Heading into the first quarter, there was growing optimism that ConocoPhillips (COP -0.12%) would finally return to profitability. Unfortunately, that didn't happen as the company reported yet another adjusted loss, this time losing $19 million, or $0.02 per share. While that's a meaningful improvement from last year's $1.2 billion adjusted loss and last quarter's $318 million loss, it still wasn't the minuscule profit that analysts expected to see. That said, there were several positives in the quarter, and they do suggest that the company is heading in the right direction.

Drilling down into the numbers

Operationally, ConocoPhillips performed well during the quarter. Production, for example, was 1.584 million barrels of oil equivalent per day (BOE/D), which came in above the high end of the company's guidance range of 1.54 million to 1.57 million BOE/D. Driving that result: the ramp-up of several major projects, the impact of multiple development programs, and improved well performance. That helped the company more than offset a production curtailment at its Surmont joint venture in Canada with Total (TTE 1.46%). That's after the companies had to cut production at the facility due to a fire at Suncor Energy's (SU 1.76%) Syncrude facility, which impacted the partners' ability to transport oil produced at Surmont.

Land rig drilling at sunset

Image source: Getty Images.

In addition to that higher production, ConocoPhillips also benefited from an improvement in realized oil prices during the quarter, which jumped from $22.94 per BOE in the year-ago quarter to $36.18 per BOE in the first quarter. At the same time, the company continues to push down costs, evidenced by a 4% year-over-year decrease in production and operating expenses. These factors helped drive earnings within striking distance of profitability.

That said, while ConocoPhillips hasn't yet returned to profitability, the company is generating ample cash flow in the current operating environment. During the quarter the company produced $1.8 billion in operating cash flow, and only spent $900 million of that on capital expenditures and $300 million on dividends. That left the company plenty of excess for other uses, especially considering the stockpile of cash currently on its balance sheet. That financial strength allowed the company to retire $800 million in debt, invest $200 million in short-term investments, and repurchase $100 million in stock during the quarter.

A look at what lies ahead

Meanwhile, the other major accomplishment in recent months was ConocoPhillips' ability to find buyers for two major asset packages. The first was the unexpected announcement that one of its Canadian oil-sands partners, Cenovus Energy (CVE 2.25%), would buy out their joint venture as well as acquire several other assets in the country. Cenovus agreed to pay a whopping $13.3 billion for those asset packages, including $10.6 billion in cash and $2.7 billion of its stock, while also agreeing to pay ConocoPhillips a contingent fee based on higher oil prices. On top of that, ConocoPhillips unloaded its low-margin gas assets in the San Juan Basin for $2.7 billion and a contingent payment of up to $300 million based on future gas prices.

Those transactions will give the company a bounty of cash to improve its balance sheet and repurchase shares. Because of that, the company revised its debt-reduction target from $20 billion by the end of 2019 to $15 million. Meanwhile, the company also increased its stock-buyback authorization from $3 billion to $6 billion, with plans to repurchase $3 billion in stock this year. The company's aim with these deals is to continue its transformation so that it has the financial strength and flexibility to consistently deliver double-digit total returns for shareholders, no matter what oil prices are doing.

Investor takeaway

While ConocoPhillips didn't return to profitability this quarter, the company did continue to make progress on its strategic turnaround plan. Production continues to grow even as it spends less cash on capex due to a focus on driving costs out of its business. Because of that, the company is starting to generate tremendous free cash flow, which it's allocating toward share repurchases and debt reduction. Meanwhile, by detailing a deal to divest two lower-margin assets, the company has put itself in the position to deliver accelerated shareholder returns later this year.