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Oil prices have bounced around quite a bit over the past year. WTI, the primary U.S. benchmark price, has topped $80 a barrel several times, including earlier this month. However, it has cooled off since then and is currently in the mid-$70s.
The price of crude oil has a meaningful impact on oil stocks. Here's a look at whether it's still worth buying shares of ConocoPhillips (NYSE: COP) now that oil has dipped below $80 a barrel again.
Cashing in on crude oil
ConocoPhillips is one of the world's leading exploration and production companies. Its oil, natural gas, and natural gas liquids (NGL) production averaged over 1.9 million barrels of oil equivalent (BOE) per day in the third quarter of last year. The company sold its oil for an average of $76.77 during that period and its total output for an average of $54.18 per BOE. That price point enabled the company to generate $4.7 billion in cash from operations. It used that money to invest in expanding its operations, pay dividends ($900 million), repurchase shares ($1.2 billion), and maintain a strong balance sheet ($7.1 billion of cash and short-term investments at the end of the period).
As its results last quarter showcase, ConocoPhillips can produce a lot of cash when crude oil is in the $70s. Through the first nine months of last year, it generated $14.9 billion of cash from operations. It produced an average of 1.9 million BOE per day, which it sold for an average of $55.77 per BOE (and $78.88 per barrel of oil). It used that cash to fully cover its capital expenditures and investments ($8.8 billion), repurchase shares ($3.5 billion), and pay dividends ($2.7 billion). The company also used some of the cash it built up on its balance sheet to repay $500 million of debt at maturity.
ConocoPhillips can generate that much cash at an oil price below $80 because of its low cost of supply. It has about 20 billion barrels of resources with a cost of supply of $40 per barrel or lower, with an average cost of supply of $32 per barrel. With crude prices in the $70s, ConocoPhillips can produce a lot of cash.
Enhancing its already low-cost oil business
ConocoPhillips is in an even better position to cash in on the current oil price environment than last year. That's because it has now closed its $22.5 billion acquisition of Marathon Oil. CEO Ryan Lance commented on the acquisition when the company announced the deal last May. He noted, "This acquisition of Marathon Oil further deepens our portfolio and fits within our financial framework, adding high-quality, low cost of supply inventory adjacent to our leading U.S. unconventional position." Overall, the company added over 2 billion barrels of resources with an estimated average cost of supply below $30 per barrel.