ConocoPhillips Earnings Preview: Fairly Valued, But Is it Delivering Growth?

Matthew 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), one of the largest oil and gas exploration and production companies in the world, has done very well for its shareholders since the 2008 oil bubble burst.  With the company set to report earnings on Jan. 21, investors will want to see that all is going well for the company and hopefully hear a clear outlook for the future.

<img src="/media/images/user_14267/cop-chart_large.png" />

ConocoPhillips is a slightly different company than it was a year ago, having split off its downstream assets into a separate company, Phillips 66 (NYSE: PSX).  With the spinoff complete, ConocoPhillips is now a purely E&P (exploration and production) company. 

Conoco explores for, produces, transports, and markets crude oil, natural gas, and natural gas liquids all over the world.  On average, the company produces around 1.7 million barrels of oil equivalent per day.  They currently have proven reserves equaling 8.4 billion barrels and have plans to grow this in the future.

The growth strategy for ConocoPhillips includes $15 billion in capital spending through 2016, of which 45% is allocated toward exploitation, 30% for major projects, 15% for exploration, and 10% for maintenance of current assets.  From this program, Conoco anticipates growth in production of 3-5% per year, as well as profit margin expansion at the same rate.  The company also wants to have a reserve replacement rate of over 100%, meaning that for every barrel of oil produced, more than that is added to the proven reserve total through exploration, etc.  Listen for any updates on this during the earnings call, as these are very ambitious goals and could provide a nice upside catalyst if the company is able to achieve them.

The company’s ambitious goals also include returning 20-25% of cash flow to shareholders as dividends in addition to share buybacks, which the company has employed with great success recently.  Since 2008, the number of outstanding shares has decreased from 1.523 billion to 1.214 billion, a reduction of 20.3%.  Also, true to their goal, Conoco has maintained an excellent dividend history, including and especially during the difficult 2008-09 period (see chart below).  It is also worth noting that although the chart suggest the dividend did not increase during the past year, it effectively went up by $0.50, or 19%, as that is the additional benefit received by shareholders as a result of the Phillips spinoff.  Phillips pays a $1.00 annual dividend, and Conoco’s shareholders received 0.5 shares of Phillips for each Conoco share they owned.

<img src="/media/images/user_14267/cop-dividends_large.png" />

In terms of valuation, I’d like to look at Conoco compared to two of its competitors.  Marathon Oil (NYSE: MRO) is one of the closest competitors to Conoco by both size and business model.  Exxon Mobil (NYSE: XOM) is by far the largest U.S. oil company and it helps get a general sense of how the industry is doing.  Conoco is expected to report earnings of $5.88 for 2012, but adjusting for the spinoff (can’t count Phillips 66’s income for valuation), this number shrinks to $5.16.  This means Conoco is currently trading at 11.3 times 2012’s earnings.  Consensus estimates call for earnings to increase to $5.79 and $6.19 in 2013 and 2014, respectively, which implies 9.6% annual average earnings growth for the next two years, more than justifying the earnings multiple.

For comparison, Marathon trades at 12.4 times 2012’s earnings, and is projected to grow earnings at 14.3% going forward, which looks a bit cheaper than Conoco with more growth anticipated.  Exxon Mobil trades at 11.5 times 2012 earnings, however it is projected to have average earnings growth of just 1.7% over the next two years.  However, working in Exxon’s favor is the fact that it is the only one of these three companies with a cash-positive balance sheet, with more cash on hand than debt.

To sum it up, Conoco looks fairly valued right now.  More important than the earnings numbers themselves are the updates the company will give on its ambitious growth plan.  However, if the numbers miss, it should create a nice buying opportunity in a very solid company that loves returning value to its shareholders.


KWMatt82 has no position in any stocks mentioned. The Motley Fool owns shares of ExxonMobil. 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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