ConocoPhillips (NYSE: COP) is firing on all cylinders these days. The oil giant’s legacy business is performing extremely well. Meanwhile, the company is about to get a big boost from closing its needle-moving acquisition of Marathon Oil (NYSE: MRO).
Those factors are giving the oil stock the confidence to return a lot more cash to its shareholders. It’s boosting its dividend and share repurchase program.
Drilling down into ConocoPhillips’ third-quarter report
ConocoPhillips recently reported its third-quarter results. The oil giant produced over 1.9 million barrels of oil equivalent per day (BOE/d) during the period, surpassing the high end of its production guidance. It achieved record production in the lower 48 states, with strong results across its Permian, Bakken, and Eagle Ford operating areas. Its production rose 3% year over year after adjusting for acquisitions and asset sales.
That strong production helped mute some of the impacts of lower oil and gas prices. ConocoPhillips realized an average of $54.18 per BOE in the period, 10% lower than the year-ago quarter. As a result, its adjusted earnings declined from $2.6 billion to $2.1 billion.
However, the company produced robust cash flows during the third quarter. It generated $4.7 billion in cash from operations. ConocoPhillips used $2.9 billion to fund capital expenses to maintain and expand its operations. Meanwhile, it distributed $2.1 billion to investors, including repurchasing $1.2 billion of shares and making $900 million in cash payments (dividends and its variable return of cash (VORC)). That left the company with $7.1 billion of cash on its balance sheet at the end of the third quarter, along with another $1 billion of long-term investments.
Pending acquisitions will fuel even higher cash returns
ConocoPhillips expects the fourth quarter to be an active one. It anticipates closing its $22.5 billion merger with Marathon Oil. The deal will deepen its portfolio, adding high-quality, low-cost supply inventory near its existing positions throughout the lower 48 states.
The company also expects the transaction to be immediately accretive to its earnings, cash from operations, free cash flow, and return of capital per share. The company initially expected to capture at least $500 million in cost and capital synergies within the first year of closing the deal. However, it now anticipates significantly exceeding that tally.
On top of buying Marathon, ConocoPhillips also recently agreed to bulk up on its position in Alaska. It exercised its rights and signed agreements to buy additional working interests in the Kuparuk River and Prudhoe Bay units for $300 million. That deal will increase its earnings and cash flow from the state.
ConocoPhillips’ acquisition-fueled growth is driving its increased confidence that it can return more cash to shareholders. The company has officially increased its quarterly dividend payment by 34%, making its current VORC payment permanent. The new dividend level exceeds the prior peak before the company had to reset its dividend following the oil price crash in 2015. The oil company plans to continue growing its dividend in the future, aiming to be in the top 25% of all dividend growers in the S&P 500 index.
On top of that, the company’s board of directors has approved an increase in its existing share repurchase authorization by up to $20 billion. That’s more than enough to retire all the shares it plans to issue to acquire Marathon Oil (roughly $17.1 billion in equity). The company plans to ramp up its repurchase pace following the deal from its current rate of $5 billion annually to around $7 billion, implying it could retire all the shares it’s issuing to buy Marathon within three years.
A top-tier oil stock
ConocoPhillips’ strategy of growing its U.S. operations has really paid off for investors over the years. It’s producing a gusher of cash, a growing percentage of which it’s returning to investors. With two more acquisitions about to close, the company should generate even more cash in the future, giving it more money to return to investors. Those growing cash returns could give ConocoPhillips the fuel to produce strong total returns in the coming years, making it a compelling long-term oil stock investment these days.
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Matt DiLallo has positions in ConocoPhillips. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
