While investors were widely expecting a sharp rise in interest rates this year, that hasn't happened. 10-year Treasury notes currently yield around 2.6 %, leaving investors scrambling for higher yielding investments.
One option income-seeking investors should seriously consider is ConocoPhillips (NYSE:COP), an independent oil company that currently sports a respectable 3.2% dividend yield and has strong prospects for dividend growth.
Comparison with BP and Chevron
ConocoPhillips, the world's largest independent E&P company based on production and proved reserves, sports a pretty compelling dividend, even when compared to large integrated majors like Chevron and BP. Chevron also has a dividend yield of 3.2%, though BP's is significantly higher at 4.4%. While I think both companies are also attractive dividend-paying stocks, Conoco may have an edge over them due to its stronger growth prospects.
Chevron plans to cut spending from $42 billion last year to an average of less than $40 billion per year in 2014-2017. To its credit, however, it does have stronger growth prospects than peers Exxon and Royal Dutch Shell thanks to the planned start-up of large mutli-billion dollar projects like Jack/St. Malo and Big Foot in the Gulf of Mexico and Gorgon and Wheatstone in Australia. Assuming these needle-moving projects are brought online on time and on budget, they should allow for decent dividend growth.
BP, meanwhile, plans to keep its spending levels more or less unchanged at around $24 billion to $25 billion a year. However, the British oil giant's cash flows are expected to rise sharply from around $21.1 billion in 2013 to between $30-$31 billion this year thanks to the start-up of major oil projects in the Gulf of Mexico and elsewhere. While BP's huge exposure to Russia remains a major source of concern, the company's strong prospects for cash flow growth should also help support decent dividend growth.
Still, I think Conoco's dividend growth prospects may be stronger than both Chevron and BP for a few key reasons. First, the company is on track to deliver stronger production growth than the majors. Second, it has a major advantage over BP and Chevron in that it commands leading positions in all three of the fastest-growing liquids-rich US shale plays – south Texas' Eagle Ford, North Dakota's Bakken, and west Texas' Permian Basin. This means its new production will be increasingly oil-weighted, which should drive stronger growth in margins and cash flows.
Shift to liquids paying off
Already, Conoco's greater focus on these three plays in paying off. During the first quarter, oil-weighted production from the Eagle Ford and Bakken surged 41 % year-over-year to 183,000 barrels of oil equivalent per day. As a result, the liquids share of the company's production rose from 48% to 52%, boosting both margins and cash flow.
First-quarter cash provided by continuing operating activities came in at $6.3 billion, up 37% from $4.6 billion in the year-earlier period. Meanwhile, the company's cash margins for the full-year 2013 improved 11% year-over-year to $28.55 per BOE. Going forward, Conoco's production will become even more heavily weighted toward oil and liquids as it ramps up activity in the Bakken, Eagle Ford, and Permian.
Production from these plays is expected to grow at an annual rate of 7%, 18%, and 16%, respectively, through 2017. This should drive 3%-5% annual growth in production and cash margins through 2017. Assuming 2013 commodity prices, Conoco expects to generate cash flow of $20 billion-$23 billion by 2017, the midpoint of which implies 36% growth from 2013 cash flow of $15.8 billion .
If it can achieve this target, it should be able to cover its 2017 capex and dividend payments through cash flow. The one risk, however, is if commodity prices fall to around $100 for Brent and $90 for WTI, the company's cash flows could fall short of its target, hindering dividend growth.
While Chevron and BP are also compelling dividend stocks, I think ConocoPhillips' stronger growth prospects and increasing leverage to oil through its leading positions in some of the best shale oil plays in the country may give it an edge over the integrated majors. As long as commodity prices remain high, the company should be able to continue growing its dividend at a strong pace over the next few years.