'Can ConocoPhillips continue with its outperformance going forward?'
Oil majors have outperformed broader markets during the past three months. Within the big oil companies, ConocoPhillips (NYSE: COP ) , the world’s largest independent exploration and production (E&P) company, has outperformed its peers, including ExxonMobil (NYSE: XOM ) and Chevron (NYSE: CVX ) , by a significant margin.
In the last three months, ConocoPhillips is up more than 25%, while ExxonMobil and Chevron are up 8.5% and 13.7%, respectively, during the same period. As you can see from the figure below, Conoco and its oil major peers also outperformed the S&P 500 by a significant margin.
Will the outperformance continue?
But now the question is, can ConocoPhillips continue with its outperformance going forward? Has Conoco reached its peak, or does the company have more capacity to outperform? I think the company has more upside potential. Conoco, compared to its peers, offers a relatively low-risk growth profile. The company is positioned to deliver the fastest growth among its peers during the next four years (2014-2018).
ConocoPhillips has already reached the inflection point of its transformation, and is looking increasingly strong to deliver both its short- and long-term operating and financial targets. Conoco’s North American unconventional portfolio is among the best in the industry, and it will help the company grow its production and cash flows much higher through 2017 and beyond.
Conoco is adopting a systematic approach to evaluating and developing its massive shale position, which some bears say could result in slower near-term growth compared to its peers. However, I think that, while the company’s approach may seem overly conservative, it’s the right approach at this point in time.
Given that the shale development cycle is still in its early innings, Conoco’s approach should yield much better full-cycle returns and cash flows. Conoco’s management believes that potential NPV accretion from focusing on process optimization will substantially outweigh the benefit of drastically accelerating the company’s development pace.
Enviable North American shale position
Bears often raise concerns around Conoco’s capital reallocation and the company’s growth potential post 2017-2018, but I think these concerns are overstated. The company not only has a deep portfolio to drive growth post-2018, but more importantly, Conoco has options that look relatively low cost compared to a number of high-cost growth projects of the company’s major peers.
The company’s extensive position in North American shale, in particular, offers long-term growth. Conoco’s shale portfolio offers both economic defensibility and resource upside. The company has substantial running room in low-cost North American shale plays by downspacing in Eagle Ford, the Permian Delaware basin, and other developing basins that can sustain growth post-2018. Longer term, the Niobrara and Duvernay shales also hold good potential.
Conoco’s management believes that the shale oil revolution is still in the early innings, and that significant upside remains from efficiency gains, particularly in above-surface operations.
Strong shareholder returns
ConocoPhillips also remains committed to returning excessive cash to shareholders and maintaining a disciplined capital spending program. Since April 2012, ConocoPhillips has returned a more than 22% return to shareholders, better than both its integrated and independent peers.
Going forward, the company remains committed to deliver peer-leading shareholder returns. Conoco believes that the underfunded capital program should lead to strong capital efficiency, as it will force operating managers to be selective in the company’s investment program.
While in recent years, Conoco’s acquisition and appraisal efforts were focused more on North American shale, the company has now sought to rebalance its portfolio a little. The year 2014 will see a shift toward a more active international exploration program. Two important frontier exploration wells are currently drilling, one in offshore Angola, and the other in Senegal.
Despite its recent outperformance, ConocoPhillips has further upside potential. The company has reached the inflection point of its transformation, and is on track to deliver its operating and financial targets during the next several years. Conoco offers a relatively low-risk growth profile, and is positioned to deliver investors the fastest growth among its peers during the next several years. The company is on track to deliver its 2017 operating and financial targets, and expects continuing growth beyond 2017.
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