Last year was a challenging one for the oil market as crude prices soared and then collapsed. That late year sell-off wiped out the gains of nearly all oil stocks. One oil producer, however, managed to buck that trend and come out ahead in 2018. That winner was U.S. oil giant ConocoPhillips (COP +2.23%) as its stock rose 13.6% last year, putting its total return at 15.6% after including the company's 2%-yielding dividend. That crushed the S&P 500's total return, which was a negative 4.4% during 2018.
How ConocoPhillips won in 2018
ConocoPhillips' success last year stems from its strategy shift in late 2016. After spending the previous two years focused on reducing costs, it charted a new way forward that focused on growing shareholder value. It aimed to sell $5 billion to $8 billion of less profitable assets and use the cash to reduce debt, repurchase shares, and invest in higher-return opportunities. The company accelerated that strategy during 2017 by selling several assets in Canada to Cenovus Energy (CVE +1.77%) for $13.3 billion in cash and Cenovus' stock. That deal enabled ConocoPhillips to double its share repurchase program from $3 billion to $6 billion while increasing its debt reduction target by another $5 billion.
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The transaction and others completed during the past two years, when combined with higher oil prices for much of 2018, enabled ConocoPhillips to achieve its targeted balance sheet well ahead of schedule. That freed the company up to return even more cash to shareholders last year. Not only did ConocoPhillips increase its share buyback plan from $2 billion for the year up to $3 billion but it also raised its dividend twice, 7.5% in February and another 7% in October.
Those share buybacks, when combined with the company's cost-reduction efforts and growth-focused investments, paid big dividends in 2018. That was evident during the third quarter when the company was able to deliver higher per-share earnings than it did during the peak in 2014, when oil was over $100 a barrel. Just as impressive is that it achieved that higher profit even though its production was 20% lower due to asset sales. It was able to earn more while producing less by focusing on expanding its most profitable assets.
Can ConocoPhillips continue winning in 2019?
ConocoPhillips expects more of the same in 2019. It unveiled its plans for the coming year last month, setting a $6.1 billion capital budget, which matches 2018's spending level. In addition, the oil giant expects to repurchase another $3 billion in stock this year while continuing to pay a growing dividend, noting that it could fund its capital spending plan on the cash flows produced at $40 oil. Meanwhile, it plans to finance the cash returns to shareholders through a combination of excess cash generated assuming oil is over $40 while bridging any gap with the cash on its balance sheet, which stood at $4.8 billion as of the end of the third quarter. Apart from that, it still owns a sizable stake in Cenovus Energy that it could monetize if needed.
That spending plan will enable ConocoPhillips to retire another 4% of its stock at the current share price and pay a dividend that yields 1.9%, while growing its production by 8% on a per-share basis this year, which is a healthy rate for an oil company of its size. That sets it up to deliver a double-digit total return assuming oil meanders around its current price. In the meantime, it could generate an even higher return if oil prices improve since that would boost its cash flow, which it could use to grow production at a faster rate or buy back even more stock.
An oil stock for any market
ConocoPhillips has crafted an operating plan that can deliver superior financial returns no matter what happens with oil prices. That strategy paid off last year as it was the only oil producer in the S&P 500 to deliver a positive return for its investors. With a similar plan in place for 2019, the company aims to repeat that success this year, making it an ideal oil stock to consider owning for 2019 and beyond.
Check out the latest ConocoPhillips earnings call transcript.
