Both ConocoPhillips (COP -1.94%) and ExxonMobil (XOM -2.30%) recently reported better than expected results, partially driven by higher commodity prices. However, ExxonMobil continues to trade at a premium compared to its large-cap U.S. exploration and production peers, which offer significantly higher growth and improving returns.

ConocoPhillips, the world's largest independent E&P company, continues to make progress delivering higher cash margins in flat price conditions. The company has the ability to grow production via its U.S. legacy unconventional and new projects, continue to improve margins and thereby support dividend growth.

The company is off to a strong start to 2014. Conoco recovered from some start-up delays and weather issues early in 1Q and exited the quarter in a strong position. The company's unconventional programs are performing very well, and major projects are ramping up or progressing toward start-up. 

Margin expansion
ConocoPhillips continues to improve its cash margins. The company is investing 95% of its capital in projects that deliver more than $30 per barrel in margins. With FCCL (Foster Creek, Christina Lake, and Narrows Lake) now able to self-fund, the drain on cash flow should also ease off. Moreover, as APLNG ramps up in 2015, another long-lived megaproject should add to cash flow and will free up capex for other purposes. 

While Conoco reported year-over-year increase in production of only 2% (4% quarter over quarter), the company's cash margins grew by 13% Y/Y to $30.24 per barrel of oil (quarter-over-quarter margins increased by 5%). A large chunk (5%) of this growth was contributed by increased portfolio weighting toward liquids production. Based on the company's project backlog, ConocoPhillips should continue to see expansion in its global margins for several years.

ConocoPhillips is the second of the U.S. majors to hit a free cash flow inflection, and this could result in another dividend increase in July. Moreover, the company could redirect its capex flexibility into shorter cycle shale growth project, helping production visibility beyond 2017.

Source: Company documents

Concentrating more on geopolitically stable regions
ConocoPhillips' operations, unlike its domestic peers ExxonMobil and Chevron (CVX -1.74%), are concentrated more in geopolitically stable regions. The company derives more than 50% of its revenues from North America. Moreover, in the coming years this concentration should increase further, as the company divests its non-core overseas operations and invests the majority of its capex in North America. ConocoPhillips is exiting its lower return international operations, which are a product of the last cycle and are maturing now, and refocusing its portfolio into the current cycle North American assets.

Earnings beat
Conoco reported adjusted first quarter EPS of $1.81, topping Wall Street estimates of $1.56 by 16%. Lower production taxes, lower exploration and corporate expenses, and higher commodity prices coupled with volumes upside all contributed to the beat. Quarterly earnings also benefited from the marketing of third party natural gas volumes in North America by $100 million, or $0.08 per share.

In addition to reporting strong financial results, the company performed well operationally with average production of 1.53 million barrels of oil equivalent per day excluding Nigeria and Libya. This is compared to company's earlier guidance of 1.525 million boe/d.

ExxonMobil, the largest publicly traded energy company, also delivered better than expected results, but the company trades at a meaningful premium compared to its large-cap U.S. E&P peers that offer significantly higher growth and improving returns.

The company's upstream results, aided by higher commodity prices and realization, helped deliver the beat. Lower depreciation and exploration expenses also contributed. However, if we take out the non-recurring items, it lowers the magnitude of the beat. The company reported first quarter EPS of $2.10 compared to sell-side estimates of $1.88.

After adjusting for gains on asset sales, tax, over lifting, and lower exploration, results would have been $1.98, still a beat compared to Street estimates of $1.88. However, for a large company like Exxon it is not uncommon to have many one-off items in the quarter. Therefore, it may be premature to totally adjust the company's earnings power based on the results of one quarter.

Moreover, these items often cancel each other out, so the collective impact in the quarter is often small. Therefore, as mentioned earlier, it would be premature or risky to jump to any conclusion based on one quarter's results.

Foolish takeaway
Among large-cap U.S. E&P companies ConocoPhillips offers better investment profile compared to ExxonMobil, given Exxon's expensive valuation, lack of meaningful near-term production growth, and growing challenges to fund its buyback program. ConocoPhillips on the other hand has demonstrated a strong ability to drive production growth in high-margin barrels and eventually generate strong cash flow.