ConocoPhillips (COP -0.02%) can make a lot of money producing oil and gas in the coming years. Thanks to a low-cost resource base, the energy company estimates it could generate well over $200 billion of cash flow from operations, assuming oil prices average $60 a barrel. It could produce even more cash if crude remains at its current level of around $80 a barrel.
The company doesn't need anywhere near that amount of money to grow its business. Because of that, it could return a massive gusher of cash to its investors in the future. That makes it a compelling oil stock to buy and hold for the long haul.
A cash-flow machine
ConocoPhillips recently provided investors with an updated look at its 10-year plan. It based its investment strategy on oil averaging $60 a barrel across the cycle. Here's what it can produce during that time frame:
Image source: ConocoPhillips.
As that slide showcases, ConocoPhillips estimates it can produce about $225 billion in cash flow from operations (CFO) over the next 10 years. That assumes an average price of $60 a barrel for West Texas Intermediate (WTI), the primary U.S. oil price benchmark.
The company expects a reinvestment rate of 50% at that oil price level. That would leave it with over $100 billion of free cash flow that it could distribute to investors. Meanwhile, it could produce even more cash at higher oil prices, potentially generating upwards of $300 billion if oil averaged $80 a barrel, which is right around the recent level.
Fueling the company's massive cash flow is its low breakeven level. ConocoPhillips only needs oil to average about $35 a barrel to support the capital required to maintain its production. Meanwhile, the company's investments in developing additional low-cost resources will grow its production by about 4% to 5% per year. That should drive 6% compound annual growth in CFO over the next decade and 11% compound annual free-cash-flow growth.
Returning its oil-fueled cash flow to investors
ConocoPhillips expects to invest about $11 billion of capital each year to maintain and grow its global oil and gas production. The company anticipates producing more-than-enough cash to cover that capital spending, with a growing amount to spare in the coming years:
Image source: ConocoPhillips.
As that slide shows, the company could produce close to $10 billion of free cash flow after covering capital expenses in the 2024 to 2028 time frame, assuming oil averages $60 a barrel, with even more cash at $80 oil. That excess cash would grow toward an average of more than $15 billion per year in the 2029 to 2032 time frame.
Since ConocoPhillips won't need that money to support its operations and already has a top-tier balance sheet, it will likely return most of that money to shareholders. The company has a three-tiered capital-return framework to deliver cash to investors:
- Dividend payments: The company pays a $0.51 per-share quarterly dividend, giving it a dividend yield of 1.9% at the recent share price. It aims to grow the payout at a top-quartile rate among companies in the S&P 500. ConocoPhillips increased it by 11% last year.
- Share repurchases: ConocoPhillips' board approved a $20 billion increase to its share-repurchase program last year, increasing the total to $45 billion.
- Variable Return of Cash (VROC): The company has the flexibility to make additional variable cash payments to shareholders when oil prices are higher. It has made quarterly VROC payments of $0.60 per share, $0.70 per share, $1.40 per share, and $0.70 per share over the last 12 months.
Given the company's free-cash-flow expectations, it could return over $100 billion to shareholders if oil averages $60 a barrel over the next 10 years. That's a massive amount of money. It represents more than 90% of the company's current market cap.
Returning a massive and growing cash-flow gusher
ConocoPhillips expects to produce a prodigious amount of cash in the coming years. It only plans to use half of what it can generate at $60 oil to maintain and grow its production. Because of that, it will produce a massive amount of free cash that it will likely return to shareholders through a growing dividend and meaningful share-repurchase program.
Those cash returns could give ConocoPhillips the fuel to produce robust total returns at a relatively conservative oil price point in the coming years. That makes it a compelling oil stock to consider buying for the long term.
