ConocoPhillips' (NYSE:COP) management team has worked tirelessly in recent years to transform the oil company into one that could thrive on lower prices. As a result, it cashed in during the first quarter when crude was well above its baseline plan. That strong showing sets the company up for continued success in the coming year -- a key theme running through management's comments on the accompanying conference call, which detailed recent achievements and how they frame what lies ahead. 

1. Thanks to higher oil prices, we're accelerating our deleveraging plan

CFO Don Wallette led off the call by running through the company's progress on its strategic priorities. He started by talking about its balance sheet goal.

We paid down $2.7 billion of debt, bringing our total debt to $17 billion at the end of the first quarter...we set out a target to reduce debt to $15 billion before the end of 2019. Given the improved outlook for the business and our current cash balances, we intend to accelerate our debt reduction by an additional $2 billion this year, thus achieving our leverage target a year early. This is consistent with our priorities, and we believe it sends another strong signal about our commitment to discipline.

One of ConocoPhillips' aims has been to shore up its balance sheet by paying down debt, which peaked at more than $27 billion in early 2016. The company initially wanted to get that number down to $20 billion by 2019, but has since set its sights even lower after selling several Canadian assets to Cenovus Energy last year. It now expects to achieve that lower target a year earlier than planned thanks to improving oil prices.

A row of oil pumps reflecting on the water at sunset.

Image source: Getty Images.

2. We're returning a significant portion of our cash flow to our investors

As ConocoPhillips works to fortify its balance sheet, it's also sending more money back to investors. Wallette pointed out:

We increased the quarterly dividend by 7.5%...With respect to buybacks, we repurchased $500 million of shares this quarter, and we're on track for a total buyback of $2 billion in 2018. This is another return of capital to shareholders that was increased during the quarter, this time by 33% from the target announced in November. Since our buyback program began in late 2016, we've repurchased about 75 million shares, or 6% of our share count, at an average price of about $48 a share. One of our stated priorities is to return 20 to 30% of operating cash flow (CFO) to shareholders. This quarter, we again exceeded that, returning 34% of CFO to shareholders through dividends and buybacks.

The increasing cash returns over the past year have been key to driving ConocoPhillips' stock up more than 50% since the repurchase program was announced.

3. We're on pace to produce more than expected this year without boosting spending

ConocoPhillips' growing cash returns and debt reduction come even as the company continues to invest money into high-return expansion projects that increase production, which is growing faster than expected. Al Hirshberg, the executive vice president of production, drilling, and projects, noted that while the "$5.5 billion capital guidance is unchanged," the company is "increasing our production guidance to 1.2-1.24 million barrels per day to reflect our strong performance in the first quarter and adjusting for disposition assumptions." He further pointed out that this improved outlook comes even though the company doesn't expect to receive any production from its KBB field in Malaysia this year due to a pipeline shutdown.

4. The "big three" are leading the way

Driving the company's growth is its "big three" unconventional assets: Bakken shaleEagle Ford shale, and Delaware Basin. Hirshberg said that output from these three areas was up 20% year over year and should rise at least 22% for the full year, putting their combined production at 300,000 barrels per day by year-end, up from 250,000 in the first quarter. Hirshberg did state, though, that "we keep improving all the time and the latest well results we've seen have been very impressive." Because of that, he said, "I certainly expect our operating teams to beat that 22%."

An oil pump next to a pond.

Image source: Getty Images.

5. We still think our stock is undervalued

ConocoPhillips spent billions of dollars in buying back its stock over the past year, which has helped drive shares up more than 50% since late 2016, vastly outperforming other oil stocks. Consequently, an analyst on the call asked if this changes what the company plans to do with its growing stream excess cash going forward. 

The CFO got to the heart of this question by elaborating on how the company values its stock. He said that ConocoPhillips views its shares through the lens of production growth on a debt-adjusted share basis as well as its ability to increase cash flow as oil prices rise. With both numbers on pace to head much higher in the coming years, Wallette said that "we think our stock is well undervalued and has a lot of upside to it." That view adds to the many factors that make ConocoPhillips a good oil stock to consider buying now.

 

Matthew DiLallo owns shares of ConocoPhillips. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.