JPMorgan analyst Arun Jayaram has maintained a ‘Neutral’ rating on ConocoPhillips (COP), but has lowered the price target from $139 to $126. This adjustment reflects a cautious outlook on oil fundamentals, as geopolitical tensions and market uncertainties loom. However, Jayaram acknowledges ConocoPhillips’ strong defensive capabilities and potential for positive surprises.
While oil prices face potential downside pressure due to factors like the Israel-Iran conflict, the upcoming U.S. election, and OPEC+ decisions, ConocoPhillips boasts a unique strength. The energy giant combines a solid defense, characterized by low sustaining capital requirements and a robust balance sheet, with the ability to capitalize on potential upside. Jayaram sees the pending merger with Marathon Oil Corp (MRO) as a factor that slightly increases ConocoPhillips’ oil beta, but also strengthens its growth potential.
ConocoPhillips is putting its cash where its strategy is, aiming for a hefty $9 billion in cash returns in 2024, with $5 billion allocated to buybacks. Importantly, after the Marathon Oil merger, these returns could surge to $11 billion in 2025, dependent on favorable commodity prices. Even in a cautious scenario, Jayaram anticipates ConocoPhillips to distribute $9-10 billion in total cash returns to shareholders over the next two years, representing nearly half of its projected operating cash flow.
ConocoPhillips’ commitment to long-cycle projects, including the substantial Willow and Port Arthur developments, is a core component of its strategy. Jayaram’s long-term model, extending to 2032, suggests these investments will generate strong free cash flow (FCF) and production growth. ConocoPhillips’ adjusted production forecast is projected to increase by 4% annually, reaching 3.1 million barrels of oil equivalent per day by 2032. With cumulative FCF potentially hitting $99 billion by 2032, ConocoPhillips’ long-term outlook appears solid, even amidst near-term uncertainties.
Despite the ‘Neutral’ rating, JPMorgan views ConocoPhillips as a core holding within the E&P sector, driven by its robust portfolio and shareholder-friendly cash return framework. Jayaram highlights ConocoPhillips’ ability to navigate macroeconomic uncertainties with strength while offering investors attractive cash returns, with anticipated yields of 7% in 2025-26. However, with the potential for oil price volatility, the path ahead for ConocoPhillips remains cautious yet prepared for opportunities.
