2023-12-31 03:29:24 ET
Summary
- ConocoPhillips has a unique portfolio of assets, and it's taken advantage of lower prices in recent years to acquire several more.
- The company has some of the most reliable assets in the best jurisdictions, meaning it trades at a premium, but one that's deserved.
- The company remains committed to shareholder returns, both through business growth, and dividends/repurchases.
- The company's lack of a plan to handle climate change in its long-term business model is a substantial risk.
ConocoPhillips ( COP ) is among the largest pure-play upstream oil companies in the world, with a market capitalization of more than $100 billion. The company recently made a final investment decision to invest in the Willow Project , a multi-billion dollar project, that'll eventually produce 600 million barrels of oil.
As we'll see throughout this article, ConocoPhillips has strong growth prospects that make it a valuable investment.
ConocoPhillips 3Q 2023 Highlights
The company had a strong quarter.
It managed to increase dividends by 14%, and now has an almost 4% dividend yield as the basis of its shareholder returns. It's also completed purchasing the remaining 50% interest in Surmont oil sands for $3 billion and signed a 15-year re-gasification agreement at the Netherlands Gate LNG terminal.
These projects show the company taking advantage of its market position and cash flow to expand its business.
Financially, the company has continued to invest heavily in its business, with $5.5 billion in CFO and $2.9 billion in FCF. The company continued to pay its strong dividends and also repurchased $1.3 billion of shares in the quarter. That's an annual shareholder returns in the double-digits.
The company has continued to streamline its operations and integrate several large acquisitions, while protecting its balance sheet, and continuing to invest in its operations.
ConocoPhillips Cash Flow
The company is focused on spending its cash flow while also protecting its balance sheet.
Over the most recent quarter, the company's net cash position decreased by $0.1 billion, counting new debt. That was despite annualized investments of $10 billion in its business, and the company's more than $10 billion annualized in shareholder returns. These two numbers together show that the company has >$20 billion in annual capital return ability.
It was also a tougher quarter for natural gas prices, although oil prices did remain fairly strong. It's worth calling out here that ConocoPhillips isn't the cheapest oil company in the world. The company has strong cash flow, but there does exist plenty of other crude oil companies with higher cash flow yields.
A big part of what you are getting with an investment in the company is reliable management committed to sensible growth along with strong assets in reliable jurisdictions.
ConocoPhillips Guidance
The company is aiming to finish the year strong.
For the full year, the company is guiding average production of 1.82 million barrels / day, although it's expecting strong production for the end of the year at 1.88 million barrels / day. Adjusted operating costs are expected to be $8.6 billion and capital expenditures are expected to be $11 billion.
The company took much more advantage of Covid-19 related price discounts for acquisitions than other companies in the industry did, so integration and synergies will continue. We expect that to be increasingly reflected in the company's results in the upcoming years.
Thesis Risk
The largest risk to our thesis is crude oil prices. ConocoPhillips is profitable, but oil prices are a complex industry that have been negatively impacted by increased production. At the same time, long-term demand remains questionable. That could hurt long-term shareholder returns and the ability to continue growing returns.
The second risk is ConocoPhillips lack of adjustment to climate change. The company continues to buy assets, especially more polluting ones like Canadian oil sands. That makes the company susceptible to future regulation that could hurt its ability to continue operating with the same profit margins. That's worth paying close attention to.
Conclusion
ConocoPhillips has an impressive portfolio of assets. The company has expanded substantially with a number of mid-sized acquisitions in recent years, and production is now approaching 2 million barrels / day going into the close of the year. At the same time, the company has maintained its efficient operations and commitment to shareholder returns.
However, the company isn't the cheapest company out there. The market recognizes a great management team and history of results, and especially in uncertain times in a tough industry, is willing to pay a premium for that. Fortunately, lower prices still mean a lower share price, and with the company down almost 10% from its peak, now is a solid time to invest.
We recommend taking advantage of current weakness and especially future potential weakness should prices drop further to build up an investment in ConocoPhillips.
For further details see:
ConocoPhillips Deserves Its Higher Share Price