Why This High Dividend Energy Company Is Poised for Huge ReturnsDec 08, 2021
Last time we wrote up ConocoPhillips (see that post here) they just closed on a bargain acquisition of Shell’s oilfield holdings in the Permian Basin.
Fast forward to today and that acquisition is paying off more than ever as they’re about to hit our price target far earlier than anticipated. The stock price is up 23% in the last 6 months and we believe there is still plenty of room left to run!
Let’s get into some of the exciting updates coming out of COP and see what growth we can expect from this energy company over the next 6 months:
ConocoPhillips just completed its $9 Billion acquisition of land from Shell in the Permian Basin. Sprawling across West Texas and New Mexico, the Permian Basin contains some of the most productive oil and natural gas fields in the US. ConocoPhillips managed to acquire the land for a great price, and they're already gearing up to pass that value along to their shareholders.
Their management team is expecting production of ~1.8 MMboe/d (one million barrels of oil equivalent/day) moving forward. This is a mild increase, and is in line with expectations from COP management and Wall Street. Fossil Fuels are the kind of industry you really want to take slow regardless, so any growth here is a great sign.
If this acquisition keeps performing well, ConocoPhillips is looking to pay out over $75 Billion to their shareholders over the next 10 years
ConocoPhillips Free Cash Flow Yield:
The biggest news coming out of ConocoPhillips this week is an announcement of a variable dividend that will bring total dividend yield for COP to 7.5%. They can afford this because of how cashflow positive they are.
The increased production coming out of the Permian basin will help bring COP to an expected Free Cash Flow Yield (FCFY) of 13% in 2022.
This is massive. We hate to bore you with the dry details but FCF yield is actually a fascinating and really important fundamental metric to look for when you're picking stocks.
Free Cash Flow (FCF) is simply the amount of cash left over for shareholders after a company has paid for all it's expenses. A positive Free Cash Flow means the company is more or less making money. If it is positive then the company is generating more cash than is used to run the business and would be able to reinvest excess profits in order to grow the business! With positive FCF the company would be fully capable of supporting itself, and there is plenty of potential for further growth while a negative FCF means the company is losing money. It's okay to see a negative FCF in growth companies but in established energy plays like COP, you want to see something positive.
Analysts take this metric to the next level by dividing Free Cash Flow by the market cap of the company to see how valuable it is as an investment. This metric is called Free Cash Flow Yield. Most analysts say 7% is a strong FCF Yield, so the fact that COP can push 13% in 2022 is incredible compared to the market.
COP is also looking really strong in their core business. There are some worries about regulation and headwinds from the Biden administration, but they shouldn't affect the ability of ConocoPhillips to grow and pay out strong dividends for the next decade.
If we had any worries at all, they would be based in more macro speculation than anything. There are two major trends that we're watching that could affect COP's growth over the next year. They are a bit paradoxical.
- First up, if the Omicron variant of COVID19 leads to more lockdowns, that will cause further supply chain disruptions that will hurt margins and growth overall. Rising inflation because of this could also become a headwind moving forward if rates are raised.
- At the same time, any COVID disruptions could cause energy prices to rise, which could result in tailwinds for the stock -- so these macro forces are a fairly mixed back for COP moving forward.
The takeaway here is that there is a fine line when it comes to how the macro will affect ConocoPhillips. We think the macro though is favoring the stock and are fine with the inherent risks!
In the end, ConocoPhillips is a strong energy play that's growing slowly, but well. Their potential dividend yield of 7.5% paired with stock growth is very unique and pretty hard to pass up for the level of associated risk.
We're continuing to hold long term through whatever volatility keeps coming as long as our thesis remains intact!
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Current Price: $74 (90% YTD Performance)
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Market Cap: $98B
Dividend Yield: 1.5%