Conoco Works to Boost Its Immune System

(Bloomberg Opinion) -- The relatively new mantra of value-over-volume in the oil business is facing its first serious popularity contest.

ConocoPhillips’s fourth-quarter earnings missed expectations. The company also trimmed production guidance for 2020. At the same time, Conoco boosted its share buyback program by two thirds to $25 billion, with $3 billion due this year, following a 38% dividend increase announced in October.

Investors seemed more focused on the former Tuesday morning, with Conoco one of only a few oil stocks in the red. Then again, down roughly 10% since year-end, it is also one of the better-performing oil stocks in what has been a dreadful start to 2020 for the sector. With that in mind, the cash-flow story should get more attention.

Conoco laid out a 10-year plan in November best described as embracing the darkness. In place of the bullishness typical of the sector was a long discussion of how to survive in a world where oil stocks aren’t popular and price cycles are fleeting. In short, it now reads like a premonition of the month just gone. Hence, Conoco emphasized paying out more cash to investors and paying its way at lower energy prices.

On that front, the latest results offer encouragement. Conoco covered capex, dividends and buybacks from operating cash flow in the fourth quarter. On a full-year basis, free cash flow was positive after dividends and only $532 million in the red after $3.5 billion of buybacks. Most importantly, Conoco managed to roughly balance all this, raising underlying production and shareholder payouts as well as replacing reserves, despite a 9.5% drop in average realized prices for its oil and gas.

Underlying this is the reset in cash-flow priorities following early 2016’s dividend cut, shifting away from capex toward payouts.

Conoco’s financial strategy doesn’t render it impervious to black swans. Besides the viral ones, there are more prosaic upsets such as the Malaysian pipeline outage that forced the cut in production guidance. Still, if immunity is to be found anywhere in this business these days, it lies in a good balance sheet and prioritizing payouts.

To contact the author of this story: Liam Denning at ldenning1@bloomberg.net

To contact the editor responsible for this story: Mark Gongloff at mgongloff1@bloomberg.net

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.

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