce Much Cash Relative To Its Debt?

COP has shrunk its total debt levels in the last twelve months, from US$20b to US$15b , which also accounts for long term debt. With this reduction in debt, COP currently has US$7.6b remaining in cash and short-term investments , ready to be used for running the business. Additionally, COP has generated cash from operations of US$13b in the last twelve months, resulting in an operating cash to total debt ratio of 86%, meaning that COP’s operating cash is sufficient to cover its debt.

Can COP meet its short-term obligations with the cash in hand?

Looking at COP’s US$7.4b in current liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.79x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Oil and Gas companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.

NYSE:COP Historical Debt, April 16th 2019
NYSE:COP Historical Debt, April 16th 2019

Can COP service its debt comfortably?

With a debt-to-equity ratio of 47%, COP can be considered as an above-average leveraged company. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Consequently, larger-cap organisations tend to enjoy lower cost of capital as a result of easily attained financing, providing an advantage over smaller companies. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. As a rule of thumb, a company should have earnings before interest and tax (EBIT) of at least three times the size of net interest. For COP, the ratio of 15.2x suggests that interest is comfortably covered. High interest coverage serves as an indication of the safety of a company, which highlights why many large organisations like COP are considered a risk-averse investment.

Next Steps:

COP’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around COP’s liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven’t considered other factors such as how COP has been performing in the past. You should continue to research ConocoPhillips to get a better picture of the large-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for COP’s future growth? Take a look at our free research report of analyst consensus for COP’s outlook.
  2. Valuation: What is COP worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether COP is currently mispriced by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.