ConocoPhillips Finishes Up an Excellent 2017

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ConocoPhillips (NYSE: COP) reported its fourth-quarter results on Thursday morning, and they were every bit as good as analysts expected. Earnings came in at $545 million, or $0.45 per share, after adjustments, which matched expectations and contrasted sharply with its year-ago adjusted loss of $318 million, or $0.26 per share. Cash flow was even better, which gave the company a windfall that it spread out to accomplish several things, including raising its dividend, boosting its share buyback plan, and acquiring some oil properties in Alaska from Anadarko Petroleum (NYSE: APC). The company's momentum has clearly turned upward, and that trend should continue in 2018.

Drilling down into the numbers

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Production averaged 1.219 million barrels of oil equivalent per day (BOE/D) during the quarter, which was above the midpoint of its guidance range of 1.195 million to 1.235 million BOE/D. Overall, production was 4% higher than it was in the year-ago period after excluding the impact of recent asset sales. Driving the growth was the ramp-up of its major projects and development programs.

ConocoPhillips also benefited from higher oil prices. Overall, the company realized $46.10 per BOE during the quarter, compared to $32.93 per BOE in the year-ago quarter. That, in combination with lower costs, enabled the company to generate $2.5 billion in cash flow from operating activities in Q4. The company used that money, along with cash on its balance sheet, to fund $1.5 billion in capital spending, pay $300 million in dividends, repay $1.3 billion in debt, and buy back $1 billion worth of its stock.

Allocating its windfall

ConocoPhillips expects cash flow to be even stronger in 2018 due to the impact of its strategic plan to increase margins, as well as from higher commodity prices. Because of that, the company plans to send more cash back to investors this year. First, it announced a 7.5% increase to its dividend, which is a bigger raise than last year's 6% boost, though within expectations. In addition, the company said that it would repurchase $2 billion in shares this year. While that's down from the $3 billion in stock the company bought back last year, it is 33% more than the $1.5 billion it initially planned to buy back in 2018.

The company further announced that it has already paid off another $2.25 billion in debt in 2018, after retiring $7.6 billion last year. That pushes its outstanding borrowings down to about $17.5 billion, which is close to its target to get debt down to $15 billion by next year. Finally, the company said that it bought Anadarko Petroleum's 22% stake in the Western North Slope of Alaska and its interest in the Alpine pipeline for $400 million. The deal will add 63,000 BOE/D to ConocoPhillips's output while enabling Anadarko to cash in on a non-core asset.

Even after it returns more cash to investors and strengthens its balance sheet, ConocoPhillips still has plenty of funds left over to continue growing production. The company reiterated its plan to spend $5.5 billion on capital projects in 2018, which should allow it to produce between 1.195 to 1.235 million BOE/D for the year. That would be a production increase of around 5% after adjusting for the impact of asset sales.

A cash flow machine

Last year was transformational for ConocoPhillips, as the company completed several asset sales to shore up its balance sheet and sharpen its focus on its best properties. While those efforts paid big dividends in Q4, the momentum should accelerate this year. The company is on pace to produce a gusher of cash flow since it geared its plan for $50 oil, but crude is now in the mid-$60's. If current price levels persist, it wouldn't be a surprise to see the company hit its debt reduction target early, and buy back even more shares than it now plans to.

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Matthew DiLallo owns shares of ConocoPhillips. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.