High oil prices remain supportive

Conoco Phillips (COP) is a global oil and gas company. It is engaged in the exploration, production, transportation and marketing of crude oil and natural gas. Its portfolio includes conventional assets in North America, Australia, Europe and Asia, as well as oil sands assets in Canada. The company was founded in 1917 and is based in Houston, Texas.

I’m bullish on COP stocks. The company has a strong balance sheet and will return $8 billion to shareholders this year through share buybacks and variable dividends. As long as they remain high, high oil prices continue to support the company’s profitability.

ConocoPhillips Business News

Some of the latest business news includes a $1 billion increase in the scheduled 2022 return of capital to shareholders for a total of $8 billion. The additional $1 billion will be distributed through share buybacks and variable return cash (VROC) levels.

Additionally, ConocoPhillips has reached an agreement to sell its Indonesian assets for $1.355 billion, plus a notice that it is exercising its right of first refusal to buy up to an additional 10% stake in Australia Pacific LNG.

Key Drivers of ConocoPhillips Financial Performance

High oil prices in 2021 and their year-to-date rally in 2022 have been a key catalyst for ConocoPhillips to deliver strong financial performance.

Many factors are now supporting high oil prices. Most notable are slow production growth in the U.S. market, the inability of several OPEC members to increase production, and geopolitical risks like tensions in the Middle East and between the U.S. and Russia, while rumor has it that Russia is invading Ukraine.

In the event that Russia invades Ukraine, oil prices would experience high volatility and could reach or exceed $100 per barrel. However, let’s assume that this scenario does not materialize. In this case, as spring approaches, oil prices should see a correction, as better weather conditions should put a damper on the increase in demand.

I dare to write that the problem and global inflationary pressures should mix politics with a coordinated attempt to drive up oil prices. Several years ago, when oil prices were also at historic highs and the majority of analysts were optimistic that prices would continue to rise, a price crash followed.

The world economy was then not ready to face the rising costs due to the extreme oil prices. The dynamics of the global economy have since changed, but even the chief executive of ConocoPhillips has expressed concerns about high energy prices.

“Chief Executive Ryan Lance, however, said high prices could cause U.S. oil producers to ramp up production too quickly, leading to oversupply.”

“If we get back to the level of growth in the United States” comparable to the shale boom of 2014-2015, Lance said, and “you’re not worried about it, you should be,” he said. he told investors on a conference call.

ConocoPhillips 2021 Fourth Quarter Results and 2021 Full Year Results

Earnings for COP shares have been on a strong upward trend over the past few quarters. In Q4 2021, GAAP EPS of $1.98 was a miss of -$0.19, but revenue of $15.96 billion was a beat of $2.56 billion.

ConocoPhillips reported fourth quarter 2021 earnings of $2.6 billion, or $1.98 per share, compared to a fourth quarter 2020 loss of $0.8 billion, or ($0.72) per share. Profit for the year 2021 was $8.1 billion, or $6.07 per share, compared to a loss for the year 2020 of $2.7 billion, or ($2.51) per share.

Revenue of $45.83 billion for 2021 showed a 144.2% increase over fiscal 2020.

Fundamentals – Risks

There are no serious warning signs for COP stock. The company declared both an ordinary dividend of 46 cents per share and a VROC payment of 30 cents per share in the second quarter, representing a 50% increase over the first quarter VROC. The combination of the increased dividends in 2022 represents a more than 50% increase in cash return to shareholders compared to 2021.

Free cash flow growth of 13,316% for fiscal year 2021 to $11.67 billion from $87 million in 2020 is also spectacular.

I would also like to point out that ConocoPhillips achieved a return on capital employed (ROCE) of 14% in 2021 compared to a figure of -1% for 2020. This financial ratio measures the company’s profitability linked to its efficiency of capital investments. . A sustained ROCE will indicate that ConocoPhillips will continue to have strong profitability and that additional capital could be returned to shareholders.

Evaluation

COP stock is relatively attractive based on its P/E ratio of 15.2x compared to the US oil & gas industry average of around 18x and relatively overvalued based on its P/E ratio of 2.6x vs. industry average of 2.2x.

The Taking of Wall Street

ConocoPhillips has a strong buy consensus based on 14 buy reviews and two reservations. ConocoPhillips’ average price target of $103.69 represents 12.6% upside potential.

Conclusion

High energy and oil prices were a key driver of the company’s very strong financial performance in 2021. The return of capital to shareholders, together with increased dividends and very strong cash flow generation available cash, are positive for COP stock even at the risk of a downward oil price correction in the spring and summer of 2022.

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Felix J. Dixon