Shares of oil giant ConocoPhillips(NYSE: COP) have slumped nearly 18% over the past year. That sell-off has come during a time when the S&P 500 has rallied over 15%. Driving this underperformance is a slump in oil prices. Over the last 12 months, Brent crude, the global oil benchmark price, has fallen by more than 15% and has recently hovered near $60 per barrel.
ConocoPhillips can thrive even if oil prices remain low. The oil company has multiple growth catalysts that should significantly boost its free cash flow by the end of the decade.
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ConocoPhillips’ management team believes they have built one of the highest-quality resource portfolios in the energy sector. Through a series of acquisitions, culminating with the $22.5 billion purchase of Marathon Oil last year, ConocoPhillips now has one of the deepest, most durable, and diverse portfolios of oil and gas resources in the industry. The company has decades of inventory with a cost of supply below $40 a barrel.
The company’s low-cost resource base enables it to generate lots of cash in the current environment. ConocoPhillips estimates that it can produce around $7 billion in free cash flow this year after funding its capital expenditures. That gives it a windfall of cash it can return to shareholders through dividends and share repurchases.
ConocoPhillips also has a strong, cash-rich balance sheet. The company ended the second quarter with $5.7 billion of cash and short-term investments and another $1.1 billion of long-term investments. That gives it a cushion to continue investing in growing its operations and returning cash to investors during periods of lower oil prices. The company is working to further fortify its balance sheet by selling non-core assets. It agreed to sell its Anadarko Basin assets for $1.3 billion earlier this year and aims to close another $2.5 billion in sales by the end of next year.
ConocoPhillips believes it’s on the verge of a multi-year period of free cash flow growth. The initial boost will come from the continued integration of its Marathon Oil acquisition, which has turned out to be much better than expected. The company originally hoped to capture around $500 million in cost savings by combining the companies. However, it’s on track to hit $1 billion of synergies by the end of this year. On top of that, the company now anticipates achieving an additional $1 billion of cost and margin enhancement related to the deal by the end of next year. That’s a $1 billion improvement in its free cash flow with no increase in crude oil prices.
The next phase of its free cash flow growth will come from its investments to expand its global LNG portfolio. In 2022, the company signed a deal with Sempra Energy to take a 30% stake in Phase 1 of its Port Arthur LNG project. That project should enter service in 2027 and 2028. Additionally, ConocoPhillips is participating in two projects to expand Qatar’s North Field, which should come online in phases starting next year through 2028. This trio of LNG investments could provide up to $2 billion in incremental annual free cash flow once all three projects enter service.
Finally, the company is investing over $7 billion to develop the Willow hub in Alaska, enabling it to tap a 600-million-barrel resource of low-cost oil supplies in the state. The company expects the project to start producing in 2029. It has the potential of generating over $4 billion in incremental annual free cash flow for the oil giant beginning that year.
Add up these growth catalysts, and ConocoPhillips could produce over $7 billion in incremental annual free cash flow by 2029, assuming oil averages $70 a barrel. That would be roughly double the free cash flow it expects to produce this year. This number would still be a strong $6 billion at the current oil price in the low $60s. This robust free cash flow growth outlook supports the company’s plans to deliver dividend growth within the top 25% of companies in the S&P 500 in the coming years. It will also provide the company with ample capacity to buy back more of its shares.
ConocoPhillips has built one of the best portfolios in the oil sector. With expansion projects set to deliver durable and growing free cash flow, the company is in a strong position to grow its high-yielding dividend (over 3.5% yield following the slump in its share price) at a high-octane rate in the coming years. Given its current lower share price, now is a compelling time for investors to consider buying and holding ConocoPhillips for its long-term income and growth potential.
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