by Johnny Duncan
Sometimes it is great management practices that make a company attractive and causes a company to be positioned in the right place at the right time. Still, other times it is a fluctuation of markets or a tragedy a world away. With ConocoPhillips (COP), it is a combination of all of these and more. I believe this to be a company to own based on a couple of key factors.
First, unlike competitors Exxon Mobil (XOM), Chevron (CVX), BP (BP), Shell (RDS.A), and Total (TOT), ConocoPhillips, because of its recent spinoff of Phillips 66, has become a more focused upstream energy company investing about $15 billion in capital. While there may be some pros and cons to the spinoff, ConocoPhillips will indeed gain more traction with the lightened load and the more intense focus. Second, ConocoPhillips has been consistent in generating great returns for investors. Since 1980, the company's shares returned an average of 11.5% per year. Of course, dividends made up a large portion of those returns, about 80%, but still not too shabby.
The management of a company gets a lot of the kudos for the returns it brings to investors, but sometimes a company can have lady luck fall in its lap. Recently, ConocoPhillips was able to fire up a liquefied natural gas (LNG) plant it had previously considered moth-balling. The plant in Nikiski, on the Kenai Peninsula of Alaska, has resumed exporting LNG to Asia. This comes as a result of the earthquake and tsunami that hit Japan back in March of 2011 creating a market opportunity for ConocoPhillips. The company sent out a cargo shipment last month to Asia and expects to send five more this year. The Nikiski plant was once the sole supplier to Japan when it began exports in 1969 and was the largest of its kind in the world.
The company will review the life of the plant between now and when the plant's export license expires in March. This is an unusual circumstance, but when these things happen, it is the wise business leader that recognizes and accepts these opportunities. ConocoPhillips' leader, CEO Ryan Lance is just that bold leader. He recently told an audience OPEC oil ministers at the OPEC policy-setting meeting in Vienna, that North America could become self-sufficient in oil by the next decade. Lance said, "In 1990, North American reserves and production were falling, but thanks to unconventionals proved reserves have risen 68% since then. North America could become self sufficient in oil as well (as gas) by 2025." While his marks are causing a stir, his boldness is defining ConocoPhillips.
In May, ConocoPhillips created Phillips 66 (PSX) by completing the spin-off of its refining/sales business into a separate, independent and publicly traded company. This has left ConocoPhillips with a less diversified business, but one that is clearly more focused on upstream services. This means that the company will be spending more capital acquiring more assets which may put a burden on capital expenditures in the short term, but will allow for bigger payouts in the long run.
Before, during, and even after the spinoff, the company has divested $20.2 billion of non-strategic assets with $1.1 billion just in the first quarter of 2012 and plans to sell off $10 billion worth of properties this year. Some of the pullouts are not just tied to the selling of assets. The company recently pulled out of Turkmen negotiations and closes its Turkmenistan office because of difficulties over exports of potential natural-gas output and because of issues with the Central Asian geopolitical environment. This is another example of streamlined focus and cutting of potential losses. Another divestment is the deal for ConocoPhillips and Santos to sell a minority stake in the Caldita and Barossa gas discoveries offshore Australia to SK E&S. The deal is worth $520 million and it means that ConocoPhillips will reduce its stake by 37.5% and Santos by 25%.
ConocoPhillips is still ranked in fifth place by U.S. Energy Information Administration (EIA) barely behind Chesapeake (CHK) and Encana (ECA) as top producers of wet gas reserves. These natural gas producers haven't sat around waiting for natural gas prices to recover, but some have shed some of their holdings while seeking crude oil, and others have tried to tough it out.
According to the EIA, there are about 2.9 trillion cubic feet of natural gas in storage today. At its high point in 2008, natural gas sold for about $11.30/thousand cubic feet, about a third below the all-time high of about $13.40 in October of 2005. The most recent low is $1.95 in April of this year. Most natural gas producers have stopped hoping for a price comeback and have started a cutback on production in an effort to kick up prices. ConocoPhillips still has its reserves and has thankfully found some buyers, but not enough. This means that with the decrease in supply, prices should begin creeping back up to a normal range. Some experts predict that could be as early as this winter, bringing even more profits to the ConocoPhillips' coffers.
With the company's spinoff, ConocoPhillips financials have taken a hit, but only in the capital expenditure and cash flow departments, and only temporarily. ConocoPhillips reported first quarter 2012 earnings of 2.02 per share, exceeding last year's first quarter results by 10.99%. The company had first quarter 2012 revenues of $56.13 billion, 10.03% below the prior year's first quarter results, and had revenues for the full year 2011 of $251.23 billion, 26.46% above the prior year's results.
Following the guidelines of good investment decisions, ConocoPhillips will not disappoint. Good management, good returns, and good, smart plays are helping this company to keep bringing smiles to investors.