ConocoPhillips (NYSE: COP) spent several years repositioning its global oil and gas portfolio by jettisoning non-core assets and building around its lowest-cost and highest-return operations. That strategy has paid big dividends in recent years. Literally -- the oil giant has transformed into a cash-gushing machine, which is giving it lots of money to return to shareholders.
The oil company's cash-generating capabilities were on full display in the second quarter. With further improvements ahead, it expects to return lots of cash to shareholders in 2024 and beyond.
Drilling down into ConocoPhillips' second-quarter results
ConocoPhillips produced more than 1.9 million barrels of oil equivalent per day (BOE/d) in the second quarter. That was a 140,000 BOE/d increase from the year-ago period, about 4% higher after adjusting for the impact of acquisitions and asset sales.
The company grew its production in a market where prices were rising. ConocoPhillips realized an average price of $56.56 per BOE in the period, 4% higher than the year-ago quarter. That combination of rising production and prices helped boost the company's earnings. Its adjusted earnings rose from $2.2 billion, or $1.84 per share, in the second quarter of last year to $2.3 billion, or $1.98 per share, this year.
The company also produced a gusher of cash. Cash provided by operating activities was $4.9 billion in the period. That was more than enough to cover the capital expenses and investments required to maintain and grow its production, which totaled $3 billion. The company returned the entire excess to shareholders, paying $900 million in dividends and its variable return of cash (VORC) while also repurchasing $1 billion of shares. That brought its year-to-date cash return total to $4.2 billion ($2.3 billion of share repurchases and $1.8 billion of dividend and VORC payments). The company returned all that money while maintaining a cash-rich balance sheet ($6.3 billion of cash and short-term investments at the end of the second quarter).
More cash flowing to shareholders
ConocoPhillips expects to continue producing more cash than it needs to grow its operations. That's fueling its plan to return at least $9 billion to shareholders this year. The company has already announced plans to boost its dividend by 34% in the fourth quarter by making its current VORC payment permanent in the form of a higher base dividend.
The company should return even more cash to shareholders in 2025 and beyond. In addition to investing in organically expanding its operations, the company recently agreed to acquire Marathon Oil (NYSE: MRO) in an all-stock deal valued at $22.5 billion, including assuming $5.4 billion of debt. The Marathon purchase will be transformational for the oil giant. It expects the deal to be immediately accretive to its earnings, cash flow, and return of capital per share. In addition, the company anticipates achieving at least $500 million of annual cost savings in the first year following the transaction. Marathon will significantly enhance its low-cost U.S. resource base, adding over 2 billion barrels of resources with an average supply cost of less than $30 per barrel.
ConocoPhillips expects the combined company to generate significant free cash flow. That drives its view that it can boost its share repurchase rate to a more than $7 billion annual pace in the first year following the deal, up from its current annual run rate of over $5 billion. The company anticipates it could repurchase more than $20 billion of its shares in the first three years after closing the deal, which it expects will occur in the fourth quarter. That would enable the company to retire the equivalent amount of shares that it will issue to acquire Marathon within three years.
ConocoPhillips also plans to continue delivering above-average dividend growth. It's aiming to be in the top 25% of dividend growers in the S&P 500. Its planned 34% increase later this year continues the above-average growth it has delivered since resetting its payout in 2016. That new quarterly rate of $0.78 per share will finally push the payout back above that prior peak of $0.74 per share.
High-octane total return potential
ConocoPhillips' strategy to focus on its lowest-cost and highest-return assets continues to pay off. It's generating lots of cash, which should continue, especially given the upcoming addition of Marathon Oil. That will give the company more money to return to shareholders via meaningful share repurchases and a rapidly rising dividend. That combination of growing cash flow and increasing cash returns could give ConocoPhillips the fuel to produce high-octane total returns in the coming years as long as oil prices cooperate.
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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.
This Oil Stock is a Cash-Gushing (and Returning) Machine was originally published by The Motley Fool