ConocoPhillips (COP +0.39%) already produces an abundance of free cash flow. That allows the oil giant to return lots of cash to investors while maintaining its fortress financial profile.
The company's already robust free cash flow is on track to steadily increase over the next few years, before reaching a major inflection point in 2029 when a large new oil project comes online. That will give the oil stock even more money to return to investors in the future.
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Built to thrive at lower oil prices
ConocoPhillips has built its business to thrive at lower oil prices. The company has spent the past few years shifting its portfolio away from lower-margin areas toward lower-cost regions. It has achieved this through a series of major acquisitions, culminating in last year's $22.5 billion merger with Marathon Oil. That deal added over 2 billion barrels of resource with an average cost of supply below $30 a barrel. The company has also sold off lower-quality assets, including closing $3 billion of deals this year.
As a result, the oil company now has one of the deepest, most durable, and diverse portfolios in the industry. Its low supply costs enable it to generate significant cash flow in the current environment where crude prices are in the low $60s. That was evident in the third quarter when ConocoPhillips produced $5.4 billion of cash flow from operations and $2.5 billion of free cash flow after capital expenses.
NYSE: COP
Key Data Points
The company returned $2.2 billion of that surplus cash to shareholders, paying $1 billion in dividends and repurchasing $1.3 billion in shares. So far this year, ConocoPhillips has produced $15.6 billion of operating cash flow and $6.1 billion of free cash flow after capital spending. It has returned $7 billion to investors ($3 billion of dividend payments and $4 billion of share repurchases). Even with those cash returns, the company ended the third quarter with $6.6 billion of cash and short-term investments on its balance sheet and another $1.1 billion of long-term investments.
ConocoPhillips' strong free cash flow and cash position gave it the confidence to increase its dividend by 8%. That aligns with its target of delivering dividend growth within the top 25% of companies in the S&P 500.
The steady rise before the coming gusher
ConocoPhillips is currently in the midst of a major multi-year capital investment phase. It's investing heavily in long-term expansion projects that will pay big dividends in the coming years. This strategy should fuel steadily rising free cash flow through 2028 before it hits a bigger gusher in 2029 upon completing a major oil project.
The energy company is significantly expanding its global liquefied natural gas (LNG) platform. It holds equity stakes in the North Field East and North Field South projects in Qatar, as well as Port Arthur Phase 1 in the U.S. The first of those projects should start producing next year, with the final one expected online in 2028. Overall, the company is investing $3.4 billion into these three LNG projects.
Additionally, ConocoPhillips is building the Willow project in Alaska. This new oil hub will enable the company to tap a 600-million-barrel resource. At its peak, the company expects it will produce 180,000 barrels per day. It's on track to achieve first oil by 2029. ConocoPhillips now anticipates investing between $8.5 billion and $9 billion into the project, up from its initial $7 billion-$7.5 billion cost estimate due to inflation.
ConocoPhillips anticipates generating $1 billion in additional free cash flow each year from 2026 through 2028. Fueling that steady step up in free cash flow will be additional merger synergies from the Marathon deal, the incremental cash flow from its new LNG projects as they come online, and lower capital spending as it completes its projects.
This all sets the stage for the coming 2029 free cash flow gusher. With Willow's production starting that year, the company anticipates generating an additional $4 billion in annual free cash flow beginning in 2029. That will bring the cumulative total to $7 billion in annual free cash flow growth by the end of the decade, nearly double what it expects to produce this year. This will give the company even more cash to return to shareholders through dividends and share repurchases.
A great oil stock to buy and hold
ConocoPhillips has visible growth on the horizon. It expects to deliver $1 billion of incremental annual free cash flow each year through 2028 before hitting an even bigger gusher in 2029 when Willow comes online. That growing cash flow positions the company to produce strong total returns, making ConocoPhillips an ideal oil stock to hold for the next several years.
