Can ConocoPhillips Really Grow EPS At 10% Over The Next 3 Years?

| About: ConocoPhillips (COP)


ConocoPhillips growth has accelerated due to Unconventional North American production growth.

The company is attempting to replace high cost production with low cost production to boost profit per barrel.

ConocoPhillips can trace its history back to 1875. The company was acquired by Standard Oil in 1885 and later divested in 1913 at the request of the Supreme Court.

ConocoPhillips is the largest independent oil and gas corporation in the world by market cap.

Conoco's recent quarterly results are examined in this article.

ConocoPhillips (NYSE:COP) is one of the world's larger oil and gas corporations, with a market cap of nearly $100 billion. ConocoPhillips employs over 18,400 people across 27 countries. The company has a long corporate history dating back to the 1800's.

Corporate History

The company can trace its origins back to 1875, when Isaac Blake began importing kerosene to Ogden, Utah from Colorado under the Continental Oil and Transportation name. In 1885 Standard Oil (Rockefeller's company) purchased the company. In 1913, The US Supreme Court ordered Standard Oil to relinquish control of Continental Oil and Transportation. In 1929, Continental Oil and Transportation merged with Marland Oil, forming Conoco. In 1981 Conoco was acquired by DuPont. In 1998 Conoco was spun off from DuPont. Finally, in 2002 Conoco and Phillips oil officially merged to form ConocoPhillips.

Source: ConocoPhillips Investor Relations

Current Events

ConocoPhillips posted 6.5% production growth in the second quarter of 2014 compared to the second quarter of 2013. The company's production growth came from a reduction in downtime (2.5%), and real production growth (4%).

Source: ConocoPhillips' 2nd Quarter 2014 Presentation

ConocoPhillips' production costs are declining as the company switches from reserves with higher cost to lower cost of production reserves. Price normalized cash margin per barrel increased by about 2.5% year over year.

The company is on track to realize production growth of 3% to 5% over full fiscal 2014 compared with fiscal 2013. ConocoPhillips plans to grow production by 3% to 5% per year up to 2017, and increase margin 3% to 5% per year over the same time frame for an earnings per share growth rate of between 6% and 10%. Factoring in the company's dividend yield (~3.5%), shareholders of ConocoPhillips can expect a CAGR of between 9.5% and 13.5% through 2017, not considering changes in the company's P/E ratio.

The company's P/E 10 ratio is around its 10 year average, and slightly higher than its level over the last 5 years. The P/E 10 ratio compares the current share price to average earnings over the last decade. It can provide a more accurate gauge of value for businesses with fluctuation earnings. Based on its average P/E 10 ratio, ConocoPhillips appears to be fairly valued at this time.

Source: Ycharts

Growth Picture

ConocoPhillips has plans in place to grow production 3% to 5% per year to 2017, and increase margins 3% to 5% per year to 2017. The company will achieve these numbers by growing low cost production at a significantly faster clip than low cost production. The company plans to grow North American Unconventional production and Oil Sands production at 20%+ per year through 2017. The company generates over $40 in cash for each barrel of North American Unconventional produced, and between $30 and $40 for each barrel of Oil Sands produced.

Source: ConocoPhillips Citi Global Energy Presentation

ConocoPhillips is a leader in North American Unconventional production. Not only is the company rapidly growing production in North America, it also has the lowest production cost for North American Unconventional oil. It has accomplished this by positioning itself in the sweet spot of the Eagle Ford and Bakken fields.

Source: ConocoPhillips Citi Global Energy Presentation

Although the bulk of ConocoPhillips growth is coming from North American oil fields, the company is globally diversified. ConocoPhillips has major oil operations on 6 of 7 continents. The company is continuously testing locations around the world to continue to build oil reserves.

Source: ConocoPhillips Citi Global Energy Presentation

Recession Performance

ConocoPhillips remained profitable throughout the recession of 2007 to 2009. The company's operations were significantly impacted, however. Earnings per share went from a high of $10.66 in 2008 down to $3.24 in 2009. The company remained profitable throughout the recession, and increased its dividend each year. ConocoPhillips has not seen earnings per share above $9.00 since the recession. The company's earnings become depressed in times of economic hardship because the price of oil generally falls. As oil prices fall, the company makes significantly less money on each barrel of oil it produces. The company estimates its profitability changes by between $80 and $90 million for each $1 change in the price of Brent Oil.

