Oil stocks can be excellent sources of passive income for investors who can stomach the volatility of the cyclical energy sector. And with oil prices down 9% or so in the last year, many oil and gas stocks have sold off even as broader indexes like the S&P 500 make new highs.
ConocoPhillips (NYSE: COP) is the largest U.S. exploration and production (E&P) company by market capitalization and has an elite portfolio of assets that can perform well even at weaker oil prices. Here's why ConocoPhillips is a top dividend stock to buy now.
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It's a marathon, not a sprint
On Nov. 22, ConocoPhillips completed its blockbuster $22.5 billion acquisition of Marathon Oil. So 2025 will mark the first full year the business will benefit from the added production. In 2024, ConocoPhillips produced 1.987 million barrels of oil equivalent per day (boe/d). 2025 production is expected to be 2.34 to 2.38 million boe/d -- or 18.8% higher at the midpoint.
Given the big investment in Marathon, ConocoPhillips is more focused on reducing costs and incrementally increasing its production in the low-single digits per year rather than continuing to grow its portfolio. On the earnings call, ConocoPhillips said it plans to reduce capital spending by 15% year over year on a pro forma basis, largely thanks to material synergies from the acquisition.
The updated guidance aligns with some of the savings announced in ConocoPhillips's presentation from May 2024. In that presentation, it forecast $500 million in annual savings, lowering operating costs and allowing the company to break even at lower oil prices.
In sum, ConocoPhillips made a splash with the Marathon deal, so now it is focusing on sustaining the now much larger business rather than getting overly aggressive with its production targets.
Backing long-term projects
Although ConocoPhillips doesn't plan to grow its production rapidly post-acquisition, it is still investing in long-cycle projects. The company is forecasting $12.9 billion in 2025 capital expenditures (capex), which would be its highest in over 10 years. Granted, the company is much larger today than even five years ago before it bought Concho Resources in January 2021 and Marathon Oil.
But still, the ramp-up in capex may catch investors off guard, given oil prices are mediocre right now. On the earnings call, ConocoPhillips CEO Ryan Lance explained why its spending will be especially large this year:
We expect 2025 to be the peak year of our long-cycle spending at around $3 billion, followed by a steady stream of project start-ups from 2026 to 2029. Once these projects are all online, we expect $3.5 billion of incremental [cash flow from operations] CFO from NFE, Port Arthur, NFS, and Willow, all combined at $70 WTI, $10 TTF, and $4 Henry Hub. And that leads to roughly $6 billion of incremental annual sustaining free cash flow relative to 2025.
These capital-intensive, longer-term projects are meant to produce steady cash flow over an extended period, which is far different from the quick-turning shale wells in the Permian Basin and other areas where ConocoPhillips produces oil and gas.
Returning capital to shareholders
Even with higher spending, ConocoPhillips still expects to return $10 billion to shareholders in 2025 -- $6 billion in stock repurchases and $4 billion in dividends. ConocoPhillips earned $8 billion in 2024 free cash flow (FCF). Now with a full year of Marathon's assets, the company should be able to afford most if not all of its capital return program with FCF as long as oil prices remain around their current mid-cycle levels.
When ConocoPhillips first announced its intent to acquire Marathon in May 2024, it made a plan to buy back between $5 billion and $7 billion in stock per year once the transaction closed -- or $20 billion over three years. Since ConocoPhillips bought Marathon in an all-stock transaction, the three-year buyback program would allow the company to offset nearly the equivalent shares it issued for the acquisition.
ConocoPhillips is making good on that promise with its $6 billion buyback target for 2025. Last year, ConocoPhillips eliminated its variable return on cash, which was a special quarterly dividend based on the performance of the business. Now, it pays an ordinary quarterly dividend of $0.78 per share. It intends to gradually raise the payout over time. Based on the stock price at the time of this writing, the yield on the ordinary dividend is 3.1%, which is good, especially considering the rapid pace of buybacks.
Add it all up, and ConocoPhillips is well-positioned to continue reducing its share count while also being a solid source of passive income.
A top oil stock to buy now
In the present mid-cycle environment, ConocoPhillips can invest in long-term growth and generate strong FCF to support its sizable capital return program. With a 14.7 price-to-FCF ratio and a 12.8 price-to-earnings ratio, ConocoPhillips is an excellent value, especially for investors who believe its Marathon acquisition was the right long-term move.
ConocoPhillips stock is currently around a two-year low, which could be a great buying opportunity for long-term investors. However, E&Ps tend to be highly volatile and can see big swings in their stock prices based on oil prices. So, it's best to approach ConocoPhillips only if you're comfortable with the volatility.
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Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
