Since the oil price downturn in 2014, the energy sector has mostly been in a bear market. There are some fundamental reasons for energy’s decline, and some psychological ones, observes Robert Rapier, editor of Investing Daily's Utility Forecaster.
From a fundamental perspective, oil and gas prices today are much lower than they were a decade ago. Thus, investor sentiment for the energy industry is decidedly negative.
But one company has risen above its peers since the energy bear market began. That company is also poised to outperform once the bear market ends.
I am speaking of ConocoPhillips (COP). Today ConocoPhillips is the world’s largest publicly traded, pure oil and gas producer. Because the roots of Conoco and Phillips date back over 100 years, the company has experienced numerous oil booms and busts.
As a result, ConocoPhillips has adopted a far more fiscally responsible approach to driller than many of its competitors. When oil prices declined, the company took defensive measures. It sold assets, paid down debt, cut its dividend, and put itself in a position to profit in an era in which oil prices might be $50 a barrel.
The result has been a steady increase in the company’s cash flow. Since 2015, cash flow has increased each year. In fact, today ConocoPhillips is generating more cash flow with oil prices in the $50s than it was in 2013 when oil prices were over $100.
In November, the company release third quarter earnings that were outstanding. While many peers struggled, ConocoPhillips reported:
• Free cash flow generation of $1 billion.
• Repurchased $750 million of shares and paid $340 million in dividends representing a return of 41% of cash from operations to shareholders.
• Q3 production (excluding Libya) of 1.3 million barrels of oil equivalent/day, which represented an increase of 7% year-over-year
• Announced a 38% increase in the quarterly dividend to $0.42/share, and $3.0 billion in planned 2020 share repurchases (~5% of the current market cap).
• Ended the quarter with $8.4 billion of ending cash and short-term investments.
ConocoPhillips has been a shareholder friendly, cash generation machine despite oil prices that remain below $60. Also, in November the company held an Analysts and Investors Meeting at which they unveiled a 10-year strategic plan.
Net debt is a quarter of what it was just three years ago, but the company has increased by 50% its oil and gas resource that breaks even at a $40 WTI price. No other independent oil and gas producer can come close to these financial measures.
Over the next decade, the company projects that it will generate about $50 billion in free cash flow if oil prices remain at $50/bbl. The company’s top stated priority is to maintain production and pay its dividend. Just behind that is annual dividend growth, while returning 30% of cash from operations to investors.
The company projects a total return to shareholders through dividends and share buybacks over the next decade of $50 billion. This is substantial, given the current market cap of $65 billion. This bear market in oil won’t last forever. But ConocoPhillips is built to survive it and thrive once it ends.
