uploads///COP Q Value Proposition Principles

ConocoPhillips’s Value Proposition for Its Stockholders


Dec. 8 2017, Published 1:41 p.m. ET

Trends in crude oil and natural gas prices

As 2017 is coming to a close, crude oil (USO) prices are still trading ~47.0% below their July 2014 high. Natural gas (UNG) prices are trading ~55.0% below their high set in February 2014.

This “lower-for-longer” trend in crude oil prices for the last three years has caused a steep decline in operating margins of many upstream companies. Lower realized prices also negatively impacted the production growth, balance sheets, and dividends of many upstream companies.

Due to these factors, Southwestern Energy (SWN), Denbury Resources (DNR), and Marathon Oil (MRO) are trading ~89.0%, ~91.0%, and ~38.0% below their all-time highs set in 2014.

In contrast, the SPDR S&P 500 ETF (SPY) has set a new all-time high every month in 2017.

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COP’s value proposition through energy price cycles

In the last one-year period, ConocoPhillips (COP) has followed a disciplined returns-based strategy to deliver value to its stakeholders through energy price volatility. This value proposition is designed for the “lower-for-longer” scenario and more uncertain energy prices going forward—precisely what the upstream industry is currently facing.

This value proposition has three core principles:

  • financial strength via a solid balance sheet
  • growing distributions for its shareholders—primarily a dividend that grows over time
  • disciplined growth in operating cash flows on a per-share basis

These core principles essentially reflect how ConocoPhillips expects to allocate its cash flow in the next few years.

Series overview

In the course of this series, we’ll explore the details related to ConocoPhillips’s (COP) value proposition. We’ll study COP’s key cash allocation priorities, low-cost reserves, and emphasis on conventional reserves.

We’ll also discover how much minimum capital ConocoPhillips would need to maintain flat production for the next three years. We’ll determine how ConocoPhillips could reduce its debt in the next two years. We’ll also look at COP’s production and capex guidance for 2018 and how it relates to its value proposition.

We’ll answer these questions by studying ConocoPhillips’s recent AIM (Analyst and Investor Meeting) presentation, which took place in New York City on November 8, 2017.

Let’s start with ConocoPhillips’s key cash allocation priorities for the next three years.


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