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Summary

  • ConocoPhillips has a market cap of $96.5 billion and a dividend yield of 3.4%.
  • The company trades at a large discount to peers in the exploration and production (E&P) industry, despite having a strong balance sheet and robust liquidity.
  • The EV/Ebitda multiple could expand and the shares could reasonably trade in the $95 range, and still be at a discount to E&P peers.
  • ConocoPhillips also trades at a discount to the S&P 500 in terms of earnings and dividend yield.

ConocoPhillips (NYSE:COP) is the world's largest independent exploration and production company, based on proved reserves and production of liquids and natural gas. COP employed 18,400 worldwide at 12/31/13.

The scope of this article will discuss the multiples that investors are paying for COP when compared to other exploration and production companies.

COP at a Glance

Total production from continuing operations for 2013 averaged 1.502 million barrels of oil equivalent per day (MMBOE/D), a 2 percent decrease compared with 1.527 MMBOE/D in 2012. At 6/7/14, the market capitalization of the company was $96.5 billion.

The management goal of 3% to 5% compounded annual growth in production (from now to 2017) is reliant on strong performance from the US liquids plays (Eagle Ford, Bakken, Permian Basin), Asia-Pacific LNG, and the Canadian SAGD developments. For more detail on the Canadian operations, and the importance for future distributions for COP shareholders, see my article on this subject (ConocoPhillips: 20% of the Stock Price is Tied to Canada).

COP Trades at a Discount to Peers

Given that the company does have a plan for production growth, and the company operates in several world class oil and gas plays, does COP deserve to sell at a growth multiple?

Below is the current EV / EBITDA calculation (created from publicly available information):

Enterprise Value = Market Cap + Debt - Cash

Market cap (6/7/14)

$96.5 billion

+ Short term debt (3/31/14)

+ 1.7 billion

+ Long term debt (3/31/14)

+ 19.5 billion

Subtotal

117.7 billion

- Cash and equivalents (3/31/14)

- 7.7 billion

= Enterprise Value

$110.0 billion

2013 fiscal year EBITDA

$22.4 billion

EV/EBITDA

4.9x

Multiples for Competitors

Company / Ticker

2013 Revenue (billions)

12 Month Stock price increase

2014 Estimated EV/Ebitda

Dividend yield

EOG Resources (NYSE:EOG)

$14

68%

6.9x

0.5%

Devon Energy (NYSE:DVN)

10

32

6.7

1.3

Chesapeake Energy (NYSE:CHK)

18

39

6.5

1.2

Apache (NYSE:APA)

16

10

4.4

1.1

(Source: Barrons.com)

COP Offers Global Diversification

COP benefits from a broadly diversified global portfolio that is nicely exposed to higher international crude and natural gas prices.

Q1 2014 Adjusted Earnings in millions

Lower 48 & Latin America

$442

Canada

$356

Alaska

$598

Europe

$343

Asia Pacific / Middle East

$770

Other

($256)

Total

$2,253

For context, below is a chart showing the realized prices that COP saw in FY 13 compared to the average realized prices in Q1 2014. In the first quarter of 2014, below are the realized sales prices for COP's production (compared to FY 13 Average Realized Prices):

From Continuing Operations

FY 13

Q1 2014

Crude Oil ($/BBL)

103.32

101.59

NGL ($/BBL)

41.42

46.52

Bitumen ($/BBL)

53.27

56.47

Natural Gas ($/MCF)

6.11

7.55*

*Obviously, the rise in natural gas prices has coincided with a rise in the stock price. Also, note that the natural gas prices realized are for the global operations of COP. In the first quarter, the significant operations in Norway, United Kingdom and Indonesia realized prices for natural gas greater than $10 per MCF. In the first quarter of 2014, COP realized prices in the Lower 48 United States of $5.08 per MCF.

COP Offers Robust Liquidity and Strong Balance Sheet

The author calculates COP's Funded Debt/EBITDA of 1.04x at FYE 13. Also, the debt per flowing barrel is $16,700. In the oil and gas industry, the credit rating agencies view debt per flowing barrel of more than $17,000 for a sustained period as concerning for investors and lenders.

At FYE 13, COP had cash and equivalents of $6.5 billion and availability of 87% ($6.5 billion available for borrowing) on a Senior Unsecured revolver after backing out commercial paper usage of $961 million. The revolver matures in August 2016. Also, near term debt maturities are manageable and include $1.5 billion due in 2015 and 1.25 billion due in 2016.

Finally, COP's derivative exposure is modest as the company has a policy to generally remain exposed to commodity price risk.

Potential Negatives on the Stock

COP has a relatively aggressive shareholder distribution policy (with 20-25% of cash flow from operations earmarked for dividends and share buybacks). Also, the company has shown declining production as a result of more than $30 billion in asset sales since 2010. For example, 2013 daily production was about 1.5 million BOE/day versus over 2.0 million BOE/day in 2010.

Conclusion

Because of the magnitude, diversity and stability of the cash flows that COP is currently generating, the author concludes that COP could see a bump up in share price, especially if either (NYSE:A) crude oil prices stay at elevated levels or (NYSE:B) realized natural gas prices are higher in 2014 than 2013.

If COP traded at the 5.8x EV/EBITDA multiple (which is still a 16% discount to the 6.9x mulitple given to EOG), the shares could trade 18% higher. This would place the shares in the $95 range.

Currently, the stock trades at a below market P/E Ratio (Trailing Twelve Month ratio of 10.9x). The company has a strong dividend of 3.4%, compared to S&P 500 current yield of 1.70%. The stock represents a Buy at these levels.

Disclaimer

The above is not intended to be investment advice, and is only the opinion of the author. EV/Ebitda is not the only metric to analyze oil and gas production companies. Observers may want to consider various oil and natural gas prices, labor costs, and the legal and ecological implications of deepwater drilling activity. COP is exposed to commodity and labor costs in many continents.

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.

Source: ConocoPhillips: Global Diversification And Robust Liquidity At A Discount