ConocoPhillips Earnings: On The Tightrope Of Fear And Greed
Which plays to ConocoPhillips's strengths.
Conoco has spent much of the past two years undergoing a radical makeover after a stinging dividend cut in early 2016. In November, it laid out a strategy of balancing growth with dividends and buybacks within cash flow at oil prices of $50 a barrel. This is about as closely aligned with what investors are demanding as you can get, as Conoco's performance demonstrates:
On the other hand, as that chart also shows, Conoco's stock also seems to be more oil-fueled than most.
This was evident in several ways in results reported on Thursday. Cash flow, in particular, was strong, with Conoco easily funding both capital expenditure and dividends with cash from operations.
It also came through in Conoco's reserves figures. The company replaced 117 percent of its production last year organically (before counting acquisitions). Strikingly, it did this despite not sanctioning any major new projects. Rather, the bulk of it came from more-productive wells in Conoco's North American tight-oil operations, not only raising output but also effectively making more oil recoverable from below the ground.
Add in the impact of higher oil prices, though -- which also makes more oil recoverable by making it economic to do so -- and reserves replacement jumps to 168 percent.
Conoco benefits from higher oil prices in part because its realized price -- what it actually gets paid -- tended last year to move more favorably than the benchmarks. In the fourth quarter, for example, Conoco's price went up by $9.60 a barrel, beating the gain for both West Texas Intermediate and Brent crude oil. For most of 2017, Conoco realized higher prices than WTI -- which has suffered bigger discounts on logistical constraints -- in absolute terms.
All of which is great but does leave investors vulnerable to a couple of nagging questions; namely, will higher oil prices last, and will they lead Conoco to abandon its professed discipline?
On both counts, Conoco delivered a reassuring message on Thursday. Its emphasis remains squarely on returning cash to shareholders rather than splurging any windfall on a land grab. The company raised its dividend by 7.5 percent, taking the yield back up to an S&P 500-like 2 percent after a strong run in the stock. Share buybacks have accelerated, with this year's program now targeting $2 billion rather than $1.5 billion, an effective additional yield of 3 percent. Meanwhile, Conoco is sticking to its baseline oil-price assumption of $50.
This should allay any concerns raised by the $400 million bolt-on deal in Alaska that Conoco also announced on Thursday. This looks like an opportunistic deal with a motivated seller, Anadarko Petroleum Corp., to enhance Conoco's existing position there, rather than the beginning of a spree.
A drop in oil prices would no doubt take back some of the gains in Conoco's stock. Equally, though, the strategy of playing defense rather than offense, prioritizing payouts and keeping costs low, is the right one and should preserve value over time.
Moreover, while Conoco's shares have clearly enjoyed a re-rating upward over the past year, they still don't look that expensive against their closest peers. That, more than most things, should soothe any frayed nerves.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.
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