Cost Cutting At ConocoPhillips Earns It An Upgrade From Jefferies

ConocoPhillips COP has been one of the sector's most aggressive cost cutters since the slump in oil prices, and Jefferies acknowledged it with an upgrade to Hold from Underperform.

ConocoPhillips cut its capex by 67 percent from 2014 to $5.7 billion, and slashed its operating costs by $2.9 billion from 2014 levels.

Moreover, Jefferies said the company's ongoing exit from deepwater will save $500 million in capex post-2016, while the completion of major capital projects in the Canadian oil sands and at APLNG will enable reallocation of about $1 billion in capex into unconventional drilling.

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"We expect that COP can balance CFFO with capex and dividends at $49/bbl Brent in 2017, which is amongst the lowest in the sector. The company's high financial leverage (40.7 percent net debt/cap at 2Q16) is likely near its peak, but we expect that balance sheet repair will be amongst the highest priorities for any free cash," analyst Jason Gammel wrote in a note.

However, Gammel expects unconventional production to decline in 2H16, but through 1H16 they have proven more resilient than he had expected.

Overall, the analyst expects production to be flat in 2017 with 2016 as the ramp up from major capital projects offsets Lower 48/legacy declines. That said, the company is heavily dependent on shale drilling for growth given few incremental major projects in construction.

Gammel raised his target price to $40 from $37, reflecting lower long-term capital requirements.

At time of writing, shares of ConocoPhillips were up 0.95 percent to $41.39.

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