Nothing like a holiday weekend to soften the blow of bad news. Add in another day for a presidential inauguration, and it’s hard to see how ConocoPhillips Corporation (NYSE:COP) could have planned better to release its sorry interim update last Friday.  The biggest bombshell in the report was Conoco’s expectation that itwould cut 4% of its workforce (about 1,300 jobs) and take a $100million hit to its fourth quarter 2008 results to pay for the firings.The company also plans to reduce its contract workforce.

The 2009 capital budget totals $12.5 billion, over $10 billion of whichwill go to E&P. A year ago, Conoco announced a capital budget for2008 of $15.3 billion, and according to the company’s third quarterresults, Conoco has spent about $10.5 billion on capex thru October2008.

The company also announced that it would take a non-cash $25.4 billion"after-tax impairment to goodwill related to our E&P segment." Atthe end of the third quarter, Conoco’s balance sheet showed goodwill at$29.2 billion. Add in another $8.6 billion in impairments to Conoco’sLukoil investment and other investments, and the total impairmentcharge reaches $34 billion. That’s not chump change, even for an oilcompany.

What the company is doing is reducing the value of its reserves basedon current and expected future pricing. At the end of the thirdquarter, Conoco’s total assets amounted to $184.6 billion. The companyjust reduced the value of those assets by about 18%.

Perhaps the worst news comes at the end of Conoco’s update. The companyexpects its net reserves replacement ratio for 2008 to be 80%-85%. Thecompany is producing more than it is replacing, and doing it for lowermargins.

The company’s market cap at Friday’s closing share price is about $73.6 billion. That number will go down today.

Paul Ausick
January 20, 2009

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