3 Reasons Why I Bought ConocoPhillips

On November 28th, 2006, I added ConocoPhillips (COP) to my portfolio at $65.17 per share driven by the catalysts listed below:

1) COP recently announced 50/50 JV relationship with Encana (ECA) adds long term value to COP.

2)Management stated focus on improving shareholder value and improving to AA credit rating by:

1) Debt level reductions
2) Annual dividend increases
3) Share repurchases

3) Strong value scorecard in comparison of the major integrated oil & gas companies, including British Petroleum (BP), Chevron (CVX), and Exxon Mobil (XOM)

Company Background:

ConocoPhillips operates as an integrated energy company worldwide. It operates in six segments: Exploration and Production, Midstream, Refining and Marketing, LUKOIL Investment, Chemicals, and Emerging Businesses. The Exploration and Production segment primarily explores for, produces, and markets crude oil, natural gas, and natural gas liquids. It also mines deposits of oil sands in Canada and upgrades into a synthetic crude oil. The Midstream segment gathers and processes natural gas; and fractionates and markets natural gas liquids primarily in the United States, Canada, and Trinidad. The Refining and Marketing segment purchases, refines, markets, and transports crude oil and petroleum products primarily in the United States, Europe, and Asia. The Chemicals segment manufactures and markets petrochemicals and plastics. The Emerging Businesses segment encompasses the development of new businesses, including new technologies related to natural gas conversion into clean fuels and related products, technology solutions, power generation, and emerging technologies. The company also provides technological solutions in deepwater exploration and production, reservoir management and exploitation, 3D seismic technology, petroleum coke upgrading, and sulfur removal. ConocoPhillips was founded in 1917 and is headquartered in Houston, Texas.

5 Year Financial Trends

COP has a 5-year compounded annual growth rate on revenue of 28.3% growing to $198.5 Billion on a trailing twelve-month basis, with the current analyst consensus coming in at $196.0 for the full year of 2006. From a profitability standpoint, COP achieved $16.0 Billion in the last twelve-months sporting a 35.6% on a 4-year growth rate basis. The current analyst consensus for 2006 net income earnings per share is $10.07.

Stock performance

Over the last 5 years, your original $10,000 investment in COP on January 2nd, 2002 would be worth $26,385 or a 21.3% annual return, ~5x higher than the S&P 500 of 4.1%. On an YTD basis, COP has appreciated 16% through December 6th, 2006 compared against the S&P benchmark of 13.2%.

Value scorecard

COP has a strong value scorecard when comparing against its major competitors in the integrated oil industry, capturing a passing mark on 5 of the 8 indicators. Of the 3 failing marks, COP is right on the edge on each of them. Earnings yield of 14.7% and a price to book of 1.34x with the management focus on improving shareholder value is providing me the appropriate safety of margin and future growth potential.

Growth Potential

To keep this simple and calculate my anticipated share price goal, I will use the current analyst estimates on Earnings per Share for 2007 and 2008 of $9.43 and $8.52, respectively. Applying an industry P/E benchmark range of 9x – 10x, the price range is from $75 to $96.

Comments

[Eric Morris]

Hi Elias.

Very nice analysis, and I agree with you totally on COP. I had bought at 57.50, and recently increased my holdings at 69.25. They have recently finished their purchase in Russian giant Lukoil, and I think the market will sooner or later wake up to it's historically low P/E and we should get a nice gain here. I'm selling at 75-76, and going very big, very long CN Rail. Your thoughts?