ConocoPhillips: Low Price for Strong Cash Flow

Buy-recommended ConocoPhillips (COP) offers unlevered appreciation potential of 28% to estimated net present value [NPV] of $112 a share that depends 54% on oil production, 24% on downstream refining/marketing and 23% on natural gas. Third quarter results reported today continue to reflect a high, if not record, unlevered cash flow (Ebitda) without the recently expropriated Venezuelan operations that were written off last quarter.

Downstream (Other) Ebitda was only a third less than in the second quarter while the industry margin in New York Harbor was half the unusually high level in the previous quarter. NPV looks easy to justify as unlevered cash flow multiple (PV/Ebitda), considering adjusted reserve life, is still quite low at 6.3 times. A strong trend for crude oil price helps oil cash flow while a steep discount for natural gas points to catch up potential for cash flow from the clean fuel.

As strong cash flow has repaid debt, Chairman Jim Mulva can express management’s confidence in the business by stepping up the tax-effective return to shareholders through stock repurchase.

Originally published on October 24, 2007.