Is ConocoPhillips a Potential Multi-Bagger?

If you bought $100 of ConocoPhillips (COP) at average annual prices prevalent during 1999 and reinvested dividends received over the years, by now the capital value would be $327.525 and you would have a dividend income flow of $13.634. Between 1999 and 2009 earnings for COP have grown at an annualized rate of 12.48%, while dividends have grown at 10.7% and the median payout ratio has run at just over 18%. And while the expected payout ratio in 2009 is expected to be 53.71%, in my view the dividend is safe, provided that oil prices sustain at levels above $60. The company has exhibited exceptional ability to generate free cash flow ahead of its competitors which is supportive to the ability to maintain dividends through temporary disruptions in the market. At recent prices, the dividend yield is a healthy 4.2%.

The company also returned considerable value via share buybacks during 2007 and 2008. With the benefit of hindsight this might not appear to have been a great idea because the share prices peaked during these years; however, it must be noted that the share buybacks were conducted when PE ratios ran at between 6.7 and 7.84, which are indicative of good value.

The net-debt to net-debt-plus-equity is 33.34% which is somewhat higher than the 30% level I look upon as an acceptable degree of leverage. This level of leverage is understandable in the case of COP because of the 2006 acquisition of Burlington. Furthermore, the degree of leverage is acceptable after considering that the company has exhibited exceptional ability to generate free cash flow ahead of its competitors. This is indicative of ability to pay down debt to lower levels fairly rapidly should the situation call for such action.

In my view, the energy sector has unrivalled strong fundamentals. The massive investment in drilling vessels during the past five years provides a better balance between drilling rig demand and supply, so COP and other oil majors can expect lower levels of operating and capital expense inflation compared with the past five years. Even with nominal/low growth in production, COP is likely to deliver earnings growth at 7% annualized because of higher than inflation growth in oil prices coupled with comparatively lower operating and capex inflation levels. Keep in mind that I am not implying COP production will not grow; I am merely pointing out that their earnings can grow considerably even without production growth. COP’s growth portfolio is high potential and well diversified across most major deep and ultra-deepwater markets, including some of the highest potential opportunities available today, like the Gulf of Guinea, Brazil, the U.S. Gulf, and Angola in West Africa.

My 2014 target price for COP is $140 with upside potential to $170. On an annualized basis that translates to a return expectation of 25% to 30%, excluding the returns which will be earned through dividends. I believe the company valuation has been punished relative to competitors, because COP’s leveraged balance sheet does not compare favorably with the immaculate balance sheets of Exxon Mobil (XOM) and Chevron (CVX). Nonetheless, the company's quality and return potential make it my favorite E&P at present.

Disclosure: No holdings.

Comments

[overbet:]

What is it that you know that Warren Buffet doesnt? He said buying this stock was one of his biggest mistakes and then he sold it. If its so great why dont you own it? Im short it by the way. I put my money where my mouth is.

Oct 01 06:15 PM

[Tom Armistead:]

COP is difficult to analyze, they had their best and worst quarters ever, back to back, the 3rd and 4th quarters 2008.

They took huge writedowns in the 4th quarter. With oil and NG prices tanking they wrote everything down to artificially low levels. In the meantime, the company over the years has traded at about 2X tangilbe book.

After the writedowns, that would be 72, a price it exceeded 4 years in a row, from 2005 to 2008.

Long COP and XIM, on valuation.

Oct 01 06:30 PM

[Senan:]

My understanding is that Warren Buffets main reason for selling was for tax purposes. Granted he could have chosen a multitude of investments to sell and he chose COP, which does say something.

Oct 01 06:33 PM

[Oilbull:]

A long diatribe and then NO holdings? What is your point? COP does not grow their reserves, why is that not mentioned in your so-called report? Looks like you were paid for this piece and appears to be a "farmed-out" report besides! Didn't you work for DELL in their help department? I seem to recognize the name...hmmm.

Oct 01 06:37 PM

[Oilbull:]

Just joking on the Dell thing...but seriously, why write up a report on something you have no interest in either pro or con?

Oct 01 06:43 PM

[vasplieon:]

Buffet sold only a small share of his holdings in COP. If next SEC disclosure shows him dumping it then maybe something is up otherwise COP still looks good and a better value than CVX or XOM in my opinion. I own this stock for this reason (and the 4% dividend).

