ConocoPhillips: Deeply Undervalued At $52

May.30.12 | About: ConocoPhillips (COP)

With the spin-off of Phillips 66 complete, the new ConocoPhillips (NYSE:COP) will be totally focused on oil and gas exploration. The company is in a much stronger position financially and will focus on using cash flow for growth and treating shareholders better. This year, the company intends to sell a total of $10 billion in assets and will then determine the timing as well as the amount of additional share repurchases, but is expected to provide an initial dividend yield in excess of 4%, and complete a $5 billion share repurchase by June. While this is great news for current investors, I see it as a sign to get on board this company now. One of the admirable advantages that ConocoPhillips has over its competitors like Exxon Mobil (NYSE:XOM), BP (NYSE:BP), Royal Dutch Shell (NYSE:RDS.A), and Chevron (NYSE:CVX), is that its main focus now is only upstream. All of its time, energy, and money go toward this end goal making progress easier to attain than most. This focus will make money and making money will make investors happy.

The company plans to spend $15 billion per year on exploration and production of oil and natural gas in the rich plays of the Permian Basin in West Texas, Eagle Ford Shale in South Texas, and the Bakken Shale in North Dakota. In a recent statement, CEO Ryan Lance said that, "They are going to show strong growth for the industry and for our company. We are putting a significant amount of our capital investment in that area and generating very high returns." Shying away from natural gas production is common among oil and gas companies today. Not included in the increased investment in North America for ConocoPhillips is dry natural gas, or methane, since its domestic price has dropped considerably. North American natural gas currently makes up about 24% of the company's portfolio.

ConocoPhillips has been working diligently selling assets that don't fit the company's plan, buying into positively productively plays, and using its attractive success to lure partners and investors. The company just recently increased its investment in its operations in Malaysia by dumping an additional $5 billion into the project. The company already put in $1.5 billion and is banking on production of three deepwater blocks offshore of Sabah to hit a peak of 300,000 barrels per day by 2016. Just last month, state-run Oil India said that it is looking to buy a stake in ConocoPhillips' Gabon assets of France's Maurel et Prom as well as oil sand assets in Canada. Though no price has been agreed upon, Oil India said that it can spend up to $200 million for unconventional assets and $1.5 billion for conventional. In the Australian state of Queensland, the company, partnering with Origin Energy (ORG) in a $20 billion liquefied natural gas project, recently received funding of $8.5 billion, money needed for the project's rising labor costs. There are other projects in Australia where ConocoPhillips hopes to target multiple options including a partnership with local player New Standard Energy to target shale assets in Western and Central Australia.

Shedding assets has helped ConocoPhillips to beef up its capital for future wise investments. One example is the struggling Trainer refinery plant near Philadelphia recently purchased by Delta Air Lines for $150 million, should be up and running by Labor Day. Another is the Nigerian assets currently for sale including on-shore, off-shore oil and gas fields and a stake in the company's LNG Brass facility. These sales combined with others like the Vietnam business unit sold earlier this year for a total of $1.29 billion, and more are being shed in hopes of raising the goal of $10 billion for 2012. These funds will be put to good use toward smart oil exploration plays and beefing up good producing plays such as those in the Permian Basin. The company also uses its resources in innovative technology to improve the way it brings resources to the surface. Recently, ConocoPhillips along with the government conducted tests injecting carbon dioxide and nitrogen in order to recover gas from methane hydrates. The company, along with the University of Bergen, Norway developed the technology.

ConocoPhillips is in a good position able to utilize low finding and development costs while at the same time delivering high cash margins. This will benefit the company since it still has a significant stake in the Eagle Ford, Permian, and Bakken that need to be developed. The company also has a significant amount of resources on hand that can benefit it greatly in the future. The company currently has proved reserves of 8.4 billion barrels of oil equivalent or 58% liquids. The increase of production of liquid-rich plays both domestically and abroad is sure to help the company's bottom line in the long term. The company is on track for its build up of cash goals keeping ConocoPhillips on firm financial footing.

Primarily through its dividends, ConocoPhillips plans to return about 20%-25% of cash flow from operations to shareholders. The company has an impressive 4.9% dividend yield. In 2011, the company reported a dividend of $2.64, representing a 22.79% increase over previous year. In the 2012 first quarter results statement, the company reported earnings of $2.02 per share, exceeding last year's first quarter results by 10.99%. The company had first quarter 2012 revenues of $56.13 billion, 10.03% below the prior year's first quarter results, and revenues for the full year 2011 of $251.23 billion, 26.46% above the prior year's results. Also, in 2011, cash reserves at ConocoPhillips fell by $3.67 billion, but the company earned $19.65 billion from its operations for a Cash Flow Margin of 7.82%.

With a keen eye on exploration and production, ConocoPhillips is picking up momentum, gaining new plays and taking advantage of cash windfalls. This good news can only benefit the wise investor willing to get a piece of this gem of a company.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.