ConocoPhillips: Can Oil Continue Its Bull Run?

Sep.18.12 | About: ConocoPhillips (COP)

This week, we have seen tensions rise once again in the Mid-East. For as long as I can recall, whenever there are global issues in that part of the world, the price of oil rises. It seems as though oil prices will spike for just about any reason these days.

For years, we have heard about futures trading in commodities that affect pricing. Specifically in oil, since this commodity is such a political football. Talking heads and experts just love to spin every detail.

We constantly hear that gasoline prices are "artificially" high due to hedge funds, electronic trading, global warming, global cooling, hurricanes, and of course, Middle East saber rattling. Whatever the reason, one thing is certain: Oil prices continue to rise (with dips of course), and big oil companies continue to make record profits.

ConocoPhillips (NYSE:COP) Is Poised To Move Higher

The largest oil companies in the world have continued to produce record profits. Exxon Mobil (NYSE:XOM) continues to vie with Apple (NASDAQ:AAPL) for the largest public company on Earth (valuation wise). While technology continues to advance, oil continues to be depleted.

Depleted oil supplies will inevitably fall into the law of supply and demand. Supply drops, prices rise. Demand rises, prices rise. When both supply and demand work in tandem, prices can soar.

This 10-year chart shows the steady rise in price from 2002 through 2009. Strategic reserves also increased consistently during the time frame. From 2008 to 2009, oil prices spiked to all-time highs. The price of oil plummeted when the financial crises hit, and the world was thrown into the worst recession since 1929.

Demand dropped, supplies rose, and the price of oil fell below $40.00/barrel for the first time in 6 years. Through it all, the major oil companies continued to profit.

Each of these companies faced the "stutter step" in revenues during the global recession and have slowly began growing once again. All but ConocoPhilips, which faced a serious spike in revenues in 2011, and then another serious drop to what we have seen recently.

COP faced increased well costs in the Gulf, as well as revenue and earnings issues when Phillips 66 was spun off (see this article). This resulted in the share price drop from $78.00/share in March, down to the current price of $58.30/share as of 9/17, while shareholders were tendered PSX shares. I believe that the share price of COP is undervalued now, being that it is a pure oil and gas "play" in the sector.

In the world of natural resource depletion (supply), and an increase in resource usage (demand), one does not need to look beyond ConocoPhillips to see a clear buying opportunity.

Facts And Fundamentals

ConocoPhillips - Price: $58.30/share, Dividend Yield: 4.55%, ESS Rating: Neutral

  • A very slight premium in share price to book value (1.52).
  • A modest P/E ratio of 10.25
  • Nearly $18 billion in operating cash flow.
  • A dividend payout ratio of only 31%.
  • YOY decrease in revenues of 17% and earnings of 33%, has been baked into the share price.
  • Nearly 70% of outstanding shares are held by institutions, mutual funds, and insiders.

Earnings per share of COP has remained virtually level, even though the share price dropped. The company value is recovering, and the dividends paid to shareholders has remained stable.

I believe that buying shares at the current level offers the dividend income seeking investor an opportunity to catch a very solid yield, with a very low payout ratio. The upside of the stock could be at much as 25-40% over the next 18-24 months since it has overcome the main issues it has faced.

I encourage comments to explore this opportunity further.

Disclosure: I am long XOM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.