3 Reasons to Buy ConocoPhillips

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

Energy giant ConocoPhillips (NYSE: COP) announced its 2013 capital budget last week.  Plans called for $15.8 billion in spending, which is flat with its 2012 capital plan.  Despite flat spending, Conoco offers investors a compelling investment opportunity.  I see three reasons why Conoco is a buy.

Repositioned and Ready to Grow 

The company completed spinning off its refinery arm Phillips 66 (NYSE: PSX) earlier this year.  The spin-off has unlocked tremendous value for investors, with Phillips shares jumping 60% since.  Phillips raised its dividend for the third time since the separation and doubled its share repurchase plan to $2 billion.   

ConocoPhillips expects to complete what’s left of its strategic asset disposition program in 2013.  With that out of the way, the company can solely focus on growth.  Through strategic capital spending, the company expects to deliver long-term annual growth of 3% to 5% on both volumes and margins.

Getting Wet

The company expects to invest 40% of the capital budget on exploration.  It plans to focus two-thirds of this spending on US onshore liquids-rich opportunities.  These developments will focus on the Eagle Ford, Bakken, Barnett, Niobrara and Permian Basin.  The company will only spend a minimal amount of capital on dry gas plays, as the last third of the spending will be on high-return liquids opportunities in the North Sea, Alaska and Western Canada.

Giving Back

Cash not reinvested in growing the company will be given back to shareholders.  Conoco plans to pay a compelling dividend, which with history as a guide, has been raised by more than 14% annually over the past five years.  That dividend is among the tops in the oil patch at more than 4.5% annually.  The company continues to buy back shares, including $3.1 billion bought back in the second quarter.

ConocoPhillips is by far the most shareholder friendly among the global big oil firms.  The company had a 16.6% net payout yield.  This was more than twice that of Exxon Mobil (NYSE: XOM) and four times the payout of Chevron (NYSE: CVX).

<img src="http://media.ycharts.com/charts/9262e44576fc877e933659ebd2008bdc.png" />

COP Net Payout Yield TTM data by YCharts

ConocoPhillips has an “A” rated balance sheet, which will be bolstered by the $5 billion sale of its North Caspian Sea assets.  The proceeds from that sale will be used to both fund the 2013 capital budget as well as to continue this sector-leading return of shareholder capital. 

Bottom Line

By repositioning the business, diving into liquids and giving back to investors, ConocoPhillips offers a compelling investment opportunity for investors.  As an added bonus, shares are changing hands at a ridiculously low single digit multiple to earnings.  ConocoPhillips has all the makings of a great energy investment for your portfolio. 

latimerburned owns shares of Phillips 66 and ConocoPhillips. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus