This Top Oil Stock Is a Cash-Producing Machine

ConocoPhillips (NYSE: COP) has spent several years building a low-cost oil company. It has sold off higher-cost assets and recycled the capital to expand its lower-cost resources. The result is an oil company that can produce a lot of cash at lower oil prices.

That was on full display during the first quarter. Meanwhile, with further improvements in its cash flow ahead, the oil stock will become an even more efficient cash-producing machine.

Image source: Getty Images.

Drilling down into ConocoPhillips' first-quarter report

ConocoPhillips produced an average of nearly 2.4 million barrels of oil equivalent (BOE) per day during the first quarter. That was an increase of 487,000 BOE per day from the prior-year period, fueled largely by its acquisition of Marathon Oil. However, even after adjusting for the impact of acquisitions and asset sales, its production was up 5% from the year-ago period due to its investments to grow its output in low-cost regions.

That higher production enabled ConocoPhillips to generate $5.5 billion of cash from operations during the period. It used that money to help fund $3.4 billion of capital expenditures and investments to maintain and grow its production. The oil company used its free cash flow and strong balance sheet to repurchase $1.5 billion of its shares and pay $1 billion in dividends. The company also retired $500 million of debt at maturity.

The oil giant ended the period with $7.5 billion in cash and short-term investments on its balance sheet and another $1 billion in long-term investments. It enhanced its balance sheet by repaying debt and selling $1.3 billion of noncore assets to maintain a strong cash position.

Flexing its efficiency muscles in 2025

"Amid a volatile macro environment, we remain confident in the competitive advantages provided by our differentiated portfolio, strong balance sheet, and disciplined capital allocation framework that prioritizes returns on and of capital to shareholders," stated CEO Ryan Lance in the first-quarter earnings press release. The company's strong competitive position enables it to operate even more efficiently this year. ConocoPhillips is reducing its full-year capital and operating cost guidance while maintaining its production outlook.

ConocoPhillips now expects its capital spending to be in the range of $12.3 billion-$12.6 billion, down from $12.9 billion. It's also lowering its adjusted operating cost guidance range from $10.9 billion-$11.1 billion to $10.7 billion-$10.9 billion. Despite reducing spending, the company still expects to produce between 2.3 million and 2.4 million BOE per day this year. That puts the company in a position to produce more free cash flow at the current oil price point than it would have had in its prior outlook.

A cash flow gusher ahead

The oil company expects to produce a lot more free cash flow in the future. Its investments in LNG and Alaska have it on track to generate an incremental $6 billion of annual free cash flow by 2029 (assuming oil averages around $70 a barrel). That positions the company to deliver sector-leading free cash flow growth over that period.

While oil is currently down to around $60 a barrel, ConocoPhillips' strategy still positions it to produce significant incremental free cash flow over the coming years. That will give the oil company more money to return to shareholders through a growing dividend and share repurchase program.

The company aims to deliver dividend growth within the top 25% of companies in the S&P 500 (SNPINDEX: ^GSPC). It's also targeting over $20 billion in share repurchases over the next few years.

A well-oiled cash flow-producing machine

ConocoPhillips has strategically invested in expanding its low-cost oil resources through acquisitions and organic development projects. That strategy has the company on track to produce more free cash flow this year to help mute the impact of lower oil prices, and even more by 2029. Because of that, the company should return more money to shareholders in the future through a rapidly rising dividend and a meaningful share repurchase program. This strategy could give the oil company the fuel to produce strong total returns by the end of the decade, making it look like an attractive long-term investment opportunity.

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Matt DiLallo has positions in ConocoPhillips. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.