14 BARRON’S October 21, 2019
ConocoPhillips is a model oil and gas producer, with
a rich dividend and cheap shares. By Andrew Bary
An Energy Stock
Worth Drilling Into
AT A TIME WHEN WALL STREET HAS
souredontheenergyindustry, Conoco-
Phillips has done as good a job as
any major company in trying to win
over investors.
It was early in coming around to
the now-popular view in the explora-
tion-and-production, or E&P, sector
that companies can’t just focus on
boostingoutput;theyalsoneedtorein
incapitalspending,generatefreecash
flow, and return it to shareholders in
dividends and stock buybacks.
Investors welcomed the company’s
approach when it was adopted in late
2016,sendingthestocktoahighof$
a year ago from about $45. But the
shares have since fallen back under
$55. Blame weaker commodity prices,
a rout in E&P stocks, the rise of so-
cially responsible investing, and fears
about the industry’s future.
Withtheselloff,theshareslookap-
pealing. ConocoPhillips (ticker: COP)
hasanattractiveglobalresourcebase,
includingaleadingpositionintheEa-
gleFordregionofTexas,astrongbal-
ance sheet, and low production costs.
“It’sthebesthouseinabadneigh-
borhood. The company has a well-
diversifiedandfree-cash-flow-genera-
tiveportfolio,executionisstrong,and
the strategy is on track,” says Phil
Gresh, an energy analyst with J.P.
Morgan.HehasanOverweightrating
and a $68 price target.
Shares of ConocoPhillips, while
down 25% in the past year, are well
ahead of the sector, as measured by
the SPDR S&P Oil & Gas Explora-
tion & Production exchange-traded
fund (XOP), which is off 50%.
This month, ConocoPhillips in-
creased its quarterly dividend 38%, to
42centsashare,resultingina3%yield,
amongthehighestofmajorE&Pcom-
panies. It also has a share-repurchase
program targeted at $3.5 billion this
year and $3 billion in 2020. All of this
provides a “total yield,” or dividends
plusbuybacks,ofabout8%–amongthe
bestintheenergysector–basedonthe
corporation’s $60 billion market value.
The dividend boost reflects what
CEORyanLancehascalleda“hyper-
focus” on shareholder returns. “The
industryhasdestroyedvalueoverthe
past 15 to 20 years. That’s why inves-
torshavefledthebusiness,”Lancetold
anindustryconferenceinMay. “You’ve
got to have the shareholder up front,
and you have to build the company
with the cash flow that’s left over.”
ConocoPhillips plans to spend $6.
billionthisyearonenergyexploration
andaimstoholdaverageannualcapital
spendingto$7billionorlessthrough-
out the next decade. It expanded or-
ganic production by 5% so far this
year, even with its capital restraint.
The company lists five priorities:
sustainoutputandpaythecurrentdiv-
idend;increasethedividend;maintain
an A credit rating; pay out more than
30% of annual cash flow from opera-
tions;andbedisciplinedininvestments
to increase cash flow.
ConocoPhillips officials weren’t
available for comment in the quiet
period before the company’s earnings
release on Oct. 29.
The stock trades for 14 times pro-
jected2019earningsof$3.75ashare,a
discountto Chevron (CVX)and Exxon
Mobil (XOM), and in line with other
leading E&P companies.
ConocoPhillips was once a “mini
major”alongthelinesoftheintegrated
ExxonandChevron,butitseparatedits
refining,chemical,andmarketingoper-
ations into Phillips 66 (PSX) in 2012.
Today,ConocoPhillipsismorediver-
sified than many E&P companies that
arefocusedonthehotPermianbasinof
West Texas and New Mexico. It gets
abouthalfofitsproductiondomestically,
from sites including the Eagle Ford,
Bakken,andPermianbasins,aswellas
Alaska.ItalsooperatesinCanadaand
hasstakesinlucrativeliquefied-natural-
Down in the Oil Patch
How ConocoPhillips stacks up against some energy peers
Recent Market YTD 2019 E 2019 E Dividend
Company / Ticker Price Val(bil) Change EPS P/E YieldConocoPhillips / COP $54.53 $60.5 -13% $3.75 14.5 3.1%
Chevron / CVX 115.35 219.0 6 6.53 17.7 4.
EOG Resources / EOG 66.77 38.8 -23 4.99 13.4 1.
Exxon Mobil / XOM 68.14 288.3 0 2.81 24.2 5.
Pioneer Natural Resources / PXD 127.70 21.3 -3 7.79 16.4 1.
E=Estimate. Source: Bloomberg
ConocoPhillips
COP•NYSE
Source: FactSet
Jan. Oct.
50
55
60
65
$
gas facilities in Qatar and Australia.
Thanks to its low operating costs,
the company believes that it can sus-
tain production and pay its dividend,
even if crude drops to $40 a barrel.
ConocoPhillipsofferssignificantearn-
ingsupsideifenergypricesrally,given
that it doesn’t use hedging.
ConocoPhillipshasoneoftheindus-
try’s better balance sheets, with net
debt under $10 billion and a debt-to-
annual-pretax-cash-flowratiobelowone;
thesectoraverageistwo.Andthiscal-
culation doesn’t include a $1.7 billion
stake in Canada’s Cenovus Energy
(CVE), which it received for selling
some assets to Cenovus in 2017.
Among the majorinvestorconcernsis
whetherConocoPhillipscansustainits
model over the next decade and
whetheritwillbetemptedtodoamajor
deal.Lance,however,hasplayeddown
interest in a large acquisition.
Analysts are looking to the com-
pany’s investor day on Nov. 19 for
more details on the 10-year outlook.
Indeed,themeetingcouldbeacatalyst
forthestockifmanagementimpresses
Wall Street with its plan.
While the bar is high for energy
investmentsthesedays,ConocoPhillips
clears it with a shareholder-friendly
approach to a challenging business.
For oil and gas investors, the shares
could eventually be a gusher. Illustration by Carl Wiens