Broadly speaking, ConocoPhillips (NYSE:COP) is a Buy because of a solid management team, a strong exploration program with strong revenue potential, and very strong metrics. As of June 10th, ConocoPhillips has seen increased coverage from Deutsche Bank as they initiated coverage with a $94 price target. This followed a boosted price target from Citigroup, which upgraded the stock to $95 per share on June 6th. Finally, on June 11th, Howard Weil upgraded the stock and set a price target of $90.00.
ConocoPhillips is a great company, and certainly a buy under normal circumstances. However, during this week alone, COP has seen an increase from the mid-$80s up to just short of $83. And this is mostly the simple result of analyst ratings.
Brav & Lehavy have shown in their research from the past, how a change in price targets will improve the stock price over the subsequent 5 days:
Price target revisions are accompanied by a mean five-day abnormal stock return of -3.9% around downward revision announcements and +3.2% for upward revisions.
And Asquith, Mikhail, and Au, who conducted similar research, found the following:
Earnings forecast revisions and recommendation revisions are significantly and positively associated with the market's reaction at the time a security analyst report is released.
So, in the case of ConocoPhillips, should one purchase now or wait?
Here is what another Seeking Alpha author indicated:
I completely agree with Howard Weil seeing further potential for Conoco given the growth profile, attractive valuation and appealing free cash flows in the coming years. I continue to like the shares and am willing to increase my position on dips around $75 per share.
So we might have this idea that the shares will dip again after the initial run-up, but what is our basis for thinking that a $75.00 share price is in the cards within the near future?
Probability Of A Dip In Price:
Fortunately, we can put together a regression model that shows us the actual probability of this happening, and specifically with respect to ConocoPhillips and the Analyst Price Targets. In our model, that you can download here in Excel, we have put together every analyst price target from the last two years, taken from the Analyst Ratings Network (there are roughly 75), and have lined these up with the corresponding historical price averaged over 1 month, 3 months, and 6 months. Here, we have plotted out the actual price averages against the corresponding analyst price targets, using the analyst price targets as the independent variable and the price as the dependent variable.
What the regression line tells us is that the price average trends low compared with the analyst price targets. And if you cannot tell this from the visual representation, then here are the summary statistics for the three different models:
So if we took Citigroup's most recent $95.00 price target and applied the formula of a line (y = mx + b) to the information contained under the coefficients section in the above diagram, we would come to the following table:
|Level of Accuracy||63%||51%||50%|
The level of accuracy for the regression model, which is the last row here in the table, comes from the R^2 value noted above. After putting together the regression model, this shows us how well the independent variable helps explain the change in the dependent variable. In this case, it gets worse as more time goes by. Therefore, if we wanted to wait for a price dip of roughly $75, we would have to wait longer, and also the probability would be less. However, with a 63% level of accuracy, we can expect the price of ConocoPhillips to come back down to the lower $80.00 level within the next 30 days.
Consequently, we can expect the price to decrease a bit before it starts going higher once again. I would wait for the mid-$80 range before trying to purchase this stock.
Now that we have determined what the optimal price point for initiating a position in ConocoPhillips most likely is, here is some additional support for the Buy recommendation.
EV/EBITDA - From the chart below, one can see the Enterprise Value versus EBITDA for the major integrated oil and gas companies:
The lower the ratio, the higher the potential value that the stock represents. Here, we have COP coming out at roughly 7.5, being edged out of the number one spot by a small margin by Chevron (NYSE:CVX).
P/E Ratio - Price-to-Earnings for the major integrated oil and gas companies is shown in the following chart:
P/E is probably not always the best way to measure a company's value within the oil industry, however, we can still identify a strong value player by using this metric. Here, the chart shows COP coming out ahead of the other major oil and gas players at roughly 11, versus the next best, which is CVX at just over 12. Shell, at over 20, is a bit of an anomaly here, but this is the result of a bad quarter that was reported a few months ago just after a change in the CEO position. If you are interested in that, here is the Forbes article, "What the Hell, Shell".
Other Value-based metrics:
CAPE Ratio, or the Cyclically Adjusted P/E Ratio = 13.40
This is a modified version of the P/E, and shows us that COP is currently trading at a solid price with respect to its 10 years of historical earnings as adjusted for inflation. In other words, you would be getting a good deal on COP even with respect to 10 years of historical earnings.
P/B Ratio - The Price-to-Book Ratio = 1.88
This shows us that the current price of COP is trading at a strong level with respect to equity.
Management & Operations:
What is seldom considered but rather important for an industry with heavy capital investment is the rate of return per capital investment dollar. Here, once again, we have the spread for the major companies:
Here, we have ConocoPhillips coming in second place against Exxon Mobil, with a healthy return of 12.56% on its invested capital. This metric gives us a strong awareness of management's capacity to effectively utilize their assets.
The easiest way to visualize the future potential for ConocoPhillips is to see the map from the March 2014 appraisal of ConocoPhillips' global exploration operations:
From this, one can easily see a snapshot view of the global operations with respect to exploration and production. Since oil exploration is much like the process of fishing, it is important for a company to create as many opportunities as possible. ConocoPhillips is doing a good job at this, as we can see in the map above. During 2013, Tullow Energy came up with 20 dry holes; it is important for the success of an exploration company to avoid this predicament.
ConocoPhillips has strong potential for future development, according to its own statements:
ConocoPhillips has a resource base of approximately 43 billion barrels of oil equivalent, providing the company with significant flexibility to increase production and cash flow over time. ConocoPhillips continues to participate in material new unconventional and conventional discoveries, further increasing both the size and the quality of this resource base.
And here is the undeveloped acreage:
ConocoPhillips has strong upstream potential, as a Deutsche Bank analyst has indicated:
Providing ~50% of growth volumes through 2017, we see potential upside on high asset quality, long inventory life (17 yr avg.), conservative activity levels and solid emerging basins (Permian, Montney, Duvernay, etc).
In short, the future looks very promising for ConocoPhillips.
While ConocoPhillips may not be at optimal price levels to justify a purchase right at the moment, it is certainly a Buy with respect to the fundamental analysis and with respect to the future potential as seen in the more qualitative component of our analysis.
From our regression analysis, we understand what the probability is for the stock to dip. In a nutshell, it tells us to purchase shares at roughly $80.00 per share and that this has about a 60% chance of happening, based on the current state of affairs.
Our brief analysis of the metrics shows us that ConocoPhillips is a good bargain and represents a solid value play, based on historical performance. Additionally, the brief summary of its exploration pursuits shows that ConocoPhillips has strong future potential as well. ConocoPhillips is therefore a Strong Buy, once the price dips a bit to roughly $80.00.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.