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ConocoPhillips: Oil Prices Might Hurt the Cash Flow

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Jan. 22 2019, Updated 1:15 p.m. ET

Cash flow and oil’s fall

On December 10, ConocoPhillips (COP) announced that its cash flow sensitivity increased by $30 million per $1 change in oil prices. In the third quarter, the cash flow sensitivity was $170 million–$195 million. On average, Brent crude oil prices have declined by ~$11.2 per barrel in the fourth quarter—compared to the previous quarter. The decline might induce a large downside in ConocoPhillips’ cash flow. The cash flow from operations might decline. In the third quarter, ConocoPhillips’ free cash flow was at $1.811 billion, which was ~35% higher than the previous quarter. In those two quarters, Brent crude oil prices averaged ~$75–$76 per barrel. ConocoPhillips’ total production grew ~1%, while production and operating expenses grew ~4%.

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Capital expenditure plan for 2019

For 2019, ConocoPhillips’ total planned capital expenditure was $6.1 billion. The capital expenditure is easily achievable with WTI crude oil at more than $40 per barrel. ConocoPhillips might go for a share repurchase of $3 billion this year. According to management, the company requires a sustaining capital of $3.5 billion per year in case there’s flat production between 2018 and 2020. The sustaining capital is achievable from the cash flow from operations even if WTI crude oil is below $40 per barrel.

EOG Resources (EOG) could have a positive free cash flow even after it pays dividends and its capital expenditure with WTI crude oil is at $50—based on management’s guidance. However, Anadarko Petroleum (APC) might face trouble due to prevailing oil prices. Anadarko Petroleum’s management expects to generate significant cash in 2019 with WTI crude oil at $60 per barrel, Brent crude oil at $70 per barrel, and natural gas at $3 per MMBtu. The conditions might improve for Anadarko Petroleum in 2019 with another rise in oil prices. Oil sales contribute ~70% to the company’s total revenues based on the third-quarter results. Occidental Petroleum (OXY) is confident that it will continue to pay dividends and maintain the production status quo even with WTI crude oil at $40.

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