This oil stock is a cash-spewing (and returning) machine

ConocoPhillips (COP 1.21%) has spent several years repositioning its global oil and gas portfolio, shedding non-core assets and building around its lowest-cost, highest-return operations. This strategy has paid big dividends in recent years. Literally – the oil giant has turned itself into a cash-guzzling machine that gives it plenty of cash to return to shareholders.

The the oil company cash generating capabilities were full screen in the second trimester. With further improvements beforeit expects to return plenty of cash to shareholders in 2024 and beyond.

Looking at ConocoPhillips’ second quarter results

ConocoPhillips produced more than 1.9 million barrels of oil equivalent per day (BOE/day) in the second trimester. That was an increase of 140,000 BOE/d from the year-ago period, about 4% higher after adjusting for the impact of asset purchases and sales.

The company increased production in a market where prices were rising. ConocoPhillips achieved an average price of $56.56 per BOE during the period4% higher than in the previous year’s quarter. That combination of Rising production and prices helped boost the company’s earnings. Its adjusted earnings rose from $2.2 billion, or $1.84 per share, in the second quarter last year to $2.3 billion, or $1.98 per share, this year.

The company also produced a cash flow. Cash provided by operating activities was $4.9 billion in the period. This was more than enough to cover the capital expenditures and investments required to maintain and increase production, which totaled $3 billion. The company returned whole surplus to shareholders, paying out $900 million in dividends and its variable return on cash (VORC), while also repurchasing $1 billion of stock. This brought its total return to date to $4.2 billion ($2.3 billion of share buybacks and $1.8 billion in dividends and VORC payments). The company returned all that money while maintaining a cash-rich balance sheet ($6.3 billion in cash and short-term investments at the end of the second quarter).

More cash flow to shareholders

ConocoPhillips expects to continue to generate more cash than it needs to grow its operations. That fuels its plan to return at least $9 billion to shareholders this year. The company has already announced plans to increase its dividend by 34% in the fourth quarter, making VORC’s current payout permanent in the form of a higher basic dividend.

The company should return even more cash to shareholders in 2025 and beyond. In addition to investing in the organic expansion of its operations, the company recently agreed to purchase Marathon oil (MRO 1.39%) in an all-stock deal valued at $22.5 billionincluding the assumption of $5.4 billion in debt. The Marathon acquisition will be transformative for the oil giant. The deal is expected to be immediately accretive to its earnings, cash flow and return on capital per share. In addition, the company anticipates achieving annual savings of at least $500 million in the first year of the transaction. Marathon will significantly enhance its low-cost US resource base, adding more than 2 billion barrels of resources with an average supply cost of less than $30 per barrel.

ConocoPhillips expects the combined company to generate significant free cash flow. That prompts his view that he can increase his stock buyback rate to an annual rate of more than $7 billion in the first year after the deal, up from the current annual rate of more than $5 billion. The company anticipates it could buy back more than $20 billion of its stock in the first three years after the deal closes, which is expected to happen in the fourth quarter. This would allow the company to withdraw the equivalent the amount of shares that will issue to acquire Marathon within three years.

ConocoPhillips also plans to continue to deliver above-average dividend growth. It aims to be in the top 25% of dividend producers in S&P 500. Its planned 34% increase at the end of this year continues the above-average growth it’s achieved since its payout reset in 2016. That new quarterly rate of $0.78 per share will eventually push the payout back above that. previous peak of $0.74 per share.

High octane total return potential

ConocoPhillips’ strategy of focusing on its lowest-cost, highest-return assets continues to pay off. It generates a lot of money, which should continue, especially with the upcoming addition of Marathon Oil. This will give the company more cash to return to shareholders through significant share buybacks and a rapidly growing dividend. That combination of rising cash flow and rising cash yields could give ConocoPhillips the fuel it needs to produce high-octane total profits for years to come, as long as oil prices cooperate.