Management's plans seem to be a prudent way to ensure the health of the balance sheet and the safety of the dividend while preserving some upside to potential oil price increases.
Allen Good, CFA
08:41 AM | Email Article
At its annual analyst day, ConocoPhillips
laid out its plans to cope with what it expects to be an extended period of low and volatile oil prices. In an effort to differentiate itself from exploration and production, or E&P, peers, it will prioritize free cash flow generation and returns, as opposed to absolute growth. Maintaining current production levels and paying the existing dividend will take precedence, followed by annual dividend growth, debt reduction, and then growth, assuming higher oil prices result in excess cash flow. Through cost reductions, ConocoPhillips has reduced its base capital necessary to hold production flat to $5 billion annually, bringing down its break-even level to $50/bbl in the process. At that level, it will be able to maintain and increase its dividend while reducing leverage to $20 billion by year-end 2019 from $27 billion currently. To accelerate value creation, it plans to divest $5 billion-$8 billion in assets, primarily North American natural gas assets, and repurchase $3 billion worth of shares. Through the cycle, it aims to pay out 20%-30% of operating cash flow to shareholders.
Allen Good, CFA, is an energy strategist for Morningstar.
Management’s plans seem to be a prudent way to ensure the health of the balance sheet and the safety of the dividend while preserving some upside to potential oil price increases. Previously, ConocoPhillips tried to have it all--a high dividend yield and growth--but that proved unsustainable as oil prices retreated from $100/barrel levels. While it could pursue the strategy of its E&P peers and prioritize growth, its size would work against it, leaving its growth rates to pale in comparison. Instead, leveraging its much larger and more diverse asset base to ensure a steady payout for energy investors means it is capitalizing on its strengths while differentiating itself from the bulk of its peer group. Incorporating the lower capital intensity into our model increases our fair value estimate to $45 from $39. Our no-moat rating remains intact.
Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.