ConocoPhillips (COP 0.78%) recently unveiled its preliminary plans for 2022. The highlight is a three-tiered program that could see the oil stock return around $7 billion in cash to investors over the coming year. Here's a closer look at what the company sees ahead for 2022.
Investing for the near and long term
ConocoPhillips plans to invest $7.2 billion into its oil and gas business in 2022. That's a significant increase from 2021's level of around $5.3 billion. Three major factors are driving the higher spending level:
- The company recently closed its $9.5 billion all-cash acquisition of Shell's Permian Basin assets. The company expects to invest $700 million into these assets next year.
- It expects to spend about $200 million on projects to reduce its carbon emissions.
- The balance of the spending increase will go toward growing its production. Planned investments include drilling incremental wells to boost production in the near term and longer-term major capital projects. Cost inflation is also playing a role in increasing spending.
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Overall, ConocoPhillips sees these investments supporting an average daily production rate of 1.8 million barrels of oil equivalent next year. After adjusting for the impact of the Shell acquisition, it implies production growth at a low single-digit rate compared to 2021. Meanwhile, its investments in major capital projects and emissions reduction put the company in a position to continue growing over the longer term.
A three-tiered plan to return more cash to shareholders in 2022
Despite that capital spending increase, ConocoPhillips expects to produce significant free cash flow in 2022 thanks to higher oil prices. As a result, it currently plans to return up to $7 billion to investors over the coming year. That's about $1 billion, or 16% more than it returned to investors in 2021.
The company's capital return program will have three tiers:
- Ordinary dividend: The company recently increased its quarterly dividend payment by 7% to $0.46 per share. That puts its current dividend yield at around 2.4%. Overall, it expects to pay about $2.4 billion in ordinary dividends in 2022.
- Share repurchases: It is targeting to repurchase $3.5 billion of its stock in 2022. It anticipates funding about $1 billion of this buyback from selling shares of Cenovus Energy. With its current market cap just shy of $100 billion, that's enough money to retire about 3.5% of the company's shares outstanding.
- Variable return of cash (VROC): The company plans to return up to an additional $1 billion to investors through a variable quarterly payment. It already declared the first one of $0.20 per share, which it will pay in January. If the company distributes around that same rate each quarter, it implies an additional 1% income yield on the current stock price.
Overall, this three-tiered program will enable ConocoPhillips to achieve its goal of returning more than 30% of its cash from operations to shareholders. Meanwhile, the roughly $7 billion of planned capital returns implies it's sending about 7% of its total current market value back to shareholders over the next year, split roughly evenly between cash payments and share repurchases.
ConocoPhillips will review all tiers each quarter. It will adjust the buyback and VROC levels higher or lower depending on oil prices. Meanwhile, it aims to deliver a consistently rising ordinary dividend throughout the commodity price cycle, with growth competitive to that offered by other companies in the S&P 500.
Well-positioned to produce strong total returns
ConocoPhillips' balanced capital plan sets it up to grow its production and cash flow in 2022 and beyond. Meanwhile, it also positions shareholders to reap the windfall from higher oil prices over the coming year via its three-tiered capital return program. If oil prices remain on their current trajectory, ConocoPhillips could send them around $7 billion in cash next year. Combined with its production growth, this three-pronged program positions the company to potentially produce attractive total returns over the coming year if oil prices corporate.
