ConocoPhillips: Rapidly Becoming 'Best Of Breed'

Jan.31.14 | About: ConocoPhillips (COP)

I added some more ConocoPhillips (NYSE:COP) into my income portfolio as the market suffered another significant decline in early trading Friday.

The company reported a quarter that was solid but not spectacular. The company reported earnings of $1.40 a share, 7 cents a share above consensus estimates. Production did decline slightly in the quarter - driven mainly by its challenged Libyan operations.

The company made good progress in growing reserves during the quarter. Conoco's proved reserves rose 3% from a year earlier to 8.9 billion barrels of oil equivalent (BOE). Proved organic reserve additions are expected to be about 1.1 billion BOE for a replacement ratio of 179% of 2013 production.

The company guided towards 3% to 5% production growth in 2014 excluding Libya. The biggest oil concern without refinery operations continued to have asset divestitures in the quarter from non-core assets which continues a strategic effort to dispose of non-core and/or geopolitical undesirable properties.

Most importantly, the company did not show the high costs and lack of fresh reserves that have plagued larger rivals Exxon Mobil (NYSE:XOM) & Shell (NYSE:RDS.A) (NYSE:RDS.B). It also did not suffer the earnings decline due to refinery margins and a drop in worldwide production that was just reported by Chevron (NYSE:CVX) this morning.

After Conoco's earnings report, Credit Suisse analyst Ed Westlake called Conoco the best performing large oil company, citing its 7% growth in cash flow despite asset sales, a reduced share count and more cash on the balance sheet during the quarter.

Conoco is in my income portfolio due to its 4.1% dividend yield. I also think the company is the best positioned domestic oil major over the long term which I articulated in an article in August. Recent results from other domestic oil majors bear out this thesis.

Conoco has the most exposure of the majors to North America which is rapidly becoming the biggest oil & gas producing region in the world. 60% of the company's capital budget is geared to grow production on its significant acreage in the Bakken, Eagle Ford and Permian shale formations in the United States. Production from all these regions is growing in the double digits.

Even with its challenged Libya operations, Conoco has less geopolitical risk than either Exxon or Chevron given its global footprint which is becoming more North American focused by the quarter. In addition, Conoco does not have the refinery or chemical operations of its larger rivals. This lowers operational complexity and should reward the company with a higher multiple in the market as it is a pure play E & P concern.

Finally, the stock is offering an attractive entry point after a little better than 10% decline during the market's recent turmoil. The shares go for 10.5x forward earnings and 5x operating cash flow. Too cheap given Conoco's better than 4% yield and growing production in North America. I see this "Best of Breed" oil major staying within my income portfolio for the foreseeable future. BUY

Disclosure: I am long COP. 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.