Comparison to Other Dividend Growth Stocks

ConocoPhillips is the largest publicly traded independent oil & gas company based on market cap. It is a global player in the energy industry. The company has a solid dividend yield and sound plan to increase earnings per share over the next several years. ConocoPhillips will be compared to other businesses with a long history of dividend increases using the 5 Buy Rules from the 8 Rules of Dividend Investing. The comparison will show if ConocoPhillips compares favorably to other investment options investors currently have.

Consecutive Years of Dividend Increases

ConocoPhillips has not reduced its dividend payment since 1987 (including Phillips' dividend history). The company's long streak of steady or increasing dividends shows it has the ability to grow profitably over a variety of economic conditions.

Why it matters: The Dividend Aristocrats (stocks with 25-plus years of rising dividends) have outperformed the S&P 500 over the last 10 years by 2.88 percentage points per year.
Source: S&P 500 Dividend Aristocrats Factsheet

Dividend Yield

ConocoPhillips currently has a dividend yield of 3.42%. The company has the 28th highest dividend yield out of 132 businesses with 25+ years of dividend payments without a reduction. ConocoPhillips' relatively high dividend yield should make it an attractive investment to investors seeking current income in today's low interest rate environment.

Why it Matters: Stocks with higher dividend yields have historically outperformed stocks with lower dividend yields. The highest-yielding quintile of stocks outperformed the lowest-yielding quintile by 1.76 percentage points per year from 1928 to 2013.
Source: Dividends: A Review of Historical Returns

Payout Ratio

ConocoPhillips has a payout ratio of about 42%, which is the 63rd lowest out of 132 businesses with 25+ years of dividend payments without a reduction. The company's fairly low payout ratio gives it ample room to increase dividends faster than overall company growth.

Why it Matters: High-yield, low-payout ratio stocks outperformed high-yield, high-payout ratio stocks by 8.2 percentage points per year from 1990 to 2006.
Source: High Yield, Low Payout by Barefoot, Patel, & Yao, page 3

Long-Term Growth Rate

ConocoPhillips has had stagnant growth over the last decade. The company has managed to increase its dividend payments at only 2.25% per year which is the 101st highest out of 132 businesses with 25+ years of dividend payments without a reduction. ConocoPhillips is likely to grow per share revenue, earnings, and dividends significantly faster over the next several years than it has in the past 10 years due to strength in its Unconventional North American plays.

Why it Matters: Growing dividend stocks have outperformed stocks with unchanging dividends by 2.4 percentage points per year from 1972 to 2013.
Source: Rising Dividends Fund, Oppenheimer, page 4

Long-Term Volatility

ConocoPhillips has a fairly high long-term standard deviation of 30.45%, which is the 79th highest out of 132 businesses with 25+ years of dividend payments without a reduction. The company's relatively higher volatility is due to its earnings exposure to changes in oil prices.

Why it Matters: The S&P Low Volatility index outperformed the S&P 500 by 2 percentage points per year for the 20-year period ending September 30th, 2011.
Source: Low & Slow Could Win the Race


ConocoPhillips is ranked 74th highest using the 8 Rules of Dividend Investing. It ranks significantly lower than its growth potential would indicate due to its low per share growth rate over the last decade. If the growth rate were changed from 2.25% to 8% (average expected growth through 2017), the company would be the 16th highest ranked stock out of 132 businesses with 25+ years of dividend payments without a reduction.

ConocoPhillips' high yield and fairly high expected growth rate should give shareholders a strong total return over the next several years. The company has historically rewarded shareholders with increasing dividends and will likely continue to do so. ConocoPhillips' long history and proven reserves make it a fairly low risk long-term investment that has higher volatility than normal due to its exposure to oil prices.

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. The author has no business relationship with any company whose stock is mentioned in this article.