ConocoPhillips (COP 4.50%) has one main goal: to thrive in almost any oil market environment. The company positioned itself to achieve this ambitious goal by transforming its business over the last three years. The moves it made to reduce costs and bolster its balance sheet now have it in a position to succeed at a range of oil prices, which was the primary takeaway from the company's fourth-quarter conference call.
Built for volatility
ConocoPhillips CEO Ryan Lance led off the call by stating:
It's certainly early in the new year and this sector is already off to another volatile start. Volatility can certainly be tough on an industry or a company if you're not built for it. Well, we're built for it, with clear resilience to lower prices, full upside to higher prices, and a shareholder-friendly framework that works through the cycles...Our main goal is to reinforce why ConocoPhillips offers an attractive way to invest in this cyclical business. That's the key theme as we reflect on 2019 and we look forward to the future.
Lance then noted that 2019 capped a successful three-year transition as the company repositioned its portfolio and operations to prosper at lower oil prices. One of the primary strategies it employed was selling higher-cost assets and using the cash to build one of the strongest balance sheets in the sector.
"As part of our high-grading efforts," Lance noted that, "we generated over $3 billion of disposition proceeds" last year. Because of those moves, Lance stated that "our world-class portfolio keeps getting better" and "our balance sheet got stronger," as the company ended the year with more than $8 billion of cash and short-term investments. As a result, the company boasts a low-cost portfolio that can generate significant cash flow at lower oil prices, as well as the balance-sheet strength to get it through the most challenging market conditions.
A plan to thrive in the decade ahead
ConocoPhillips' efforts over the past three years put it in an excellent position heading into both the new year and next decade. Lance stated on the call that:
So 2019 is over, and we're in the starting gates for a new year and a new decade. In November, we laid out a powerful 10-year plan that can deliver on all the elements we believe investors want from this sector: a disciplined strategy framework, consistent execution, strong free cash flow, and compelling returns of and returns on capital. That's the path we set for ourselves in 2016. That's what we delivered in 2017, '18 and '19, and that's what we're ready to do again in 2020. We're focused on executing a strategy that we believe is right for the future of our industry and certainly right for ConocoPhillips and our investors.
The baseline of ConocoPhillips' 10-year strategy is the forecast that its low-cost portfolio of oil and gas assets will generate $50 billion in free cash flow after financing growth. The plan assumes oil averages $50 a barrel, which is right around the current level after its slump to start the year.
The company aims to return all that money to investors by growing its current dividend and repurchasing shares. It has already authorized a monster $25 billion in share repurchases, $9.6 billion of which it has completed over the last three years. It aims to buy back another $3 billion this year, which it can finance with a mix of free cash flow (depending on crude prices) and cash from its balance sheet.
Because the company plans to programmatically repurchase shares each quarter using the cash war chest it's built, it will be able to take advantage of volatility-induced sell-offs in its stock. That gives it an edge over other oil companies, which typically only repurchase shares when they produce excess cash during periods of higher prices.
Ready for any market condition
ConocoPhillips' maneuvering over the past three years put it in the position where it can continue producing solid results at lower oil prices while fully cashing in when they rebound. Because of that, the company can generate and return a boatload of cash to investors, even if oil prices go through long rough patches. That makes it an ideal energy stock for investors who are looking for a lower-risk oil company that still has plenty of reward potential.