Navigating Challenges And Capitalizing On Tactical Growth Opportunities In The Global Oil And Gas Industry

Key Takeaways

• Expansion through international projects and record production in Canada reflects a solid strategy aimed at driving revenue growth.
  
• Strategic investments in LNG and efficient growth initiatives coupled with strong shareholder returns and commitment to operational efficiency highlight a diversified approach and financial resilience.
  
• Dependence on weather, maintenance, and market conditions, alongside geopolitical and technological factors, impacts production, profitability, and growth in a volatile industry.

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 development of international projects like Surmont Pad 267, Bohai Bay 4B, and subsea tiebacks in Norway, along with a record production level in Canada after starting up a second central processing facility, indicates a solid expansion strategy which could drive revenue growth.
  
• Investments in LNG portfolio projects in Qatar and Port Arthur alongside a focus on capital efficient growth in the Lower 48 demonstrate a diverse and strategic approach to expanding supply and improving efficiency, likely enhancing revenue and net margins.
  
• The commitment to returning at least $9 billion to shareholders this year, with a balance between buybacks and cash distributions, reflects a strong cash flow generation that can boost earnings per share.
  
• The anticipation of low single-digit production growth in 2024 with flat activity levels and lower capital spending compared to 2023 suggests operational efficiency improvements, positively impacting net margins.
  
• The execution of strategic initiatives and adherence to full-year guidance, with expectations of 2% to 4% underlying growth despite the volatility in oil and gas prices, showcases resilience and operational strength, potentially leading to revenue and earnings growth.

Assumptions

• Analysts are assuming ConocoPhillips's revenue will grow by 1.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 18.6% today to 19.1% in 3 years time.
• Analysts expect earnings to reach $11.4 billion (and earnings per share of $9.87) by about July 2027, up from $10.6 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $15.4 billion in earnings, and the most bearish expecting $9.6 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.3x on those 2027 earnings, up from 12.9x today. This future PE is greater than the current PE for the US Oil and Gas industry at 11.1x.
• Analysts expect the number of shares outstanding to decline by 3.35% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.73%, as per the Simply Wall St company report.

Risks

• The reliance on weather conditions and unexpected maintenance could reduce production efficiency and timelines, impacting revenue and growth projections.
  
• Volatility in global oil and gas prices, including low gas prices in the Lower 48 due to pipeline capacity constraints, could significantly impact profitability and cash flow.
  
• Geopolitical tensions or regulatory changes in key operating regions like the Permian, Alaska, and international projects could introduce unpredictability into operations, potentially affecting net margins.
  
• Technological advancements or failures, such as the efficiency of new pads in operations like Surmont 267, could influence capital expenditure effectiveness and overall production costs.
  
• Competition and market demand changes, especially in the LNG market, could affect the company's ability to secure favorable contracts and prices, impacting earnings and revenue growth.

Valuation

• The analysts have a consensus price target of $140.82 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 $112.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $59.6 billion, earnings will come to $11.4 billion, and it would be trading on a PE ratio of 16.3x, assuming you use a discount rate of 7.7%.
  
• Given the current share price of $116.08, the analyst's price target of $140.82 is 17.6% 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.