ConocoPhillips recently purchased Royal Dutch Shell's Permian Basin (US) assets in a quality transaction that will provide the company with billions in additional free cash flow (FCF). The main price of $ 47,500/boed (equivalent in barrels per day), will have a production cost of $ 13 per barrel over the next decade. Moving forward, the company hopes to use its FCF to generate substantial returns for shareholders, making it a valuable long-term investment.
ConocoPhillips (COP.US) is one of the largest upstream energy companies with a market capitalization of more than $ 80 billion. The company recently acquired assets in the Permian Basin from Royal Dutch Shell (RDSA.US) for $ 9.5 billion. Making this acquisition one of the most long-term return potential for ConocoPhillips.
How was the acquisition?
The transaction is expected to allow the company's cash flow to increase significantly.
The new acquisition allows the company to focus on its triple premise of meeting transition demand, developing competitive returns, and ultimately achieving zero net emissions. The $ 9.5 billion cash acquisition of more than 225,000 acres (91,000ha) net will allow the company to produce 200,000 barrels (2022E) in the heart of the Delaware Basin.
The acquisition, incorporated into the company's 10-year strategic plan, will result in a $ 10 billion increase in FCF. Approximately 100% of the company's market capitalization is expected to be distributed over the company's 10-year plan at the rate of a WTI barrel price of $ 50, which shows the company's overall strength and capacity. continues to drive long-term returns for shareholders.
The company has a base dividend yield of 3% and recently announced that it intends to raise it to 7%. The company is expected to continue to distribute a large portion of its cash flow going forward. It is also worth noting that oil prices can be expected to remain much higher than $ 50 in WTI (currently at $ 79). That will help the transaction generate even higher returns for shareholders.
Where does ConocoPhillips do business?
ConocoPhillips is focused on driving future returns for shareholders from its activity in oilfield.
ConocoPhillips' new acreage consists of 225,000 net acres well integrated into the company's existing portfolio. The acquisition currently generates an estimated free cash flow return (FCFe) of 20% for 2022E and an EBITDA of 3.7x for the same date, an incredibly strong rate based on a production assumption of $ 47,500 / boed (equivalent to barrels per day). Yield estimate for year-end 2021 at $ 15,600 per net acre is already incredibly reasonable.
It should be noted that the current properties of the company will contribute $ 1.9 billion in 2022 from FCF. The company is increasing its goal from $ 2 billion to $ 4.5 billion, allowing it to improve its overall portfolio.
ConocoPhillips portfolio
ConocoPhillips will use the acquisition to enhance its overall portfolio by becoming one of the strongest companies in the Lower 48 (contiguous United States, ex-Hawaii and Alaska).
ConocoPhillips will achieve a budgeted production of nearly 1 million barrels per day. The acquisition will increase the recent company reduction of 12%. Its global production will be 1.7 million barrels per day, a presumably manageable amount and, in general, it will provide the company with good diversification.
This portfolio will continue to grow in the long term, according to its strategic plan. At the same time, compared to its competitors, the company still has a relevant LNG (liquefied natural gas) exposure in its portfolio, which is a transition energy worth paying close attention to from the point of view of shareholders and investors, until the move towards green hydrogen pays off.
ConocoPhillips Valuation
The company's 10-year plan at a WTI price of $ 50 per barrel will generate substantial benefits for shareholders.
ConocoPhillips has the ability to generate attractive returns for shareholders at a variety of prices in its 10-year plan. This plan, with the new acquisition, will contribute more than $ 80,000 million in FCF and more than $ 75,000 million in dividends for shareholders. For an $ 87 billion company, that's impressive and enough to pay off 85% of its market capitalization.
That is in addition to continued large investments in the company's businesses. The company will be able to continue to generate returns of 10% in the future with this potential, and that, taken together, makes the company a valuable long-term investment.
What risks does ConocoPhillips have?
ConocoPhillips' risk, magnified by this acquisition, is oil prices. The company can generate incredibly strong cash flow with its $ 50 WTI plan. However, with prices at $ 20 WTI and above, the business can generate much more cash flow. The additional $ 20 per barrel of the $ 50 WTI plan is roughly the equivalent of $ 60 billion.
That $ 60 billion of free cash flow can go toward all kinds of shareholder pay. However, falling prices are still a risk worth paying close attention to.
Conclusion
- ConocoPhillips has a diversified portfolio of assets worth paying close attention to.
- The recent acquisition of the Permian Basin land from Royal Dutch Shell for $ 9.5 billion should pay off comfortably over the next decade. This should allow the company to offer additional compensation to shareholders.
- The company is focused on its dividend which currently offers a return of almost 3%.
- You could more than double it or focus on implementing a share buyback program and other forms of shareholder compensation.
- That ongoing commitment to shareholders is worth paying attention to. It makes the company very attractive to those who invest from a growth and dividend perspective.
Technical analysis
The recent events led by OPEC+, which will maintain the increase in production at 400,000 barrels per day, have been interpreted by investors as an expectation of demand growth for the coming months, focused on the beginning of 2022. What has the price of WTI oil shot up to $ 79 per barrel.
Under this premise, the company has the potential to reach its fibo levels of 240% of the last retracement, matching with the next relative maximum at $ 80 per share, with relative ease, provided that investor sentiment remains favorable.
In any case, as we see in the chart below, the resistance zone at $ 77 must be taken into account if the markets change direction and the search for support becomes the main objective. If the WTI barrel does not consolidate levels at $ 77, it could correct to the previous support at $ 68, which could cause the company to correct to its previous reference levels at $ 63.6 per share.
Darío García, EFA
XTB Spain
