U.S. oil and gas driller ConocoPhillips (NYSE:COP) had been lagging big oil companies like ExxonMobil (NYSE:XOM) throughout the oil price downturn, a victim of having spun off its refining and marketing arm as Phillips 66 (NYSE:PSX) in 2012.

All of that -- well, some of that -- changed in 2017 as rising oil prices boosted ConocoPhillips' stock price. It ended up not only handily outperforming many of its peers, but also outperforming ExxonMobil for the year. But a single good year doesn't make a trend. Let's see what's in store for Conoco this year to try to determine if it really is a buy.

A group of items, including miniature oil barrels, bills and coins, a pool of black liquid, and a pen and paper on a wood surface.

Oil and gas industry player ConocoPhillips outperformed in 2017. Can it repeat its success this year? Image source: Getty Images.

Keep on flowing

Conoco's fourth-quarter 2017 earnings release, which came on February 1, just before the big market correction, showed big year-over-year improvement.

The company had a banner 2017, achieving full-year production of 1.3 million barrel of oil equivalents per day (BOE/D), excluding Libya. Excluding the impact of closed and planned dispositions like the company's Canadian oil sands asset sales, production grew 3%.

All of that oil and gas left the company awash in cash, with cash from operations exceeding capex by $2.5 billion, and exceeding capex and dividends by $1.2 billion. That allowed the company to pay down $7.6 billion -- about 30% -- of its debt ending the year with less than $20 billion on the balance sheet, which had been a key goal. Conoco also repurchased $3 billion of shares, reducing its share count by 5% from 2016. 

In short, it was not only a good year for Conoco's stock, but also for its operations. And the company is expecting more good things in 2018.

More of the same

Management expects not only the oil, but rewards for investors to keep flowing throughout 2018. Production is expected to come in at approximately 1.2 million BOE/d, about a 5% year-over-year increase, after factoring in asset dispositions, particularly its $13.3 billion Canadian oil sands asset sale.

In a press release, CEO Ryan Lance said:

We are focused on safely executing our 2018 operational and financial plan, which is designed to generate top-tier growth in free cash flow and production per debt-adjusted share, while delivering superior returns and a compelling payout to shareholders.

The company's 2018 projections back Lance up. Conoco announced a 7.5% increase to its quarterly dividend and an acceleration of its share repurchase program, which has been increased by one third, from $1.5 billion to $2 billion for the year. It has also continued to pay down its debt, reducing it by an additional $2.3 billion so far this year to about $17.5 billion. 

The year's off to a good start for the company's stock as well. Even after February's market correction, it's up 1.6% since the beginning of the year, outpacing both ExxonMobil (down 7.6%) and Phillips 66 (down 9%). 

The potential downside

In 2017 and so far this year, Conoco was very successful in executing its strategic plan of selling assets to pay down its debt and buy back shares. But its debt of just under $20 billion is still quite high. The company's debt-to-equity ratio currently stands at 30%, much higher than Phillips 66's 19% or ExxonMobil's 12%.

On the most recent earnings call, Lance indicated he wasn't in any hurry to dramatically pay down the remaining debt, targeting $15 billion in debt by the end of 2019. And, as long as things go well and the price of oil remains stable at about $60/barrel or higher, Conoco shareholders probably don't need to be all that concerned.

On the other hand, if oil prices weaken -- which could happen for any number of reasons -- and the company needs to start borrowing again, its existing debt load could cause some headaches. Of course, substantially lower oil prices would cause a whole host of other problems for Conoco, which has already drastically pared back expenses and may not have many other places left to find cost savings. 

But in the second and third quarters of 2017, Conoco proved it could turn a profit with oil prices at about $50/barrel, so the price would have to drop beyond that to cause real problems for the company. At the moment, that seems unlikely, but -- as we found out in 2014 -- energy prices can drop suddenly, leaving investors holding the bag.

Investor takeaway

After a rocky couple of years, ConocoPhillips seems to have finally adjusted to the "new normal" of lower oil prices. It has taken great strides in reducing its debt and buying back shares, and it seems poised to have another great year in 2018. Absent a major drop in oil prices, ConocoPhillips looks like a solid bet for investors interested in getting back into the oil and gas sector.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.