Oct 01 06:43 PM

[zorro6204:]

Boring, Sidney. There are MLP's like LINE, EVEP, VNR, ENP and LGCY, which are currently priced to yield 12-13%. Due to hedging, the distributions are well covered and secure, and all of these have dry powder to take advantage of properties in weak hands. 4 points doesn't do it for me.

Oct 02 12:15 AM

[Shocked:]

Something is very wrong with your math calculations. I have had 100 shares since 1999 and I have reinvested the dividends and my total value is only $9508. So where is my money?

Oct 02 08:27 AM

[optionsgirl:]

One unknown that concerns me is what the US Government will do to tax the heck out of our major energy companies should they become wildly profitable again.

Oct 02 09:20 AM

[Shiv Kapoor:]

The calc indicates that for every $100 put in at annual average price of $18.10, you would have stock worth $327 today + dividend income. If you purchased 100 shares at $18.10 (adjusted for splits and div) which was the annual adjusted price during 1999, you would expect to have shares worth 3.27*$1,810 = $5,918 assuming you reinvested dividends. You have $9,508 and have done much better. My guess is that you were wise enough to have bought at lower adjusted closing prices (range during 1999 was $14.32-$21.67) and you must have benefited from the 2 for 1 split in June 05. In my view return of 525% over your holding period coupled with dividend income of over $250/year is a very good return.


On Oct 02 08:27 AM Shocked wrote:

> Something is very wrong with your math calculations. I have had 100
> shares since 1999 and I have reinvested the dividends and my total
> value is only $9508. So where is my money?

Oct 02 10:13 AM

[Thomas LaCour:]

Another unknown, but suspected, is by how much the USG will tax the heck out of any capital gains / dividends anyone who invests in oil companies will be smacked. Probably special exemption for investments in "green" energy.


On Oct 02 09:20 AM optionsgirl wrote:

> One unknown that concerns me is what the US Government will do to
> tax the heck out of our major energy companies should they become
> wildly profitable again.

Oct 02 11:00 AM

[Gravity404:]

This article and the comments are skewed. Conoco was spun off DuPont and taken public late 1998 and Philips 66 had been trading for much longer.

If you use the Conoco numbers alone, then, yes, these figures are wrong.

I have been a shareholder of Conoco since it went public, and if my memory servers me right the IPO price was in the mid 30s. So, price appreciation form there is not good a current levels.

However, I strongly agree with the author – this is a great opportunity for longs to buy.

I was feeling real good when it was trading at 100. It will be there again soon.

Oct 02 12:34 PM

[The Hammer:]

I amazes me that people write these articles then disclose they own 0 shares??
COP has made some quality acquisitions, but mulva's timing is rather poor. In addition, When oil and Nat gas were sky rocketing in price over $100 and $12 mcf I wrote an email to the Board of directors telling them that they should hedge some production something like 25-50% and let the rest float with the market.. My main reason was that the oil prices was above the inflation adjusted highs and the company just made a few large acquisitions and it would be prudent to lock in some production to pay down debt , continue the dividend and maybe even buy in a few shares of stock. i received some non-sense email back stating that investors wanted the oil price to float and that they should hedge against it if you wanted.

What a bunch of dolts on the board!

Oct 02 01:24 PM

[31October:]

Is ConocoPhillips a Potential Multi-Bagger? Anything is.
But let's look at the numbers:

In case of reduced demand, while inventories are rising, they have a poor quick ratio. Also...
EPS -16.55
ROE -32.30%
P/Cash on hand 76
P/FCF - bleeding out
EPS past 5Y -5.07% despite Sales past 5Y 18.56%
Oper. Margin -8.95%
63% loss of cash flow from OPERATIONS! (6mos09/06mos08)
Insider Ownership only 0.29%, and nobody is buying.
Higher cost per barrel of extractable oil than BP, TOT, XOM.

I do not own XOM at current valuations, but I think the author might want to compare these ratios and trends. Look at PTR's numbers and pray for a downturn to buy. I still own BP, no regrets. I failed to sell CVX, but even that drag on my portfolio is a safer investment than COP.

A low p/s and EV/rev is not enough to make me believe that COP will completely reverse their history of poor productivity.

