Summary
- ConocoPhillips has increased quarterly dividends by 38% to $0.42 per share, translating into an annualized yield of 3.1%, and will spend $3 billion in 2020 on buybacks.
- Oil has fallen to $53/bbl due to trade war fears and concerns regarding the commodity’s demand and supply fundamentals.
- The weakness in oil prices will hurt a lot of oil producers but ConocoPhillips will continue generating profits and free cash flows, even in a much weaker oil price environment.
- The company also has a strong balance sheet, with low levels of debt and ~$12 billion in liquidity.
The oil prices environment continues to remain challenging. The persistent weakness in prices could hurt the profit and cash flows of several oil producers, but ConocoPhillips (COP), the largest independent oil producer in terms of output, will continue rewarding investors. The company has recently announced a dividend hike and is planning a $3 billion stock buyback. This shows that ConocoPhillips is confident that it can generate tons of free cash flow, even as oil dips to under $55 a barrel. In my opinion, the company’s optimism is well-founded given ConocoPhillips benefits from having a low-cost asset base which can generate strong levels of excess cash flows even in a weak oil price environment. The company has shown, time and again, that it is one of the lowest-cost oil producers and I believe it will continue doing well in the future.
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Earlier this week, ConocoPhillips announced that it will increase the quarterly dividends by 38% to $0.42 per share. The dividend will be paid in early December to shareholders of record on October 17. ConocoPhillips now offers a dividend yield of 3.1%, which is one of the highest among all independent exploration and production companies. The yield is also higher than the S&P 500 average of almost 2%. This increase will push the company’s dividend expenditure higher by $500 million on an annualized basis. Furthermore, ConocoPhillips has also announced that it will repurchase $3 billion of its shares in 2020.
ConocoPhillips’ announcement has come at a time when oil prices have come under renewed pressure. The West Texas Intermediate futures have recently fallen to $53 a barrel after President Donald Trump blacklisted several Chinese companies, including eight technology giants, even as Washington prepares to resume trade talks with Beijing. The trade war between two of the world’s largest economies has been going on for 15 months and President Trump has just signaled that he’s not going to change his hard-line stance. I think this has dimmed the prospects of a deal as China’s Vice Premier Liu He, the country's chief trade negotiator, prepares to hold trade discussions with the US officials in Washington this week.
The US-China trade spat has exacerbated the global economic slowdown, hurting oil demand. Last month, Ed Morse, global head of commodity research at Citi, warned that the conflict has already reduced global oil consumption by 800,000 bpd since the end of March 2018 and an additional 300,000 bpd could get lost if the trade war continues for another six months. At the same time, production from outside of OPEC continues to climb. The US oil production growth has slowed but it is still expected to increase by 1.2 million bpd in 2019 and 1 million bpd in 2020 to average 13.2 million bpd next year, as per the US EIA’s estimates.
