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Here's How ConocoPhillips Crushed It in 2017

When you hit rock bottom, there's no place to go but up.

When it comes to the stock market, it's tough to tell where exactly rock bottom is. But for the largest U.S. independent oil and gas exploration and production company, ConocoPhillips (NYSE: COP), the worst appears to be over.

The company had an amazing rally in the second half of 2017, with its stock price rising 24.5%. Here's how this beaten-down company managed to finally shake off the bears.

As the sun set on 2017, ConocoPhillips' stock was sitting on an impressive six-month uptrend. And it may be poised to outperform in 2018. Image source: Getty Images.

Streamlining the business

When oil prices tanked in 2014, many producers were caught flat-footed with business models that were only viable at $90-per-barrel oil. With per-barrel oil prices mired in the $30s and $40s, drastic cost cutting and dividend slashes were the only way to stay afloat in the short term, and ConocoPhillips pursued both strategies.

But in March, Conoco made a huge leap forward by selling off several of its underperforming Canadian oil-sands assets to its project partner, Cenovus Energy (NYSE: CVE), for $10.6 billion in cash, 208 million shares of Cenovus stock, and potential contingency payments for five years to boot. Conoco clearly got the better end of the deal: Its stock rose 8.8% the day it was announced. Meanwhile, Cenovus' stock dropped 13.7% that day and hasn't recovered since, losing more than 30% since the deal was announced.

Of course, Cenovus' stock slump means those 208 million shares were worth far less when the deal closed in May than their $2.7 billion value in March. But Conoco still made out like a bandit on this deal, which management said would enable the company to reduce its debt to below $20 billion by the end of 2017.

Returning to profitability

Things were looking bleak financially for Conoco after its Q1 2017 earnings report. The company, which hadn't turned a quarterly profit for nearly two years at that point (since Q2 2015) had posted yet another quarterly loss.

This was something of a surprise, because Conoco claimed it was cash flow-neutral with oil prices between $45 and $50 per barrel. Yet marker prices for the quarter were $53.78 per barrel for Brent crude and $51.83 per barrel for WTI, and the company still lost money.

But Conoco managed to post consecutive adjusted quarterly profits in Q2 and Q3 of 2017, proving it could turn a profit in the new era of $50-per-barrel oil. It also proved it can generate sufficient cash from its operations to cover its dividend and execute its plan to buy back stock and pay down debt. And with Brent crude prices currently above $60 per barrel (and WTI crude just under $60), Conoco's $35-per-barrel cost of supply is looking better and better.

Sticking to the plan

ConocoPhillips' success in returning to profitability and in executing its strategy to divest underperforming assets -- it also unloaded its San Juan Basin assets in April for $2.5 billion -- has investors bullish on its ability to execute the remainder of the shareholder-friendly plan it rolled out in November 2016.

At the company's November 2017 analyst and investor meeting, CEO Ryan Lance presented an updated set of shareholder-friendly priorities:

  • Investing capital to cover the company's dividend, coupled with annual dividend growth.
  • Reducing the company's debt to $15 billion -- 25% lower than the $20 billion that was promised a year earlier.
  • Expanding the company's cash flow from operations, with a goal of returning 20% to 30% of that cash to shareholders annually.

With oil prices seeming to cooperate -- both Brent Crude and WTI Crude spot prices rose more than 30% in the second half of 2017 -- Conoco should have no trouble executing its plans, which ought to be good for shareholders.

Investor takeaway

The prognosis for ConocoPhillips -- indeed, for the entire oil industry -- is far more favorable today than it was a year ago. Thanks to savvy execution of its plan, Conoco has been able to improve its fortunes, and the stock market has rewarded the company in return.

However, investors should be aware that Conoco's stock has already risen nearly 25% in the past six months. It probably has further room to run, assuming energy prices continue to rise. But there may be better values elsewhere in the oil patch, particularly among smaller producers whose stocks haven't climbed quite so far, so fast.

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John Bromels 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.