ConocoPhillips:Takeaways from Meetings with Management

Takeaways from management meetings with CEO Ryan Lance

    We spent the day on the road with ConocoPhillips CEO, Ryan Lance, where thekey message was COP’s advantaged balance of offense and defense. With 14Bn boe of resource with an average cost of supply of $35/boe, and a fullyloaded,post-dividend breakeven of ~$45/bbl, the lowest in our coverage, COPis uniquely positioned to succeed in a “lower for longer” environment, while itstop-quartile crude leverage drives an accelerating FCF gap vs. peers as crudeprice rises. At a 10%-15% discount to large-cap peers, we see compellingvalue in COP, with steady execution and accelerating cash return toshareholders likely to close the gap. Buy.Higher relative upside leverage to a recovery in crude

    With an average cost of supply of $35/boe and a resource life of ~31yrs (at a costof supply of less than $50/bbl), we see COP as having the lowest (post-dividend)break-even in our coverage at ($45/bbl). And despite concerns last year about itsbalance sheet or the implied capital efficiency of its portfolio, managementhighlighted its transformation to amongst the strongest balance sheets of its peers(1.4x FY17Net Debt/EBITDA post yesterday’s FCCL sale closure) and consistentexecution (2016production +3% vs. guidance while capex beat guidance by 15%)as evidence of its strength. We see $1900mm of FCF (post-dividend) in 2017at$52/bbl crude, with likely downside to the $5Bn capex budget potentiallysupporting even more.While an average cost of supply of $35/boe provides downside protection

    Despite its defensive positioning, COP retains top-quartile sensitivity to potentialupside in crude price, with its FCF yield increasing to 4.5%/6.5% at $55/$60/bbl vs..5%/2% at cash-return focused peers, and proceeds expected to support debtreduction/share purchase targets of $7Bn/$3Bn in 2017. With a paced schedulingfor the retirement of debt, excess FCF beyond the current plan is likely to supportadditional returns to shareholders via additional buyback.Valuation remains compelling

    With a (post-div) FCF yield discount of ~2.5%/4% at $45/$55/bbl vs. a peer(CVX, OXY, XOM) average of -2%/+0.5% respectively and an aggressive sharerepurchase program ($3Bn through 2017) underway, we see visibility ongrowing shareholder cash returns and on addressing the valuation gap vs. theyield-rich majors. And while estimated annual volume growth of 3% through2020(from 2017pro-forma volumes of 1165Mboe/d) looks underwhelming vs.large-cap E&P peers, DACF/DAS growth y/y growth of 6% by 2020at $50/bblis broadly competitive with the group despite a 10%+ valuation discount (2018EV/DACF).