ConocoPhillips (NYSE:COP) has been making the right calls right from the time the company separated its refining and marketing division into an independent company, Phillips 66. That has allowed it to concentrate on exploration and production businesses and invest in politically stable regions including the United Kingdom, Alaska and Mexico.
ConocoPhillips has an impressive history of dividend payouts and growth and should be a part of every income-based portfolio for retirement or otherwise.
ConocoPhillips is a global integrated company engaged in exploration, production, transportation and marketing of crude oil, natural gas, and bitumen. The company has assets in North America, Europe, Asia and Australia including North American shale and oil sands businesses. Formed after the merger of Conoco Inc. and Phillips Petroleum Company, it is a Fortune 500 company and also one of the largest pure-play exploration and production companies in the world.
In 2011, the company announced the separation of its upstream and downstream operations. The separation was completed in April 2012 and ConocoPhillips continues as a pure oil exploration and production company. Shareholders of the company received one share of the new company for every two shares held in the parent company.
Maintaining asset base
Oil companies need to be on a constant lookout for new sources to counter the natural decline in oil and gas in wells, the greatest enemy of oil production companies. Moreover, being a capital intensive business, keeping oil production steady is also necessary for maintaining capital expenses.
ConocoPhillips plans to spend $9 billion ($5.5 billion in Canada, $2.5 billion in Europe and $1 billion in Asia Pacific and Middle East) over the next five years to maintain its 170,000 barrels of oil equivalent per day. That is however not enough for mitigating the loss due to the natural decline.
Whereas ConocoPhillips' international investments are not enough to cover the natural decline in its overseas assets, development of U.S. projects cover the decline of both U.S. and international assets.
New development projects in the U.S. as well as internationally, will more than cover the natural decline and even increase annual production by anything between 3% and 5%. On March 19, 2013, the company and its partners announced a significant discovery in deepwater Gulf of Mexico. This year, the company plans to drill five exploration wells and may increase the number to eight. Depending upon that success, the company may mark more funds for extending deepwater projects.
On March 25, 2013, the company announced a second oil discovery in the same area. The 1,000 net feet of oil pay is of a quality that has not ever been discovered in the Lower Tertiary of the Gulf till date.
Production in Texas' Eagle Ford shale formation has been increasing since 2010 with the biggest increase coming last year. The Texas Railroad Commission announced that production increased 50% in January this year as compared to the year earlier boosted by drilling by ConocoPhillips and Chesapeake Energy Corporation (NYSE:CHK).
The company, along with its partners, British Petroleum (NYSE:BP), Shell and Chevron (CVX), is also proceeding with a two-year appraisal program for feasibility of developing a third phase of the giant Clair field, west of Shetland Islands.
In February this year, the company also announced an agreement with PetroChina Company Ltd. (NYSE:PTR) whereby PetroChina will acquire an interest in ConocoPhillips' two Western Australia exploration assets and establish a joint study agreement for unconventional resource development in Sichuan Basin in China.
ConocoPhilips announced its fourth quarter and full year 2012 results on January 31, 2013. The company reported Q4 2012 earnings of $1.4 billion or $1.16 per share against earnings of $3.4 billion or $2.56 per share in 2011. However, 2011 earnings included the earnings from the downstream operations prior to the separation of Phillips 66 on April 30, 2012.
Full year earnings for 2012 were $8.4 billion or $6.72 per share against $12.4 billion or $8.97 billion reported in 2011. Whereas 2011 earnings included 12 months' earnings of downstream operations, the figure for 2012 includes four months earnings of the separates division.
Competitors and others
Besides ConocoPhillips there are other companies in the oil and gas industry that one can look at. Occidental Petroleum Corporation (NYSE:OXY), for example, operates in oil and gas, chemical, midstream, marketing and other segments of the oil and gas operations. Valued at $65.93 billion, the company has a dividend yield of $3.13. The market believes that the company's stock is worth much more than it is currently available at, particularly if its cost-cutting efforts are continued. According to Barron's Occidental's share dipped when capital spending increased from $3.9 billion in 2010 to $10.2 billion in 2012. However, investors need to consider that Occidental trades at a high P/E of014.34 as compared to 9.91 of ConocoPhillips.
Kinder Morgan Energy Partners LP (NYSE:KMP), on the other hand, is a pipeline transportation and energy storage company in North America. The company has a comparable dividend yield of 5.86% and reported earnings of $1.65 per share. No matter how attractive the dividend yield looks, its stock is trading at a very high P/E of 53.49. Moreover, in early 2013, Kinder Morgan acquired Copano Energy, a company that has been making losses for three year in a row, after paying a good premium.
ConocoPhillips - A company that one can live on
Ten years ago, the stock was trading at around $19 and one could buy 50 shares for one thousand dollars. From October 22, 2002 to date, the company has paid a total of $19.86 per share. In addition, $1,000 invested ten years ago is now worth $5,854 (50 x 2 x $58.54). This could be even more for investors who had opted for a Dividend Reinvestment Plan.
Investors who had bought the company's shares ten years ago have got back the invested money by way of dividends alone. Their shares have also doubled due to a 2:1 stock split and have seen their investment gain 123%.
It has an uninterrupted history of handsome dividend payouts. In the last ten years, the company has increased its dividend by 65% - from $0.40 to $0.66. At the current market price of $58.84 per share, it has a dividend yield of 4.51%. The current trailing twelve month dividend payout ratio is 43.75%, a sign that the company has a policy of returning a good portion of its tangible profits to shareholders.
ConocoPhillips is an extremely investor friendly company. It is one of those stocks that one can live on.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.