JPMorgan's Arun Jayaram just initiated coverage of ConocoPhillips (NYSE:COP) with a Neutral rating and a price target of $126, down from the previous target of $139.
The change reflects Jayaram's cautious outlook on oil fundamentals as a host of geopolitical and market uncertainties loom, but there's no denying ConocoPhillips' defensive prowess, as the company prepares for potential upside surprises.
While oil prices face potential downside pressure — due to factors like the Israel-Iran conflict, the U.S. election, and the OPEC+ wild card — ConocoPhillips' portfolio has a unique strength.
The energy giant pairs solid defense (low sustaining capital requirements and strong balance sheet) with the ability to go on offense, ready to cash in if oil prices swing higher.
Jayaram sees the pending merger with Marathon Oil Corp (NYSE:MRO) as a factor that slightly increases ConocoPhillips' oil beta but also boosts its capacity for growth.
Cash Is King, And COP Knows It
ConocoPhillips is putting its cash where its strategy is, targeting a whopping $9 billion in cash returns in 2024, with $5 billion of that earmarked for buybacks.
But here's the kicker—after the Marathon Oil merger, those returns could swell to $11 billion in 2025, contingent on commodity prices playing nice.
Even in a cautious scenario, Jayaram expects ConocoPhillips to shell out $9-10 billion in total cash returns to shareholders over the next two years, which would represent nearly half of its forecasted operating cash flow (CFO).
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Can Long-Cycle Investments Fuel Long-Term Growth?
ConocoPhillips' commitment to long-cycle projects, including the massive Willow and Port Arthur developments, is a key piece of its strategy.
Jayaram's long-term model through 2032 suggests these investments will yield strong free cash flow (FCF) and production growth, with ConocoPhillips' adjusted production forecast to grow by 4% annually to 3.1 million barrels of oil equivalent per day by 2032.
With cumulative FCF potentially reaching $99 billion by 2032, ConocoPhillips' long-term prospects look solid—even if near-term uncertainty persists.
Core E&P Stock With A Conservative Outlook
Despite its 'Neutral' rating, JPMorgan views ConocoPhillips as a core holding in the E&P sector, thanks to its robust portfolio and shareholder-friendly cash return framework.
Jayaram highlights ConocoPhillips' ability to navigate macro uncertainties with strength while offering investors attractive cash returns, with expected yields of 7% in 2025-26. However, with oil prices facing potential volatility, the path ahead for ConocoPhillips remains cautious but prepared for opportunity.
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