Fall Is Temporary for This Oil and Gas King
Ishtiaq 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) fell after the company reported a decrease in profits. The stock fell by 5% in the regular trading hours. However, COP started to recover in the after-hours trading. Stock price for COP has shown a solid upward trend over the past four months. The company's strategy seems to be novel. From seeking a 100% reserve replacement ratio, devoting 75% of its cash flows to capital expenditure and the remaining to shareholders, there is very little that does not appeal to the eye. Growth and dividends appear to be guaranteed.
Low Risk Exploration coupled with Efficiency, and Shrewd Capital Expenditures
It is well known that ConocoPhillips is the largest independent E&P (oil and oil equivalent) company in North America. Without delving into its future strategy, it is easy to infer that long-term sustainability of the company is not under any significant threat. ConocoPhillips has a major chunk of its production and reserves emanating from low risk destinations such as Europe, Canada and US/Lower. These assets account for 58% in reserves and 59% of the production. On the other hand, 21% of the production and reserves are located in Asia Pacific and the Middle East. Aside from Qatar, all the other exploration and production destinations lie Central, South and East Asian States, which are conflict free. The Investor Update for January 2013 sums this up by highlighting that 79% of ConocoPhillips' proved reserves lie in OECD countries.
From an analytical point of view, the company's international spread seems to be favorable from a transportation point view. Developed countries are the major consumers of oil and oil equivalents, and the proximity to these markets factors in as a huge positive for ConocoPhillips. Moreover, ConocoPhillips will spend $15 billion in capital expenditure that will lead to a compound annual growth rate of 3-5% over the next four years. In addition, divestment in mature oil fields in Northern Dakota, Nigeria and other spin-offs have led to capital availability of $8-10 billion. Additional capital can be re-allocated into high growth projects in the current year.
Challenges for the Company
Amidst the ongoing wave, activist investors are amassing shares in order to restructure energy companies. This is being done through reconstituting the Board of Directors and getting rid of underperforming assets. There is a feeling that ConocoPhillips may also be a target. However, there are many factors that allay these fears. The separation of downstream Phillips 66, the aforementioned active divestitures and lucrative investments help in dispelling such negative claims.
Moreover, significant concerns have arisen after a 58% drop in the fourth quarter earnings. The fourth quarter profit stood at $1.43 billion (adjusted earnings of $ 0.43 per share) from $3.39 billion (adjusted earnings of $1.55 per share). In addition, full year earnings fell to $8.4 billion in 2012 from $12.4 billion and the cash flow position also seems to be a little constrained. In my opinion, investors should not be overly concerned about these results at this point. As a result of all the smart and diverse investments, profits and earnings should be back on track in very little time.
Comparison with Peers
ConocoPhillips peers include BP (NYSE: BP) and ExxonMobil Corporation (NYSE: XOM). BP has recently sold its refinery in Texas City, where an explosion killed 15 workers and other assets to Marathon Petroleum Corp. for $2.4 billion. Sale includes the refinery and a portion of its retail and logistics network in the Southeastern U.S. BP is betting on oil rather than gas for its future growth. Furthermore, the company will increase capital expenditures to over $24 billion a year from $22 billion. On the other hand, ExxonMobil might suffer slightly due to the law suit about knowingly adding an environmentally harmful chemical to gasoline. The company faces an $800 million trial, which may cause the price to shift downwards. However, if the price falls, it will be a good opportunity to buy as it will not have a long-term affect. Exxon has an extremely strong cash position with over $50 billion in operating cash flows.
In the current world, the energy sector is going to be the defining catalyst of economic growth. Therefore, a lot of faith can be placed into energy stocks overall. The overall shortage having arisen from geo-political factors, will lead to an increased emphasis on exploration and diversification of energy resources. The stock currently trades at a P/E ratio of 6.29 and P/BV of 1.2. At the current price levels, COP can prove to be a great investment.
IshtiaqAhmed has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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!