ConocoPhillips (COP) is up about 18% in the past six months, and keeping in mind the improving economic conditions, I believe the stock will continue to move higher. The stock hit its all-time high of $74 per share in mid-November, but it was unable to hold its position. The shale-plays have resulted in a complete revamp of the natural gas segment of the energy sector - for a long time, the U.S. has been an importer of natural gas, but the shale plays have resulted in oversupply of the natural gas in the local market. As a result, the U.S. is now an exporter of the natural gas, and the companies with natural gas assets are looking to get export licenses.
New Export License: A Better Direction to Move in?
ConocoPhillips is looking to move to more politically stable areas that have better regulatory framework, and getting a natural gas export license is the right way to move forward in my opinion. The company has recently applied to resume its export license with the Department of Energy of U.S. for a period of 2 years. The company has plans to restart its LNG plant at Nikiski, Kenai Peninsula in order to start the export of LNG on seasonal basis. This is an incredible move and it should have been made earlier. The worldwide market for LNG has been developing in the recent years. Especially South East Asia has a strong demand for LNG and it's likely to get even stronger. However, as the operations are starting just now, we would most like see some real revenues in the coming year. Natural gas market is more of a seasonal market and it takes a hike in winters. Unfortunately, the company would not be able to supply gas for a major part of winters.
Australia Pacific LNG
Beside Kenai Peninsula, the company has huge natural gas interest in Australia. ConocoPhillips has a joint venture with Origin Energy and Sinopec with shares of 37.5% and 25%, respectively. ConocoPhillips and Origin are jointly constructing a $24 billion setup to liquefy natural gas to meet the increasing demand of Asia, while Santos Ltd. (STO) is constructing an $18.5 billion setup. If we take out this venture from the picture, these setups would need about 87 miles (140 Kilometers) of extra pipelines and several connecting points to supply their gas to Curtis Island plants to prepare it for the export.
With this joint venture, consider the amount of costs they would reduce by not having to build 87 miles of pipelines and other connecting points. This cost reduction would allow ConocoPhillips and other partners to either have more profit margins, or they could sell their product at a lower cost so as to gain a larger market share and gaining even more profits by achieving economies of scale.
Dividends and Cash Flows
One of the most attractive features of COP is its dividend yield - the stock pays an annual dividend of $2.76 per share, resulting in dividend yield of about 4%. The dividend payments have been around $3.5 per year for the company over the past three years. However, at the same time, capital expenditures have been rising - as a result, free cash flows for the company have been falling over the past three years. At the end of last year, ConocoPhillips had negative free cash flows of $250 million. However, for the trailing twelve months, the free cash flows have gone up and stand at over $1.3 billion, indicating an improvement in cash flows. Capital expenditures in the past twelve months have been the highest in any of the past four years. The company is generating good cash flows and future exports of natural gas a steady production from politically stable areas will allow the company to strengthen its cash flows in the future. As a result, we will probably see an increase in dividends over the next twelve months.
ConocoPhillips is an extremely attractive investment in my opinion - both for the income investors as well as growth investors. As I mentioned above, the company will be able to increase its dividends due to strengthening cash flows and increased production from stable environments will allow the company to report higher earnings.