Oct 02 01:46 PM

[Shiv Kapoor:]

Stop being amazed. It is not possible to own every stock I like. I create a watch list and look to buy into various stocks I like as and when I replace a position I have recently exited (normally to book a profit or rotate to sectors I expect will outperform).
For example, at present I am keen on buying HD and HMC as these are discretionary stocks, which I feel are good long term buys and I expect them to outperform in the short term - I could buy them buy booking some gains on my early cyclicals but am reluctant to do so simply because the condition of the US consumer is a higher risk compared with growth opportunities in IT/Industrials/Materials which are getting better support from overseas. Nevertheless first use of surplus cash will go to these stocks because I am as overweight early cyclicals as I will accept. If HMC/HD outperform following purchase, I will book profits (not principal) in 3 to 6 months and use the profits to buy into COP/CVX which are also stocks I like; but I expect these (energy sector) to outperform later in the cycle; I will also use funds from partial exit of industrials to finance build in energy positions.

Slightly further down the road, I am very keen on buying JNJ/KO/VOD/WMT; these will be defensive & income positions and will be purchased on exit of positions (more likely booking profits) in early cyclicals - basic materials/industrials/...

There is really nothing sinister about writing about an interesting stock and watching it until it makes sense to buy - after considering alternative opportunities and liquidity and forward outperformance expectations. Can you honestly declare that you own every stock you like? If not, why should I?

On Oct 02 01:24 PM The Hammer wrote:

> I amazes me that people write these articles then disclose they own
> 0 shares??
> COP has made some quality acquisitions, but mulva's timing is rather
> poor. In addition, When oil and Nat gas were sky rocketing in price
> over $100 and $12 mcf I wrote an email to the Board of directors
> telling them that they should hedge some production something like
> 25-50% and let the rest float with the market.. My main reason was
> that the oil prices was above the inflation adjusted highs and the
> company just made a few large acquisitions and it would be prudent
> to lock in some production to pay down debt , continue the dividend
> and maybe even buy in a few shares of stock. i received some non-sense
> email back stating that investors wanted the oil price to float and
> that they should hedge against it if you wanted.
>
> What a bunch of dolts on the board!

Oct 02 02:00 PM

[Shiv Kapoor:]

It is not possible to own every stock I like. I create a watch list and look to buy into various stocks I like as and when I replace a position I have recently exited (normally to book a profit or rotate to sectors I expect will outperform).
For example, at present I am keen on buying HD and HMC as these are discretionary stocks, which I feel are good long term buys and I expect them to outperform in the short term - I could buy them buy booking some gains on my early cyclicals but am reluctant to do so simply because the condition of the US consumer is a higher risk compared with growth opportunities in IT/Industrials/Materials which are getting better support from overseas. Nevertheless first use of surplus cash will go to these stocks because I am as overweight early cyclicals as I will accept. If HMC/HD outperform following purchase, I will book profits (not principal) in 3 to 6 months and use the profits to buy into COP/CVX which are also stocks I like; but I expect these (energy sector) to outperform later in the cycle; I will also use funds from partial exit of industrials to finance build in energy positions.

Slightly further down the road, I am very keen on buying JNJ/KO/VOD/WMT; these will be defensive & income positions and will be purchased on exit of positions (more likely booking profits) in early cyclicals - basic materials/industrials/...

There is really nothing sinister about writing about an interesting stock and watching it until it makes sense to buy - after considering alternative opportunities and liquidity and forward outperformance expectations. Can you honestly declare that you own every stock you like? If not, why should I?


On Oct 01 06:43 PM Oilbull wrote:

> Just joking on the Dell thing...but seriously, why write up a report
> on something you have no interest in either pro or con?

Oct 02 02:05 PM

[hwood007:]

so did I


On Oct 01 06:15 PM overbet wrote:

> What is it that you know that Warren Buffet doesnt? He said buying
> this stock was one of his biggest mistakes and then he sold it. If
> its so great why dont you own it? Im short it by the way. I put my
> money where my mouth is.

Oct 02 02:37 PM

[hwood007:]

I own all three and none are in the red in my accounts


On Oct 01 06:43 PM vasplieon wrote:

> Buffet sold only a small share of his holdings in COP. If next SEC
> disclosure shows him dumping it then maybe something is up otherwise
> COP still looks good and a better value than CVX or XOM in my opinion.
> I own this stock for this reason (and the 4% dividend).

Oct 02 02:39 PM

[auto44:]

That's all talk on the gov't part. They already make six times as much money on the oil as the companies do. For every dollor of profit there is six in tax by time gas gets in your tank. The hollering about obscene profits is a all retoric for the unsuspecting public.


