ConocoPhillips (NYSE: COP) has done an impressive job navigating through the challenges of the current oil market. That was quite clear in its third-quarter results as the energy company continued to generate a gusher of free cash flow even though crude prices slumped during the period.
The oil producer's ability to generate cash was one of the key takeaways of its third-quarter conference call. Not only is that giving it the funds to return an increasing supply of money to shareholders, but it's also growing its cash war chest, which stood at an impressive $8.4 billion at the end of the quarter. That mammoth cash position makes its 3%-yielding dividend one of the safest in the oil patch, which is why income-seeking investors will want to carefully consider this oil stock.
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Walking through the cash flow waterfall
ConocoPhillips CFO Don Wallette spent much of his time on the call focused on the company's ability to generate cash. "Cash from operations (CFO) was $2.6 billion, resulting in free cash flow of $1 billion in the quarter and $4 billion year to date," he said. "We ended the quarter with $8.4 billion of cash and short-term investments." That's a hefty sum for a company that currently has a market cap of around $62 billion.
What makes that ending number all the more impressive is that the company "began the quarter with cash and short-term investments of $6.9 billion," meaning it grew significantly during the period. That increase came even though it funded $1.7 billion of capital expenditures and "distributed $1.1 billion or 41% of CFO to shareholders during the quarter through dividends and share buybacks." ConocoPhillips more than offset those outflows by closing the sale of its U.K. assets, which brought in an addition $2.2 billion in cash during the quarter, helping push its cash position to its current tally.
Meanwhile, that number appears poised to continue increasing in the coming quarters. Not only is the company's underlying business generating gobs of cash, but it also continues to sell assets. It recently agreed to sell its Australia-West business for nearly $1.4 billion and put its Austin Chalk assets in the U.S. on the market, which could fetch as much as $1 billion.
Cash is king, especially in the oil patch
ConocoPhillips has already earmarked some of that money for additional shareholder returns. Wallette noted that it recently "announced a 38% increase to our quarterly dividend, which reflects the company's improved underlying financial strength as well as our commitment to peer leading capital returns to shareholders." He added that the company "announced our plan to buy back $3 billion of shares in 2020."
The company can fund most of that commitment with free cash flow at current oil prices. Through the first nine months of 2019, for example, it has produced $4 billion in free cash, which was more than enough to cover the $3.8 billion it returned to shareholders. As such, if oil remains around the same level, it should be able to use its free cash flow to support its dividend and repurchase program.
Its cash position gives its lots of flexibility. It can use those funds to maintain its current pace of shareholder returns if oil prices head into another protracted slump. Meanwhile, it can also use the money to make acquisitions. While the company has made it clear that it's not interested in corporate M&A, it would love to complete additional low-cost bolt-on deals, especially in places like the Permian Basin. As such, if the right transaction comes along, the company has the financial firepower to pounce on an opportunity to bolster a core position. That's an important competitive advantage, since many of its peers are more focused on selling assets to pay down debt than on making acquisitions. That could enable the company to get a good price on some high-quality drillable land.
Low-risk income with lots of upside
With $8.4 billion of cash on the balance sheet, ConocoPhillips' 3%-yielding dividend is one of the safest in the oil patch. The company's stock, meanwhile, has lots of upside, since the oil giant has the money to continue growing its operations as well as buy back more stock.
Wallette concluded his remarks on the call by saying that "we firmly believe that ours is a sustainable, distinctive, and compelling value proposition, one that is highly competitive not only within the energy sector, but also across the broader market." That's one of the many reasons it's an ideal stock for dividend-focused investors to consider buying.
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