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Conoco Plans Share Buyback That’s Almost 50% of Market Value

Kevin Crowley

(Bloomberg) -- ConocoPhillips announced a 10-year plan to buy back $30 billion of shares, equivalent to about half of its current market capitalization, as the oil producer attempts to distance itself from the troubled U.S. shale industry.

The company also said it will pay dividends of about $20 billion over the period and limit average capital expenditure to about 10% above current levels.

Chief Executive Officer Ryan Lance told investors and analysts at a presentation in Houston on Tuesday that the long-term plan sets the company apart from its peers amid a fight to regain the interest of shareholders in U.S. oil and gas, one of the worst-performing sectors this year.

“The industry faces a flight of sponsorship by investors,” Lance said during the presentation. There’s a “struggle for relevance unless the industry can create value on sustained basis.”

After being forced into a painful dividend cut during the 2014-2016 oil price crash, the third-largest U.S. oil producer has regrouped under Lance and has built a reputation of being one of the more dependable producers, differentiating itself from other shale operators that have disappointed on production and earnings.

Energy stocks have shrunk to less than 5% of the S&P 500 Index, less than half the level a decade ago, after shale producers burned through nearly $200 billion of cash in pursuit of surging flows of oil and gas. Oil and gas producers have responded by returning more cash to shareholders. At the end of their most recent full fiscal years, U.S. energy companies in the S&P 500 bought back $24.2 billion of shares, compared with $10.5 billion in the previous year, according to data compiled by Bloomberg.

With investors focused on returns rather than output expansion, Conoco is busy morphing into a low-growth but high cash-generating company that’s built to withstand low crude prices and peak oil demand, which the International Energy Agency says could happen around 2030.

Conoco’s plan “shows sustainability over a long period” and a business model “that can deliver competitive returns and appeal to a wide range of investors,” Scott Hanold, an analyst at RBC Capital Markets LLC, said in a note.

Conoco was 0.8% higher at $57.15 at 2:27 p.m. in New York trading. The stock has dropped 8.3% this year, while the Standard and Poor’s 500 Energy Index has advanced 1.3%.

Investors have delivered stinging rebukes to energy companies this year for paying substantial premiums for acquisitions, such as Occidental Petroleum Corp.’s $37 billion deal for Anadarko Petroleum Corp. Chief Operating Officer Matt Fox admitted that the “elephant in the room” is the possibility Conoco will use its cash hoard for a major deal.

“Obviously we can’t and we shouldn’t rule that out, but we can rule out doing a bad acquisition driven by the wrong reasons,” Fox said during the presentation. “We’re not going to do something that undermines our financial framework.”

What Bloomberg Intelligence Says

“With leverage below 1x cash flow, Conoco has plenty of room to make opportunistic acquisitions. The Permian Basin is likely the biggest target, with significant assets in the area and a relatively small presence in Conoco’s portfolio. However, overdrilling by some of its neighbors will drive management to be highly selective of deals.”

--Brett Gibbs, BI analyst

Read the research here.

Conoco also has conventional production in Alaska, Europe and Asia, while also operating in shale basins. Though Conoco aims to avoid the pitfalls of rival shale producers, the sector will provide much of the company’s growth and account for about 60% of its capital expenditure over the next decade. Its shale production from the Permian Basin, Eagle Ford, Bakken and Montney in Canada will more than double to 900,000 barrels a day by 2029.

Conoco said it will stick with about 20 drill rigs and won’t try to chase higher production in times of high crude prices, which tends to destroy shareholder capital, Fox said.

“Unfortunately, we know this because we did it,” he said.

(Updates with industry buybacks in sixth paragraph)

--With assistance from Brad Skillman.

To contact the reporter on this story: Kevin Crowley in Houston at kcrowley1@bloomberg.net

To contact the editors responsible for this story: Simon Casey at scasey4@bloomberg.net, Christine Buurma

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