Higher Oil Prices Are Boosting This Oil Stock's Profits. Here's How It's Using That Windfall.

ConocoPhillips (NYSE: COP) is the first major U.S. oil company to report earnings since the war with Iran started two months ago. Its earnings rose significantly from the fourth quarter and handily beat analysts' expectations, despite some downtime from its operations in Qatar.

Here's a closer look at the quarter and how ConocoPhillips plans to allocate its unexpected earnings bounty.

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A gusher despite some issues

ConocoPhillips reported $2.3 billion, or $1.89 per share, of adjusted earnings in the first quarter. That was up from $1.2 billion, or $1.02 per share, in the fourth quarter, and also well above the analysts' consensus estimate of $1.68 per share.

The oil company benefited from higher energy prices. It realized $50.36 per barrel of oil equivalent (BOE) during the quarter, up from $42.46 per BOE in the fourth quarter. Higher prices helped offset lower production. The company produced 2.3 million BOE per day during the period, down 1% from the year-ago period due to the impact of the Middle East conflict on its LNG operations in Qatar and higher royalties in Canada.

Allocating the windfall

Higher oil prices enabled ConocoPhillips to generate $5.4 billion of cash flow from operations during the first quarter and $2.4 billion of free cash flow after capital expenditures and working capital adjustments. The company used its free cash flow to pay its dividend ($1 billion), repurchase shares ($1 billion), and retire debt at maturity ($100 million). It ended the period with $6.7 billion of cash and short-term investments and $1.2 billion of long-term investments.

The oil company is also allocating some of its higher profits to drill more wells this year and bring additional supplies to the market. ConocoPhillips is raising its capital budget from $12 billion to between $12 billion and $12.5 billion, or a 2% increase at the midpoint. This range reflects incremental drilling activity in the Permian Basin and uncertainty about when construction will resume on two LNG facilities in Qatar that are currently on hold due to the war.

Even with that capital spending increase, ConocoPhillips is on track to generate significantly more free cash flow this year than initially anticipated. At current prices, it could produce over $25 billion in cash flow from operations this year, well above its initial expectations of less than $20 billion. That incremental cash will give the company the flexibility to continue strengthening its balance sheet, ramp up its share repurchase rate, or pursue additional incremental activity across its portfolio.

A strong start to the year

ConocoPhillips delivered strong first-quarter financial and operational results, with higher oil prices more than offsetting downtime in Qatar. The company is on track to generate significantly more cash flow this year, enabling it to increase its capital spending plan while maintaining meaningful flexibility for the remainder of the year. With the likelihood that oil prices will remain higher for longer, ConocoPhillips is one of the top oil stocks to buy to capitalize on higher crude prices.

Matt DiLallo has positions in ConocoPhillips. The Motley Fool recommends ConocoPhillips. The Motley Fool has a disclosure policy.