ConocoPhillips (NYSE:COP) has been having a better year than its stock price performance suggests. While shares of the upstream oil and gas company have fallen 6% even though oil is up about 15%, it delivered exceptional operating results in the first quarter. Not only did the company's production come in above the midpoint of its guidance range, but earnings also beat analysts' expectations.
Investors will get their next data point on the company's operating performance later this week when it reports its second-quarter results. Here are a few things to keep an eye on when ConocoPhillips releases those numbers.
Check out how the company's performance lined up with expectations
ConocoPhillips anticipated that it would produce between 1.24 million and 1.28 million barrels of oil equivalent per day during the second quarter. At the midpoint, that forecast implies a 4.4% decline in its output from the first quarter. That's because the company had seasonal maintenance projects scheduled in Alaska, Canada, and Europe, which would squeeze production in those regions.
Despite that production decline, the current consensus among analysts is that ConocoPhillips will report $1.03 per share of adjusted earnings during the quarter. That would be an improvement from the $1 per share it delivered during the first quarter. The main driver of the more optimistic earnings expectation is that oil prices were higher during the early part of the quarter.
Several things need to have gone ConocoPhillips' way during the second quarter for the business to beat expectations again. For starters, it had to deliver strong drilling results out of its U.S. shale plays. That would help it overcome the maintenance-related downtime, as well as the sale of its interest in the Greater Sunrise fields of Timor-Leste, which closed during the quarter. On top of that, the company had to keep a firm lid on costs to help offset the late-quarter slump in crude prices.
See if it plans to boost its buyback
Given how volatile oil prices were at the end of last year, ConocoPhillips took a conservative approach to spending 2019. The company set its capital budget at $6.1 billion, which it can fund with the cash flows it can produce as long as oil averages around $40 a barrel. That sets it up to generate free cash flow if oil is above that level. The company intends on using that money as well as the cash on its balance sheet to pay its dividend and repurchase $3 billion in shares this year.
With oil hovering around $55 a barrel during the first quarter, ConocoPhillips produced more than enough cash to fund its capital program and dividend, as well as repurchase about $800 million of its stock. As a result, its cash position stood at $6.7 billion at the end of the period, a $300 million increase from the start of the year. That number is on track to continue growing. That's because oil prices spent most of the second quarter above that level, implying that the company will produce even more excess cash. On top of that, ConocoPhillips closed the $350 million sale of its Greater Sunrise interest while also agreeing to sell its U.K. business for $2.675 billion.
Given ConocoPhillips' cash-rich balance sheet, it seems increasingly likely that the company will accelerate the pace of its share-repurchase program. The oil giant currently intends on buying back a total of $15 billion in stock at a rate of $3 billion per year. However, with its business generating cash at a faster rate than it's using those funds, it can easily afford to repurchase more shares. That would be an excellent use of the money since ConocoPhillips' stock has lost value this year even though the business is operating exceptionally well.
All eyes on shareholder returns
The second quarter is a seasonally slower one for ConocoPhillips since it typically works on maintenance projects at several key fields. Because of that, and the late-quarter slump in oil prices, it might not have produced a profit gusher during the quarter. However, the company likely still generated more cash than it needed, which would have added more money to an already cash-rich balance sheet.
Given that likely outcome, investors will want to see what the company will do with those funds. Ideally, it will unveil plans to use more of its growing cash position to buy back its attractively priced stock.