A person would have to have been living under a rock to not know that oil investments are a good thing. We've been dependent on oil for hundreds of years, and until technology drastically changes, we will be dependent for many more years to come. The issue isn't that oil is not a good investment.The issue is determining which oil companies are the winners and which to stay away from. I will invest in the former and believe that hands down, ConocoPhillips (COP) is a winner.
There are several reasons ConocoPhillips is a winner. But first, it is not because of everyone else getting on the bandwagon. Although, when you see some smart players such as Warren Buffett buying into this company (Berkshire (BRK.A) began accumulating shares of Conoco in 2008, at one point owning as many as 84 million shares), it does make you stop and think. Just because 39 hedge funds reported in late 2011 that they own ConocoPhillips (to the tune of roughly $3.5 billion) is not simply another reason to jump on board. No, the real reasons are always in the numbers.
ConocoPhillips, the third-largest U.S. integrated energy company based on market capitalization, and the largest refiner in the United States, operates in over 30 countries and holds around 8.4 billion barrels of oil equivalent in proved reserves. The company recently announced that it will begin selling assets from the company's upstream divisions, exiting assets that yield low margins or lack any upside potential, to raise $10 billion in 2012.
It announced earlier last year that it will be spinning off its refining and marketing arm, a move to boost its exploration and production (E&P) operations. This segment contributes 23% to the revenue and 80% to the company's earnings, so it should be very profitable as a stand-alone business. The spinoff will also allow ConocoPhillips to reallocate its capital and invest in E&P operations. The spinoff (the new arm, Phillips 66) allows shareholders to receive one share of Phillips 66 for every two shares of ConocoPhillips stock held.
The spinoff should allow for better margins and potentially higher returns for shareholders. In July, 2011, Marathon Oil (MRO) completed the spinoff of its refining and marketing business, Marathon Petroleum (MPC). As in the Marathon situation, ratings agencies are poised to downgrade ConocoPhillips when the spinoff is complete, but as has been proven, both stocks have enjoyed returns of 40% and 35%, respectively.
Perhaps a spinoff will serve well for ConocoPhillips' ROE. Competitors Exxon Mobil (XOM) and Chevron (CVX) have diversified refining segments. Exxon Mobil had a return on equity for the last 12 months of 26.9% and Chevron, 23.7%. For ConocoPhillips, return on equity for the last 12 months was 18.5%.
With crude supplies jumping to a staggering seven-month high, oil and gas companies are poised to gain even greater steam in the months ahead. The U.S. Energy Department's report shows that crude inventories climbed by 7.10 million barrels for the week ending March 23, 2012. This is after a low of 1.16 million barrels just one week before.
ConocoPhillips has enjoyed double-digit year-over-year percentage revenue growth for the past four quarters. During that time, the company has averaged growth of 32.7%, with the greatest boost coming in the second quarter when revenue rose 43.9% from the year earlier quarter. Additionally, ConocoPhillips is currently trading at a P/E ratio of 8.447, a significant discount to the industry average of 17. The company had 4th quarter 2011 revenues of $62.4 billion, and analysts expect ConocoPhillips to earn $8.35 per share in 2012 and $8.55 per share in 2013, versus $8.77 per share in 2011. The stock is currently trading at about $75.80 per share. Over the long term ConocoPhillips' earnings are expected to grow at around 3% per year.
On average, analysts predict $40.56 billion in revenue for the first quarter of 2012, a decline of 21.6% from the year ago quarter. Analysts are forecasting total revenue of $223.82 billion for the year, a rise of 18.1% from last year's revenue of $189.44 billion. But remember, this is all prior to the spinoff and sell-off of assets. Projections were based on current operating levels. The forecasting needs to also take into account projections for what Phillips 66 should bring, as well as future expansions in its oil explorations here and abroad.
Finally, ConocoPhillips has a dividend yield of 3.45%, which is a solid dividend for dividend-dependent investors. ConocoPhillips has an impressive record of increasing dividends and has been raising its dividend payments for 11 consecutive years. It recently increased its quarter dividend by 20% to $0.66 per share, which was paid to its shareholders at the beginning of March. The company has the ability to further increase future payouts, but is currently only paying roughly 30%.
There are some dings in the armor of ConocoPhillips caused from outside forces that cause fluctuations, but do not necessarily affect long term growth. As of recent, Senate Democrats are trying to put an end to about $20 billion in federal subsidies of the largest oil and gas players. Republicans are trying to block the measure, but the proposed bill will affect subsidies paid to BP (BP), Exxon Mobil, Royal Dutch Shell (RDS.B), and Chevron.
But, a combination of good numbers and smartly played spinoffs helps to keep ConocoPhillips looking very attractive. When you also factor in healthy resources such as Bakken, Eagle Ford, Canada and Permian, as well as talks with BP and Exxon over a $40 billion project to transport natural gas from Alaska and Asia, ConocoPhillips is a winner.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.