ConocoPhillips Is Set To Face The Uncertain Commodity Markets With Its Latest Operating Plan

by Trefis Team
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Having surprised the market with an earnings beat in the third quarter, ConocoPhillips (NYSE:COP), an independent oil and gas company, has proactively realized its operating plan for the next 3 years, highlighting its priorities and strategy to deal with the continued volatility in the commodity markets. Below we present our forecast on the company’s key drivers that impact its objectives using our interactive platform. Feel free to create your own scenarios and visualize the impact on the company’s overall valuation.

We have a price estimate of $53 per share for the company, which is slightly higher than its current market price.

See Our Complete Analysis For ConocoPhillips Here

Throughout the commodity downturn, ConocoPhillips has managed to hold a firm ground backed by its decision to control its capital investment, depending upon the movement of commodity prices. The company, that had spent close to $15.5 billion in capital expenditure in 2014, reduced its capital budget to merely $5 billion for the full year 2017. However, during the year, the company assessed its operational efficiencies and market conditions, and revised its capital spending budget to $4.5 billion for 2017. The move seemed to have pleased the market, causing the company’s stock to rise sharply post the announcement.

Given the uncertain outlook of the commodity prices, ConocoPhillips has now decided to restrict its sustainable capital investment to about $3.5 billion, which could go up to $5.5 billion, based on the pace of production growth that the company aims for. Currently, the company expects to grow its production at a compounded annual growth rate of 5%. We believe that the targeted production growth may be difficult to achieve with the current capital budget, if the commodity prices do not recover as expected by the company.

ConocoPhillips reiterated its plans to bring down its long term debt to less than $20 billion by the end of 2017 and to $15 billion by 2019. As per the company’s latest financial numbers, its long term debt stood at $19.7 billion, down from $26.2 billion at the beginning of the year. This indicates that the company progressing well towards achieving its objective in the next two years.

With reduced debt on its books, the company will also be able to achieve its target of “A” credit rating by the end of this decade. In fact, both S&P and Moody’s have improved their rating outlook for the company on the news of debt reduction and higher share buyback. Also, with lower debt, the company’s interest obligations are likely to decline, which will boost its bottom-line in the coming years. We view this strategy to be a positive one for the company and is likely to enhance its value in the long term.

Since ConocoPhillips has raised a notable amount of cash from its recent asset sales, the company has further extended its existing share repurchase program by $1.5 billion, taking its total buyback amount to $7.5 billion for the period of 2017-2020. This will not only enable the company to return value to its shareholders but will also improve its earnings per share going forward.

In addition, the company aims to increase its dividend payments in the coming quarters, subject to its improving cash flows from operations. This, along with a higher share repurchase program, will help the company to achieve its objective of returning 20%-30% of its cash flows from operations to its shareholders.

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