ConocoPhillips (COP, Financial) is one of the best-managed independent oil and gas companies in the world. Over the last several years, the comapny has transformed its business model and strengthened its balance sheet. Since oil prices crashed a few years ago, ConocoPhillips has gone to great lengths to transform its business so it can make a profit from lower oil prices. With oil prices at 20-plus year lows currently, ConocoPhillips is one of the best companies in the industry.
The company entered this period of turmoil with a strong balance sheet and the ability to weather lower oil prices. ConocoPhillips produced 1.3 million barrels of oil equivalent per day in 2019. Now what matters is the cost of producing that oil going forward. The company ended the year in a sound financial position, having $8.1 billion in cash on hand and $14.7 billion in debt. ConocoPhillips produced $7 billion in net earnings in 2019, which is misleading since it includes some mark-to-market gains on equity investments and gains on reported asset sales. When you account for these items, net adjusted earnings come in at $4 billion.
Back in February, ConocoPhillips had capital plans for 2020 of $6.6 billion, but that was before the oil market collapse. The company increased its quarterly dividend by around 10% to 42 cents per share. However, unlike its competitors, ConocoPhillips isn't taking extreme measures. The company plans on cutting the midpoint of its capital plans by $700 million to $5.3 billion. ConocoPhillips is one of the best-run oil companies in the world with a strong balance sheet.
Unlike the oil price crash of 2015-16, ConocoPhillips is financially strong and can weather this storm and provide a continued dividend payment going forward. When oil prices are not being artificially lowered, ConocoPhillips produces strong free cash flow on its oil assets, which are some of the best in the industry. This has allowed the company to repurchase large amounts of its stock over the last several years. Last year alone, ConocoPhillips spent $9.2 billion to repurchase its stock.
When this crisis is over and the Saudis and the Russians agree to cut production, oil prices will rebound. This will drive the stock higher on expanding margins from its oil assets.
Valuation
Currently, ConocoPhillips is trading at 4.6 times its earnings and offers a 5.6% dividend yield. I see that earnings will be impaired going forward until oil prices return to normal or Russia and OPEC agree to cut production. Even though earnings will suffer in the short term, it doesn't change the long-term value of the company or the underlying economics of the business. The company produced over $9.7 billion in pretax earnings in 2019, or $8.8 per share. Thanks to the market, ConocoPhillips is offering a 23% pretax earnings yield.
ConocoPhillips has produced a return on equity of 23%, return on assets of 10.17% and return on capital of 23.2%. This shows how strong the company is and how well management is able to produce above-average returns on its assets. The company is a steal at its current price and may go down more. It's clearly time to load up on shares.
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