ConocoPhillips Stock: High Oil Prices Remain Supportive

ConocoPhillips (COP) is a global oil and gas company. It engages in the exploration, production, transportation, and marketing of crude oil and natural gas. Its portfolio includes conventional assets in North America, Australia, Europe, and Asia, as well as oil sand assets in Canada. The company was founded in 1917 and is headquartered in Houston, Texas.

I am bullish on COP stock. The company has a strong balance sheet and will return $8 billion to shareholders this year through share repurchases and variable dividends. As long as they remain high, high oil prices continue to support the company’s profitability.

ConocoPhillips Business News

Some of the latest business news includes a $1 billion increase to the expected 2022 return of capital to shareholders to a total of $8 billion. The incremental $1 billion will be distributed through share repurchases and variable return of cash (VROC) tiers.

Also, ConocoPhillips reached an agreement to sell its Indonesia Assets for $1.355 billion, plus a notice that it is exercising its preemption right to purchase up to an additional 10% shareholding interest in Australia Pacific LNG.

ConocoPhillips Key Drivers of Financial Performance

The elevated oil prices in 2021 and their rally year-to-date in 2022 have been a key catalyst for ConocoPhillips to deliver a strong financial performance.

Many factors are now supportive of high oil prices. The most notable ones are a slow production growth in the U.S. market, the inability of several OPEC members to increase production, and geopolitical risks like tensions in the Middle East and between the U.S and Russia, as Russia is rumored to invade Ukraine.

In the event of Russia invading Ukraine, oil prices would witness high volatility and could reach or surpass $100 per barrel. However, suppose this scenario does not materialize. In that case, as we head into spring, oil prices should witness a correction as better weather conditions should put a halt to increased demand.

I dare to write that the global inflationary problem and pressures should mix politics with a coordinated attempt to drive oil prices higher. Several years ago, when oil prices were also at historic highs, and the majority of analysts were bullish about continued higher prices, a collapse of prices followed.

The global economy was not then ready to deal with rising costs because of extreme oil prices. The dynamics of the global economy have changed ever since, but even the Chief Executive of ConocoPhillips has expressed his concerns about high energy prices.

“Chief Executive Ryan Lance, however, said the high prices may lead U.S. oil producers to add production too quickly, leading to oversupply.”

“If we are getting back to the level of growth in the U.S.” comparable to the 2014-2015 shale boom, said Lance, and “you’re not worried about it, you should be,” he told investors during a conference call.

ConocoPhillips Q4 2021 Earnings and Full-Year 2021 Results

COP stock earnings have been witnessed a strong uptrend in recent quarters. In Q4 2021, EPS GAAP of $1.98 was a miss by -$0.19, but revenue of $15.96 billion was a beat by $2.56 billion.

ConocoPhillips reported fourth-quarter 2021 earnings of $2.6 billion, or $1.98 per share, compared with a fourth-quarter 2020 loss of $0.8 billion, or ($0.72) per share. Full-year 2021 earnings were $8.1 billion, or $6.07 per share, compared with a full-year 2020 loss of $2.7 billion, or ($2.51) per share.

Revenue of $45.83 billion for 2021 showed an increase of 144.2% compared to Fiscal Year 2020.

Fundamentals – Risks

There are no severe warning signs for COP stock. The company declared both an ordinary dividend of 46 cents per share and a second-quarter VROC payment of 30 cents per share, representing a 50% increase over the first quarter VROC. The combination of increased dividends in 2022 represents a more than 50% increase in cash return to shareholders compared to 2021.

Free cash flow growth of 13,316% for Fiscal Year 2021 to $11.67 billion from $87 million in 2020 is also spectacular.

I also want to highlight that ConocoPhillips achieved a return on capital employed (ROCE) of 14% in 2021 compared to a figure of -1% for 2020. This financial ratio measures the company’s profitability related to its efficiency of capital investments. A sustained ROCE will indicate ConocoPhillips will continue to have strong profitability, and further capital could be returned to shareholders.

Valuation

COP stock is relatively attractive based on its P/E ratio of 15.2x compared to the U.S. oil and gas industry average of ~18x and relatively overvalued based on its P/B ratio of 2.6x compared to the industry average of 2.2x.

Wall Street’s Take

ConocoPhillips has a Strong Buy Consensus based on 14 Buys and two Holds ratings. The average ConocoPhillips price target of $103.69 represents 12.6% upside potential.

Conclusion

High energy and oil prices have been a key driver of a very strong financial performance for the company in 2021. The return of capital to shareholders, along with increased dividends and very strong free cash flow generation, is positive for the COP stock even at the risk of oil prices correcting lower in the spring and summer of 2022.

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