ConocoPhillips - Value Creating Strategy Continues To Drive Returns

Nov. 5.13 | About: ConocoPhillips (COP)

Shares of ConocoPhillips (COP) continue to trade near their all time highs as the strategy to focus on high growth and low risky assets continues to pay off.

This structural transformation strategy warrants a higher valuation versus some of its peers. Combined with a nearly 4% dividend yield, shares continue to offer appeal.

Third Quarter Results

ConocoPhillips generated third quarter revenues of $15.47 billion, up 9.4% on the year before.

The company reported net earnings of $2.48 billion, up from $1.80 billion last year. Earnings per share came in at $2.01, up from $1.46 per share reported last year. Note that earnings from continuing operations came in at $1.96 per share.

ConocoPhillips reported adjusted earnings of $1.82 billion, or $1.47 per share which is up slightly from reported earnings of $1.38 per share last year. Note that reported earnings saw a $749 million boost from asset sales.

Analysts were looking for adjusted earnings of $1.45 per share.

CEO and Chairman Ryan Lance commented on the third quarter developments, "We have made significant progress toward positioning the company for 3 to 5 percent growth in volumes and margins. We successfully completed our major turnaround activity and have brought two major projects on line, with another three major projects expected to start production in the coming months."

Looking Into The Results

ConocoPhillips reported production of 1.51 million barrels of oil-equivalent per day, of which 1.47 million barrels production came from continuing operations. This is flat compared to a year ago.

New developments offset disruptions in Libya and normal field decline.

Higher prices and a continued shift to liquids boosted margins and earnings. Note that realized prices per barrel of oil-equivalent increased from $65.52 per barrel last year to $69.68 per barrel over the past quarter.

Looking Ahead

Production from continuing operations is seen between 1.505 and 1.515 million barrels of oil-equivalent per day. The impact of the disruptions in Libya will reduce production by some 50,000 barrels per day in the final quarter of the year.

ConocoPhillips already announced its intentions to sell its Kashagan, Algeria and Nigerian businesses resulting in expected proceeds of $8.9 billion.


ConocoPhillips ended the third quarter with $3.9 billion in cash and equivalents. Total debt stands at $21.7 billion, for a net debt position of $17.8 billion.

Sales for the first nine months of the year came in at $44.26 billion, down 3.0% on the year before. Net earnings attributable to shareholders came in at $6.67 billion, down 4.7% on the year before.

At this pace annual revenues of $60 billion are attainable as earnings could come in between $8.5 and $9.0 billion.

Trading around $73 per share, the market values ConocoPhillips at $89 billion. This values operations of the firm at 1.5 times annual revenues and 10 times annual earnings.

ConocoPhillips currently pays a quarterly dividend of $0.69 per share, for an annual dividend yield of 3.8%.

Some Historical Perspective

Long term holders in ConocoPhillips have seen great returns. Shares tripled from levels around $30 in 2004 to highs around $95 by 2008. Shares fell back to lows around $35 in 2009 again and have steadily risen to current levels around $73 per share.

Note that following the spin-off of the downstream activities in May of 2012, shareholders received 0.5 shares in Phillips 66 (NYSE:PSX), currently valued around $32 per share. This means that investors hold a total value of $105 per share now, given that they didn't sell out of their shares in the refiner activities.

Investment Thesis

Conoco has created a lot of value for its shareholders. The spin-off of Phillips 66 was widely applauded and set the example for many more limited partnerships being formed within the industry. In these cases, companies were typically spinning of their refinery or logistical assets.

On top of this came the decision to reduce exposure to political risks, after the Libyan debacle. As such ConocoPhillips focuses on safer production areas, notably North America, to benefit from the shale oil boom. The investments following the strategy, is expected to generate $9 billion in proceeds, which could cut the net debt position in half. Given the lower production rates of these assets, it hardly reduces current production, while it does reduce capital expenditures.

Note that Libya continues to provide headwinds, although investors are not too worried. The full year production range of 1.505 to 1.515 million barrels of oil-equivalent, is down from an expected 1.515 to 1.530 million barrels, not a surprise given recent developments. Investors are more focused on the impressive 40% increase in production from the Eagle Ford, Bakken and Permian assets, producing some 214,000 barrels of oil-equivalent per day, providing a strong base to grow from.

Back in April of 2012, I last took a look at ConocoPhillips prospects. At the time, just before the spin-off of the refinery business, I concluded that such a move could unleash a great deal of value for shareholders. I noted that shares offered great appeal as the two separate companies could focus on their core activities, acting as a main value driver. On top of this came the great strategy to focus on less risky assets in North America, which offer growth potential at the same time.

For now, shares continue to offer great value at around 10 times reported earnings. Even based on adjusted earnings, the multiple of 12-13 times earnings is justifiable given the growth profile and relative low riskiness of its assets. Combining this with a nice 3.8% dividend yield, shares continue to offer great appeal.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.