ConocoPhillips (COP +2.86%) is one of the world's largest independent exploration and production (E&P) companies. That global scale gives it significant competitive advantages over many of its smaller rivals. It has several attractive investment qualities that make it a top choice for investors.
Here are three reasons why you can confidently buy this leading oil stock right now.
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A low-cost leader
ConocoPhillips has spent the past several years high-grading its portfolio. The company has sold off higher-cost assets and recycled that capital into expanding its lower-cost resources. It made its biggest upgrade last year, acquiring Marathon Oil in a $22.5 billion deal. The acquisition added over 2 billion barrels of resource with an average estimated cost of supply below $30 a barrel.
The company has built one of the deepest, most durable, and diverse portfolios in its peer group with some of the lowest supply costs in the sector. ConocoPhillips currently has a break-even level in the mid-$40 a barrel range to support its capital expenditure program. With crude prices in the low to mid-$60s these days, the company is generating significant excess free cash flow after funding its capital expenditures.
That ultra-low-cost position gives it a competitive advantage to weather even lower oil prices in the future.
NYSE: COP
Key Data Points
Visible free cash flow growth through the end of the decade
ConocoPhillips has invested a considerable amount of money over the past few years in large-scale capital projects. The company and its partners are working on three liquefied natural gas (LNG) expansions. Additionally, ConocoPhillips is spending $9 billion on its Willow oil project in Alaska.
These investments will fuel meaningful free cash flow growth over the next few years. The company expects that additional cost and margin enhancements from its Marathon deal will add an incremental $1 billion to its free cash flow next year. Meanwhile, its three LNG investments should add another $1 billion in incremental cash flow in both 2027 and 2028 as they come online. Finally, it expects to reach an inflection point in 2029 when Willow starts up, with the oil field projected to contribute $4 billion to its annual free cash flow. Add it up, and that's $7 billion in incremental free cash flow by the end of the decade. That assumes oil averages $70 a barrel; ConocoPhillips can produce $6 billion in additional free cash flow if crude averages $60 a barrel. That's a meaningful increase for a company that has generated $6.1 billion in free cash flow through the first nine months of this year.
A high-octane dividend
ConocoPhillips' low-cost operations enable it to generate significant free cash flow, even in the current environment. That allows the company to pay an attractive dividend. Its payout currently yields 3.3%, more than double the S&P 500's level (1.2%).
That high-yielding dividend is on a very sustainable foundation. The company estimates that its current oil price breakeven level for capital spending and the dividend is in the mid-$50s. It has a comfortable cushion with crude prices currently well above that level. Additionally, ConocoPhillips has a fortress balance sheet. It ended the third quarter with $6.6 billion of cash and short-term investments and another $1.1 billion of long-term investments. With its dividend payment currently around $1 billion per quarter, it could cover that payout for several quarters on its cash balance alone.
The company recently increased its dividend payment by 8%. It aims to deliver dividend growth among the top 25% of companies in the S&P 500 in the future. That's easily achievable, given the growth it sees ahead for its free cash flow. The company anticipates its oil price breakeven level will decline into the low $30s by the end of the decade, further enhancing the sustainability of its steadily rising dividend.
A low-cost, high-yielding oil growth stock
ConocoPhillips has one of the lowest breakeven levels in the industry. This metric should continue declining in the future as the company's expansion projects come online and begin generating additional free cash flow. That will give it the fuel to continue increasing its high-yielding dividend, which will become even more sustainable. This combination of a low risk profile, high yield dividend, and visible free cash flow growth makes ConocoPhillips a top oil stock to buy and hold long term.
