This Energy Company has Enough Wind to Perform
Ankit is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
ConocoPhillips (NYSE: COP) is the largest American-based independent Energy & Power company. The company has a strong legacy asset in North America combined with a low risk international diversified portfolio. I believe the company has a major asset base with a compelling outlook for growth in volumes and margins. I believe there are several attributes of the stock case that make ConocoPhillips a relatively attractive near-term investment option.
High Dividend Yield
Recently, the company has shown its intention to allocate 20% to 25% of cash flow annually back to shareholders principally in the form of a dividend. I expect the company to focus on dividend as the top cash priority. Going forward, I believe ConocoPhillips’ lofty dividend will continue to attract yield-oriented capital.
Portfolio Rationalization
Last month, ConocoPhillips announced the sale of its 30% interest in NaryanMarNefteGaz (NMNG) and certain related assets to Lukoil and expects to recognize a $400 million after-tax gain from the sale in 3Q12. I like the strategic rationale behind the transaction that these assets were not part of the company’s core operations and had no expectation of any upside surprise. I believe additional asset sales may provide favorable news flow over the next 18 months as I expect the company to continue rationalizing its portfolio.
Pertinent Valuation
On May 1, ConocoPhillips broke off into two different companies ConocoPhillips and Phillips 66 (NYSE: PSX). After the split, while PSX took on the production of natural gas liquids and the petrochemicals components of the company, ConocoPhillips remains involved in the exploration and production of oil and gas products. ConocoPhillips and PSX both continue to remain in direct competition with Major Integrated Oil & Gas companies such as ExxonMobil (NYSE: XOM), Chevron (NYSE: CVX) and Occidental Petroleum (NYSE: OXY). The following table summarizes the expected EPS growth, forward PE and Dividend yield of ConocoPhillips, Exxon, Chevron and Occidental petroleum:
|
Company |
Expected EPS growth (next year) |
Forward PE |
Dividend Yield |
|
Conocophillips |
2.6% |
10.01 |
4.7% |
|
Exxon Mobil |
4.7% |
11.08 |
2.5% |
|
Chevron |
-3.3% |
9.21 |
3.2% |
|
Occidental Petroleum |
8.8% |
11.49 |
2.5% |
From the above table, it would not be wrong to say that Chevron deserves discount valuation as expected EPS growth is lowest among the major Oil and Gas companies and dividend yield is also not very enticing. ConocoPhillips offers impressive dividend yield of 4.7% which is highest among its peers. Therefore, I believe the company valuation is justified even when its expected EPS growth is not impressive on both absolute and relative basis. Also, the stock is trading at 130% of the value of proved reserves alone. Thus, lower valuation in the near term is highly unlikely.
Some Concerns
There have been some concerns over funding deficits for the long term in the absence of a commodity price increase. I believe the funding deficit will lead to dip into cash on hand, increasing debt, and selling of additional assets. I believe the company is lacking a downstream segment to dampen overall cash flow volatility and cross-subsidize the upstream operations, cash flow growth via production increases and margin expansion. Therefore, I expect the deficit to remain a headwind for the foreseeable future.
I believe that downside of the shares is limited as management appears to have convinced the market that the company has the ability to fund its dividend and CAPEX program in a more modest oil price environment. Going forward, I expect strong free cash flows from ConocoPhillips’ legacy portfolio, a robust share repurchase program, high commodity prices and a stable dividend to balance against future concerns over production growth and future upstream capital intensity. I think ConocoPhillips has few bad apples in its basket which could be replaced easily. Thus I recommend buying it.
ankitagrawal has no positions in the stocks mentioned above. The Motley Fool owns shares of ExxonMobil. Motley Fool newsletter services recommend Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
