ConocoPhillips (COP +0.10%) is a leading producer of oil and gas. It has built one of the industry's deepest, most durable, and diverse portfolios. The company controls a treasure trove of low-cost oil and gas supplies around the world.
These features have made the oil stock a very desirable investment. Here are two crucial factors investors need to know before buying shares.
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It declared its independence a long time ago
ConocoPhillips is one of the largest oil and gas producers in the industry, with production approaching 2.4 million barrels of oil equivalent (BOE) per day. However, the company's business model differs significantly from those of fellow industry leaders ExxonMobil and Chevron. ConocoPhillips is an independent exploration and production company (E&P), while Exxon and Chevron are integrated energy companies.
An independent E&P company focuses on exploring for and producing oil and gas, which it sells on the open market. On the other hand, integrated energy companies have integrated upstream and downstream operations. They produce oil and gas that flows through midstream assets (many of which they own) to downstream refining and chemical facilities they operate. Both business models have their benefits and drawbacks.
NYSE: COP
Key Data Points
ConocoPhillips was an integrated energy company until 2012, when it spun off its midstream and downstream operations into Phillips 66. That move created the industry's largest independent E&P company, enabling ConocoPhillips to focus exclusively on growing its production business to grow shareholder value. This strategic focus allows it to capitalize on the upside potential from rising oil and gas demand and pricing. In exchange, the company assumes more downside price risk compared to its integrated peers.
The coming free cash flow gusher
Many of ConocoPhillips' E&P peers focus exclusively on tapping the vast oil and gas resources in the lower 48 states, primarily utilizing unconventional production techniques (horizontal drilling with hydraulic fracturing). E&P companies can drill these wells quickly, enabling them to ramp their growth rates up or down based on market conditions.
ConocoPhillips, on the other hand, takes a much broader approach both geographically and operationally. While the company has one of the best unconventional U.S. onshore resource positions, it also invests in liquefied natural gas (both domestically and internationally), the Canadian oil sands, and conventional production in Alaska and elsewhere.
Building new LNG export terminals and production hubs in Alaska requires a significant amount of time and money. However, these investments can be worthwhile. ConocoPhillips is currently investing in three LNG projects and building its Willow oil project in Alaska. These projects should come online through 2029. The company estimates that these long-cycle projects will add a cumulative $7 billion to its annual free cash flow over the next four years as they come online. That has the company on track to double its free cash flow by 2029 compared to its current level.
A different kind of oil stock
ConocoPhillips is different from most other oil and gas companies. Its business model makes it riskier than integrated oil companies, but with more upside potential. It also has greater diversification and growth visibility compared to other independent E&Ps. In many ways, it's right in that sweet spot, making it a compelling oil stock to consider buying.
