ConocoPhillips: What Is The Company Thinking?

| About: ConocoPhillips (COP)
This article is now exclusive for PRO subscribers.


ConocoPhillips rallies though the company remains unprofitable.

The company started increasing capital returns during the quarter though capital spending needs to grow.

Investors need to keep the perspective that stock gains aren't relatively impressive.

My investment thesis surrounding ConocoPhillips (NYSE:COP) has long focused on the cash flow equation. A company that is burning cash can not control their own destiny.

The stock has risen from my negative call at the start of September, but clear data points show that alternative plays were better. Ultimately though, the key focus in on what to do with the stock now at over $50 and some questionable decisions on cash flows.

One of the reasons that ConocoPhillips became an interesting play in the E&P sector was the dividend cut and following stock plunge. As the large integrated oil companies kept their dividends, ConocoPhillips had a better cash flow position.

Despite reporting another loss during Q4, the company actually returned to increased capital returns. The dividend was hiked 6% to $0.265 quarterly for a 2.1% yield. The shocking part was the decision to spend roughly $100 million on share buybacks after approving a $3 billion share repurchase plan back at the Investor meeting in November.

The cash flow situation is clearly enhanced with cash flow from operations excluding working capital changes up at $1.75 billion. Capital expenditures were down at only $1.0 billion and dividends paid at $300 million.

Source: ConocoPhillips Q416 presentation

Remember, the company has cut capital spending to the bone. At the same time, the oilfield services companies expect to retake some of the pricing cuts accepted during the oil downturn. Weatherford International (NYSE:WFT) claimed on the earnings call that pressure pumping prices are up 25% since the end of the year.

ConocoPhillips forecasts spending an average $1.25 billion per quarter during 2017. THe company will spend roughly $250 million per quarter more than the amount spent during Q4. The positive cash flows quickly disappear.

On the flip side of the equation is Freeport-McMoRan (NYSE:FCX) in the similar materials sector. The company has shifted even further into a positive cash flow position and is focused on paying down debt versus getting cute with capital returns.

While anybody long ConocoPhillips has made a decent return lately, the key is to keep the returns relative. Absolute gains are always a plus, but anybody in ConocoPhillips over the last quarter gave up the opportunity to own the better story at Freeport-McMoRan and numerous other material stocks.

COP Chart

COP data by YCharts

The key investor takeaway is that ConocoPhillips isn't out of the woods yet as shale drilling ramps up with oil around $50/bbl. At the same time, drilling costs are rising suggesting the company shouldn't be so cute by raising the dividend and repurchasing stock.

Investors should consider themselves lucky and realize that relatively speaking ConocoPhillips wasn't a good investment and remains that way up at $50.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.

Disclosure: I am/we are long FCX.

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.