ConocoPhillips (COP) shares have rocketed higher today, gaining 9% after the company announced the decision to divest its interest in certain Canadian properties that COP had joint ventured with Cenovus Energy (CVE) . Reading COP's presentation slides related to the deal left me with one key, crucial impression: ConocoPhillips' management is trying to maximize value for its shareholders.
Wait, isn't that the duty of every public company management? Of course it is, but I have learned that in the oil patch that ethos is preached much more frequently than it is practiced.
I deal often -- and have written many Real Money columns about -- smaller E&Ps. Those companies' existential problem is lack of access to capital. Conversely, the larger E&Ps, a cohort that includes COP, have ample access to capital but often spend that cash in unwise, uneconomic and sometimes inexplicable ways.
That is why COP's management strategy is so refreshing. In announcing the deal, COP management reiterated the company's five key priorities for capital allocation:
- Invest capital to maintain production and pay existing dividend.
- Annual dividend growth.
- Reduce debt and target "A" credit rating.
- Pay out 20%-30% of annual cash flow from operations to shareholders.
- Disciplined growth capital.
Those bullet points are music to my ears as a value investor, and COP's Canadian transaction shows that those words are not just a hollow mantra.
ConocoPhillips is not completely exiting the Alberta oil sands with this transaction. COP retains its interest in two Alberta acreage blocks (Surmont and Blueberry-Montney) and also took $2.7 billion of the total deal proceeds of $13.3 billion in Cenovus shares. So COP's still "long oil sands," but in a much more capital-efficient way.
What's really striking about this deal is the extent to which it lowers COP's annual production. COP management guided to a post-deal pro forma production rate for 2017 of about 1,275 million barrels of oil equivalent per day (MBOED), down dramatically from 2016's level of 1,540 MBOED. So ConocoPhilips management has accepted 17% lower production in 2017 (pre-deal guidance had been for a slight gain in year-on-year production in 2017). In the "size matters" world of the large E&Ps, that just doesn't happen very often, and I believe their discipline should be applauded.
In conjunction with this deal, COP has doubled its share repurchase authorization to $6 billion over three years and tripled its 2017 repurchase target to $3 billion. COP's presentation noted that management still expects to "grow the dividend annually." COP's quarterly payout was increased to $0.265 from $0.25 per share, with the most recent payment on March 1.
After today's share price run, COP's current yield is 2.1%. That pales in comparison to Exxon Mobil's (XOM) 3.7% current yield, and XOM is still my favorite long-term deep-value name in energy. But I like what ConocoPhillips management did, and I love their reasons for doing it. So, I'll put COP on my watch list, and if the shares pull back on an oil price wobble -- a frequent occurrence over the past 2.5 years -- I'll start to build a position in COP for the long term.
