ConocoPhillips (COP) - Get Report , the world's largest independent oil producer, is an excellent play on energy for investors.

The company plans a major transformation to combat compressed oil prices. ConocoPhillips, as part of the refurbishment, will maintain production, grow its dividend, and pay down debt each year.

Moreover, adjustable allocation of excess cash flow will boost share buybacks and enhance growth-focused expenditures.

Many investors, however, have not adequately grasped the need for the makeover. This is why ConocoPhillips' shares are flat so far this year.

However, this stock is likely to deliver more than 16% upside over the next twelve months.

ConocoPhillips makes and sells crude oil, bitumen, natural gas, and liquefied natural gas globally. With a market value of over $61 billion, the company ranks among the biggest in its space, among other players like Occidental Petroleum (OXY) - Get Report , Anadarko Petroleum (APC) - Get Report , Pioneer Natural Resources (PXD) - Get Report , and Devon Energy (DVN) - Get Report .

ConocoPhillips' stock has outperformed peers over the past few months. So far this year the company's shares have dipped 0.54% versus an 11% loss for Occidental and an 8% decline for Murphy Oil (MUR) - Get Report .

However, lower losses won't impress investors for long. It is, therefore, important to understand the transformation taking place at ConocoPhillips, a company that produces 6.4 billion barrels of oil.

The dip in oil prices has imperiled energy companies with high-cost structures. This has led ConocoPhillips to attempt to reduce its cash flow breakeven level from above $75/barrel of oil to less than $50/barrel.

Tough decisions and spotless execution to create a stronger oil company are the needs of the hour.

There is also the need to prune the more than $27 billion of debt. The loans are costing the company over $1.2 billion annually in interest expenses.

The other major transition area for ConocoPhillips will be its portfolio in North America. The company aims to sell between $5 billion and $8 billion of primarily North American natural gas assets, helping pay down debt and save costs.

A good example was offloading the entire stake in FCCL to Cenovus Energy (CVE) - Get Report . The money earned, besides paying down debt, will also help ConocoPhillips allocate resources to high-return shale wells. This will enable the company's investors profit from balanced growth and returns irrespective of oil price movement in the future.

However, the measures are unlikely to yield meaningful results quickly. Investors need to be patient and give at least 12 months to see the fruits of this turnaround.

Till then, they can benefit from the 2.1% dividend yield and high probability of increasing payouts. As ConocoPhillips starts generating strong levels of cash flow, Wall Street will pivot to upgrade the stock, which provides an excellent growth opportunity to early investors.

The 23 analysts providing 12-month price forecasts for ConocoPhillips have a median target of $58, indicating a 14.5% increase from current levels.


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The author is an independent contributor who at the time of publication owned none of the stocks mentioned.