ConocoPhillips (COP -0.43%) might not be the fastest growing oil and gas company in the world. However, instead of excitement, the company offers its investors stability and strength. We can see this strength by taking a deeper look at the company's balance sheet, but one of the reasons its balance sheet is so strong is that ConocoPhillips produces a lot of cash. Today, I want to drill down a little deeper to see what it does with all its cash.
The numbers that matter
A cash flow statement is made up of three parts. It contains cash flows from operating activities, investing activities and financing activities. We'll start right at the top and quickly analyze ConocoPhillips' operating cash flows by looking at a snapshot of its cash flow statement from the first six months of 2014 as compared to the same period of 2013.
Source: ConocoPhillips 10-Q for the second quarter of 2014
Here we see that ConocoPhillips' cash flow from operating activities is more than double its net income. The company took nearly $4 billion in depreciation, depletion and amortization charges, which dropped net income for tax purposes but didn't impact its cash flow. When we add back in the variety of other charges the company took we find that it generated almost $10 billion from operating activities through the first six months of this year, which is $1.5 billion more than it produced in the first six months of last year.
Now, let's look at what the company did with this cash flow. For that we'll look next at its cash flow from investing activities.
Source: ConocoPhillips 10-Q for the second quarter of 2014
Here we see that ConocoPhillips consumed almost $8 billion in cash, with all of that cash going toward its capital expenditures to drill new wells and build production equipment. This is actually a billion dollars more than the company invested through the first six months of last year. However, it's also worth noting that last year the company sold over $1.6 billion in assets to help pay for its capex program.
Still, in both sets of numbers we see that ConocoPhillips' operating cash flow is enough to pay for its capex program, which is what we want to see. Because of that the company has some cash left over that it can use in financing activities, which we see in the next snapshot.
Source: ConocoPhillips 10-Q for the second quarter of 2014
Here we see that ConocoPhillips is using its excess cash flow to pay down debt and pay dividends to investors. Both are excellent uses of cash. Further, this shows us that the company can invest in growth and still have plenty of cash left over to send some back to investors while also improving its balance sheet. These are all key characteristics of a solid long-term investment.
What does a cash flow analysis of ConocoPhillips tell us?
What we see in ConocoPhillips is an energy company that's doing a good job of managing its cash flow. It also tells us that the company's capex investments are paying off as ConocoPhillips' cash flow is growing. Looking ahead, this is a trend we expect to see continue over the next few years as long as energy prices cooperate. As the following slide notes ConocoPhillips expects to grow its cash flow from operations by 6%-10% per year.
Source: ConocoPhillips Investor Presentation
As the above slide notes, by 2017 ConocoPhillips expects its annual cash flow to be upwards of $23 billion. That's $7.2 billion more than last year's cash flow, which should leave the company with plenty of excess cash flow to increase its already generous dividend over the next few years. Bottom line here is that ConocoPhillips' cash flow is strong and is only expected to grow stronger over the next few years.
