Why ConocoPhillips Is a Top Dividend Stock in a Volatile Oil Market
Investing in the oil and gas sector offers multiple avenues, ranging from upstream exploration and production (E&P) companies to midstream pipeline operations, refining, and integrated majors that cover the entire value chain. The upstream segment, which includes companies like ConocoPhillips (NYSE: COP), usually feels the impact of fluctuating oil prices the most. Currently, oil prices are nearing their lowest levels in a year, placing even strong E&P firms like ConocoPhillips around their 52-week lows.
ConocoPhillips Raises the Bar for Dividend Stocks
ConocoPhillips Holds Strong Despite Price Challenges
During its latest quarter, ConocoPhillips produced 1.917 million barrels of oil equivalent per day (boe/d), reaching a record-high output of 1.147 million boe/d in the Lower 48 states. However, the overall adjusted earnings dipped by 20% compared to the same period in 2023, with Lower 48 earnings falling 26.2%. This decline is understandable, as the average realized price in the third quarter of 2024 was $54.18 per boe, down from $60.05 in the same quarter last year.
Nonetheless, ConocoPhillips continues to generate substantial earnings and free cash flow (FCF), enabling it to support operations, invest further, and return capital to shareholders. While its results have dropped considerably from peak levels observed a couple of years ago, the company still outperforms pre-pandemic metrics.
COP Revenue (TTM) data by YCharts
As per the Energy Information Administration, West Texas Intermediate crude oil spot prices averaged $76.24 per barrel from July to September 2024, down from $82.30 during the same time in 2023.
ConocoPhillips has made strides to strengthen its asset base by focusing on disciplined investments and prioritizing low-cost production assets. The company stated on its earnings call that its FCF breakeven price is around the mid $30s per boe, projected to decrease to the low $30s due to synergies from acquiring Marathon Oil. This positions it well, as the dividend adds roughly $10 per boe to its breakeven level, indicating it can sustain its dividend at prices in the low $40s per boe.
While the company needs higher prices for aggressive stock buybacks and capital expenditures, its low breakeven offers a comfortable buffer for investors looking for stability during market downturns.
Strengthening Capital Return Initiatives
Recently, ConocoPhillips announced its acquisition of Marathon Oil for an enterprise value of $22.5 billion and plans to repurchase $20 billion in stock over the next three years to counterbalance the shares issued during the transaction. In the first three quarters of 2024, the company allocated $8.8 billion to capital expenditures, bought back $3.5 billion in shares, and distributed $2.7 billion in dividends.
Now, with the Marathon Oil deal set to close soon, ConocoPhillips has revamped its buyback and dividend strategies. It has increased its share repurchase authorization by up to $20 billion, allowing for significant buybacks without needing additional board approval. Management indicated plans for nearly $2 billion in stock purchases in the fourth quarter, which hints at an accelerated buyback effort.
Additionally, ConocoPhillips is streamlining its dividend approach by eliminating the variable dividend model and raising the ordinary dividend by 34% to $0.78 per share, resulting in a forward yield of 2.9%. This change is likely to enhance buyback capacity and simplify passive income for shareholders.
Looking Forward: ConocoPhillips’ Future Potential
ConocoPhillips stands out as a compelling E&P investment. The integration of Marathon Oil should bolster its portfolio, particularly boosting production in the Lower 48 states. Even under current oil price conditions, the company is capable of executing substantial stock buybacks and fostering its appealing dividend. Investors can find reassurance in ConocoPhillips’ ability to maintain a steady payout even when oil prices dip.
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Daniel Foelber has no position in any of the stocks mentioned. 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.
