This year hasn't gone as well as the oil market expected. Despite OPEC's best efforts to drain the excess inventory, crude prices are down double digits since the beginning of the year. We can blame U.S. shale producers for that since many of them have ramped up investment spending, which has unleashed a torrent of new production that is working against what OPEC is trying to accomplish.
Because of that slump in the oil market, and some company-specific issues, ConocoPhillips (COP 3.58%) stock is down 8.5% year to date. However, there's reason to be optimistic that the company might reverse that trend, with three things standing out as potential catalysts that could fuel a second-half rally in the stock.
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The data tells a different story
Because of surging U.S. production, crude oil recently revisited its 2017 low of around $45 per barrel, which is where it was before OPEC announced a deal to support the oil market last November. This slide came despite the fact that oil market fundamentals are clearly getting better. For example, global oil supplies fell 140,000 barrels per day in April according to the latest data from the International Energy Agency. Because of this, the IEA noted that global stockpiles have continued to drop, while demand continues to grow. In fact, the IEA still sees oil demand increasing by 1.3 million barrels per day this year, while non-OPEC supplies are only expected to rise 600,000 barrels per day. Meanwhile, OPEC's production is down by more than half a million barrels from last year. Because of this, the global oil market is currently undersupplied, which should continue to drain off excess inventory.
As this trend continues, oil prices should eventually start heading higher, especially since OPEC recently renewed its production cuts for another nine months. Those higher oil prices could be just the fuel ConocoPhillips stock needs to start moving higher again, since it has mostly followed the movement of oil prices over the past few years.
Buybacks start making a difference
Unlike most of its shale-focused rivals, ConocoPhillips has no plans to ramp up spending and chase production growth. Instead, the company plans to focus its capital on creating value for investors, which includes allocating it toward paying a higher dividend, buying back stock, improving its balance sheet, and prudently investing in high-return growth projects. It's a value-creation plan that the company is in the process of accelerating by selling non-core assets.
The company has already sold off several assets this year, including a significant transaction with Cenovus Energy (CVE 4.65%). These deals brought in $13.3 billion in cash, 208 million shares of Cenovus Energy stock (worth $2.7 billion at the time of the deal), and contingency payments based upon future oil and gas prices. The company plans to use the initial cash payment to reduce debt and buy back up to $6 billion in stock over the next three years, including $3 billion this year. This year's buyback could provide a boost to the share price, even if oil doesn't do that much, because it represents 5% of the company's outstanding shares at the current market price.
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The company finally returns to profitability
After reporting a string of losses during the oil market downturn, analysts expected ConocoPhillips to get back into the black last quarter. Unfortunately, the company reported another loss, this time of $19 million, or $0.02 per share, despite the fact that production came in above the high-end of its guidance range. Furthermore, it would go on to revise that result and reveal an even deeper loss a few days later after Anadarko Petroleum (APC +0.00%), which is the operator of the Shenandoah exploration prospect in the Gulf of Mexico, disclosed its decision to write down its carrying value in the project. ConocoPhillips chose to follow Anadarko's lead, which resulted in it reporting an adjusted loss of around $200 million, or $0.14 per share for the quarter.
Despite being burned last quarter, analysts still believe that ConocoPhillips is on the cusp of returning to profitability. That's apparent from their consensus for the second quarter, where they estimate that the company will report a profit of $0.02 per share. If the company does indeed head back into the black, that could be the catalyst that turns the stock around. Especially if the company manages to blast past analysts' expectations, which is possible if it gets a meaningful boost from the buyback, delivers expectation-beating production, and keeps a lid on costs.
Investor takeaway
While ConocoPhillips stock has struggled to gain traction in the first half of this year, several catalysts on the horizon could get the company out of its rut. A rebound in the oil market, for example, would likely provide the stock all the fuel it needs to rally, given that it's highly correlated to oil prices. Meanwhile, the impact from its buyback or a surprisingly strong showing in its upcoming second-quarter report could also prove to be the nudge that gets the stock moving higher in the second half of this year.
