ConocoPhillips (NYSE:COP) is not off to a good start in 2016. Persistently weak oil prices, along with the announcement that it was cutting out production growth and reducing its dividend, have pushed the stock price down double digits to start the year. That said, there are some catalysts on the horizon that could reverse this rough start.
1. Oil prices rebound
ConocoPhillips' stock is very correlated to the price of oil, basically following it down over the past year:
Suffice it to say, if crude were to reverse course, it would take ConocoPhillips' stock up with it.
There is reason to be optimistic that crude oil might rally later this year. OPEC is working to freeze not only its output level, but that of large non-member producers such as Russia in order to stop supply growth so that the oil market can begin to work off its oversupply.
In addition to that, many oil companies are either investing to keep production flat this year, which is the course of action ConocoPhillips is taking, or investing within cash flow. For most companies, that cash flow is not enough to enough to maintain production, which is expected to cause production in North America to accelerate its decline. That should eventually lead to a rebalancing of the oil market. Once this rebalance starts to happen oil prices should rebound, fueling a rally in oil stock prices too.
2. It strikes oil in the deepwater
Prior to the downturn in oil prices, ConocoPhillips built up a very large deepwater acreage position, which it planned to use to drive production growth in the decade ahead. However, it has since decided to abandon these efforts and instead focus its attention on North American unconventionals because the returns are higher and it's much more flexible:
Due to that shift, the company is currently in the midst of a phased exit of deepwater exploration, which means it is reducing its investment, before eventually exiting its position. As such, this is a transition year for the company, with it participating in the drilling of several wells:
It needs these wells to be successful in order for it to be able to maximize the value of its deepwater assets in the future. In particular, ConocoPhillips' joint venture with Suncor Energy (NYSE:SU) and Shell (NYSE:RDS-A) in Nova Scotia is one to watch. Shell, which owns 50% of the venture, initially acquired the lease position in 2013 for CAN$988 million and then brought in ConocoPhillips as a 30% partner and Suncor Energy as a 20% partner in mid-2014. Success here can enable ConocoPhillips to eventually recoup something from an investment made right before oil prices crashed, possibly selling its stake to one of its partners, both of which plan to stick with deepwater for the long term.
3. It starts buying back stock
After reducing its dividend and capex, ConocoPhillips put itself in a position to be cash flow breakeven in 2016 at a $45 oil price. Furthermore, with the cash it has on hand, it won't need to take on any additional debt this year as long as oil averages $40 per barrel this year. That puts it in a pretty decent position to generate some excess cash this year either through non-core asset sales or higher oil prices.
Assuming that happens, the company would then have three options for that cash: start boosting the dividend, invest to grow production, or buy back stock. Given how far its stock price has dropped, a stock buyback might be its best use of cash. It would be a sign to the market that it thinks its stock is undervalued, which could bring back buyers.
As an oil producer, ConocoPhillips' stock is very correlated to the price of oil, meaning any rise there will likely cause its stock to follow suit. That said, the company also has some catalysts of its own that could push the stock higher should the price of oil at least stabilize. The biggest are the potential for finding a gusher in offshore Canada or selling non-core assets so that it can buy back its stock at the low point of the cycle. If either comes through, it could give investors something to be excited about after the rough start to 2016.
Matt DiLallo owns shares of ConocoPhillips. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.