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Summary

  • I believe Conoco at $84 offers excellent value with minimal risk.
  • With the stock trading at just 12 times next year's estimates, which is roughly 6 points lower than the industry average P/E of 18, I would be a buyer here.
  • Based on growing cash-flow from operations, this stock should achieve $95 per share in the next 12 to 18 months.

With weaker-than-expected results coming in from BP, shares of ConocoPhillips (NYSE:COP) have traded with caution ahead of the company's second-quarter earnings results Thursday. The stock closed Tuesday at $84.71, down 0.56%. But on a year-to-date basis, it has been a completely different story.

ConocoPhillips shares have soared more than 23% and fueling the energy sector's 14% gain. Investors want to know if this outperformance can last or whether they should move on to the next great idea, especially with geopolitical risks from areas like Russia serving as an overhang. But I wouldn't get carried away just yet.

ConocoPhillips is still in the midst of an impressive turnaround, which began when the company spun-off its refining business. While the stock has performed well since that decision (up 33%), management remains committed to extracting more value for shareholders.

So with the stock trading at just 11 times trailing earnings, I would be a buyer here ahead of Thursday's report. I believe Conoco at $84 offers excellent value with minimal risk. And based on growing cash-flow from operations, this stock should achieve $95 per share in the next 12 to 18 months. And that's a journey that begins Thursday when the numbers are released.

Wall Street will be looking for $1.60 in earnings per share on revenue of $15.38 billion. This represents a 13% year over year jump in profits, while revenue is projected to grow at roughly 9%. Unlike with BP, which has significantly more exposure in Russia, analysts seem more positive about Conoco's potential results. EPS estimates have risen by 6 cents over the past three months.

For the full year, earnings are projected to grow more than 15% to $6.59 per share, while revenue is projected to come in at $62.10 billion. And revenue is the area where Conoco has outperformed both BP and Exxon Mobil (NYSE:XOM). All told, the company appears more focused after having become a pure-play exploration and production (E&P) power.

In that regard, Conoco management deserves some applause for their execution, which has produced consistently solid quarterly performances, including a 16% year-over-year profit increase in the January quarter and 29% jump in the May quarter. Not to be forgotten, in the third quarter earnings jumped close to 40%.

On Thursday investors should expect more of the same. This is because Conoco has built up strong capabilities in areas like the Eagle Ford Shale, which now accounts for roughly 25% of the company's production. And when you consider the degree to which management has made investments in areas like natural gas, there's no denying that Conoco is on the right track.

From my vantage point, this is one of the best performing companies in any sector. Even more impressive, I don't believe Conoco has reached its full potential and the many ways it can capitalize on strong production outputs and higher oil prices.

With the stock trading at just 12 times next year's estimates, which is roughly 6 points lower than the industry average P/E of 18, I would be a buyer here ahead of Thursday's results and hold towards $95 per share.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by Wall Street Playbook's energy sector analyst. Wall Street Playbook is not receiving compensation for it (other than from Seeking Alpha). Wall Street Playbook has no business relationship with any company whose stock is mentioned in this article.

Source: Why ConocoPhillips Can Still Fuel Your Portfolio