ConocoPhillips’s (COP) total debt-to-equity ratio, or leverage, has risen more than two times to ~79% in the last two years. This level of leverage is on the higher side when compared with the oil and gas industry median of ~66%. ConocoPhillips’s peers Marathon Oil (MRO), EOG Resources (EOG), and Devon Energy (DVN) have debt-to-equity ratios of ~38%, ~58%, and ~144%, respectively.
In this part, we’ll study reasons behind the steep rise in ConocoPhillips’s total-debt-to-equity ratio, or leverage, in the last two years.
In 3Q16, ConocoPhillips reported total debt of ~$28.7 billion, higher by ~35% when compared with its total debt of ~$21.2 billion at the end of 1Q14. In 1Q16, ConocoPhillips reported the highest-ever debt of ~$29.5 billion since 3Q09.
One thing that is not working in ConocoPhillips’s (COP) favor is the lower crude oil (USO) (UWTI) (DWTI) and natural gas prices (UNG) (UGAZ) (DGAZ). Lower crude oil prices have resulted in a steep decline in ConocoPhillips’s total profit margin as well as caused COP to take non-cash impairment charges related to its proved and unproved reserves, which caused a declining trend in ConocoPhillips’s retained earnings since 4Q14. From 3Q14 to 3Q16 ConocoPhillips’s retained earnings have fallen from ~$45.5 billion in 3Q14 to ~$31.9 billion in 3Q16.
Due to this ~$13.6 billion decline in retained earnings coupled with a ~$5.4 billion decline in other equity, ConocoPhillips’s total stockholder equity has fallen from ~$55.3 billion in 3Q14 to ~$36.2 billion in 3Q16.
Next, let’s take a look at an interesting chart that reveals how negative changes in ConocoPhillips’s retained earnings have affected its stockholder equity.