Why ConocoPhillips Will Keep Pumping out Dividends for Years

ConocoPhillips has refocused its portfolio on booming U.S. oil production, and the company and its investors will reap years of rewards.

Jul 14, 2014 at 10:01AM

Over the past year, ConocoPhillips (NYSE:COP) has taken investors through a transformation. Because of booming production in the United States and increasingly risky conditions overseas, ConocoPhillips is really getting domesticated. It's sold off major assets abroad and doubled-down on premier U.S. plays such as the Eagle Ford, Bakken, and Permian Basin.

This makes perfect sense, since oil production here is soaring. The U.S. Energy Information Administration reported that American oil production climbed 15% last year. The U.S. produced a grand total of 7.5 million barrels per day, a level not seen since 1989.

Because of this, ConocoPhillips management looks brilliant for its strategy to sell off risky international assets and reinvest the proceeds in promising domestic fields.

Here's ConocoPhillips' strategy, and why it's working out so well.

ConocoPhillips reshuffles its portfolio
ConocoPhillips is depending heavily on domestic fields for future production and development. To do this, it's unloaded several overseas assets that it deemed non-critical to future growth, primarily because those assets are located in areas of the world with heightened instability. Plus, focusing on the United States makes perfect sense because domestic production is soaring.

Proceeds from ConocoPhillips' divestments last year totaled $7 billion from locations such as Kazakhstan, Algeria, and Nigeria, which were reinvested primarily in U.S. oil fields. Continuing political tensions and unrest prompted the move. In addition, ConocoPhillips' results last year were once again adversely affected by poor performance in the company's Libyan operations.

Other companies are feeling the effects of supply disruptions out of Libya. For example, Hess Corporation (NYSE:HES) production was significantly affected by worsening conditions in Libya last year. Extended shutdowns caused from civil uprisings in Libya resulted in a 23,000 barrel-per-day drop in first-quarter production.

However, excluding Libya and asset disposals, Hess grew production by 11% last quarter. The bulk of this growth was due to strength from domestic fields such as the Bakken shale, where Hess brought 30 more wells on-line. Production there now clocks in at 80,000 barrels per day for Hess.

Gearing up for the future
With billions in cash on hand as a result of its significant divestments, ConocoPhillips is plowing tremendous resources back into the United States. The strategy is clearly working. ConocoPhillips produced 28% growth in adjusted earnings in the first quarter, despite losing $21 million from its "other international" segment, which includes Libyan operations.

ConocoPhillips' production grew 3% last quarter, or 41,000 barrels-per-day more. Most of the growth came from the U.S. fields. For example, the company's Lower 48 segment grew production by 50,000 barrels per day. This more than made up for declining production elsewhere.

In fact, its domestic oil production jumped 16% year over year. It reached a new peak daily production level in the Eagle Ford. And, it's making progress in drilling and testing at additional locations in the Permian Basin.

ConocoPhillips is also benefiting from margin improvements per barrel, which management specifically attributes to its portfolio shift. ConocoPhillips realized a price-normalized cash margin of $30.24 per barrel in the first quarter, up 13% year over year. Management credited a full five percentage-points of this growth to its reshuffled portfolio.

Paving the way for shareholder rewards
In response to disappointing production overseas, ConocoPhillips decided to sell off assets in risky international geographies. Afterwards, the company reinvested the proceeds in exploration and production activities in great domestic fields such as the Permian Basin and Eagle Ford shale. This has worked out exactly as management had intended.

As a result of its success, ConocoPhillips is committed to returning value to shareholders with a compelling dividend. The stock yields 3.25%, and as production and earnings steadily increase, so do the dividends.

ConocoPhillips gave investors a 4.5% dividend increase last year, and it's now been a full year since the last dividend raise. That means investors should fully expect another solid dividend increase in time for the company's next declared dividend.

If you're looking for a company taking full advantage of booming oil production in the United States and a compelling, growing dividend, look no further than ConocoPhillips.

Top dividend stocks for the next decade
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.

Bob Ciura has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers