That opportunity for higher rewards is why I have not shied away from investing in the E&P space. That said, I have learned a couple of critical factors that I believe separate the winners from the losers.
The first one is that a strong balance sheet is a must. The best way to measure that, in my opinion, is a minimum credit rating in the high B range and ideally enough cash on hand to fund capex for at least several months. A fortress-like balance sheet like that gives an oil company the strength to hold up during times of trouble and provides it the financial capacity to invest in good times and bad.
The balance sheet is one area where ConocoPhillips shines. Not only has it maintained a solid investment grade credit rating -- its currently rated A/A-/Baa2 -- but it has a boatload of cash.
With a $5.7 billion capex budget this year, it has ample cash to meet its near-term needs. The only concern is the company's debt-to-cap ratio, which went from a comfortable sub-30% level to more than 40%. That said, its priority as prices improve is to pay down debt to bring its leverage back into more comfortable territory.
Another crucial factor is a diversified asset base. In my opinion, this diversification should be both global and by asset class. For example, one fundamental reason why ConocoPhillips has been able to maintain its production during the downturn despite a significant drop in capex spending is its base of assets that deliver low-decline production, including the Canadian oil sands, Australian LNG, and conventional resources offshore. These steady producers made it easier for the company to overcome higher-decline forms of production such as from unconventional shale resources.
While it will likely be a bumpy ride, I believe ConocoPhillips has the optimal combination of balance sheet strength and resource diversification to continue to deliver market-beating, long-term returns for investors.
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Matt DiLallo owns shares of ConocoPhillips. Tyler Crowe has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .