ConocoPhillips: New Focus On Shareholder Returns Highlights Its Financial Strength

Summary

• ConocoPhillips' new focus on shareholder returns and its ability to provide these returns at current prices show its strength.
• The company's acquisition of Concho Resources significantly increases its impressive low cost portfolio.
• ConocoPhillips will generate substantial dividends and continue to buy back shares.
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ConocoPhillips (NYSE:COP) saw its share price jump up recently on the back of the announcement that it was resuming its buyback program at a $1.5 billion annualized revenue. That's a significant amount, it's enough for the company to repurchase more than 2% of its shares annually. As we'll see in this article, that's on the back of a broader shareholder return plan that helps highlight how the company is undervalued.

ConocoPhillips 2020 Results

ConocoPhillips has respectable 2020 results despite it being an incredibly difficult year for the company.

ConocoPhillips 2020 Results - ConocoPhillips Investor Presentation

ConocoPhillips took advantage of the downturn to invest in Concho Resources (CXO), something we were a big fan of. That allowed the company to acquire 9 billion barrels of low cost of supply resources, while high-grading its portfolio, allowing the company to improve its overall market positioning. The company also managed to commit to the Paris climate framework and return 53% CFO.

Financially, the company had a $1 billion adjusted loss, not surprising giving the collapse in prices. However, the company still managed to generate $0.5 billion in FCF + $1.3 billion of disposition proceeds. It managed to take advantage of the downturn to pay $1.8 billion in dividends and repurchase $0.9 billion in shares with ending cash of $7 billion.

The company has focused on maintaining strength in its operations and continuing production of almost 1.12 million barrels/day.

ConocoPhillips 2021 Operating Plan

ConocoPhillips 2021 operating plan, post acquisition, comes with the plan to generate substantial production and rewards.

ConocoPhillips Guidance - ConocoPhillips Investor Presentation

The company's full-year production guidance is ~1.5 million barrels/day with ~$5.5 billion in operating capital guidance, the most of which is the Lower 48. The company's capital guidance will be spread across primarily its new shale items, with a significant amount near Concho Resources. The company also has significant Alaska and other capital spending.

This production can help drive significant cash flow and shareholder capital returns. The company's capital spending guidance will come out to $10/barrel. The company's dividend will be ~$5/barrel. At $60+/barrel Brent with low breakeven, the company should see strong cash flow and the ability to generate strong shareholder rewards.

ConocoPhillips and Concho Resources

ConocoPhillips' best move in 2020, in our view, was the acquisition of Concho Resources.

Concho Resources - ConocoPhillips Investor Presentation

The ConocoPhillips and Concho Resources merger represents a major move for ConocoPhillips into the Permian Basin. The combined position of ~700 thousand net acres of unconventional assets will be impressive and low cost supply. We recommend reading our article discussing the acquisition of the company in detail here.

ConocoPhillips Shareholder Returns

Putting all of this together, ConocoPhillips has the ability to drive substantial shareholder returns.

ConocoPhillips Shareholder Returns - ConocoPhillips Investor Presentation

ConocoPhillips has the ability to drive substantial shareholder returns with the combined company. At $40/barrel WTI, the company's pro forma CFO is ~$7.65 billion growing to $10.65 billion at $50/barrel WTI. With current prices of more than $60/barrel WTI, the company would have nearly $14 billion in CFO.

At $39/barrel WTI, the company can cover its sustaining capital, base dividend, and dividend growth. At $50/barrel, it can focus on additional distributions and CFO growth. Long term, ConocoPhillips has an almost $75 billion market capitalization and, past sustaining capital, has $9 billion in FCF. That means a FCF yield of ~12% at current market prices.

That FCF yield is substantial allowing the company to grow, improve its balance sheet, and generate strong shareholder rewards. This combination of things makes ConocoPhillips an exciting investment.

ConocoPhillips Risk

ConocoPhillips' largest risk, partially expanded by its recent acquisition, is oil prices. The company's breakeven is $39/barrel WTI and prices have shown a clear ability to go below that during COVID-19. We expect the company will be able to generate incredibly strong returns at current prices, however, there's no guarantee that this'll continue.

Conclusion

ConocoPhillips has an impressive ability to generate substantial shareholder returns. The company, at current WTI prices, has a 12% FCF yield. That's after the company's substantial sustaining capital representing strong continued investment in its business. The company can comfortably cover its base dividend and growth at <$40/barrel.

Going forward, we expect ConocoPhillips to continue generating substantial shareholder returns. The company will be able to continue paying its dividend, ~3% and growing, while using opportunistic acquisitions and acquiring shares as it did through 2020. That's impressive and shows ConocoPhillips' overall potential.

Analyst’s Disclosure: I am/we are long COP. 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.