2018 was the first year since 2015 that crude oil prices ended the year lower than they started, and while the bear oil market weighed on oil and gas equities, ConocoPhillips was the only major pure-play producer to buck the trend.
The West Texas Intermediate, or WTI, crude oil futures price fell 24.8% year over year to $45.41 per barrel on the last trading day of 2018, while that of the Brent product fell 21.5% over the same period to $54.91/bbl. Meanwhile, total return for the S&P 500 Oil & Gas Exploration and Production index was a loss of 19.5%, compared to a loss of 4.4% for the S&P 500.
While its peers underperformed the broader market, ConocoPhillips' 2018 total return was 15.7%.
In releasing its 2019 capital budget Dec. 10, 2018, the company outlined plans to keep capital expenditures flat at $6.1 billion and to pay out at least 30% of cash from operations to shareholders at WTI crude oil prices of at least $40/bbl.
"Management continues to stay ahead of the curve, highlighting [free cash flow] generation and shareholder returns with a capital budget below consensus … and production guidance above consensus," Tudor Pickering Holt & Co. analysts wrote Dec. 11, 2018, highlighting that the company addressed financial performance at low oil prices.
The analysts said they agree that ConocoPhillips sustaining its current level of $1.5 billion in dividends and the 2019 share repurchase target of $3 billion are achievable with 50% of cash flow from operations at a WTI oil price of $50/bbl. Further, they believe in the company's ability to generate free cash flow at WTI oil prices above $40/bbl.
"The shrink to grow Renaissance strategy employed by [ConocoPhillips], with relatively modest growth and strong capex and cost control, makes it absolutely the poster child for shareholder success in oil," Mizuho analyst Paul Sankey wrote in a Dec. 31, 2018, report.
In a Jan. 3 price outlook, Moody's Investors Service said it expects WTI crude oil prices to remain between $50/bbl and $70/bbl through 2020.
For the broader E&P sector, however, Moody's analysts said 2019 could be another long year.
"E&P investors looking for higher shareholder returns will continue to wait in 2019, despite strides in capital efficiency and higher commodity prices since the 2015-16 downturn," the analysts wrote. "Elevated oil prices throughout most of 2018 did not benefit many producers in the Permian. … [Takeaway] capacity constraints have soured investors' expectations over near-term earnings potential. Investor sentiment has weakened — especially at the end of 2018 — amid increased commodity-price volatility, US production growth, renewed economic uncertainty, and tariff wars. Even if such risks do not worsen in 2019, tepid investor appetite will make companies less inclined to try and raise capital, and could even temporarily dampen E&P consolidation."
Some analysts hope that in an environment of poor investor sentiment, shareholder activism will drive needed consolidation within the industry.
"It still feels as if high management pay and benefits, large corporate egos, and lack of sense of crisis in boardrooms will mitigate M&A, and there may be less this year than hoped, but we can hope," Sankey wrote. "Activists can square that circle, and we look for more engagement from shareholders in forcing positive change at these self-satisfied big oils that have had an abysmal year in terms of share price performance."