Conoco Phillips (COP -1.12%) swimming in money these days. The oil and gas producer generated $7.2 billion in operating cash in the third quarter, bringing its 2022 total to more than $22 billion. This gives it a huge windfall to allocate to creating shareholder value.
The company recently provided details on how it plans to use the money. One of the highlights was a dramatic $20 billion increase in its share buyback program. Here’s a closer look at the company’s cash flow and how it uses its oil windfall.
Take advantage of rising energy prices
ConocoPhillips produced 1.754 million barrels of oil equivalent per day (boe/d) during the third quarter. This represents an increase of 210,000 boe/d over the prior year period due to acquisitions and organic production growth, primarily in the lower 48 states. Its production below 48 reached a milestone of more than 1 million boe/d.
This increase in production allowed ConocoPhillips to take advantage of higher prices. The company sold its production for an average of $83.07 per boe during the quarter. This is 46% more than a year ago.
This combination of production and higher prices helped ConocoPhillips generate $7.2 billion in cash from operations during the period, bringing its year-to-date total to $22.1 billion. The company also closed about $400 million in non-core asset sales, bringing its total to $3.4 billion. Add to that working capital fluctuations and ConocoPhillips produced a staggering $25.7 billion in the first nine months of this year.
Distribute the manna
ConocoPhillips has five clear cash flow priorities:
- Support its production and pay its basic dividend.
- Offer annual dividend growth.
- Maintain an A-rated balance sheet.
- Return at least 30% of its operating cash to shareholders.
- Make disciplined investments to improve returns.
As the following graph shows, the company allocated its cash to its priorities this year:
Data source: ConocoPhillips.
The energy company has made $7.6 billion in capital investments, including acquisitions. This allowed him to sustain his production (priority n°1) and increase his yields (n°5). It also returned $9.9 billion to shareholders by paying its base dividend, making a variable return from cash payments and repurchasing shares. At 45% of its operating cash flow, these returns hit its first and fourth priorities. Finally, the company repaid $3 billion in debt to satisfy priority #4.
The company also disclosed its future cash plans in its third-quarter earnings release, which align with its financial priorities. These include:
- Increase its dividend by 11% to achieve its second priority.
- Increase its share buyback authorization by an additional $20 billion to continue returning at least 30% of its cash from operations to investors.
- Expand its global presence liquefied natural gas (LNG) portfolio to improve returns. It is participating in QatarEnergy’s North Field South LNG project and has accepted terminal services in Germany for a future LNG import terminal.
Of all the actions taken by ConocoPhillips, the one that stands out is the massive $20 billion increase in stock buyback authorization. This brings the total current authority to $45 billion. Since the program launched in 2016, ConocoPhillips has repurchased $20.7 billion in shares.
The $20 billion increase represents nearly 12% of the company’s outstanding shares, given its market capitalization less than $170 billion. Add what remains on the company’s existing clearance and ConocoPhillips can withdraw a significant number of its outstanding shares. This should help prevent the stock price from falling too deeply if oil prices decline while providing an additional boost if crude remains high.
Generate and return a lot of cash to shareholders
Recent investments by ConocoPhillips to increase its oil and gas production are paying off, allowing it to take advantage of higher energy prices this year. It produces gushing cash flow, giving it a massive windfall to allocate on behalf of shareholders. It returns much of that money to investors via a growing dividend and a monster stock buyback program. With more cash for shareholders in the future, this oil stock is ideal for those looking to profit from rising energy prices.
