ConocoPhillips' (COP -0.43%) strategy of not hedging any oil and gas production is paying huge dividends this year. Unlike many of its peers, the oil company didn't lock in prices at lower levels. That's enabling it to capture the entire upside of higher crude prices this year.
As a result, its cash flow is surging. The company is returning the bulk of that growing windfall to shareholders. It now plans to send them $10 billion this year, $2 billion more than its previous target.
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Cashing in on higher crude prices
ConocoPhillips produced $5.1 billion in cash provided by operating activities in the first quarter, more than double the roughly $2 billion it generated in the year-ago period. Higher production and oil prices helped fuel the surge in cash flow.
The company's oil and gas output averaged 1.747 million barrels of oil equivalent per day (BOE/d), a 220,000 BOE/d increase from the prior-year period. That's due entirely to the impact of acquisitions. After adjusting for acquisitions, production declined by 2% year over year due to maintenance and seasonality impacts. The overall increase in production came at an excellent time. ConocoPhillips realized $76.99 per BOE during the quarter, 70% above the prior-year period, as it captured the full benefit of higher market prices thanks to its unhedged production.
ConocoPhillips' surging cash flow gave it money to fund its $1.8 billion capital project budget with room to spare. It returned $900 million of that excess to investors via its regular quarterly dividend and a variable return of cash (VROC) payment. The company also paid off another $1.1 billion of debt.
Meanwhile, the oil giant supplemented its surging operating cash flow by selling $2.3 billion of assets during the quarter, including its remaining stake in fellow oil producer Cenovus Energy (CVE -0.19%). The company used the $1.4 billion in proceeds from the Cenovus sale to repurchase an equal amount of its stock. Meanwhile, it spent $1.4 billion to acquire an additional 10% stake in Asia-Pacific LNG.
Even after those investments, cash returns, and debt repayments, ConocoPhillips ended the quarter with more cash than it started, growing its cash balance from $5.8 billion to $7.5 billion.
More cash headed to investors this year
With the continued strength in the oil market, ConocoPhillips expects to generate more cash this year than initially anticipated. That's giving it a growing windfall to allocate on behalf of investors.
The company plans to spend some of that money on additional capital projects. It's increasing its 2022 capital budget from $7.2 billion to $7.8 billion due to higher inflation rates and increased partner-operated spending in the lower 48 states. That spending level should enable the company to produce an average of 1.76 million BOE/d this year. That's slightly below its initial 1.8 million BOE/d production target due to the net impact of asset sales, which will shave about 25,000 BOE/d from its 2022 output.
Meanwhile, the company now plans to return $10 billion in cash to shareholders this year. That's $2 billion more than last quarter's goal and $3 billion higher than its initial target. The oil company plans to allocate that incremental cash return across its share repurchase program and VROC.
ConocoPhillips set its latest VROC payment at $0.70 per share. That's more than double its last payment of $0.30 per share and 250% above its initial $0.20 per share VROC payment.
With its fixed quarterly dividend payments totaling about $2.4 billion this year, ConocoPhillips is returning more than $7.5 billion of additional cash to shareholders through repurchases and the VROC payments. That's a total cash yield on the company's current market cap of 7.5% when adding in its 1.8% current dividend yield.
Reaping the windfall
ConocoPhillips is one of the few oil companies that doesn't hedge its production. That strategy is paying massive dividends this year, allowing it to capture the full upside of higher prices and generate a gusher of cash flow. Investors are reaping the lion's share of this windfall as the company returns an increasing amount of cash to shareholders through its three-tiered capital return program. That ability to cash in on the uncapped upside of higher oil prices makes ConocoPhillips stand out as a top oil stock to buy in today's environment, where high prices seem to be here to stay.
