Spurred by a Significant Merger, This Oil Company Increases Its Dividend by 34% and Contemplates Buying Back $20 Billion Worth of Its Shares.
ConocoPhillips (COP shedding -1.44%) is running at full speed right now. The company's traditional business segment is thriving, while it's on the brink of receiving a significant boost from finalizing its game-changing acquisition of Marathon Oil (MRO).
These factors are granting the oil sector stock the self-confidence to redistribute a substantial amount of money to its shareholders. It's enhancing its dividend and stock buyback plan.
Delving into ConocoPhillips' third-quarter report
Recently, ConocoPhillips unveiled its third-quarter financial figures. The firm produced over 1.9 million barrels of oil equivalent per day (BOE/d) during the period, surpassing the upper limit of its estimated production range. It recorded record production in the lower 48 states, with notable results across its Permian, Bakken, and Eagle Ford operational regions. Its production grew by 3% compared to the same period last year, after accounting for acquisitions and asset sales.
This robust production helped mitigate some of the negative effects of lower oil and gas prices. ConocoPhillips garnered an average of $54.18 per BOE during the period, which was 10% lower than the corresponding period last year. Consequently, its adjusted earnings decreased from $2.6 billion to $2.1 billion.
Nevertheless, the company generated substantial cash flows during the third quarter. It brought in $4.7 billion in operational cash. ConocoPhillips expended $2.9 billion on capital expenses to maintain and expand its operations. Simultaneously, it disbursed $2.1 billion to its investors, including purchasing $1.2 billion worth of shares and making $900 million in cash payments (dividends and its variable return of cash [VORC]). This left the company with $7.1 billion in cash on its balance sheet at the end of the third quarter, along with another $1 billion in long-term investments.
Upcoming acquisitions will bring even greater cash returns
ConocoPhillips anticipates the fourth quarter to be an active one. It foresees closing its $22.5 billion union with Marathon Oil. This deal will expand its portfolio, incorporating high-quality, low-cost supply inventory, which is positioned near its existing sites across the lower 48 states.
The company also estimates that this transaction will positively impact its earnings, operational cash, free cash flow, and shareholder return on the first day of closure. It initially anticipated capturing at least $500 million in cost and capital synergies within the first year of closing the deal. However, it now predicts significantly surpassing this figure.
In addition to acquiring Marathon Oil, ConocoPhillips recently agreed to enhance its stake in Alaska. It exercised its rights and inked agreements to buy additional working interests in the Kuparuk River and Prudhoe Bay units for $300 million. This deal will bolster its earnings and cash flow from the state.
ConocoPhillips' acquisition-driven development is bolstering its belief that it can redirect more cash to its shareholders. The company has officially boosted its quarterly dividend payout by 34%, making its current VORC payment perpetual. The new dividend level surpasses the previous peak before the company had to revise its dividend following the oil price plunge in 2015. The oil company intends to continue escalating its dividend in the future, aiming to be part of the top 25% of all dividend growers in the S&P 500 index.
Beyond this, the company's board of directors has authorized an increase in its existing share buyback authorization by up to $20 billion. This is sufficient to retire all the shares it plans to issue to acquire Marathon Oil (approximately $17.1 billion in equity). The company plans to accelerate its share buyback pace post-deal, exceeding its current annual pace of $5 billion to around $7 billion, suggesting it could retire all the shares it's issuing to buy Marathon within three years.
The increased cash flows due to robust production and cost savings from planned acquisitions have led ConocoPhillips to increase its dividend payout by 34%, aiming to be among the top dividend growers in the S&P 500. Additionally, the company has boosted its share buyback authorization by up to $20 billion, allowing it to retire shares issued for the Marathon Oil acquisition within a few years.
In view of the impending acquisition of Marathon Oil and the recent increase in its stake in Alaska, ConocoPhillips is keen on investing more money back into its shareholders, further strengthening its dividend and share buyback plans.
