There are many different ways of approaching an investment in oil and gas. But one of the simplest is to target a company in the upstream oil and gas sector, whether that's an exploration and production (E&P) company, oil-field services and equipment provider, or integrated major.
At a market cap just shy of $150 billion, ConocoPhillips (COP -0.08%) is the most valuable U.S.-based independent E&P. It's worth more than some integrated majors -- like BP -- and about half as much as Chevron.
Here's why ConocoPhillips is well positioned to thrive in the current price environment, and why it has what it takes to endure a downturn.
Image source: Getty Images.
Capital discipline
ConocoPhillips has a track record of making timely acquisitions and not getting too caught up in whatever its peers are doing. In January 2021 it completed its acquisition of Concho Resources when the industry was still recovering from a downturn.
It's been fairly quiet on the merger and acquisition front since then, while many other E&Ps are scrambling to acquire or get acquired.
Some U.S.-based E&Ps operate exclusively in the continental U.S. (Lower 48). But just 55% of ConocoPhillips' Q4 2023 adjusted earnings came from the Lower 48. The company looks for value no matter the geography.
ConocoPhillips targets assets with low costs of production so that it can profit even when oil and gas prices are low. It plans operations around its mid-cycle target price of $60 per West Texas Intermediate (WTI) barrel (the U.S. benchmark). But it can break even at a much lower price too.
The company's 10-year plan is centered around breaking even at just $35 per barrel WTI, which ensures the company stays disciplined and doesn't over-expand into less profitable assets.
The company's regimented approach leads to lasting financial health. It has consistently kept a balance sheet with low net long-term debt and solid debt-to-capital and financial debt-to-equity ratios. While many E&Ps leveraged up during the 2020 downturn, ConocoPhillips kept its balance sheet in good shape.
COP Net Total Long Term Debt (Quarterly) data by YCharts
Rewarding shareholders
ConocoPhillips returns value to shareholders in a variety of ways. Over the last five years, it has distributed over 40% of its cash flow from operations (CFO) to shareholders. Its long-term goal is to distribute at least 30% of CFO throughout the cycle.
The first priority of these distributions is the ordinary dividend, followed by share buybacks and then its variable return on capital (variable dividend).
The variable dividend is based on the company's performance -- so higher earnings means a higher variable dividend -- while the ordinary dividend is just like any other quarterly dividend.
ConocoPhillips' ordinary dividend sits at $0.58 per share per quarter, or a 1.8% yield on its own. Variable dividends exceeded ordinary dividends in 2023, but investors shouldn't count on that to repeat.
Since CFO has been sizable over the last few years, ConocoPhillips has been able to repurchase a considerable amount of its own stock. It has reduced its share count by 12.8% over the last three years, on top of the money it spent paying ordinary and variable dividends.
Regardless of the cycle, ConocoPhillips is a well run, disciplined, and diversified E&P with a good dividend and plenty of upside potential from the business and the variable dividend.
An E&P you can count on
Even near an all-time high, ConocoPhillips is a great value. Despite being in a volatile industry, the company does a great job of providing stability and consistency through effective capital allocation. It also sets manageable goals and clearly outlines what shareholders should expect from the company throughout the cycle.
There are cheaper E&Ps out there than ConocoPhillips, but this is the kind of industry where it is better to go for quality. ConocoPhillips can do very well in the current operating environment, but it also has the balance sheet and cost profile to endure a downturn. Add it all up, and ConocoPhillips is a best-in-breed oil stock to load up on in April.
