ConocoPhillips Delivers A Stellar Quarter; Raises Quarterly Dividend By 7%

ConocoPhillips (NYSE: COP), one of the largest independent oil and gas companies, posted a remarkable improvement in its third quarter financial results last week. The company exceeded the market expectations on both the revenue and earnings front on the back of notably higher price realizations and production during the quarter. Further, the company’s profitability has also improved due to higher revenue as well as lower interest expenses.

However, the key highlight of the quarter was the 7% increase in the company’s quarterly dividend. The move shows ConocoPhillips’ willingness to share its growth with its shareholders, which has reinforced investor confidence in the company. Consequently, the stock has gained 4.2% since the announcement of results and is currently trading at $68.48 per share. We expect the company’s focus on its key basins, Eagle Ford, Bakken, and Delaware, coupled with the rising commodity prices to drive its value in the long term.

We currently have a price estimate of $71 per share for ConocoPhillips, which is higher than its market price. View our interactive dashboard – ConocoPhillips’ Outlook For 2018 – and modify the key drivers to visualize the impact on the company’s valuation.

Key Highlights of 3Q’18 Results

• ConocoPhillips’ reported 3Q’18 revenue of $10.2 billion, 41.3% higher compared to the same quarter of last year. The revenue from its core upstream operations came in at $9.4 billion, up from $6.7 billion last year. This sharp jump in the revenue is attributable to a notable improvement in the company’s average price realization during the quarter. The company’s crude oil price rose from $49.39 per barrel to $73.05 per barrel in the quarter, representing a 48% increase on a year-on-year basis.
• Apart from higher pricing, ConocoPhillips’ top-line growth benefited from a 9% rise in its liquids output, which was partially offset by a 6% decline in its gas production. Overall, the company’s output rose about 3% during the quarter.
• On the cost side, ConocoPhillips’ operating expenses rose 11% during the quarter, largely due to its higher output. However, the company’s lower debt obligations resulted in lower interest expense for the quarter, augmenting its operating profits.

• That said, the company experienced higher tax expenses due to higher profitability, which weighed on its bottom-line. Yet, ConocoPhillips managed to generate adjusted earnings of $1.6 billion, or $1.36 per share, which were $0.17 per share higher than the market expectations. Interestingly, the current magnitude of earnings was last witnessed by the company in 3Q’14, with 25% higher prices and 20% higher volumes. This indicates that the company has come a long way, making itself a leaner and more efficient company.
• ConocoPhillips continued to optimize its asset portfolio and announced $600 million of dispositions over the past few months. It generated $3.5 billion of cash flows from its operations (CFO) during the quarter, and spent $1.6 billion in capital expenditure.
• Earlier this month, ConocoPhillips had announced a 7% increase in its quarterly dividend. Also, the company had extended its share repurchase target for 2018 to $3 billion. The combination of the company’s dividend and buybacks represents a return of about 35% of its CFO to its shareholders, which is well in excess of its 20% to 30% target. Also, the company’s dividend and share buybacks were more than funded from its operations. This hints at the financial health of company, which should further strengthen investor confidence in the company.
• Lastly, the company plans to announce its operational plan for 2019 in December of this year. We will closely watch the company’s guidance for 2019 and look for any significant changes in its strategy going forward.

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