Breakingviews: ConocoPhillips exemplifies oil’s cloudy future

ConocoPhillips and its oil-industry peers are struggling with a cloudy future. On Tuesday the $66 billion U.S. driller posted decent returns for the second quarter despite lower crude prices than a year earlier. Conoco also upped its buyback target, and its executives talk a relatively good game on climate risk. But investors don’t seem to be convinced.

Over the past five years, Conoco’s stock has fallen some 31%. That’s worse, though not by much, than Exxon Mobil’s showing, and way behind Chevron’s single-digit drop. Dividends helped ameliorate the pain, but of the three only Chevron managed a positive total return – albeit far smaller than that of the broader S&P 500 Index.

Even with crude prices lowish, that’s strange because Conoco boss Ryan Lance runs a pretty tight ship. He managed to steer the company clear of infrastructure bottlenecks in the Permian basin last year and kept costs under control as oil prices started going down in the latter half of 2018. Revenue fell almost $1 billion last quarter compared to the same period in 2018 – yet expenses decreased more.

As a result, Conoco’s annualized return on capital employed for the quarter was 13% or so, Breakingviews calculates after adjusting for various tax effects. That’s just above the company’s trailing 12-month return and beats Exxon, which has rarely hit double digits of late.

That clearly isn’t doing it for shareholders. They are perhaps justifiably skeptical of pledges from Conoco or its U.S. peers to be disciplined about investments and rely less on production targets and high oil prices than in the past.

If that’s a fairly short-term concern, there are also longer-term worries. Conoco’s approach to climate-related risks to its business is more realistic than some – though that is a low bar for U.S. players. The company earned a B rating overall from investor-focused climate nonprofit CDP. Along with investors governments, including U.S. states if not the feds, are increasingly conscious and inclined to activism when it comes to emissions and other environmental damage. So far, most in the Big Oil camp don’t have compelling answers.