Which Is The Better Stock: ConocoPhillips Or Occidental Petroleum?

| About: ConocoPhillips (COP)

With the economy slowly but steadily improving, and the U.S. shale boom continuing, the energy industry is experiencing a bounceback in confidence and financial strength. Based on BDO USA LLP's annual study of 100 US oil and gas CFOs, 71% of them feel better about their company's ability to access capital and credit in 2014 as compared to 2013. In fact, 64% of CFOs foresee that worldwide demand for natural gas will grow in 2014, and 65% anticipate a similar increase for oil. Barclays forecasts an increase of more than 7% in E&P spending in 2014, compared with a 2% increase in 2013. This increased spending is likely to boost revenue opportunities for these diversified E&P companies. On top, Moody also has a positive outlook for this industry, particularly in Asia.

All in all, the industry has performed well in 2013, and looks to generate stable growth in 2014. In this article, I picked ConocoPhillips (COP), an undervalued Oil & Gas E&P company with an established track record of sustaining consistent growth. I will compare it with its closest industry peer Occidental Petroleum (OXY), a company in a better position, as it also offers attractive returns for investors, both in the form of dividends and in price appreciation. I will focus on dividend stability, as well as financial situations, business plans, and future prospects to see whether these are good stocks to buy or hold.

Where does ConocoPhillips Stand?

Based on production and proved reserves, ConocoPhillips is the globe's largest independent exploration and production [E&P] company. ConocoPhillips is working in a capital-intensive industry, so it has to make large investments to acquire acreage, develop newly discovered fields, explore for new oil and gas fields, uphold existing fields, and build pipelines and liquefied natural gas facilities. The company has invested capital of around $16.3 billion from continuing operations. Based on SEC filings, ConocoPhillips uses a disciplined strategy to select suitable projects, seeking out those that can provide the most attractive investment opportunities, with a continued focal point on higher-margin liquid plays and narrow investment in North American conventional natural gas.

In the short-term, COP plans to fund a portion of its capital program with the proceeds from asset dispositions. At the end of recent year, it received 10 billion from proceeds. In the long run, its focus on investment in high-margin developments should position it to generate 3% to 5% annual production volume and margin growth. The company's reserves have increased over the past year due to a continuing portfolio shift to higher-value liquids as well as reflecting increased levels of activity in its development programs and major projects, along with revisions and extensions of existing fields. Liquids encompass approximately 60% of the reserve additions and another 15% have been attached to liquids pricing.

In order to generate 3% to 5% growth in volumes and margins, the company has effectively completed its major divesture activity and brought three major projects online, Jasmine and Ekofisk South, with preparations in progress for a full-field startup at Siakap North-Petai and Gumusut. At the end of the last year, production from continuing operations came in at 1,502 MBOED, compared to 1,527 MBOED in 2012, due to the disruption in Libya. Nevertheless, the company managed to increase income to $9.2 billion, or $7.38 per share, over $8.4 billion, largely due to a shift to higher-margin liquids.

By maintaining strong production levels, the company has been generating massive cash flows to invest in growth opportunities and return significant cash to shareholders. In the 2013, it generated 15.8 billion from continued operations and invested around $16 billion, while returning $3.3 billion to share holders in the form of dividends. However, its free cash flows are not providing coverage for dividend payments. Its payout ratios based on income of only 40% seem manageable. It should be stated that ConocoPhillips is setting strong footprints with its aggressive investment strategy. Investors seem to agree, as the stock price gained around 21% in the last year alone. With the recent pitfall in the market due the fed announcement, the stock recently dipped to $65/share, which is well below its 52 week-high of around $75/share. Nonetheless, the recent drop in the stock price makes it undervalued, trading and 9.7 times-to-earnings and 1.3 times-to-book ratio, while the industry average is at 29.8 and 1.4.

Where does Occidental Petroleum Stand?

Occidental Petroleum is an international oil and gas exploration and production company with operations in the United States, the Middle East/North Africa and Latin America. Based on equity market capitalization, Occidental is one of the largest U.S. oil and gas companies. The company conducts its operations through three segments: oil and gas, chemical, and finally, midstream, marketing/other.

Occidental is also focusing to increase liquid productions. Consequently, at the end of 2013, it grew domestic liquids production by 5%, to 343,000 barrels per day. Its focused drilling program and concentration on efficiencies resulted in a 24% reduction in drilling costs comparative to 2012 and a 17% improvement in operating costs. Its domestic proved liquids reserve replacement was 228%, and the company replaced all of its domestic gas production with its drilling program. Consequently, the company has been able to post a net income of $5.9 billion compared to the earlier year of $4.6 billion. It focuses on capital and operating efficiencies led it to generate $12.9 billion in operating cash flow. The company invested $8.8 billion of its cash flow on capital expenditures which further allowed repurchasing 11 million shares and reducing its debt by 9%. At the year end, its balance increased $1.8 billion to $3.4 billion in contrast to increases in 2012.

Also, its dividend looks safe as free cash flows are providing adequate cover to dividend payments. A payout ratio of 42 is maintainable. Over the last year, its stock has gained momentum in the wake of the company's continued ability to chase the right business strategy. However, after reaching a 52-week high of around $100/share mark, the stock has dropped back to the normal levels with recent volatility. Even now, trading at about 15.7 times-to-earnings, Occidental appears to be undervalued, and has the potential to keep its recent year momentum as it has a solid outlook in place.

In Conclusion

With successful development in the deepwater Gulf of Mexico, rapid growth of shale production, and rising production from the Canadian oil sands, the outlook for this industry is positive. Both of these companies are well set to generate consistent growth with their aggressive investment strategies. ConocoPhillips has made a solid turn around with its recent investments and dispositions. The company is now set to generate a solid stream of income with its portfolio shift to liquids. Occidental looks like a good buy as well at current valuations.

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.