Factors That Will Drive ConocoPhillips’ Near Term Value

ConocoPhillips (NYSE: COP), one of the largest independent oil and gas companies, has witnessed a rise of 42% since the beginning of the year, backed by the strong growth in its revenue due to rising commodity prices. Further, the company’s profitability has also improved due to higher revenue as well as significantly lower debt levels. We expect the company to expand its production volume by focusing on its key basins – Eagle Ford, Bakken, and Delaware – which will drive its value in the long term.

We currently have a price estimate of $71 per share for ConocoPhillips, which is lower than its market price. View our interactive dashboard – ConocoPhillips’ Price Estimate – and modify the key drivers to visualize the impact on the company’s valuation.

Strong Production Growth

To improve its margins and returns, ConocoPhillips has been divesting its low-margin and non-core assets over the last few quarters. While the overall production levels have dropped, the company’s Big 3 assets – Eagle Ford, Bakken, and Delaware – have delivered strong performance since the beginning of the year. As a result of this improved performance, the company has revised its 2018 production outlook by almost 2% to the range of 1.225-1.255 million barrels of oil per day (boed). The enhanced guidance largely reflects the efficiency in the company’s existing production facilities and its caliber to benefit from higher crude oil prices.

Despite the recovery in the commodity markets, ConocoPhillips plans to restrict its capital investment to a sustainable level of $3.5 billion for 2018. This investment could go up to $5.5 billion, based on the pace of its production growth and recovery in the commodity markets. A lower capital spend will not only allow the company to meet its steady production targets but also effectively manage its debt reduction and shareholder distribution targets. We expect the company to display moderate revenue growth over the span of the next two years.

Higher Shareholder Returns

With an aim to optimize its balance sheet and enhance its shareholder returns, ConocoPhillips has been systematically working towards reducing its long term debt obligations to better equip itself for the volatility in the commodity markets. The company had reduced its total debt to less than $20 billion by the end of 2017 and has targeted to bring it down further to $15 billion by the end of 2019. However, the company achieved its $15 billion debt target at the end of 2Q’18, 18 months ahead of schedule during the quarter. Lower debt levels will result in lower interest costs, which will significantly aid the company’s bottom line in the coming quarters. Further, this will also enable the company to achieve its target of an “A” credit rating sooner than anticipated.

Apart from enhancing its capital structure, ConocoPhillips aims to pay 20%-30% of its cash flow from operations annually to its shareholders. For this, the company has increased its share repurchase program by $1 billion to a total program of $3 billion for 2018. This has raised the company’s total repurchase authorization to $15 billion, indicating its willingness to share its growth with its shareholders. Furthermore, ConocoPhillips plans to grow its annual dividend at a consistent rate to deliver additional value to its shareholders.

Thus, with a solid production volume, improving commodity prices, and a strong balance sheet, ConocoPhillips is well-positioned to have a strong year ahead.

Do not agree with our forecast? Create your own price forecast for ConocoPhillips by changing the base inputs (blue dots) on our interactive dashboard.