ConocoPhillips Selling Assets, Announces Buyback

Shareholders don't appear to be too enthusiastic with ConocoPhillips (COP) plans to sell assets and trim its capital budget for 2017. COP shares dropped 2% during the trading session Thursday.

At its Analyst and Investor Meeting Thursday, the independent oil and gas company announced a $3 billion share repurchase program as well as a $5 billion to $8 billion asset divestiture program.

"While these are high-quality assets, they are not attracting development capital in our current plans, and therefore, we think they are going to likely be more valuable to other operators," said Al Hirshberg, ConocoPhillips Executive Vice President for Production, Drilling and Projects.

The divestiture program will be focused primarily on North American natural gas, targeting areas with active acquisition and divestiture (A&D) markets. With a targeted $8 billion asset sale, ConocoPhillips plans to use the funds for debt reduction and buybacks, while also improving underlying margins.

As of the company's third quarter results, which were announced on Oct. 27, ConocoPhillips had $28.69 billion in debt. But during the presentation today, CFO Don Wallette said $20 billion is an "appropriate debt level" and "is achievable within a few years with the planned asset sales."

ConocoPhillips' is also trying to differentiate itself as an exploration and production (E&P) company. "We are charging our business model for free cash flow ... we're focused on returns, not absolute growth," said CEO Ryan Lance.

Lance outlined a plan to return between 20% and 30% of its cash flow back to its shareholders through growing dividend and buybacks. ConocoPhillips expects to initiate the share buyback program this quarter. But management views the 20% to 30% payout "as an average through-the-cycle target," as Wallette added that in any given year, ConocoPhillips may exceed the top end of the range.

Furthermore, the company's 2017 operating plan includes a 4% decrease in capital expenditures to $5 billion, compared with the 2016 guidance of $5.2 billion. Expenses will be focused on unconventional development programs in the lower 48 as well as conventional projects in Europe, Asia Pacific and Alaska, and asset maintenance. "Approximately $0.6 billion is included for exploration, which is primarily focused on unconventional, appraisal of the Barossa discovery, and the closeout of deep-water Gulf of Mexico and Nova Scotia drilling obligations," the company said in a statement.

As for production, ConocoPhillips anticipates between 1,540 to 1,570 thousand barrels of oil equivalent per day (MBOED) for the full-year 2017. That equates to flat to 2% growth compared with expected 2016 production of 1,540 MBOED.

The plan appears to work in favor of the shareholders, as management is working to return value to them through buybacks and asset sales. However, the stock was in the red most of the day, a sign of how investors really feel.

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