ConocoPhillips (NYSE: COP) is running on all cylinders these days. The oil giant’s old activities are performing well extremely Good. Meanwhile, the company is about to get a big boost by completing the acquisition of Marathon oil (NYSE: MRO).
Those factors give the oil stock the confidence to return much more money to shareholders. It is increasing its dividend and share buyback program.
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ConocoPhillips recently announced its third-quarter results. The oil giant produced more than 1.9 million barrels of oil equivalent per day (BOE/d) during the period, exceeding the upper limit of its production guidance. The company achieved record production in the lower 48 states, with strong results in the Permian, Bakken and Eagle Ford operating areas. Production rose 3% year on year, after adjusting for acquisitions and asset sales.
That strong production helped cushion some of the impact of lower oil and gas prices. ConocoPhillips averaged $54.18 per BOE during the period10% lower than last year’s quarter. As a result, adjusted profits fell from $2.6 billion to $2.1 billion.
However, the company generated robust cash flows during the third quarter. It generated $4.7 billion in cash from operations. ConocoPhillips used $2.9 billion to fund capital expenditures to maintain and expand its operations. Meanwhile, it distributed $2.1 billion to investors, included buying back $1.2 billion in shares and making $900 million in cash payments (dividends and variable return cash (VORC)). As a result, the company still had $7.1 billion in cash on its balance sheet at the end of the third quartertogether with another $1 billion in long-term investments.
ConocoPhillips expects the fourth quarter to be an active quarter. It expects to complete its $22.5 billion merger with Marathon Oil. The deal will deepen its portfolio, adding high-quality, low-cost supply inventory to existing holdings in the lower 48 states.
The company also expects the transaction to be immediately accretive to earnings, cash flow from operations, free cash flow and capital return per share. The company initially expected to realize at least $500 million in cost and capital synergies within the first year of closing the deal. However, it now anticipates significantly more than that number.
In addition to the Marathon purchase, ConocoPhillips also recently agreed to expand its position in Alaska. It exercised its rights and signed agreements to purchase an additional $300 million in working interests in the Kuparuk River and Prudhoe Bay units. That deal will increase the state’s revenues and cash flow.
ConocoPhillips’ acquisition-driven growth drives increased confidence that it can return more money to shareholders. The company has officially increased its quarterly figures dividend payment by 34%, making the current VORC payment permanent. The new dividend level exceeds the previous peak before the company had to revise its dividend following the oil price crash in 2015. The oil company plans to continue increasing its dividend going forward, with the aim of being among the top 25% of all dividend growers in the future. S&P500 index.
In addition, the company’s board of directors has approved an increase existing share buybacks authorization by up to $20 billion. That is more than enough to retire all the shares it plans to issue to acquire Marathon Oil (about $17.1 billion in equity). The company plans to increase the pace of buybacks after the deal from the current rate of $5 billion per year to about $7 billion, implying it could retire any shares it issues to buy Marathon within three years.
ConocoPhillips’ strategy to expand its U.S. operations has done just that Real recent years have paid off for investors. It produces a flow of money, a growing percentage of which returns to investors. With two more acquisitions about to close, the company should generate even more cash in the futuregiving it more money to return to investors. These growing cash returns could give ConocoPhillips the fuel to produce strong overall returns in the coming years, making it an attractive long-term investment in oil stocks these days.
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Matt DiLallo has positions in ConocoPhillips. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
Fueled by an unprecedented takeover, this oil stock is increasing its dividend by 34% and plans to buy back $20 billion in shares. Originally published by The Motley Fool
