Shares of ConocoPhillips COP have scaled a new 52-week high of $75.73 in yesterday’s trading session, before eventually closing a tad lower at $75.04, generating a healthy year-to-date rate of around 36.7%. The stock displays an impressive price movement both in absolute and relative terms. The company has had a great run on the bourses over a year, with its shares rallying in excess of 56.3%, outperforming its industry’s growth of 34%.
This Zacks Rank #3 (Hold) stock, having a VGM Score of A, has further price appreciation potential, with long-term earnings growth expectation of 9%, and looks poised to touch new highs in the coming period. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Let’s analyze the factors that are driving the stock and making it a promising pick in the rising oil environment.
An Unparalleled Portfolio
ConocoPhillips’s diverse portfolio of low-cost oil and gas assets certainly provides an edge over peers including Occidental Petroleum Corporation OXY, EOG Resources, Inc. EOG and Marathon Oil Corporation MRO, among others. The company has a good mix of conventional as well as unconventional assets, along with LNG and oil sands facilities.
Its conventional assets, including properties in Alaska and North Sea, involve moderate capex to maintain the production levels, as these assets have a lower decline rate. The firm’s LNG assets in Australia and Qatar position it well to supply natural gas to the Asian markets that are witnessing a boom in gas demand. Also, its oil sands holdings in Canada produce at a steady rate, not involving much spending to maintain the output levels, thus increasing the firm’s financial flexibility.
The acres that ConocoPhillips holds in the three big unconventional plays, namely Eagle Ford shale, Delaware basin and Bakken shale plays, are rich in oil. The company is planning to add six rigs in these prolific plays, in addition to the five that have been operating since 2017 and will continue till 2020. While these assets require higher capex owing to greater decline rate, these also boast greater growth potential than the traditional onshore and offshore oil and gas wells.
What’s worth noticing here is the fact that while most of the company’s peers have jettisoned bulk of their non-shale assets, ConocoPhillips still holds three classes of assets that lend it a competitive advantage. Notably, most of ConocoPhillips’ rivals have offloaded their traditional assets to focus solely on shale assets, which no doubt enhances growth potential but come with elevated capex spending requirements and higher decline rates in production levels. Hence, ConocoPhillips’s attractive asset mix portfolio ensures the right amount of diversification.
Strategic Divestment Strides
While the company still retains its core conventional assets, along with LNG and oil sands facilities, its strategies to divest non-core assets have paid off well. It is to be noted that during 2017, ConocoPhillips generated $16 billion from the asset sale program. Moreover, the company closed the divestiture of its Kenai LNG facility to Andeavor on Jan 31, 2018.
With the sale of Kenai assets, ConocoPhillips completed its retreat from the Cook Inlet region. The divestiture enabled ConocoPhillips to shift its focus to shale and North Slope region operations. Notably, significant opportunities are left for ConocoPhillips in the Eagle Ford shale where it owns about 3,400 undrilled locations that could lend access to almost 2.3 billion barrels of oil equivalent estimated potential reserves.
The company’s efforts to reshape its portfolio during the slump period, for boosting its financials and lowering its break-even level to less than $50 a barrel, are reaping profits at the moment. The boatload of cash coming its way via divestment strategies has strengthened its financials via lowering its leverage and increasing liquidity.
Strong Second-Quarter Results and Buoyant View
Higher oil and gas price realizations, along with operational efficiency helped the company post strong year-over-year results in the second quarter. Importantly, cash flow from operations came in at $3.34 billion during the quarter, almost twice the year-ago figure. Free cash flow, which is a key metric in gauging the financial health of the business, totaled $1.34 billion, which was notably four times the dividend obligations.
ConocoPhillips has raised its full-year 2018 production guidance to 1,225-1,255 thousand barrels of oil equivalent per day (MBOEPD) from 1,200-1,240 MBOED expected earlier. Its third-quarter 2018 production is anticipated within 1,215-1,255 MBOED. The upcoming projects such as the GMT-2, Bohai Phase 2 and Barossa are expected to be the key growth drivers.
With the addition of rigs in the three big unconventional resources, ConocoPhillips expects a cumulative average production growth rate of 22% in the 2017-2020 period. The company added that the probable surge in production will eventually help earn more than $2 billion of net cash flow in the said period.
Investor-Friendly Moves Evoke Optimism
Riding high on crude rally and strong fundamentals, it has been generating free cash flow and is committed to enhancing shareholder returns via dividends and buybacks. The company increased its dividend by more than 14% since 2016, when it slashed its payout amid the downturn.
Notably, ConocoPhillips has doubled its total share repurchase authorization to $15 billion, boosting shareholders’ value. As the company has achieved its debt ahead of schedule, ConocoPhillips can focus on channeling its cash flow for business growth and maintaining efficiency in operations.
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