I was a Conoco shareholder before the 2002 merger with Phillips that created ConocoPhillips (NYSE: COP). Working for Conoco I accumulated stock over the years through profit sharing and 401K saving with corporate matches. I never sold any, although in the interest of diversification I also never invested additional money in the company.  

It’s been a pretty wild and sometimes rocky ride, as one might expect from a company in the cyclical energy industry. But just looking at the share price over the years can provide a misleading picture of performance, as I explain below.

The company has made some good moves over the years but missteps as well. One mistake that hurt performance for years was overpaying for natural gas producer Burlington Resources in 2006, just when it looked as if natural gas prices more than three times higher than they are today might persist for years.

ConocoPhillips spun off its refining arm as Phillips 66 (NYSE: PSX) in 2011 just as refiners entered a multi-year stretch of fat margins enabled by an abundance of U.S. shale oil. Phillips 66 shares doubled less than two years after being spun off. The spinoff turned ConocoPhillips into the world’s largest publicly traded non-integrated oil and gas producer.

More recently, ConocoPhillips had to slash its dividend by two-thirds in late 2015 to help plug a cash flow deficit brought on by plummeting commodity prices. This was after the company had assured investors that no such cut would be needed.

However, the stock did quite well before the oil price crash. Investors enjoyed a dividend yield of about 4% for many years, and shares gained 53% in the two years following the Phillips 66 spinoff. In fact, we added ConocoPhillips to The Energy Strategist portfolios in February 2014, and by July 2014 we had notched a 33% gain.  

Then of course the bottom fell out of the commodity market, and by year-end shares were 20% off the peak. Then 2015 was a bad year for the company as it was across the oil and gas sector, but I was even more disappointed in 2016.

In August 2016 I ran the proprietary stock screen I developed for The Energy Strategist and MLP Profits. This screening tool is Excel-based, and extracts data from the subscription-only S&P Global Market Intelligence database. I was screening for oil and gas producers with the biggest improvements in free cash flow (FCF) over the previous quarter. In second place among the the 83 U.S. and Canadian “Oil and Gas Exploration and Production” companies sat ConocoPhillips. It had improved FCF by $1.4 billion between Q1 and Q2 of 2016, swinging from a deficit of $1.1 billion to a surplus of nearly $300 million. (By Q4 that surplus reached $1.1 billion).

The only company with a better quarterly improvement was WPX Energy (NYSE: WPX), which had shown a $1.7 billion improvement. Shareholders had rewarded WPX with a 90% year-to-date return in response. In fact, 7 of the 10 companies with the greatest improvement in FCF were rewarded with a positive return, and the average YTD return in that top 10 stood at 22.4%.

Nevertheless, investors continued to punish COP. Despite the huge turnaround in FCF, it was one of the three stocks on the list with a negative YTD return, down 9.3% at that time.

I was certainly disappointed, because I believed the market was failing to recognize the strides COP had made in correcting course. My impression has been that COP has continued to underperform, but this week I happened to look up the 12-month return. What a difference six months makes, as COP now has a 12-month total return of just over 40%. The stock is up about 20% since I ran that disappointing screen back in August.

This week ConocoPhillips was in the news again, as it wrote down a billion barrels of Canadian oil sands reserves as a result of low crude oil prices. As I have noted before, all that’s happened is that these barrels have been shifted from the proved reserves category to the dicier resource column, meaning they can still be produced should higher prices warrant it.

But it looks like ConocoPhillips may be finally turning the corner. Free cash flow has increased for four straight quarters, and has now reached levels last seen when oil prices were still at $100/bbl. Last week the company announced a 6% increase in the dividend, the first increase since the cut.

The share price of ConocoPhillips today is nominally the same as in October 2009. At first glance it may seem like it would have been a terrible long-term choice for your portfolio. But looks can be deceiving.

Over that span the stock generated a 4-5% annual dividend yield, and the Phillips 66 stock spun off to shareholders is worth nearly as much as COP was in 2009. So even though the share price looks the same today, ConocoPhillips has in fact returned more than 100% since October 2009, despite the painful decline in 2014-16.

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