ConocoPhillips' (NYSE:COP) stock has surged strongly this year. In fact, its relative strength index [RSI] technical indicator is indicating overbought conditions. Since the beginning of the year, COP's stock has gained 14.4%, while the S&P 500 index has increased 5.5%, and the Nasdaq Composite Index has risen 3.5%. Moreover, since the start of 2013, COP's stock has gained 39.4%, while the S&P 500 index has increased 36.7%, and the Nasdaq Composite Index has risen 43.1%. Nevertheless, considering its compelling valuation metrics and its solid earnings growth prospects, ConocoPhillips' stock is not expensive, and in my opinion, it still has plenty of room to move up. Furthermore, the rich growing dividend represents a gratifying income.
ConocoPhillips is the world's largest independent exploration and production company, based on proved reserves and production of liquids and natural gas. The company explores for, develops, and produces crude oil and natural gas globally. ConocoPhillips was founded in 1917 and is headquartered in Houston, Texas.
The table below presents the valuation metrics of COP, the data were taken from Yahoo Finance and finviz.com.
ConocoPhillips's valuation metrics are very good; the trailing P/E is very low at 11.00, and the Enterprise Value/EBITDA ratio is extremely low at 5.15, one of the lowest ratios among all Russell 1000 companies. According to James P. O'Shaughnessy, the Enterprise Value/EBITDA ratio is the best-performing single value factor. In his impressive book "What Works on Wall Street," Mr. O'Shaughnessy demonstrates that 46 years' back-testing, from 1963 to 2009, have shown that companies with the lowest EV/ EBITDA ratio have given the best return. Mr. O'Shaughnessy explains that EV/ EBITDA is a better way to assess value-that is, how cheap or expensive it is-than looking at the PE ratio alone. The EV/ EBITDA is neutral to a company's capital structure and capital expenditures. Stocks that have very high debt levels often have low PE ratios, but this does not necessarily mean that they are cheap in relation to other securities.
Latest Quarter Results
On May 01, ConocoPhillips reported its first-quarter 2014 financial results, which beat EPS expectations by $0.25 (16.00%) and beat the street's consensus on revenues. The Company reported first-quarter 2014 earnings of $2.1 billion, or $1.71 per share, compared with first-quarter 2013 earnings of $2.1 billion, or $1.73 per share. Excluding special items, first-quarter 2014 adjusted earnings were $2.3 billion, or $1.81 per share, compared with first-quarter 2013 adjusted earnings of $1.8 billion, or $1.42 per share.
In the report, Ryan Lance, chairman and chief executive officer said:
We are off to a great start in 2014. Our operational performance was strong and our margins continued to grow. Production increased due to strong performance in our North American unconventional plays, ongoing growth in our Canadian liquids and major project ramp ups in the Europe segment. During the quarter, production started at SNP with four additional major projects progressing toward startup by year-end. In exploration, we are also testing multiple prospects across our diversified portfolio. This quarter's performance gives us confidence that we are on track to achieve 3 to 5 percent growth in both volumes and margins, and to deliver double-digit returns to shareholders annually.
Dividend and Share Repurchase
ConocoPhillips has been paying dividends since 1982, the forward annual dividend yield is high at 3.41% and the payout ratio is only 36.8%. The annual rate of dividend growth over the past three years was at 7.9%, over the past five years was at 7.5%, and over the past ten years was high at 12.7%. I consider that besides dividend yield, the consistency and the rate of raising dividend payments are the most crucial factors for dividend-seeking investors, and COP's performance has been good in this respect.
Source: Charles Schwab
Since ConocoPhillips is generating much cash flow and the payout ratio is very low, I believe that the company is well-positioned to achieve steady dividend growth going forward.
Net cash provided by operating activities during first-quarter 2014 was $6.3 billion. ConocoPhillips does not have a share buyback program.
A comparison of key fundamental data between ConocoPhillips and its main competitors is shown in the table below.
ConocoPhillips has the lowest trailing P/E, the second lowest Enterprise Value/EBITDA ratio, and the second highest dividend yield among the stocks in the group.
The charts below give some technical analysis information.
The COP stock price is 2.99% above its 20-day simple moving average, 8.23% above its 50-day simple moving average and 16.20% above its 200-day simple moving average. That indicates a short-term, mid-term, and a long-term uptrend.
Chart: TradeStation Group, Inc.
The weekly MACD histogram, a particularly valuable indicator by technicians, is almost fix at 1.13 which is a neutral signal (a rising MACD histogram and crossing the zero line from below is considered an extremely bullish signal). The RSI oscillator is at 79.85 which indicates strong overbought conditions.
Many analysts are covering the stock, but their opinion is extremely divided. Among the twenty-two analysts, six rate it as a strong buy, four rate it as a buy, ten rate it as a hold, and two analyst rate it as an underperform.
TipRanks is a website that ranks experts (analysts and bloggers) according to their performance. According to TipRanks, among the analysts covering COP stock, there are only six analysts who have the four or five star rating, two of them recommend the stock, two analysts rate it as a hold and two rate it as a sell.
On June 06, Oppenheimer's analyst Fadel Gheit kept its "outperform" rating on ConocoPhillips and raised the price target to $90 from $85. Mr. Gheit said that he believes that the company can continue to expand margins. I consider Mr. Gheit's analysis valuable, since he has 5-Star rating from TipRanks for the accuracy of his previous calls.
After spinning off its downstream assets into Phillips 66 (NYSE:PSX) on May 1, 2012, COP began trading as a standalone exploration and production company. According to COP, it is now the largest independent E&P company in the world. Production from continuing operations, excluding Libya, for the first quarter of 2014 was 1,530 MBOED, an increase of 24 MBOED compared with the same period a year ago. Adjusted for dispositions and downtime, production increased by 41 MBOED or 3 percent. This increase was primarily due to new production from development programs and major projects, partially offset by normal field decline. The company expects to achieve 3 to 5 percent growth in both volumes and margins this year. ConocoPhillips has the advantage that 83% of its proved reserves are in OECD countries while a relatively small 17% are in non-OECD markets.
Since ConocoPhillips is now a pure exploration and production company, it will continue to benefit from the rise of oil and natural gas prices. Oil and natural gas prices have been rising from the start of the year. WTI crude price has risen 14.3% from its low of $90.69 per barrel on January 09, 2014, to $103.68 per barrel on June 09 while Henry Hub natural gas price has risen 13.2% since the beginning of the year to $4.692 per Million Btu.
WTI crude July 2014 leading contract
Henry Hub natural gas July 2014 leading contract
Charts: TradeStation Group, Inc.
As the world's largest independent E&P company, ConocoPhillips will continue to benefit from the rising prices of oil and natural gas. ConocoPhillips has compelling valuation metrics and solid earnings growth prospects; its Enterprise Value/EBITDA ratio is extremely low at 5.15. ConocoPhillips is generating strong cash flows and returns value to its shareholders; the company is confident that it will deliver double-digit returns to shareholders annually. All these factors bring me to the conclusion that COP stock is a smart long-term investment. Furthermore, the rich growing dividend represents a gratifying income.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in COP over 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.