Why You Should Buy ConocoPhillips
Justin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Energy is a sector that everyone's portfolio should have some exposure to. Energy powers everything in our society, with oil being the dominant resource. Over the long term, ConocoPhillips (NYSE: COP) is one of my favorite companies--let's take a closer look at the company and see why.
Source: Yahoo! Finance
As you can see in the graph above, ConocoPhillips has been on a nice run this year. Here are some quick facts about its current price levels:
- P/E: 10.69
- P/CF: 5.7X
- Dividend Yield: 4.20%
- 52w High: $66.17
- 52w Low: $52.84
You can see that ConocoPhillips is up against its high for the year. Is there more room for this stock to run? Here is why I am bullish on ConocoPhillips over the next 5 years.
Management that keeps delivering
Management has made promises to its shareholders over the last couple of years, and they have delivered on those promises. In May of 2012, management spun off its downstream operations into what is now Phillips66. Management promised that this would unlock significant value for ConocoPhillips shareholders. With shares of PSX currently priced at almost double the spin off price, I would say management delivered on that promise.
Excelling at E&P
With ConocoPhillips now strictly an exploration and production company, it is crucial that Conoco keeps finding ways to expand its reserves. Earlier this year, ConocoPhillips announced two significant discoveries in the deep water Gulf of Mexico region. The numbers have not officially come in yet as to the amount of oil expected to be produced, but it is expected to have a significant impact on its overall production numbers.
No drama needed
ConocoPhillips is currently in the middle of a large scale restructuring of assets. It has been selling its working interests in low margin, politically volatile areas. ConocoPhilliops has then been turning around, and investing in higher margin, politically stable areas, and has also been building a larger presence near American lands. This strategy is expected by management to boost production volume, and margins by 3%-5% annually over the next 3-5 years.
Juicy dividend with growth to boot
ConocoPhillips currently offers one of the more generous dividends in the sector. With a current yield of 4.20%, you are being well paid to hold on to ConocoPhillips. ConocoPhillips has recently announced a dividend increase of 4.5%. The dividend has a 5 year growth rate of 10% annually.
This company is healthy
ConocoPhillips has a healthy balance sheet. Its dividend payout ratio is only 44.3% and a debt to equity ratio of 0.4. Also, its net profit margin of 12.09% is well above its peers (5.93%). Once the restructuring is complete, ConocoPhillips will be in a good position to further improve its balance sheet, and reward its shareholders.
ConocoPhillips competes with a handful of other oil majors in the sector. Do any of the others make a better investment?
Chevron Corp (NYSE: CVX) is a fully integrated oil major. It is a larger company than ConocoPhillips, but that doesn't mean its a better investment at the moment. Chevron has a better looking debt to equity ratio at a robust 0.1. Its dividend payout ratio is also smaller at 27.1%.
However, ConocoPhillips has a higher net profit margin, as well as a lower price to cash flow ratio. Its dividend yield is also higher (4.20%, compared to Chevron's 3.15%).
Chevron is also dealing with a problematic pending lawsuit. While the lawsuit will likely avoid costing Chevron the full $19 billion the suit is for, it adds a splinter of uncertainty in this stock's side.
Chevron reported a 2.1% production drop in its most recent quarterly filing. However, this drop was mostly due to planned shutdowns and maintenance.
ExxonMobil (NYSE: XOM) is also a fully integrated oil major. It is larger than both ConocoPhillips and Chevron (it actually is the largest company in the world by market cap).
Exxon Mobil has a robust balance sheet with a debt to equity ratio of 0.1. Its dividends payout ratio is only 23%. Exxon produces immense cash flows that are used to buy back massive amounts of stock (about $5 billion each quarter). These buybacks have been Exxon's preferred method to reward shareholders. Because of this, Exxon's dividend yield is "only" 2.65%.
So ExxonMobil is a dividend stalwart with a robust balance sheet. What is not to like? To be honest, not much. I recommend you find a spot for Exxon Mobil in your portfolio. But, when a company gets as big as Exxon, it becomes harder for it to grow. ExxonMobil is essentially a cash-flow machine at this point.
ConocoPhillips has more room to run than Exxon, as its restructuring will provide it with organic growth opportunities that may be a little harder for Exxon to come by. While ConocoPhillips is setting up to grow production and margin by 3%-5%, Exxon has run into a production hurdle.
ExxonMobil like Chevron, experienced a production decrease in its latest quarterly filing. Exxon had a 3.5% production decrease. Don't worry, as Exxon is perhaps the king of oil majors and very stable. It just doesn't excite when it comes to potential for growth.
The Bottom Line:
These oil companies represent perhaps the "best of the best" in oil. You really can't go wrong investing in any of these 3 majors. However, I like ConocoPhillips the most over the next 5 years. Management's strong track record, a company wide restructure, and commitment to shareholder returns, win me over to ConocoPhillips.
Justin Pope owns shares of ConocoPhillips. 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!