On Oct 02 09:20 AM optionsgirl wrote:

> One unknown that concerns me is what the US Government will do to
> tax the heck out of our major energy companies should they become
> wildly profitable again.

Oct 02 10:54 PM

[donzoab:]

Nice piece, well written. Those that look at what Buffett is doing on any given qtrly basis just haven't a clue. He uncharacteristically bought at the top, and wisely sold some for tax writeoffs from other huge gains.
Oil isn't going away, and higher prices are sure to come one day. Alternative sources of energy are years away from making any meaningful dent in today's energy needs.
Buying cop in the low 40's ( as I have been doing) and booking the nice dividend will lead to significant gains down the road. Doing so in your Roth ira is even better as it will be tax free. If you're concerned that the stock will retest lows, sell a portion of the position and repurchase lower, booking the cash as a nice gain. Keep the core position in case you're wrong and the stock moves ever higher.
Either way you win.
Stop bashing other's opinions. Everyone's analysis can be different if you're looking at different metrics. Sudden changes in the economy, world politics, public perception or market demand can change the course of a companies earnings in the short term.
Its a shame some come on this or other boards and post insults, negative false ranting or other nonsense.
This is a very simple game. If you're long, post why. If you're short, post why. Let the market show who is right long and short term, and try to profit from it. Agree to disagree and benefit from each others analysis. In the end, you really don't have any say. The big institutions , hedge funds and investment banks control all the flow.

Oct 03 10:13 AM

[Steven Ward:]

With what CVX and XOM and even BP has comming on -line I simply do not see COP's advantage here. COP needs gas to go up alot and soon with her Burlington purchase.
CVX and XOM have huge supplies of gas comming on stream over the next 5 years and signed contracts to boot.
BP cost cutting, discarding of silly "green" projects and current and future deep water discoveries coupled with the dividend is better choice than COP.

Oct 03 11:10 AM

[Connecticut:]

I'm long COP.

Got in at 39.40 w/ a 4.5%+ dividend. After watching it go down a long time. I'm not pleased w/ Mulva's decisions but he will be gone soon. I really like the asset base COP has (long term). And I don't think they should sell anything. Refining margins will slowly come back and the Democrats have lost way too much political capital on healthcare to pass cap and trade.

We have a weakening dollar coming. And everybody knows the long term fundamentals of oil are excellent. But selling assets going up in value to pare down fixed rate debt is not a good idea in an environment where the dollar is weakening and inflation is coming. I think domestic NG will rise over time as well from where we are right now. The BTU balance is just way too out of whack and oil and gas investment will shift away from gas to the black stuff to chase the profit potential this presents.

I hope they take the full two years to sell assets. The value of assets far outweighs the cost of debt in the environment we are in.

Shareholder value long term is excellent but it takes patience. I hope Mulva will be patient and maintain his holdings after his retirement.

Oct 18 12:45 AM

[Connecticut:]

Those numbers are out of line w/ reality because of the writeoffs for Burlington Resources and LUKOIL.

They really aren't any kind of indication of the true value of the asset base or future cash flows.


On Oct 02 01:46 PM 31October wrote:

> Is ConocoPhillips a Potential Multi-Bagger? Anything is.
> But let's look at the numbers:
>
> In case of reduced demand, while inventories are rising, they have
> a poor quick ratio. Also...
> EPS -16.55
> ROE -32.30%
> P/Cash on hand 76
> P/FCF - bleeding out
> EPS past 5Y -5.07% despite Sales past 5Y 18.56%
> Oper. Margin -8.95%
> 63% loss of cash flow from OPERATIONS! (6mos09/06mos08)
> Insider Ownership only 0.29%, and nobody is buying.
> Higher cost per barrel of extractable oil than BP, TOT, XOM.
>
> I do not own XOM at current valuations, but I think the author might
> want to compare these ratios and trends. Look at PTR's numbers and
> pray for a downturn to buy. I still own BP, no regrets. I failed
> to sell CVX, but even that drag on my portfolio is a safer investment
> than COP.
>
> A low p/s and EV/rev is not enough to make me believe that COP will
> completely reverse their history of poor productivity.

Oct 18 01:02 AM

[Connecticut:]

Another strength that COP has is the revenue per employee is higher than any other oil and gas but Murphy Oil. Those two are much higher than anyone else.

Buffett, as usual, knew what he was doing buying the company. He just timed the energy market in a very bad way. Remember his ideal holding period is forever.

Oct 18 01:07 AM