Marathon Oil Acquisition Will Deliver Significant Synergies And Cost Savings

Key Takeaways

• The Marathon Oil acquisition is expected to generate significant synergies, improving net margins and earnings through cost reductions and capital optimization.
  
• Strategic moves in LNG exports and share repurchases focus on boosting revenue, diversifying cash flows, and enhancing shareholder returns.
  
• Commodity price volatility and operational challenges could impact ConocoPhillips' revenue, margins, and ability to maintain strong shareholder returns.

Catalysts

Explores for, produces, transports, and markets crude oil, bitumen, natural gas, liquefied natural gas (LNG), and natural gas liquids in the United States, Canada, China, Libya, Malaysia, Norway, the United Kingdom, and internationally.

• The Marathon Oil acquisition is expected to bring significant synergies, with an initial target of at least $500 million, which is now anticipated to double to $1 billion. This will primarily be achieved via overhead and operating cost reductions as well as capital optimization, potentially boosting net margins and earnings.
  
• The company anticipates maintaining a pro forma CapEx of less than $13 billion in 2025 while continuing to deliver low single-digit growth. This disciplined capital spending, alongside growth, is poised to positively impact net margins and earnings.
  
• The integration of Marathon Oil assets is likely to allow for more efficient allocation of capital towards Lower 48 assets, including the consolidation of drilling schedules and operational improvements, potentially boosting revenue and net margins.
  
• The increase in share repurchase authorization by up to $20 billion and a focus on dividend growth at a top quartile rate relative to the S&P 500 may positively affect earnings per share and overall shareholder returns.
  
• The strategic prioritization of LNG exports and long-term contracts, as well as managing new regasification terminals, aims to capture value from international markets, potentially enhancing revenue and diversifying cash flows.

ConocoPhillips Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ConocoPhillips's revenue will grow by 1.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 17.4% today to 17.1% in 3 years time.
• Analysts expect earnings to reach $10.3 billion (and earnings per share of $9.17) by about December 2027, up from $9.9 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $15.1 billion in earnings, and the most bearish expecting $8.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.0x on those 2027 earnings, up from 12.8x today. This future PE is greater than the current PE for the US Oil and Gas industry at 10.9x.
• Analysts expect the number of shares outstanding to decline by 4.7% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.2%, as per the Simply Wall St company report.

ConocoPhillips Future Earnings Per Share Growth

Risks

• The potential oversupply in the global LNG market due to projects potentially coming online in 2027-2028 could impact LNG prices and ConocoPhillips’ revenue from LNG operations.
  
• Lower realized gas prices due to pipeline constraints and negative pricing at Waha could negatively impact the company's net margins in the Lower 48.
  
• Potential challenges in closing and integrating the Marathon Oil acquisition and realizing the expected synergies could impact earnings if costs are higher or savings are lower than projected.
  
• Commodity price volatility, particularly oil prices not reaching the projected levels, could affect ConocoPhillips' cash flow and the ability to maintain shareholder returns, which may impact net income.
  
• The expected reduction in capital expenditures and production growth may not be sufficient to offset operational and competitive risks, thus potentially impacting future revenue growth and earnings.

Valuation

• The analysts have a consensus price target of $133.61 for ConocoPhillips based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $165.0, and the most bearish reporting a price target of just $114.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $60.0 billion, earnings will come to $10.3 billion, and it would be trading on a PE ratio of 18.0x, assuming you use a discount rate of 7.2%.
• Given the current share price of $98.26, the analyst's price target of $133.61 is 26.5% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.