ConocoPhilips: Time to Embrace Natural Gas Transportation

The ConocoPhilips (COP) quarterly earnings conference call was noteworthy for a couple of different reasons. First, the company seems to be taking logical steps to address its debt issues in light of new realities. Although several oil analysts suggested COP would sell off its Lukoil (LUKOF) stake, company executives took any potential Lukoil divestitures off the table:

(Conference call remarks in bold type)

Paul Sankey: Great. And then, if I could just clarify an early question. We are saying that you will not be selling out of any of the Lukoil state? Thanks, I will leave it there. Thank you.

Jim Mulva (CEO): Well, what I said is, we will maintain our strategic relationship with Lukoil.

Sig Cornelius (CFO): I think we said also that the $10 billion in asset sales don't include any of the Lukoil share.

This is good news. The COP/LUKOF relationship has been very beneficial for both companies and is a future production growth vehicle.

Secondly, production is growing. Including LUKOIL, total production was 2.2 million BOE/day - up 40,000 BOE per day over last year.

Next, the company is committed to dividend growth:

Jim Mulva: We think and believe that annual increases in dividends is a very important discipline for our company and is recognized and our shareholders like to see that.

The one issue I still don’t understand about the company is Jim Mulva’s refusal to be an outspoken advocate and strongly embrace natural gas transportation. Instead, like other international oil company executives, Mulva continues to site “access” as a big issue:

Jim Mulva: … And then the other very important point is access continues and will be an issue for companies like ConocoPhillips and international oil companies.

But what Mulva is talking about here is really access to oil. COP has tremendous access to abundant natural gas reserves in Alaska, the lower 48, and worldwide. The relative underperformance of the company’s stock is a direct result of greater exposure to lower natural gas prices than its peers. Further, under Jim Mulva, COP has invested much of its treasure in Burlington Resources and Origin (OGFGF.PK) in order to gain exposure to natural gas.

Since the shale plays have been, and will continue to be, a game changer in this space, why doesn’t Mulva join other natural gas advocates like Hefner, Pickens, and McClendon and embrace natural gas transportation in America? Certainly COP will continue to profit from the fundamentals of oil supply/demand and the continuing ramping up of gasoline powered vehicles in China, India and Asia in general. This is validated by a $75/barrel price during a period of brimming oil inventories coincident with the worst financial downturn since the Great Depression.

So, Jim, if you’re worried about natural gas transportation hurting your oil profits – don’t be. You should be a patriotic American and do the best thing to help turn your country and your company around: support natural gas transportation. It is the best way to save your legacy and increase the return on your natural gas investments. Instead of being criticized for over-paying for natural gas assets, you would instead be viewed as an energy and ecological visionary. Otherwise, natural gas demand in the US will continue to stagnate. Supply is the turn of a valve away, and natural gas prices will remain pressured for years to come.

In the final analysis, COP remains an extremely attractive investment at current levels. With a dividend close to 4%, a wealth of oil and natural gas assets and an extremely bullish outlook for energy in general, Conoco is well positioned for future earnings growth. That said, the company would fire on all cylinders if America got serious about addressing the economic, environmental and national security issues facing it as a result of its imported oil crisis and adopted natural gas transportation. As a patriotic American and in the best interest of shareholders, ConocoPhilips CEO Jim Mulva should embrace that effort.

Disclosures: Long COP

Comments

[long_on_oil:]

Why would you pay $51 for COP with it's 4% yield when you can buy BP at $58 with a 5.6% yield. Plus we all know where the dollar is headed so you can own BP and take advantage of the decline in the dollar too.
I am amazed that BP is not currently an $80 stock based on its dividend.

Oct 30 08:43 AM

[Mmarrkk:]

Increasing dividend? Good.

Borrowing money to pay dividend? Bad

Increasing dividend while increasing borrowing to pay for said increasing dividend? I just don't understand!

You are right about the natural gas transportation. Maybe we need to direct this line of thinking to the B.O.D.'s?

Oct 30 09:56 AM

[auto44:]

Where do you think the pound and euro are headed?


On Oct 30 08:43 AM long_on_oil wrote:

> Why would you pay $51 for COP with it's 4% yield when you can buy
> BP at $58 with a 5.6% yield. Plus we all know where the dollar is
> headed so you can own BP and take advantage of the decline in the
> dollar too.
> I am amazed that BP is not currently an $80 stock based on its dividend.

Oct 30 02:13 PM

[Michael Fit...:]

long_on_oil: hey, i love BP and STO. of all the earnings released, i think you'd have to say that BP and CVX had the best quarters.

Mmarrk: i have sent emails to Conoco's BOD. no reply, and obviously no success. in light of all their investments in natural gas plays, i just don't undertand COP management's aversion to natural gas transportation. what jim cramer tonite, he's in OK interviewing some natural gas heavyweights. i am sure they'll be talking about it. the U.S. will have to migrate to natural gas transportation at some point - we'll have no choice. the question is, will the government wait until there is rioting in the streets, or will we do it before a crisis. of course, i think last year's $145/barrel oil was a crisis...

auto44: if you are compariing to the US dollar, it's a good question, but a better question maybe this: china, india, brazil, france, and germany have all said they are in favor of a new world reserve currency not based on a single country. so, the real long-term question is this: what will the U.S. dollar be valued to wrt a new world reserve currency based on a basket of currencies, gold, and silver? the answer to this question, i believe, is: "less than it is valued today".

