Summary
- The company has arguably the lowest-cost resource base in the business and is throwing off tons of free cash flow ("FCF").
- Despite multi-billion annual stock buybacks and a recent 38% increase in the quarterly dividend, the company ended Q3 with $8.4 billion in cash on hand.
- Meantime, the company generated another $1 billion in FCF in Q3 despite a 9% yoy drop in oil and gas prices.
- The company is holding an Analyst & Investor Meeting on Tuesday, Nov. 19 where it is expected to outline a 10-year operating plan.
- Shareholders should hope the company includes renewable energy investments as part of the "going forward" strategy.
ConocoPhillips (COP) released another very solid quarterly report last week. Q3 Highlights include:
- FCF generation of $1 billion.
- Repurchased $0.75 billion of shares and paid $0.34 billion in dividends in the quarter, representing a return of 41% of CFO to shareholders.
- Q3 production (excluding Libya) of 1,322,000 boe/d: yoy underlying production grew 7% overall and 6% on a debt-adjusted share basis.
- Announced a 38% increase in the quarterly dividend to $0.42/share, and $3.0 billion in planned 2020 share repurchases.
- Ended the quarter with $8.4 billion of ending cash and short-term investments.
In addition, the company already has an A-rated investment grade balance sheet and has announced an agreement to divest the "Australia-West" asset for $1.4 billion - further high-grading the portfolio and generating more shareholder value.
COP Is Cash Rich
Note the $8.4 billion in cash at the end of the quarter was up $1.5 billion from the $6.9 billion of cash and short-term investments at the end of Q2. The point is, in spite of lower oil & gas prices, and in spite of returning $1.09 billion to shareholders with buybacks and dividends, the company still raised its overall cash hoard by another $1.5 billion. Sure, the company completed its U.K. divestiture ($2.2 billion in proceeds) during the quarter, but high-grading the portfolio with non-core asset sales has been - and still is - part of COP's long-term strategic plan to increase shareholder returns and its FCF generation profile.
But note also that COP's guidance for $3 billion in 2020 share buybacks still dwarf the new (38% higher) quarterly dividend obligation of $0.42/share. Consider at the end of Q3 COP had 1.131 billion fully diluted shares. At the new dividend rate, that equates to $1.9 billion on an annual basis. So it is clear management is doubling down on its over-emphasis on share buybacks as compared to dividends directly to shareholders (now by a 3:2 ratio in favor of buybacks).
