Has the ConocoPhillips Split Left a Cheap Oil Major?

Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Last year, ConocoPhillips (NYSE: COP) spun out its downstream assets as Phillips 66 in order to focus more on its exploration and production operations. In theory, spin-offs such as this one not only lead to the “child” company becoming more efficient -- as management does not have to concern itself with the needs of the larger organization -- but also help the parent company improve as its management can focus on the core business.

Taking a closer look at the company

In the first quarter of 2013, ConocoPhillips experienced small declines in its revenue and in its earnings from continuing operations versus a year earlier (in line with results from many other large oil and gas companies). The stock trades at 11 times trailing earnings, and the P/E multiple from reviewing analyst consensus for 2014 is the same. WTI crude oil prices are up quite a bit from a year ago, though this has mostly come from a narrowing of what had been a wide spread between WTI and Brent prices; in addition, ConocoPhillips’ adjusted earnings per share have been remarkably consistent over the last three quarters.

Several large oil and gas companies offer moderate to high dividend yields, and ConocoPhillips is among them with an annual yield of 4.2% after having increased its quarterly payments to $0.69 per share earlier this year. Of course, income investors might prefer a stock with less exposure to commodity prices, but that is an attractive yield.

We, at Insider Monkey, track quarterly 13F filings from hundreds of hedge funds and other notable investors as part of our work researching investment strategies (for example, we have found that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year). According to our database, Warren Buffett’s Berkshire Hathaway -- which is also a major investor in Phillips 66 -- owned more than 24 million shares of ConocoPhillips at the end of the first quarter of 2013. Find Buffett's favorite stocks. Donald Yacktman’s Yacktman Asset Management was another major shareholder, reporting a position of 6.6 million shares (check out Yacktman's stock picks).

Peer oil and gas companies

ConocoPhillips is best compared to some large integrated oil and gas companies, including Chevron (NYSE: CVX) and ExxonMobil (NYSE: XOM), as all three of these companies are major oil and gas producers, although Chevron and Exxon have retained their downstream units. Chevron, like ConocoPhillips, has been seeing slightly lower revenue and earnings going by recent reports. Its trailing and forward earnings multiples are both 10, as the sell-side is looking for a small decrease in profits next year. The valuation is cheap enough that it would be worth looking into, or at least following as more results come in, and the 3.2% dividend yield is notable as well.

ExxonMobil is slightly more expensive than either Chevron or ConocoPhillips on a forward earnings basis, with a P/E multiple of 12. The yield is also a bit lower than what can be found at Chevron, and therefore, investors looking for dividends would avoid it in favor of ConocoPhillips as well. Exxon’s premium relative to the other two stocks can be explained by the company’s strong position in natural gas (it acquired XTO Energy in 2009 to strengthen its assets in this area), which some energy analysts argue could be poised for strong market conditions in the future as infrastructure is developed to support more processing and export of natural gas.

Of course, the company is also thought of as having a general market leadership position. Analyst expectations are that net income will come in lower next year than what Exxon has done on a trailing basis, even as oil prices remain high, and it might be worth looking into for investors who are willing to pay a premium in terms of valuation metrics for the company.

Conclusion

ConocoPhillips deserves further attention from income investors, at least those who are comfortable investing in basic materials and oil and gas in particular (and aren’t already too exposed to those sectors or industries). In terms of value, investors should have more or less the same take on it as on its peers -- the forward valuations are appealing on an absolute basis, but it might be best to wait to see how performance unfolds over another quarter or two given the stagnant to weak results recently.

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This article is written by Matt Doiron and edited by Meena Krishnamsetty. Meena has a long position in COP. The Motley Fool recommends 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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