As America gets ready for a new President, ConocoPhillips (COP) is preparing to hopefully ease investors' concerns over free cash flow (FCF) at its Analyst Day on Nov. 10.
So far, the independent oil and gas company has had a "challenging year," as analysts at Deutsche Bank note significant underperformance and a dividend cut. However, Deutsche Bank analyst Ryan Todd says ConocoPhillips FCF profile is "impressive and underestimated." The firm rates COP shares at Buy with a $62 price target.
"With outstanding execution in 2016 (higher vols/CF and lower costs than expectations) a strong starting point, we see the opportunity to highlight best-in-class flexibility and FCF generation at a material (20%) discount to peers," Todd wrote in a research note. COP shares were gaining by 1% during the trading session on Tuesday.
Furthermore, Todd and his team also see the potential for "material returns" to shareholders sooner than the market expects. By assuming a 5% dividend growth per year and CapEx at $5 billion to $7 billion, the Deutsche Bank analysts estimate available excess cash of $1.7 billion in 2017, $2.9 billion in 2018 (this also accounts for oil prices at $55 a barrel in 2017 and at $60 a barrel in 2018 and beyond.)
"At $60/bbl Brent, we estimate a FCF yield of 7%," the analysts wrote. That's compared to a FCF yield of 4.3% for Exxon Mobil (XOM) , 4.2% for Chevron (CVX) and 4% for Occidental Petroleum (OXY) . (Occidental is a holding in Jim Cramer's Action Alerts PLUS portfolio.)
Beyond FCF, the analysts also think there's a possibility for further details about ConocoPhillips's "largely overlooked" Permian position. Currently, the company has about 1 million net acres in the oil-rich basin, which contain more than 1 billion barrels of oil equivalent. It operates more than 5,000 wells in the region, with its 2015 net production totaling 62 million barrels oil equivalent per day.
Given that the U.S. Energy Information Administration has projected the Permian Basin as the only region where oil production is expected to increase during October and November, the area could create more upside as the company looks to utilize "new technologies to improve recovery and value" from its conventional fields like Gandu as well as continuing to develop its unconventional fields in the Delaware, Central Platform and Midland Delaware basins.
While more information on its Permian play could boost investor confidence, that will still largely depend on ConocoPhilliops' FCF story.