ConocoPhillips offers fat dividend
BY EDWARD KLUMP Bloomberg News
Tuesday, April 17, 2012
4/17/12 at 4:12 AM
ConocoPhillips will court income-focused investors with a dividend yield quadruple that of its peers after spinning off its refining business this month to become more of a pure oil and natural gas producer.
The plan to pay at least 4 percent will help compensate shareholders for production and earnings growth that trails rivals. The Houston-based company forecasts output will shrink 4.3 percent in 2012 before growing a compound 3 percent to 5 percent in subsequent years, compared with estimates of 5 percent to 7 percent by Marathon Oil Corp. and Anadarko Petroleum Corp.
Paying the highest dividend of a major U.S. oil producer without cutting capital spending will challenge ConocoPhillips compared with its new competitors that have lower dividend burdens.
CEO-designate Ryan Lance gave an update on the company's outlook to investors in a webcast Monday.
ConocoPhillips may have a "slight deficit" this year with estimated cash flow from operations of $16 billion, compared with capital spending of about $15 billion and $3 billion spent on dividends, Lance said. It expects to have enough cash to fund its dividend program this year, he said.
The company plans to boost profit margins and production by 3 percent to 5 percent each, compounded annually, meaning cash flow from operations may reach $22 billion a year by 2016, according to Lance's presentation.
"Within a relatively short period, cash flow from operations should exceed our dividend and capex commitments," he said, with excess cash flow being available for future growth and further distributions.
The company plans to return 20 percent to 25 percent of operating cash flow to shareholders, he said. ConocoPhillips also expects to make "opportunistic" share repurchases, he said.
ConocoPhillips's annual dividend of $2.64 a share divided by its closing Friday stock price of $73.63 produced a yield of 3.6 percent.
Such a high dividend comes with tradeoffs for ConocoPhillips, whose earnings per share as a combined company excluding one-time costs and gains are forecast to rise less than 1 percent this year, according to analysts' estimates compiled by Bloomberg.
Shares of ConocoPhillips have climbed 1.3 percent this year. They rose 0.3 percent to $73.83 on Monday, remaining below a June 2008 high of more than $95 a share.
ConocoPhillips is on track to have $5 billion of share repurchases in the first half, Lance said. Another possible $5 billion in repurchases will depend on asset sales, he said.
Lance said the company sees about $8 billion to $10 billion in divestitures, with some possible next year.
Employees at ConocoPhillips' offices in Bartlesville began being notified in late February about which company they'll be working for when the split occurs.
The total number of workers in Bartlesville, which currently is about 3,500, will stay the same, company officials said.
Bartlesville, a global support center for the company, was the headquarters of Phillips Petroleum Co. before it merged with Conoco Inc. in 2002. ConocoPhillips operates out of five facilities in Bartlesville - the Plaza, Phillips and Adams office buildings, the Information Center and the Technology Center.
Pavel Molchanov, an analyst with Raymond James & Associates Inc., gave his assessment of Lance's presentation:
"Traditionally, E&P selling points are: No. 1, growth. No. 2, growth. No. 3, growth," he said of companies that focus on exploration and production. "Conoco's will not be any of those three."
The company may have to cut capital spending, sell more assets or use cash to meet obligations if oil prices decline next year, Molchanov said.
Paul Sankey, an analyst at Deutsche Bank AG, has estimated ConocoPhillips may need to sell $1 billion of assets annually to help fund the quarterly shareholder payouts in future years.
ConocoPhillips stands out among oil and gas explorers for its combination of dividend growth and potential for rising production, CEO Jim Mulva said during a March 5 presentation to analysts and investors. The company's dividend is 66 cents a share each quarter, and Mulva said he expects annual increases.
"We're giving growth in distributions that you don't get from the pure independent" companies, said Mulva, who plans to retire after the spinoff.
Original Print Headline: ConocoPhillips' big move
The Tulsa World Business staff contributed to this story.
Ryan Lance, senior vice president of exploration and production international at ConocoPhillips, speaks at a conference in Kuala Lumpur, Malaysia, in 2010. Now the incoming CEO, Lance on Monday updated the company's outlook during a webcast. GOH SENG CHONG / Bloomberg
The sun sets behind the ConocoPhillips Co. refinery in Richmond, Calif., last October. ConocoPhillips announced on Monday it plans to give at least a 4 percent dividend to investers. DAVID PAUL MORRIS / Bloomberg