ConocoPhillips (COP) Is In a Strong Position to Cope With Oil Price Volatility

Oil prices have been tumbling sharply over the last two months, down almost 14% since OPEC players have announced to extend their output cuts for the next nine months. It was a smart and brave move from producers, albeit a market-share war between the largest producers. However, the move appears unhelpful in restoring investor confidence.

U.S. oil is currently trading around $44 a barrel, while Brent is trading close to $47 a barrel. The pressure of a low pricing environment has also impacted the stock prices of exploration & production companies. However, several value and long-term investors see the volatility as a buying opportunity.

ConocoPhillips (NYSE:COP), an independent exploration and production (E&P) company, appears to be in a strong position to confront pricing headwinds. Its stock offers a perfect buying opportunity after dipping significantly from the 52-week high.

The company has significantly restructured their business model in the last two years to cope with the lower pricing environment. In an earnings conference call, the company said they are establishing their footprints to breakeven around $40 a barrel.

The latest dividend increase despite the volatile market environment highlights the company’s confidence in their future fundamentals.

The company plans to work on the strategy of increasing their higher margin oil volumes, while maintaining their cost and capital discipline. In addition, its operating cash flow generation potential seems strong enough to cover capital spending and the dividend payments. Moreover, the company plans to support its cash position through asset disposals.

Recently, ConocoPhillips announced strategic Canada and San Juan Basin asset dispositions for total consideration of more than $16 billion. On the other hand, the company plans to sustain their production volumes despite the price volatility and the recent asset disposals. It expects second-quarter 2017 production to stand in the range of 1,495 to 1,535 MBOED, almost flat with the previous quarter level. Therefore, the company is in a strong position to repel the pricing headwinds.

The author does not own COP shares.

Alexander is an analyst for who specializes in index and commodity trading. His outlook is usually near-term to medium-term. He has over 10 years of experience in the financial industry and began his career at the dealing desk. Alexander holds a Bachelor’s degree in Economics from University of Delaware.