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Summary

  • With the stock trading at just 11 times trailing earnings, I would be a buyer here.
  • It seems investors are punishing the stock for the revenue number and not focusing on the bottom line. This is a mistake.
  • On the basis on growing cash-flow from operations, this stock should achieve $95 per share in the next 12 to 18 months.

Shares of oil giant ConocoPhillips (NYSE:COP) are getting hammered Friday, down more than 2% to $80.68 following the release of the company's second-quarter earnings result. The stock closed Thursday at $82.50. Despite the recent decline, shares are still up more than 20% on the year to date, outperforming the energy sector's 14% gain.

With worst-than-expected results coming out from BP (NYSE:PB), investors in ConocoPhillips approached Friday with caution. As luck would have it, their anxiousness was well placed. But it's not because ConocoPhillips didn't deliver the goods. This was more of a situation where the company's results didn't match the outperformance presumed in the stock price. Profit-taking was the outcome.

The company delivered revenue of $14.7 billion, climbing 4% year over year, topping last year's mark of $14.14 billion. Profitability was also strong as earnings arrived at $2.08 billion. On a per-share basis, this equated to $1.67, besting last year's mark by 2 cents. This means ConocoPhillips increase profits by more than 15% year over year.

Recall, Wall Street was looking for $1.60 in earnings per share on revenue of $15.38 billion, which would have represented a 13% year jump in profits, while revenue was projected to grow at roughly 9%. In this case, it seems investors are punishing the stock for the revenue number and not focusing on the bottom line. This is a mistake.

What's more, investors are also ignoring the company bigger-than-expected increase in oil and gas production. Management's decision to focus resources in U.S. shale fields are beginning to deliver the steady oil and natural gas outputs that they promised.

During the quarter, ConocoPhillips delivered 1.56 million barrels oil equivalent per day (boed), which was up more than 3% from 1.51 million boed a year earlier. Based on the stock's response, it doesn't seem as if investors believe this performance can be sustained, especially with geopolitical risks from areas like Russia serving as an overhang.

In that regard, while speaking to analysts, management said it had put its 50% interest in Rosneft's (OTC:RNFTF) Polar Lights project on the market. Jeff Sheets, the company's Chief Financial Officer said,

"Once we made the decision to exit the joint venture we had with Lukoil, it doesn't make sense for us to have this really small asset in Russia."

Recall, in 2011 ConocoPhillips completed its 20% sale stake in Lukoil. Now it makes sense for the company to completely wash its hands off that territory, especially with Russian sanctions on the table.

If there are any concerns here, it's with the guidance, which arrived weaker-than-expected. While citing issues related to maintenance, the company forecasted downbeat production growth for the third quarter. But even then, the company raised the midpoint of its full-year production outlook for continuing operations. Management is now calling for roughly 1.525 million boed to 1.550 million boed.

All told, this wasn't a perfect quarter. But 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.

ConocoPhillips is still in the midst of an impressive turnaround, which began when the company spun-off its refining business. And 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. And based on growing cash-flow from operations, this stock should achieve $95 per share in the next 12 to 18 months.

Source: ConocoPhillips: Investors Are Missing The Good