The Oil Company Built To Survive The Bear Market

A Cash Generation Machine

Earlier this month, the company release third quarter earnings that were outstanding. While many peers struggled, for the third quarter ConocoPhillips reported:

• Free cash flow (FCF) generation of $1 billion.
• Repurchased $750 million of shares and paid $340 million in dividends representing a return of 41% of cash from operations (CFO) to shareholders.
• Q3 production (excluding Libya) of 1.3 million barrels of oil equivalent/day, which represented an increase of 7% year-over-year
• Announced a 38% increase in the quarterly dividend to $0.42/share, and $3.0 billion in planned 2020 share repurchases (~5% of the current market cap).
• Ended the quarter with $8.4 billion of ending cash and short-term investments.

In short, ConocoPhillips has been a shareholder friendly, cash generation machine despite oil prices that remain below $60.

The 10-Year Plan

Last week, the company held an Analysts and Investors Meeting at which they unveiled a 10-year strategic plan. Early in the presentation, they highlighted their remarkable transformation over the past three years:

Related: Leading Fund Managers Say Aramco Is Significantly Overvalued

Although the company is producing less oil – primarily because it is focusing on low-cost production – it has shown vast improvement across all important financial categories. Net debt is a quarter of what it was just three years ago, but the company has increased by 50% its oil and gas resource that breaks even at a $40 WTI price. No other independent oil and gas producer can come close to these financial measures.

Over the next decade, the company projects that it will generate about $50 billion in FCF if oil prices remain at $50/bbl. The company’s top stated priority is to maintain production and pay its dividend. Just behind that is annual dividend growth, while returning 30% of CFO to investors. The company projects a total return to shareholders through dividends and share buybacks over the next decade of $50 billion. This is substantial, given the current market cap of $65 billion.

With a lot of companies, you could take these projections with a big grain of salt. But because ConocoPhillips has been around a long time – and because the company has already demonstrated the kind of fiscal restraint that has allowed them to rise above its peers – you can have a higher degree of confidence that they will deliver.

This bear market in oil won’t last forever. But ConocoPhillips is built to survive it, and thrive once it ends.     

By Robert Rapier

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