ConocoPhillips (COP +1.19%) closed its massive $22.5 billion acquisition of Marathon Oil last November. That deal bolstered its U.S. onshore position in several key regions while expanding its international operations. The company expects the highly accretive deal to enable it to produce significantly more free cash flow in the coming years, which will give it more money to return to shareholders.
The acquisition of Marathon enabled ConocoPhillips to upgrade its already strong portfolio of low-cost oil and gas resources. That's allowing the company to trim away some of the edges of its portfolio to further strengthen its financial position. As a result, the company's wheeling and dealing is enabling it to get bigger and better.
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Cashing in after a shopping spree
ConocoPhillips' acquisition of Marathon Oil added highly complementary acreage to the company's existing U.S. onshore portfolio in the Permian, Eagle Ford, and Bakken regions. The company brought in more than 2 billion barrels of resources with an average supply cost below $30 per barrel. In addition, Marathon had assets in the Anadarko region of Oklahoma and Equatorial Guinea.
The company has decided to cash in on the acquired assets in Oklahoma. It has reportedly put that position up for sale, seeking a price of more than $1 billion. The operations include 300,000 net acres that produce about 39,000 barrels of oil equivalent per day (BOE/d), about half of which is natural gas. Given the gasier nature of these assets, they currently have lower margins than their oil-rich operations.
The sale would help ConocoPhillips reach its target of divesting $2 billion of non-core assets following the Marathon purchase. The company has already sold its interest in the Ursa and Europa Fields and the related Ursa Oil Pipeline company to Shell for $735 million. It had a nearly 16% interest in Ursa and a 1% stake in Europa, which produced a combined 8,000 BOE/d last year.
These asset sales will enable ConocoPhillips to strengthen its balance sheet following the purchase of Marathon and additional interests in two Alaskan oil fields late last year. The company assumed $5.4 billion of Marathon's debt and spent about $300 million on those Alaskan acquisitions.
A well-oiled machine
ConocoPhillips will further strengthen its excellent balance sheet by cashing in on some of its non-core assets. The company ended last year with $6.4 billion in cash and short-term investments, and another $1.1 billion in long-term investments. Meanwhile, it has A-rated credit.
Because it already has a strong financial profile, ConocoPhillips can return a significant portion of its free cash flow to investors. The company started this year with a plan to return $10 billion to investors via repurchases and dividends. That's an increase from the $9.1 billion it sent them last year. The company boosted its dividend by 34% late last year and is ramping up its share-repurchase rate following the Marathon deal.
ConocoPhillips expects to continue returning more cash to investors in the future. It plans to deliver dividend growth within the top 25% of companies in the S&P 500 going forward. Meanwhile, it plans to repurchase more than $20 billion of its stock during the next three years. That's equivalent to the amount of newly issued shares it used to buy Marathon.
Staying in great financial shape
ConocoPhillips has significantly upgraded its portfolio over the past few months by acquiring Marathon Oil and boosting its stake in two Alaskan oil fields. That's giving it the flexibility to sell some non-core assets as it trims the edges of its portfolio to strengthen its already very healthy financial profile. By maintaining a strong balance sheet, ConocoPhillips can continue returning a boatload of cash to its investors, which should help give it the fuel to produce strong total returns in the future.
