Exploring For Dividends With ConocoPhillips

Mar.18.13 | About: ConocoPhillips (COP)

ConocoPhillips (NYSE:COP) isn't one of those high-flying, fast-growing growth stocks you carry around in your portfolio if you want capital appreciation at a fast rate. In all actuality since COP spun off Phillips 66 (NYSE:PSX) back on 01May13, COP is only up 4.53% excluding the reinvestment of dividends. What COP really is, is a high end dividend paying stock that moves at the speed of an iceberg. I design my portfolio with growth as my strategy, but I like to keep roughly 20% of the portfolio in dividend-growth stocks such as COP. COP is the largest independent exploration & production business of oil & natural gas and has been raising its dividend payouts for at least the past 10 years. This kind of dividend-growth consistency is what I look for in a dividend paying company and is why I like dividend paying companies like COP. The company is dedicated to "predictable returns" (which I interpret to be dividends) through organic growth as was stated by CEO Ryan Lance at the investor meeting back on 28Feb13.

To sustain the organic growth the company has primarily focused on the unconventional oil & gas plays, such as shales and oil sands. The company achieved 100,000 barrels/day out of the Eagle Ford Shale and oil sands in 2012, and each segment is still growing. Overall the company has 1.5 million barrels/day of production and 8.6 billion barrels of reserves. In addition, the company has several development projects which will grow top-line growth and margins which are good for increasing dividends. COP already has one of the highest dividend yields in the industry at 4.47%, however, many of COPs peers pay their dividends through free cash flow and there are concerns that COP may be facing a funding gap in the future to continue paying the high yield.

Mr. Lance asserts that the dividend is an important part of the COP investment story, even if it means selling assets to raise the cash for paying the dividends. He also maintains that the dividend is the #1 priority of the company. Currently there is a short term deficit relative to the capital program and dividend but the cash needs are being met through the selling of non-core assets, and since the beginning of 2012 COP has sold nearly $12 billion in assets. Such assets of the like are Cedar Creek Anticline Properties which were sold to Denbury Resources for $1.05 billion back on 15Jan13. This particular property had a net production of 13 thousand barrels of oil equivalent/day and the proceeds of the sale primarily went to developing the investments COP already has in the Bakken shale. These property sales are going to be used to bridge the cash-flow gap over the next couple of years in addition to the organic growth and increase in shareholder value through distributions.

The company is aiming to grow 3-5% each year in addition to increasing margins 3-5% each year which reiterates my opinion that this is not a high-flying capital appreciation stock, but more of the dividend variety. The increases in margins are going to grow the cash flows to be able to fund the capital program and the dividend. Those margin expansions are expected to come to fruition during 2013 in the form of the organic growth projects, namely the shale plays.


If you believe COP is dedicated to the dividend growth it says it is, you should expect continued divestitures of low performing assets with the company putting that capital raised to use through organic high margin projects, high margin asset purchases, dividends, and stock buybacks. Don't for one second think that these asset sales are going to make the price of the stock depreciate because the board certainly doesn't want to see their own personal value decrease, rather they would want capital appreciation in parallel with dividend appreciation. Personally I'm purchasing shares for the dividend portion of my portfolio but not all at once because I'm wary of current macroeconomics.


These are only my personal opinions. Please do your own homework because only you are responsible for what you invest in. Happy investing!

Disclosure: I am long COP, PSX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.