ConocoPhillips (NYSE: COP) recently unveiled its 2019 operating plan, which has many similarities to this year's strategy. Two central themes shine through: the company will remain disciplined when it comes to capital spending while continuing to return a meaningful portion of its cash flow to investors. That dual approach has the company well positioned to navigate next year's oil market.
Keeping the budget flat
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ConocoPhillips set its 2019 capital budget at $6.1 billion, which is flat with this year's spending plan, though ConocoPhillips did initially expect to invest $5.5 billion during 2018 but increased its budget twice along the way. At next year's spending level, ConocoPhillips can generate free cash flow as long as oil is above $40 a barrel.
That's a slightly more conservative approach than fellow oil producer Anadarko Petroleum (NYSE: APC). While Anadarko is reducing its capital budget from last year's level, that's mainly because it's selling its midstream assets. Otherwise Anadarko's investments in new wells are increasing slightly while its capital plan balances the cash flows it expects to produce at $50 a barrel.
ConocoPhillips plans on investing roughly half its capital into the lower 48 states, which is flat with last year's plan. Most of the money will go into drilling new wells in the Eagle Ford, Bakken, and Delaware Basin. However, the company also expects to drill some test wells in the Louisiana Austin Chalk.
Meanwhile, the company intends to spend $1.2 billion, or 20% of its capital, in Alaska, an increase from $900 million last year. That's because the oil giant recently sanctioned a new project in the state and should soon complete a transaction to bolster its interest in a key oil field. Finally, the company plans to spread the rest of its capital around the world to drill test wells in an emerging Canadian shale play and develop offshore oil and gas fields in the UK and Norway, as well as new projects in Australia, China, Malaysia, and Indonesia. These investments should enable ConocoPhillips to produce between 1.3 to 1.35 million barrels of oil equivalent per day in 2019, an increase of about 5% from 2018's average.
Allocating the excess
As mentioned earlier, ConocoPhillips's 2018 plan will generate excess cash flow above $40 a barrel. That low oil price breakeven level means that the company is on track to produce significant free cash flow at current oil prices, which are above $50.
The company plans to return all this excess cash, and then some, to its investors, aiming to pay its recently increased dividend as well as buy back up to $3 billion in stock. Those rates imply that the company would return about 50% of its cash flow to shareholders next year, assuming oil averages $50 a barrel. The company can afford to do that because it ended the third quarter with $4.8 billion in cash on its balance sheet. That gives it a nice cushion should oil prices tumble in 2019.
ConocoPhillips's share buyback plan has the potential to move the needle for investors. Given the current share price, the company could retire enough stock to grow its production per debt-adjusted share (which also takes into account changes in debt level) by 8% in 2019. That's a solid growth rate for a company of its size.
Well positioned for whatever happens in the oil market
ConocoPhillips's efforts to reduce costs over the years have enabled the company to build a business that can thrive at lower oil prices. That's evident from the company's 2019 operating plan, which will see it invest capital to grow production while sending a significant amount of money back to investors. That balanced approach should enable the company to prosper no matter what happens to oil prices in the coming year.
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