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This Oil Stock Expects to Produce a Gusher of Cash Over the Coming Decade

By Matthew DiLallo - Jul 1, 2021 at 7:32AM

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Most of that money will make its way back to shareholders.

Oil giant ConocoPhillips (COP 2.38%) recently unveiled its 10-year plan. The key takeaway is that the company expects to produce a massive amount of cash over the coming decade, even if oil prices decline, while returning a significant portion of that money to shareholders. That could give it the fuel to produce compelling total returns for investors, even as the global economy transitions away from fossil fuels.

Here's a closer look at the oil company's long-term strategy.

A happy person standing next to a barrel with cash coming out of it.

Image source: Getty Images.

Remaining disciplined

ConocoPhillips has worked hard over the years to reduce costs. One of the biggest drivers was last year's acquisition of Concho Resources. That combination will save the company $1 billion per year. Because of its focus on reducing costs, ConocoPhillips can generate significant cash flow from operations, even at lower oil prices.

The company set clear and consistent priorities for the cash flow produced from its oil and gas operations. It ranks them in the following order:

  1. Invest enough capital to sustain its production rate while also paying its dividend.
  2. Increase its dividend each year.
  3. Maintain an A-rated balance sheet.
  4. Distribute at least 30% of its cash flow from operations to shareholders via the dividend and share repurchases.
  5. Make disciplined investments to enhance returns.

The company's game plan ensures that it can survive the inevitable downturns in oil prices because it can support its base plan to maintain its production rate on the cash flows produced at $30 oil. That low oil price breakeven level gives it significant upside to higher oil prices.

For example, at $50 oil, ConocoPhillips could generate $70 billion of free cash flow over the next 10 years after investing enough money to maintain its production rate and enhance its returns. To put that into perspective, ConocoPhillips' current market capitalization is less than $82 billion.

Returning the windfall to shareholders

ConocoPhillips expects to return the bulk of its free cash flow to shareholders over the coming decade via dividends and share repurchases. The base return will come from the dividend. ConocoPhillips currently offers an attractive payout that yields 2.8%, more than double the S&P 500's average.

Meanwhile, its second-ranked priority is to increase that payout each year. The company estimates it will pay out $24 billion in dividends over the next decade, which it can afford to do even if oil prices fall below $40 a barrel.

The company plans to complement the dividend by returning additional cash to shareholders via its repurchase plan. It intends to repurchase as much as $3.5 billion of its shares this year. That includes the potential of $1 billion of incremental repurchases by selling off its stake in Canadian oil sands producer Cenovus and using the proceeds to repurchase its stock.

When combined with its dividend, ConocoPhillips could return $6 billion in cash to shareholders this year, or a 7% yield on its current market capitalization. Meanwhile, total cash returns over the next decade could reach more than $65 billion, assuming oil prices average around $50 a barrel.

That number could be even bigger if oil prices are higher over the coming decade. That's because, for every $10 increase in the average oil price over the next decade, ConocoPhillips can produce more than $30 billion of additional cash flow from operations. While it would likely reinvest some of that capital to further enhance its returns, the company's disciplined investment approach suggests it will return a meaningful portion of any incremental cash flow to shareholders over the coming years.

Focused on producing cash

ConocoPhillips has concentrated on driving down costs in recent years. That emphasis is paying big dividends for investors because it has the company on track to produce a gusher of excess cash over the coming decade, even if oil prices moderate from their current level in the low $70s. It plans to return the bulk of that money to shareholders, which could give it the fuel to produce compelling total returns in the years ahead.

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.

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Stocks Mentioned

ConocoPhillips Stock Quote
ConocoPhillips
COP
$102.75 (2.38%) $2.39
Cenovus Energy Inc. Stock Quote
Cenovus Energy Inc.
CVE
$18.68 (0.65%) $0.12

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