ConocoPhillips Is in No Hurry to Restart Its Growth Engine

Image source: ConocoPhillips.

The price of crude oil had been on quite a run this year, rebounding from the mid-$20s all the way past $50 a barrel before recently slumping on Brexit fears. For a driller like Pioneer Natural Resources that rebound to $50 was the signalit had been waiting for to start adding back rigs to accelerate its production growth. However, forConocoPhillips $50 oil is an improvement, but not the price at which it plans to restart its growth engine.

It is not the oil price, but the macro environment

Improving oil prices over the past few months are fueling many investors and analysts to ask at what oil price drillers will start adding back rigs. That was the very first question an analystasked ConocoPhillips' management team on its last quarterly conference call. However, instead of pointing to a particular oil price as some of his counterparts did, Al Hirshberg, ConocoPhillips' executive vice president of production, drilling, and projects, had this to say:

In other words, ConocoPhillips is not basing its decision to increase capital spending on increasing cash flows or the returns it can earn at higher oil prices. Instead, it only wants to consider returning to growth mode when the oil market needs incremental supplies.

That is not to say rivals like Pioneer Natural Resources are not concerned about market stability. However, Pioneer Natural Resources made it clear earlier this year that it would likely start adding back rigs once oil recovered to $50 a barrel. Itdid just that earlier this month by injecting an additional $100 million into its capital expenditures budget, boosting it to $2.1 billion to provide funding to add five rigs to its drilling fleet by the end of the year. Further, the company plans to add even more rigs once it is confident that oil is sustainable above $50 a barrel.

Other priorities

Production growth is one of Pioneer Natural Resources'highest priorities. That is why the company plans to grow its output by 12% this year and accelerate that growth rate to 13%-17% in 2017. Meanwhile, most other producers are either holding production flat, which is what ConocoPhillips is doing, or allowing it to decline.

Instead of growing production, ConocoPhillips has other priorities as market conditions improve. Hirshberg detailed these on the call:

Topping ConocoPhillips' list is the plan to pay back some of the debt it incurred during the downturn. It has targeted to get its debt back below $25 billion after it had risen to nearly $30 billion as of the end of last quarter:

COP Financial Debt (Quarterly) data by YCharts.

However, even after it trims its debt, the company is not planning to grow for the sake of growth. Instead, it has determined that pushing an absolute production-growth target does not yield the best results for investors, which is why it plans to grow production on a per-share basis going forward. This implies that it will likely use some of the incremental cash flow from higher prices to buy back stock instead of adding back rigs.

Investor takeaway

While some of its peers are starting to add back rigs when oil is at $50 a barrel, ConocoPhillips has no such plans. Instead, it might not add rigs any time soon if it can achieve better growth for its investors via share buybacks. Given this new take on growth, it could be quite some time before ConocoPhillips restarts its production growth engine.

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Matt DiLallo owns shares of ConocoPhillips. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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