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ConocoPhillips (COP) Up 32.8% in 3 Months: More Growth Ahead?

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ConocoPhillips’ (COP - Free Report) shares have jumped 32.8% in the year-to-date period. While the upstream energy industry is grappling with coronavirus woes, the company has managed to navigate through the challenges. Headquartered in Houston, TX, ConocoPhillips is one of the largest explorer and producers in the world, with a market cap of $50.9 billion.

It delivered an average earnings surprise of 10.9% in the trailing four quarters. The company continues to benefit from prolific U.S. shale plays.

Can It Retain Momentum?

The answer is yes and here’s why we think so:

ConocoPhillips holds bulk of acres in the three big unconventional plays, namely Eagle Ford shale, Delaware basin and Bakken shale, which are rich in oil. The company has long-term plans to spend almost $4 billion per annum on the shale plays and operate around 20 rigs across four major fields. This can boost production from the regions from more than 400,000 barrels a day (bpd) to 900,000 bpd or greater by the end of the next decade. Additionally, the remaining opportunities for ConocoPhillips in the Eagle Ford shale, wherein it owns around 3,800 undrilled locations, could lend the company an access to huge oil equivalent potential reserves.

ConocoPhillips has confirmed its decision to buy Concho Resources Inc. in an all-stock transaction, valued at $9.7 billion. Amid the coronavirus pandemic, this has been one of the largest oil accords in the United States. Importantly, by 2022, the combined firm is expected to save cost and capital of $500 million per annum.

At third quarter-end, the company had $2,490 million in total cash and cash equivalents, and long-term debt of nearly $14,905 million. Importantly, its massive liquidity position will enable it to pay off short-term debt of only $482 million. Also, the company has a debt to capitalization of 33%, lower than the industry average of 44%. Therefore, ConocoPhillips’ balance sheet is significantly less leveraged than the industry it belongs to.

Following a five-month hiatus, the company resumed share repurchase of $1 billion in fourth-quarter 2020. ConocoPhillips will use the cash available on the balance sheet to fund the stock buybacks. Earlier, it slowed down the pace of the 2020 stock buy-back program due to market uncertainties. Moreover, the Zacks Rank #3 (Hold) company boosted quarterly dividend payments as a shareholder-friendly measure.

However, there are some factors that are holding back the stock from attaining its true potential. High exploration costs are affecting the bottom line. Moreover, the company has reduced capital budget due to the ongoing pandemic, which can affect production levels. Although crude prices have improved from the recent low levels, they are still below the year-ago mark. This is keeping profits under pressure. Nevertheless, we believe that its systematic and strategic plan of action will drive long-term growth.

Stocks to Consider

Some better-ranked players in the energy space include TC PipeLines, LP (TCP - Free Report) , Suncor Energy Inc. (SU - Free Report) and Summit Midstream Partners, LP (SMLP - Free Report) , each holding a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

TC PipeLines’ bottom-line estimates for 2021 have increased nearly 2% in the past 60 days.

Suncor’s sales for 2021 are expected to increase 16.5% year over year.

Summit Midstream’s bottom-line estimates for 2021 have increased 12.4% in the past 60 days.

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