ConocoPhillips' (COP 0.16%) stock has been blistering hot, rising a jaw-dropping 35% in the last six months and blasting past the red-hot S&P 500, which is only up 16% over that time frame. Fueling those gains has been a combination of improving oil prices and the impact of the company's strategic plan, which helped it blow past analysts' earnings estimates in each of the last two quarters.
Given that recent outperformance, analysts and investors have high expectations for the company's upcoming fourth-quarter report, which should hit the wires on Thursday morning. Here's a look at what needs to be in that release to keep the upward momentum going.
The beat marches on
After reporting a surprising $0.14 per-share profit in the second quarter, ConocoPhillips posted another upside surprise in the third, earning $0.16 per share, even though oil prices dipped and Harvey impacted output. However, with those headwinds going away, analysts are much more bullish this quarter, anticipating that the oil giant will post $0.44 per share in earnings.
For the company to beat that estimate and maintain its momentum, it needed to operate exceptionally well during the quarter. For starters, production has to be at or above the high end of its guidance range of 1.195 million to 1.235 million barrels of oil equivalent per day. In addition to that, the company needed to maintain a tight lid on costs, including keeping full-year capital expenses at or below $4.5 billion, while also continuing to push down operating costs, which were down 20% year over year during the third quarter.
Finally, ConocoPhillips needed to buy back the remaining $1 billion in stock it had planned for 2017 early in the quarter, because it would have a greater impact on earnings per share than if the company waited until the end of the quarter to make those repurchases.
Ramp up cash returns
One reason why analysts are expecting ConocoPhillips' profitability to have significantly improved last quarter is that oil prices were well above the $50 a barrel baseline of its go-forward plan. At that level, the company said that it could generate enough cash flow to increase output at a 5% annual rate, buy back $1.5 billion in shares each year, retire debt, and increase its dividend. However, with crude now in the mid-$60s, ConocoPhillips should generate even more free cash flow, which begs the question of what it will do with that excess money.
While the company will undoubtedly announce a dividend increase for 2018, it likely won't go too high, since it wants a payout that's sustainable if crude tumbles again. Further, it doesn't seem like it's in any hurry to ramp up its drilling activities by boosting spending, since the market remains tight and doesn't need more oil right now. That leaves it with two other options: It could bolster its balance sheet by building up its cash position and paying off more debt, or accelerate its stock-repurchase program. If it goes with the latter, that choice could provide even more fuel to drive the stock higher.
Getting a little too hot
ConocoPhillips has been on a nice run lately and could continue going higher if it reports strong fourth-quarter results later this week and ramps up its cash return to investors. That said, thanks to its recent run, shares now trade at a premium to equally strong rivals.
For example, ConocoPhillips sells at 12 times cash flow, while fellow oil giants Anadarko Petroleum and Devon Energy fetch around 8.5 times cash flow. That's because the stocks of Devon and Anadarko haven't bounced back as much after getting beaten down during the oil-market downturn -- which makes them more compelling buys right now. Anadarko looks the most appealing heading into its fourth-quarter report since it's on pace to produce a gusher of free cash flow this year if crude holds firm.