ConocoPhillips Reaffirms Double-digit Returns - Analyst Blog

World's largest independent exploration and production company, ConocoPhillips COP at its Annual Meeting of Stockholders held in Houston reiterated its target of delivering double-digit returns annually to shareholders by growing production and margins by 3% to 5% a year and offering a steadily increasing dividend.

Since Apr 2012, when the company spun off its refining operations to Phillips 66 PSX, it has generated total shareholder returns of 22%. With this, ConocoPhillips has shifted its total focus to upstream operations and thus oil and gas prices play a major role in determining its performance. The company plans to grow production by maintaining its focus on growth in reserves, through global drilling programs in legacy assets, unconventional assets and major projects.

ConocoPhillips' margin growth drive would also be helped by its shift of production mix to higher-value products. The company expects to spend $16 billion on average annually and will allocate 95% of its capital to investments that deliver above-average margins. The recent activity aims offshore prospects in Australia Angola and Senegal, conventional exploration in Norway and Indonesia and unconventional exploration in North America, Poland and Colombia.

With leading positions in both natural gas and heavy crude oil in North America, as well as a legacy position in the North Sea and growing exposure to lucrative international regions, ConocoPhillips expects to replace reserves and sustain production growth over the long term. ConocoPhillips' liquids-rich exploration initiatives are gaining momentum through the Eagle Ford, Bakken and North Barnett shale plays.

We believe that any downtrend in the global economy will affect the supply-demand fundamentals of oil and gas, hurting the sales prices of crude oil and natural gas.

ConocoPhillips currently carries a Zacks Rank #3 (Hold), implying that it is expected to perform in line with the broader U.S. equity market over the next one to three months. Investors interested in the oil and gas sector could consider stocks like Athlon Energy Inc. ATHL and Pembina Pipeline Corp. PBA. Both these carry a Zacks Rank #1 (Strong Buy).