ConocoPhillips (COP) is one of the highest yielding dividend stocks in the oil and gas sector with a dividend yield of over 4.30%. The leading industry peers - Exxon Mobil (XOM), Chevron (CVX) and Chesapeake (CHK) are far behind with dividend yields of 2.5%, 3.41% and 1.32%, respectively. The energy stocks are usually solid long-term investments due to the massive size of the operations and strong cash flows. Along with the dividends, these companies also offer the opportunity of growth. Almost all the companies mentioned above gained more than 12% during the last year - taking into account the dividend yield, the total return for shareholders was more than 15% for almost all of these companies. As the global economy continues to recover, the demand for oil is expected to remain strong. As a result, these companies should be able to grow cash and dividends over the next few quarters.
Dividend Growth and Cash Flows
First of all, let's look at the dividend growth over the past few years. Going back to 2005 when the company announced 2-1 split, we see that the quarterly dividend payment has more than doubled. At the time of the split, the quarterly dividend came down to $0.31 per share (it was $0.62 per share before the split and represented the same value after the split). After two quarters, the company increased the dividend to $0.36 per share, increasing the dividend by more than 16%. After that, the dividend has been growing gradually, although there has not been a set pattern for dividend increases. Some companies increase the dividend at a specific time of the year; however, for ConocoPhillips, there has been no set time. Sometimes the company has raised dividend after two quarters and sometimes it has been as long as two years. The last dividend increase came in the third quarter of the last year. Nonetheless, the dividend has been growing and currently stands at more than double the 2005 levels. On average, ConocoPhillips have been growing dividend at over 15% every year.
During the last year, the company paid $3.3 billion in cash dividends. In the two years before 2013, the company repurchased about $16 billion worth of shares; however, there were no share buybacks during the last year. Capital spending, however, was the highest ($15 billion) in the last year compared to the previous two years ($11 and $14 billion, respectively). As a result of rising capital expenditures, free cash flows have been falling for ConocoPhillips. Free cash flows for the last year stood at just under $600 million. Now, if we take the payout ratio based on free cash flows (my preferred approach), the situation looks precarious for the company. The payout ratio comes out to be over 550% -- meaning the company is paying 5.5 times more in dividends than it is generating in free cash flows.
Alright, let's not start panicking yet - another way to look at the payout is the payout ratio based on earnings - here, the company looks in far stronger position. Payout ratio based on earnings is close to 36%, prettier picture than the free cash flows. We need to understand the trend in free cash flows to make an informed decision. The free cash flows have been falling due to an increase in capital spending, not because of a fall in cash flows from operations. In fact, cash flows from operations have improved by more than $2 billion during the last year, which indicates that the capital spending has started to grow cash flows of the company. Most of the capital spending has been done in the Americas (more than 50%); other two main regions have been Europe and Asia Pacific and Middle East. Now, most of these regions are politically stable, which means the production levels will not be affected due to the political unrest.
Furthermore, we might see a decline in capital spending, especially in Europe - according to this study, investment in North Sea is expected to fall over the next three years - ConocoPhillips was one of the largest investors in this region. Increased operating cash flows coupled with a decrease in capital expenditures will enhance the free cash flows. Even if we assume the current growth rate in operating cash flows and a decline of 5-10% in capital spending, the payout ratio will come close to 100% of free cash flows. Now it is clear why the company increased dividend last year along with the capital spending. With the current growth rate in earnings and cash flows, the company will be able to grow dividends and have a free cash flows payout ratio at less than 100%.
Growth Projects will Continue to Enhance Cash Flows
ConocoPhillips has a strong position in the Gulf of Mexico and it one of the most important assets of the company. ConocoPhillips announced its fourth major discovery in the Gulf of Mexico late last year at its Gila well. The company has forecasted that the Gila well will fuel their U.S production this year and beyond. These are important milestones and establish strong momentum for exploration and revenue generation for the coming years.
The energy sector demands heavy allotment of resources for the capital expenditures. It has become a norm for this sector due to the need to replace the depleting reserves. ConocoPhillips achieved 179% reserve replacement and added over 1 billion barrels of reserves organically, which grew its reserves by 3% in the last year. The company's strong financial results and superior quality asset base will provide it with adequate momentum to perform significantly in the coming years.
Technology plays a crucial role in generating strong revenues. Huge capital expenditures are vital for the survival of companies in the energy sector. The depleting reserves usually result in increased extractions costs and decreasing productivity. ConocoPhillips is executing its strategy well to replace its assets in politically unstable areas, with more productive assets in better political and regulatory environment. Also, the strong earnings reflect a fundamental shift towards liquids in its portfolio. The worldwide market for liquefied natural gas (LNG) has been developing in the recent years. Especially, south East Asia has a strong demand for LNG and it's likely to get even stronger. With the application of export license, ConocoPhillips will be able to penetrate deeply in those markets. Production levels for the last year were 1,502 MBOED, for the current year, production levels are expected to be close to 1,550 MBOED, in line with the company's policy of 3-5% growth in production. These expected production figures exclude the operations in Libya due to the continued shutdown of Es Sider Terminal.
Conclusion
As I mentioned above, the recovering global economy will continue to support the demand and price for oil, which should result in increased production from the oil and gas companies. ConocoPhillips' policy of 3-5% growth in production also suggests that the company sees a strong market for oil. Capital projects have started to bring in cash - the growth in operating cash flows is a proof of company's strength. In my opinion, ConocoPhillips should be a part of every dividend portfolio as the company has shown impressive growth in dividends. Furthermore, future growth in operating cash flows makes it even more attractive. The capital spending is returning cash for the company and the improving financial condition will certainly push it higher.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)
Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.
Seeking Alpha PRO helps fund managers:
- Research new investment ideas
- Reduce risk
Thank you for your interest in Seeking Alpha PRO
We look forward to contacting you shortly for a conversation.
This entry passed through the Full-Text RSS service — if this is your content and you're reading it on someone else's site, please read the FAQ at http://ift.tt/jcXqJW.
Aucun commentaire:
Enregistrer un commentaire