- COP has outperformed its peers YTD;
- The company is benefiting from both higher oil prices and a strong presence in domestic onshore plays;
- COP has divested the large major asset of its divestiture program and is on track to deliver its operational and financial targets over the next several years.
ConocoPhillips (NYSE:COP), the largest U.S. independent oil and gas company, has outperformed its Big Oil U.S. peers YTD. COP is up 15.5% YTD, while ExxonMobil (NYSE:XOM) is down 1.5% and Chevron (NYSE:CVX) is down 2.3% during the same period. ConocoPhillips is benefiting from both higher oil prices and a strong presence in domestic onshore plays.
Despite of increased geopolitical tensions stemming from the Ukraine crisis, particularly following the downing of Malaysian airlines, as well as growing militancy in Iraq and Syria and stability of Iraq's infrastructure, oil prices have remained largely range-bound ($105-$115 per barrel) since the start of the year. I think, even after the recent sanctions by the U.S. and Europe, the risk of disruption to Russia's large resource base is small given Europe's strong reliance on Russia's natural gas exports and the world's inability to replace Russian oil exports. It's the growing uncertainty in Iraq which could keep the oil prices elevated and volatile.
Strong Operational Results and Growth Story on Track
COP reported 2Q14 operating EPS of $1.61, slightly above consensus estimates of $1.60. Operationally it was a strong quarter; the company reported production of 1,556 mboed from continuing operations, compared to its own guidance of 1,490-1,540 mboed.
The combined production from Eagle Ford and Bakken of 208 mboed was up 14% Q/Q and 38% Y/Y and more positive news is expected from Permian and Niobrara pilot test in the next 12 months. Lower 48 development is still strong enough to help overcome the slight drag from delayed start-ups of projects that COP is not the lead operator of (such as Foster Creek F and Gumusut). COP reaffirmed its 3Q14 and 4Q14 guidance, and raised the lower end of its FY14 range to 1,525-1,550 mboed from 1,510-1,550 mboed.
The company also increased its quarterly dividend by 5.8%. 1H14 results again demonstrated that the Houston based oil major can grow production via the U.S. legacy unconventional and new projects, continue to improve margins (2.5% y/y) and thereby support dividend growth. COP has a dividend yield of 3.6%, compared to 2.8% of ExxonMobil and 3.4% of Chevron. 1H14 has seen Conoco deliver good cash flow growth and reaffirmed confidence of a strong growth story over the 2015-18 period. Similarly, second half should see more growth, particularly into the fourth quarter as Foster Creek Phase F and Gumusut start-up.
Major Divestitures Done, Now Focus Is On Growth Plans
ConocoPhillips continues to sell its non-core assets to focus on core and high returning assets, such as U.S. shale formations. Since the beginning of 2012, Conoco has sold $13.9 billion in total assets. In a latest such move, the company sold its Nigerian oil assets to a local player, Oando PLC, for $1.5 billion. The sale which was expected to be completed by mid-2013 had been stalled largely due to delays in Oando getting the financing and local regulatory clearance.
COP expects to receive $900 million in the third quarter; the company has already received $550 million. While Conoco will continue to fine-tune and high-grade its portfolio when possible, Nigeria represents the last major asset of the company's divestiture program. In the past, COP has occasionally used divestiture proceeds to buy back stock but currently, management's focus is using that cash to fund its dividend in its capital program and focus on growth plans.
Despite of its outperformance YTD, I believe Conoco has further room to run. Conoco is still trading at a discount compared to its peers. The Houston based company is trading at a price/earnings ratio of 12.4 compared to 13.4 of XOM and 12.5 of CVX. The company has reached an inflection point in its transformation. Conoco has divested the large major asset of its divestiture program and is on track to deliver its operational and financial targets over the next several years. The company is positioned to deliver one of the fastest growths among its big oil peer group. The combination of growth and robust profitability at reasonable valuation make Conoco an attractive investment opportunity. The company also offers healthy dividend yield of 3.6%.
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