Here's How ConocoPhillips' Formula for Success Pays Off

Exploration and production giant ConocoPhillips (NYSE: COP  ) is reaping the rewards of independence. After spinning off its downstream unit, Conoco is now an upstream pure-play, and its results reflect the benefits of being unchained from refining. The same holds true for other E&P majors like Occidental Petroleum (NYSE: OXY  ) which are not integrated. Both Conoco and Occidental performed very well last year thanks to their independent focus, unlike the integrated majors which continue to suffer from a horrible climate for refining.

ConocoPhillips has a lot to offer you, especially if you're the kind of investor that prefers steady growth and hefty dividends. Here's what allows ConocoPhillips to post such strong results.

Oil to the rescue
As opposed to the integrated energy companies that are busy trying to turn around their deteriorating downstream units, ConocoPhillips is focused simply on increasing production of oil and gas. That task is made even easier because of its foothold in some of the premier areas of production in the United States, such as onshore fields like the Permian Basin and Eagle Ford, as well as deep-water plays like the Gulf of Mexico.

More specifically, ConocoPhillips is focusing heavily on oil production, and the results speak for themselves. First-quarter oil production jumped 16% year over year, thanks to its strong assets. The company reached new peak production rates in the Eagle Ford development, where production hit 163,000 barrels per day. In all, total production from the Permian Basin and Eagle Ford soared 41% year over year.

Source: ConocoPhillips web site. http://www.conocophillips.com/newsroom/Pages/image-gallery.aspx

The decision to focus intently on oil production is echoed across the independent E&P space. Close peer, Occidental Petroleum, shook things up earlier this year when it revealed it would spin off its California assets, where its natural gas operations are held, into a separate business. This is a major move, since its California assets comprised about one-fifth of its total production last year.

Going forward, Occidental's remaining assets will be almost entirely oil-focused. This makes sense, since Occidental is such a major oil producer with huge operations in the best-producing regions in the country. Occidental holds a very large presence in Texas, where the Permian Basin lies. Occidental itself accounts for 16% of all oil produced in the Permian Basin.

ConocoPhillips' strategy to lean so heavily on oil is paying off in two ways. Not only is production increasing on an absolute basis, but it's growing its margins as well.

Profitability expanding
In the first quarter, Conoco realized an average price per barrel of $71.21. This resulted in a 13% improvement in cash margin per barrel, a full 5% of which management attributes to its portfolio shift. Strong operational performance in terms of increased production, as well as increased profitability, drove solid overall results. ConocoPhillips increased adjusted profits by 28%, to more than $2.2 billion. This compares very well to the integrated majors like ExxonMobil, which are still posting declining profits due almost entirely to falling refining earnings.

Further growth is likely throughout the year, too. That means that the good times aren't about to end for ConocoPhillips. It continues to expand its inventory of organic growth opportunities, including new positions in the Permian Basin. In addition, ConocoPhillips is increasing rig counts in Alaska and is progressing nicely at its Surmont development in Canada, which is now 68% complete.

The Foolish conclusion
While the integrated majors continue to wallow with declining profits from refining activities, exploration and production giant ConocoPhillips is thriving. Without the anchor of a downstream unit weighing it down, it's smooth sailing ahead. ConocoPhillips is posting strong growth across all metrics important to an E&P, such as production, margins, and profits.

ConocoPhillips' independence is paying off considerably, which makes it an ideal pick for investors hoping to escape what ails the integrated companies. ConocoPhillips will further increase production this year, thanks to its premier positions in the Permian and Eagle Ford onshore developments. With all this in mind, 2014 is shaping up to be a great year for ConocoPhillips and its investors.

Conoco also competes nicely with regards to providing a dependable dividend yield
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That’s beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor’s portfolio. To see our free report on these stocks, just click here now.


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