Oil prices have slumped this year. WTI, the primary U.S. oil price benchmark, has fallen more than 10% this year to the low-$60s. That’s due to demand concerns from a potential slowdown in the global economy and increased supply as OPEC unwinds its voluntary production cuts faster than many anticipated.
The slump in oil prices will impact the cash flows of oil companies. However, some producers are in a better position to weather lower oil prices than others.
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ConocoPhillips (NYSE: COP) is in that group. Because of that, it’s one of the top oil stocks to buy and hold during the current market environment.
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A leader of the “haves”
ConocoPhillips CEO Ryan Lance discussed the current market environment on the company’s recent fourth-quarter earnings conference call. He stated, “The ultimate depth and duration of this current price environment remains unclear.” However, he noted, “ConocoPhillips is built for this, with clear competitive advantages.”
He highlighted that the company has a “deep, durable, and diverse portfolio,” with decades of inventory that boasts a cost-to-supply of less than $40 a barrel in the U.S. and internationally. He stated that “our advantaged U.S. inventory position in particular should become increasingly evident as the market sorts through the inventory ‘Haves’ and’ ‘Have-Nots’ in the current environment.” The company firmly believes it’s “the clear leader of the ‘Haves,'” commented the CEO.
In addition to having a top-tier portfolio, ConocoPhillips has a disciplined capital allocation strategy “that is battle-tested through the cycles.” The company recently showcased its discipline by reducing its capital spending guidance by $500 million and operating costs by $200 million in response to lower oil prices. Despite cutting spending, the company maintained its production guidance. It’s delivering the same oil and gas volumes for less money.
That cost discipline enables the company to generate more excess cash that it can return to shareholders. It sent them $2.5 billion in the first quarter via dividends and repurchases. Lance noted, “We believe our shares represent a very attractive investment at these prices, and we will continue returning a significant portion of our cash flow to our shareholders.”
Only getting better
ConocoPhillips is focusing its investments on its highest-return opportunities. This strategy has the company on track for further improvements in the coming years.
Lance highlighted:
We are on the cusp of a compelling multiyear free cash flow growth trajectory, led by our high-quality longer-cycle investments in Alaska and LNG. This underlying improvement in our free cash flow will structurally lower our breakeven and increase our capacity to return capital to shareholders.
The company is developing the Willow project in Alaska, which is on track to start producing oil in 2029. It’s investing an estimated $8 billion into the project, which will produce an average of 180,000 barrels of oil per day at its peak. Willow holds an estimated 600 million barrels of recoverable oil.
The company is also building an integrated global LNG business. It has a 30% equity interest in Sempra‘s Port Arthur LNG Phase 1 project, which started construction last March. It also formed two joint ventures with QatarEnergy for interests in the North Field South project. The company also signed agreements to buy gas from several other LNG export terminals in North America and resupply agreements with import terminals in Europe and Asia.
The growth from these major projects and the continued expansion of its base businesses position ConocoPhillips to deliver sector-leading free cash flow growth through 2029. The company expects LNG and Alaska to drive $6 billion of incremental free cash flow growth during that period.
This growing free cash flow will help further mute the impact of commodity price volatility in the future by lowering the company’s break-even level. Meanwhile, it will give ConocoPhillips more cash to return to shareholders through dividends and share repurchases. The oil company aims to deliver dividend growth within the top 25% of companies in the S&P 500 (SNPINDEX: ^GSPC) over the next few years. Meanwhile, it expects to buy back more than $20 billion of its shares over the next three years.
ConocoPhillips has what it takes to thrive
ConocoPhillips has a high-quality portfolio loaded with low-cost oil resources. That positions the company to prosper in the current lower-oil price environment. Meanwhile, it has visible growth on the horizon from two major long-term initiatives.
These factors should enable the company to produce strong free cash flow in the coming years, giving it more money to return to shareholders. The company’s combination of defensive and offensive characteristics makes it a great oil stock to buy and hold long term, despite the current uncertainty in the oil market.
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Matt DiLallo has positions in ConocoPhillips. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
