ConocoPhillips (COP - Free Report) is well poised for growth on the back of production possibilities and strong financial flexibilities. However, rising operating costs continue to be a concern.
Headquartered in Houston, TX, ConocoPhillips is primarily involved in the exploration and production of oil and natural gas. Considering proved reserves and production, the company is the largest explorer and producer in the world.
Let’s take a closer look at the factors that substantiate its Zacks Rank #3 (Hold).
What’s Favoring the Stock?
The bulk of acres that ConocoPhillips holds in the three big unconventional plays — namely Eagle Ford shale, Delaware basin and Bakken shale — is rich in oil. The company is planning to spend almost $4 billion per annum on the shale plays and operate around 20 rigs across four major fields. This is expected to ramp up production from the regions from more than 400,000 barrels a day to more than 900,000 barrels by the end of the next decade.
From the three unconventional plays, ConocoPhillips projects a compound annual production growth rate of more than 25% from 2017 through 2019. Notably, significant existing opportunities for ConocoPhillips in the Eagle Ford shale, wherein it owns about 3,400 undrilled locations, could lend the company an access to almost 2.3 billion barrels of oil equivalent estimated potential reserves. Notably, it has a humongous resource base of around 15 billion barrels of oil equivalent, which has a supply cost of less than $40 per barrel.
ConocoPhillips — which had recorded $16.3 billion and $7.3 billion in free cash flow (FCF) in 2017 and 2018, respectively — expects to generate around $50 billion FCF during the 2020-2029 time period. It assumes WTI Crude price at $50 per barrel during this period. Notably, the company generated $6 billion FCF in the first three quarters of 2019, with WTI Crude price averaging $57.04 per barrel.
The upstream companies are under pressure from investors, who are no longer supporting drilling programs and expansions in the absence of strong cash flows. Investors want explorers to reduce costs, improve internal efficiencies, raise share repurchases and increase returns. As such, ConocoPhillips’ target of paying dividends of $20 billion and making $30 billion of share repurchases over the coming decade can cheer investors.
The company’s balance sheet is significantly less leveraged than the industry it belongs to. At the end of third-quarter 2019, the company had a debt-to-capitalization ratio of 30%, lower than the industry average of 35.6%. Currently, it has nearly $7.2 billion in cash and cash equivalents. Importantly, in 2018, ConocoPhillips had managed to reduce debt burden to reach its target of roughly $15 billion, much earlier than planned.
Hurdles in Growth Path
ConocoPhillips’ expectation for higher production costs and operating expenses is likely to hurt profits. For 2019, the firm projects total production and operating expenses of $5.4 billion, indicating an increase from $5.2 billion in 2018. Production and operating expenses rose to $4,020 million in the first three quarters of 2019 from $3,851 million in the comparable year-ago period. Also, exploration costs rose to $592 million in the first nine months of 2019 from $267 million recorded in the corresponding period last year.
For fourth-quarter 2019, ConocoPhillips projects production in the range of 1,265-1,305 thousand barrels of oil equivalent per day (MBoe/d), suggesting a reduction in sequential volumes from 1,366 MBoe/d. The lower production volumes will result in reduced profit levels.
Crude price volatility amid low energy demand outlook is concerning. With oil contributing 52% to the company’s production mix, weakness in commodity prices is likely to hurt the explorer’s bottom line in the coming quarters.
To Sum Up
Despite significant prospects, ConocoPhillips’ increasing costs and oil price volatility are concerning. Nevertheless, we believe that systematic and strategic plan of action will drive its long-term growth.
Which Way are Estimates Headed?
The Zacks Consensus Estimate for 2019 earnings per share is $3.63, which witnessed three upward estimate revisions and one revision in the opposite direction in the past 60 days.
Stocks to Consider
Some better-ranked stocks in the energy sector include Enbridge Inc. (ENB - Free Report) , Antero Midstream Corporation (AM - Free Report) and Phillips 66 (PSX - Free Report) , each carrying Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Enbridge’s bottom-line estimates for the current quarter have increased from $2.00 per share to $2.03 in the past 30 days.
Antero Midstream’s bottom line for the current quarter is expected to skyrocket 120% year over year.
Phillips 66’s 2019 earnings per share have witnessed nine upward estimate revisions and no downward movement in the past 60 days.
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