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This Energy Giant May Be a Safe Bet

June 29, 2014 | About:
abirk

abirk

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ConocoPhillips (COP), being one of the most interesting stocks is getting ready to provide greater returns. It has started to see production growth in certain key segments due to its multi-year turnaround.

One of the biggest advantages of ConocoPhillips is its global diversification in its assets, which provides it stability. Furthermore, the most of these assets are in the politically stable regions which ensure the uninterrupted production activity for the company.

Shiny Numbers

This year, Conoco intends to make investments in its legacy assets and ramp up its unconventional plays with additional projects like the recent startup at Siakap North-Petai and the startups in Canada, the United Kingdom, and Malaysia. In the first quarter of this year, the company continued with its growth strategy and has generated 3% production growth. Bakken and Eagle Ford combined increased production by 41%. Liquid production from Christina Lake Phase E approached full capacity, adding to the continued growth from the Canadian oil sands. ConocoPhillips has continued working on exploration and appraisal activity in Alaska, the Gulf of Mexico, and Australia.

ConocoPhillips will grow production each year by between 3%-5% through 2016. This growth is coming from a variety of places, but it is centered around more politically stable, high-margin locations: the Canadian oil sands, the Gulf of Mexico, the North Sea, and most of all, U.S. shale plays such as the Eagle Ford and the Bakken.

Compounding this production growth is impressive margin growth. As Conoco sold its lower-margin assets in Nigeria, Kazakhstan, and North Africa, the company invested in projects yielding higher-margins, namely the Canadian oil sands and U.S. shale. As a result, margins are also growing at 3%-5%.

illips grew production by 3% and grew margins by 5%. Therefore, I believe we will see a 7.5%-8% dividend increase in 2014. That dividend growth is in addition to the already substantial 3.6% yield that Conoco offers right now. Trading at only 10.5 times trailing earnings, Conoco still has a ways to go.

Future Outlook

Investors have good reason to believe that ConocoPhillips will continue to grow production into and beyond 2017. Production growth from 2017 onward will be determined by exploration results today. Management has shown a continued focus on high-margin, OECD projects. The lion's share of Conoco's exploration and appraisal budget is going to Alaska, the Gulf of Mexico, and less-developed shale plays such as the Duvernay and Montney in Canada and the Wolfcamp and Niobrara in the U.S. If these shale plays are anything like the Bakken or Eagle Ford, then they will provide high-margin, liquids-rich growth for several years at least.

ConocoPhillips has a number of interesting exploration opportunities that position the company to deliver growth in the back half of the decade. The company has a real balance between unconventional exploration opportunities in North America as well as more conventional deepwater opportunities in the Gulf of Mexico and offshore Africa. Because of this long-term opportunity investors can confidently continue to hold shares as the company appears to have more than enough growth opportunities to fuel its next phase of growth beyond 2017.

To End

It is hard on the investors’ part to choose one energy company for investment especially with so many energy companies vying for investors’ attention. ConocoPhillips has been on an impressive run. ConocoPhillips has a bright future, and its stock is still worth holding. Dividends and dividend growth are the primary reasons why major oil companies are bought for. This oil giant is currently in a position to provide investors with these.

Besides possessing an incredible portfolio of oil assets, Conoco pays a strong dividend, and with production and margin growth, shareholders can continue to load up on this stable oil producer. Overall, Conoco's goal is to achieve double-digit returns per annum for shareholders. It intends to do this through a combination of production growth, increased efficiencies, and dividends.

Conoco's management is targeting 3% to 5% annual growth in production by unlocking oil reserves from both conventional and unconventional sources. Additionally, the company is looking to increase margins by around 3% to 5% per annum by targeting oil projects with lower lifting costs and lower start-up costs.

To achieve these goals, Conoco is looking to spend around $16 billion per annum with 95% of this capex devoted to investments that deliver margins greater than the company's average today.


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