ConocoPhillips: More Upside Potential Is Ahead

Jun.27.14 | About: ConocoPhillips (COP)

Summary

ConocoPhillips is gaining momentum.

The shift in Conoco’s strategy, aggressive investments, and portfolio adjustments led it to boost profits and cash flows.

ConocoPhillips is a good buy as a shift in strategy started bearing fruit for the company and shareholders.

ConocoPhillips (NYSE:COP) has been gaining momentum with their shift in strategy and production growth. The company has been moving more towards oil and liquid rich plays, and this strategy has been working for the company as oil and natural gas liquid plays are offering higher volume and margins. Its share price gained almost 25.19% in the past three months, which is a vote of confidence from investors on Conoco's business strategy. ConocoPhillips started to move towards liquid plays since the gas prices started to decline, and that timely shift started bearing fruit for the company for the past few quarters. The company has been achieving value proposition through optimizing its portfolio, investing in high-margin developments, and maintaining financial flexibility. It has been heavily investing in oil and liquid-plays with a limited investment towards gas.

In the past year alone, the company's organic reserve replacement was at 179%. With the plan of making limited investment towards gas while investing heavily on oil and liquid-rich plays, ConocoPhillips had invested approximately $14 billion in 2012 and $15 billion in 2013 and is looking to invest about $17 billion this year. Along with its operating cash flows, it has been also raising cash to support growth strategy by disposing of non-core assets, which are not aligning with its future. Thus, with the massive investments, liquid accounted for around 56% of total ConocoPhillips production at the end of 2013. The company is further looking to expand its oil and liquid production this year. Its recent investments in liquid plays, especially in the oil sands in Canada and the Lower 48, contributed to higher production levels, and reserves will continue to generate high production from this year forward.

This year, Conoco intends to make investments in its legacy assets and ramp up its unconventional plays with additional projects like the recent startup at Siakap North-Petai and the startups in Canada, the United Kingdom, and Malaysia. In the first quarter of this year, the company continued with its growth strategy and has generated 3% production growth. Bakken and Eagle Ford combined increased production by 41%. Liquid production from Christina Lake Phase E approached full capacity, adding to the continued growth from the Canadian oil sands. ConocoPhillips has continued working on exploration and appraisal activity in Alaska, the Gulf of Mexico, and Australia in addition to unconventional plays in Canada and the Lower 48.

The shift in Conoco's strategy, aggressive investments, and portfolio adjustments led it to boost profits and cash flows. In 2013, the company has generated $7.32 per share compared to $6.72 per share in 2012. The company profits continued to enlarge in the first quarter of this year; in Q1, COP earnings remained comparatively flat with the past quarter, but its cash flow expanded significantly. Its operating cash flows were at $6.3 billion, capital expenditure at $3.9 billion, and free cash flow at $2.4 billion. Its free cash flows are now providing enough to cover dividend payments of $0.9 billion. The company has recently announced regular quarterly dividends of $0.69 per share, and I believe COP has strong potential to make an increase in its next quarterly dividends as they did in the past year. Its free cash flows are providing room for that increase as there is a big difference between free cash flows and dividend payments.

In Conclusion

COP

OXY

DVN

APC

Industry Average

Price/Earnings TTM

13.2

12.9

19.7

30.7

Price/Book

2.0

1.8

1.6

2.9

2.2

Price/Sales TTM

1.8

3.0

2.7

3.3

1.8

Click to enlarge

Source: Morningstar.com

Though ConocoPhillips share price is on momentum and reached a 52-week high, it is still trading at a significant discount based on price to earnings ratio as compared to the industry's peers. The company is set to generate 3-5% in production growth and move towards liquid plays, which will enhance its margins and profits. The company's attractive asset base, disciplined capital allocation strategy, and efficient management will allow it to generate hefty profits in the coming days. Its cash-generating potential is also enhancing with the growth in earnings, and the company's cash flow has potential to cover both capital requirements and dividend payments. I strongly believe that COP has potential to make an increase in its next quarterly dividends. In addition, I think COP is still a good buy as the company is set to generate hefty profits with its smart capital allocation strategy, which will allow it to gain momentum in its share price.

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.