Oct 30 05:10 PM

[longoil:]

Long_on_oil

I agree with you on COP vs BP but for a totally different reason.

COP is bathing in debt, $52 billion dollars debt on a market cap of $75 billion. And its EPS is negative $16.38 share and so it is paying shareholders dividends with borrowed money, not earnings. This is the same problem with CHK.

BP has high debt of $65 billion, but it is small compared to its market of $175 billion. Its EPS is a positive $3.76, so at least its dividends are coming from actual earnings.

After being burnt by many times by stories of potential growth by companies like COP and CHK , now I always look at the balance sheet carefully before sinking a dime into any company.

Oct 30 05:38 PM

[longoil:]

Fitz,

I am not anti-NG, just not too crazy about badly managed companies like COP and CHK.

I choose to play NG through better managed companies like BP, RDS, TOT, CVX, ECA and XOM..

Oct 30 05:46 PM

[doublebogey:]

How about playing nat gas transportation thru nat gas transportation Mid stream company Mlp's like Enterprise, Kinder, Enbridge, Magellan, Plains, etc, etc. Get the distributions while you wait for the country's politicians to pull their heads out of that warm dark place they usually keep them.

Oct 31 01:01 PM

[Michael Fit...:]

long_on_oil: the negative EPS you site is due to a huge one time write down. i don't think this charge should be forecasted forward as an indication of the future. COP has generated large positive net income for years and years, and even after the blistering it has taken in the market during this crisis, a look at its 5 and 10 year performance is not bad at all. yes the debt is more than i'd like to see. that said, it isn't exhorbitant, and i think with oil prices where they are today ($70's!), and the divestitures the company is planning to take to pare down that debt, you may be underestimating COP's earnings going forward. the company has some mature low cost oil producing fields which are cash cows. not only that, it is clear that mulva wants to shine up his reputation before leaving...a reputation that certainly has taken a hit with the developments of the past year or two. he could salvage it easily by simply joining pickens, mcclendon, hefner, and others and push for U.S. policymakers to adopt natural gas transportation. increased demand will take the yo-yo out of natural gas prices, and then mulva's strategy of natural gas assets will enable both his reputation (and the stock price) to appreciate. unfortunately, mulva is silent on the issue....which i for one simply cannot understand.

longoil: well, to each his own. i certainly like XOM, BP, and CVX as well, and have suggested those companies many times in my articles. certainly BP and CVX had the best earnings this quarter, and BP has the best dividend of the lot. that said, from a stock appreciation perspective, at these levels, i am not so sure COP might not have the best potential gain over the next year or two. if they announce some asset sales at decent prices, and people see how the debt is indeed being reduced, and i have no doubt that will be the case, i think the leaner-meaner COP might be looked at in a much different light then today's.

doublebogey: well, that might be a birdie of an idea. the distributers get paid no matter what the price. you probably know alot more about them than i do, so i'll just say you certainly could be right.

Nov 01 03:57 PM

[Mmarrkk:]

Fitz: not surprised with the lack of response. BOD's, unfortunately, just like to get along!

Yes, $145/BO was a disaster in general. Yes, it helped me out a lot as an investor in oils and an employee of oil/gas co'. But on a macro level, given the state of the economy, it was bad. Now, layer on that oil price on top of the ever increasing debt, the soon to be increasing taxation, the anti-business legislation we seem to see everyday, and the precarious condition of the stock market, I think it could be the straw that breaks the camel's back! The stimulous money only stimulated a lot of government pocket books and executive salaries and union chief's savings. It isn't going to what needs stimulating. My wife's small business is doing well, but will probably not make it through healthcare reform due to the taxes and requirements that will be placed on them. Based on what she's read of the bills so far, she'll just shut it down and lay off the employees and let them go as contractors. Fine with me...I get my full-time wife back! But the employees will probably not be too happy!

I'm still pushing nat gas as a transport fuel and I'm fighting with all of my energy and money the cap/tax/trade bills. Those will drive costs way too high at the wrong time. Its too much, too soon, at the wrong time, for the wrong reasons and needs to be put on the back burner (nat gas burner BTW) until our economy is out of ICU.


On Oct 30 05:10 PM Michael Fitzsimmons wrote:

> long_on_oil: hey, i love BP and STO. of all the earnings released,
> i think you'd have to say that BP and CVX had the best quarters.
>
>
> Mmarrk: i have sent emails to Conoco's BOD. no reply, and obviously
> no success. in light of all their investments in natural gas plays,
> i just don't undertand COP management's aversion to natural gas transportation.
> what jim cramer tonite, he's in OK interviewing some natural gas
> heavyweights. i am sure they'll be talking about it. the U.S. will
> have to migrate to natural gas transportation at some point - we'll
> have no choice. the question is, will the government wait until there
> is rioting in the streets, or will we do it before a crisis. of course,
> i think last year's $145/barrel oil was a crisis...
>
> auto44: if you are compariing to the US dollar, it's a good question,
> but a better question maybe this: china, india, brazil, france, and
> germany have all said they are in favor of a new world reserve currency
> not based on a single country. so, the real long-term question is
> this: what will the U.S. dollar be valued to wrt a new world reserve
> currency based on a basket of currencies, gold, and silver? the answer
> to this question, i believe, is: "less than it is valued today".

Nov 02 11:25 AM