ConocoPhillips (COP) is an international, integrated energy company. The Company operates in six segments: Exploration and Production, Midstream, Refining and Marketing, LUKOIL Investment, Chemicals, and Emerging Businesses. Its E&P segment primarily explores for, produces, transports and markets crude oil, natural gas, natural gas liquids and bitumen on a worldwide basis. The Midstream segment gathers, processes and markets natural gas produced by ConocoPhillips and others, and fractionates and markets natural gas liquids, predominantly in the United States and Trinidad. Its R&M segment purchases, refines, markets and transports crude oil and petroleum products. The LUKOIL Investment segment consists of its equity investment in the ordinary shares of OAO LUKOIL, a Russian-based international, integrated oil and gas company (the company is in fact selling half of this stake). Its emerging businesses segment represents its investment in new technologies or businesses outside its scope of operations.
Yielding 3.79% in dividends at the current stock price of $58, this $90 billion company has a long history of paying sturdy and reliable dividends. At the current price ConocoPhillips is on a price to sales ratio of 0.57, a price to book ratio of 1.39 and a price to cash flow of just above 6 times. All these metrics are significantly below industry averages.
ConocoPhillips, as mentioned above, will be selling half its stake in Russian oil company LUKOIL, which is expected to yield about $4.7 billion in cash. Such a sale would see the company’s cash on hand increase to about $5.5 billion. I believe it’s unlikely such cash will be used for new projects, as return on equity is currently only 8.2% and return on investment is 3.98%. As such it’s likely this cash inflow will be used to strengthen the balance sheet and ensure cash availability for dividends.
This is not to say the company doesn’t generate copious amounts of cash from operations – in fact $12 billion in 2009. This was however down 44% from 2008. On a free cash flow basis the company generated $2.8 billion in 2009. Free cash flow is in effect the cash earnings that accrue to shareholders after eliminating all cash expenses necessary to maintain the business. This is equivalent to $1.83 per share. Given that the dividend was $1.91 last year, one can see how the dividend is both safe and sustainable.
In 2008, using the same free cash flow measure (and excluding the $34 billion write off after Venezuela nationalized Conoco assets in that country) the company generated $6.4 billion. That’s equivalent to $4.23 per share, or 2.25 times the common stock dividend.
Therefore the yield on ConocoPhillips is likely to stay at current levels and the company should have very little problem financing these dividends, with such a rich cash flow operating base.
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