ConocoPhillips: Disparity With Exxon Mobil Will Not Last

| About: ConocoPhillips (COP)
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ConocoPhillips (NYSE:COP) has been a core part of my income portfolio for almost two years. It provides a solid dividend and I like the strategic direction of the company over the past 18 months. It has spun off its refinery assets via a very successful IPO of Phillips 66 (NYSE:PSX) in 2012. It has also refocused its capital budget to grow production from its prime assets in North America. This lessens the company's geopolitical risk and also allows Conoco to be a bigger participant in the huge energy boom happening in the United States.

I also like the stock, as a few times a year it seems to suffer an undeserved pullback that allows me to accumulate additional shares at a lower price. Over the past two weeks, COP has had a six percent decline while its larger brethren Exxon Mobil (NYSE:XOM) has actually gone up (See chart).

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I don't believe this disparity will continue and I recently sold some of just out of the money puts on ConocoPhillips to either collect premium income or pick up additional shares at a lower cost. Several items have bolstered Exxon recently but I don't trust the permanence of the move.

  • The shares have benefited from the glow from the Oracle of Omaha as Warren Buffett recently disclosed a sizable stake in the company.
  • Goldman Sachs just upgraded the shares from "Neutral" to "Buy." Goldman's analyst believes Exxon may be nearing an inflection point in production growth. Given the energy giant has not achieved this to any extent in years I find this a dubious assertion. Revenues in FY2012 were less than 2% higher than they were in FY2008. The company has achieved earnings growth to a large extent via stock repurchases. Exxon reminds me in this way (no revenue growth/large stock buybacks) to IBM Corp. (NYSE:IBM), another holding of Mr. Buffett which has not worked out for him up to this point.
  • RBC Capital also upgraded Exxon last week, although it put a price target of $105 a share on the stock, just 10% above the current stock price.
  • Crack spreads have recently widened which helps Exxon's refinery operations, which Conoco wisely chose to divest. Whether the spread between Brent and WTI continues to be over $10/barrel is not a certainty.

There are several reasons I continue to prefer Conoco to Exxon especially after the recent disparity in their stock prices:

  • Conoco sells for 10.9x forward earnings, Exxon sells at 12.3x forward earnings. Given Conoco has evolved into a pure play E&P concern (No refineries or chemicals), I don't believe it should trade at a discount to an energy conglomerate.
  • Conoco provides a higher dividend (4.1%) than Exxon (2.6%).
  • Conoco is a more focused energy play. 55% of its capital budget this year is geared to increasing production from its North American properties. Just to give a hint at the huge complexity of Exxon Mobil, it has ownership interests in & mostly operates 32 refineries on five continents. It also has ~19,000 gas stations scattered across the world.
  • COP is currently trading ~15% below the median price target of $78.50 a share the 18 analysts that cover the shares have on it. XOM is less than 5% under the $99 a share median price target the 19 analysts have assigned to the shares.

When it comes to choosing between these two huge energy entities, I prefer to utilize the KISS (Keep it simple, stupid) principle and choose Conoco.

Disclosure: I am long COP. 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.