In late 2016, ConocoPhillips (COP -1.27%) launched a disciplined strategy focused on creating value for investors. That led the company to take several actions to reduce its cost structure so it could make more money in the future.

This strategy has started paying big dividends over the past year. It can be seen in the company's fast-improving profitability, which once again came in ahead of analysts' expectations in the third quarter. That quick success was a key theme on the company's third-quarter conference call, where CEO Ryan Lance demonstrated how far the oil giant has come in the past two years.

Gas flaring off an offshore oil platform with the sun in the background.

Image source: Getty Images.

Making all the right moves

One aspect of ConocoPhillips' strategy has been to sell its less profitable assets to boost its profit margin. It did most of the heavy lifting in 2017 by selling several of its assets in Canada, as well as parting with its position in the San Juan Basin. While those deals caused its production base to fall from an average of 1.55 million barrels of oil equivalent per day (BOE/D) to 1.16 million BOE/D, or more than 25%, its anticipated cash flow from operations was expected to decline by less than 5% assuming oil averaged $50 a barrel. The reason cash flow didn't decline as much as production is that these properties earned lower margins. On top of that, the company used some of the proceeds from the sales to retire debt, which cut interest expenses and boosted cash flow.

In addition to reducing debt, ConocoPhillips also used some of its asset sale proceeds to buy back stock, repurchasing about 6% of its outstanding shares in the past two years. One benefit of the reduction in outstanding shares is that it provides a boost to the company's earnings on a per-share basis, since it now divides its profits among fewer shares.

The company complimented those strategic efforts to boost profitability with other internal initiatives to drive out costs by becoming more efficient, using new technologies, and cutting out excess. Those actions have all helped push the company's cash flow to breakeven level from needing oil over $75 a barrel to sustain its business to below $40 a barrel. 

A barrel of oil coming through money.

Image source: Getty Images.

Partying likes its 2014

The result of this effort to improve the company's profitability has been remarkable. That's clear from the jaw-dropping comments of Lance on the third-quarter conference call:

In the third quarter, we generated $1.6 billion or $1.36 per share of adjusted earnings. And here is some interesting perspective. The last time ConocoPhillips generated quarterly adjusted earnings of $1.6 billion from continuing operations was in the third quarter of 2014. Brent was over $100 per barrel and our production was almost 1.5 million barrels of equivalent oil per day. So we're as profitable today as we were then, despite prices being 25% lower and volumes being 20% lower. So bigger isn't always better. That's why we're focused on per share growth and value, not absolute volume growth.

As Lance noted, the oil company is making just as much money on an absolute basis as it was in 2014, when oil was in the triple digits, even though it's producing fewer volumes. That's because its focus is now on producing the most profitable barrels it can, as opposed to pumping out as much as possible.

Another benefit of this focus on profitability over growth is that ConocoPhillips isn't spending money on marginal projects geared to grow production. Instead, it's using the cash it might have invested on a lower-return oil project to buy back stock. That's why earnings are even higher on a per-share basis, with the company reporting $1.36 in adjusted earnings for 2018's third quarter, versus $1.29 in the same period of 2014. This trend of delivering even higher profits on a per-share basis should continue, since ConocoPhillips expects to repurchase up to $15 billion in stock in the coming years, enough to retire 20% of its outstanding shares. 

The good times should continue rolling

ConocoPhillips' plan to create value for shareholders has been doing just that in the past two years, evidenced by the fact that the stock has rebounded more than 60%. However, the company believes there's plenty more where that came from, since it expects earnings to continue rising even if oil prices take a breather, because it's focused on growing production that increases its profitability. Add that profit growth to the company's rapidly expanding dividend, and this oil stock should continue creating value for its investors in the years to come.