ConocoPhillips (NYSE: COP) remains in the tight clutches of the bears, extending the decline which began in mid-December. As a result, the stock hit its lowest level of $44.19 of 2017 last week. The selloff arrived on account of the sharp decline in the crude oil price (NYSEARCA: USO) and has some investors worried if a further decline in the commodity will be detrimental to the stock. In this article, I will discuss why COP investors should remain confident and what could cause the stock to break its 12-month uptrend.
Almost a month ago, I submitted an article titled ConocoPhillips – Is The Bottom Close? in which I had said that investors should create long positions since the bottom was close, and barring a 2-5 percent drop, the stock should do well. At that time, COP was trading at $47.51 per share. Today, it stands at $45.69, well within the decline range that I talked about.
So, what has changed since then to warrant another article? Back then, crude was making a strong attempt to break out of its consolidation zone on the upside but in a shocking turn of events, the commodity has plummeted, causing a knee-jerk negative reaction in the entire energy space (NYSEARCA: XLE). ConocoPhillips also was not spared as the stock dropped below the 200-day simple moving average and once again slid to test the lower range of the short-term downtrend. Please see the daily COP price chart below.
So, with crude oil in disarray and the stock continuously drifting lower, what’s an investor got to do? Well, one thing that an investor must realize is that COP is not a get-rich-quick stock and will not run upwards incessantly. It will provide dips which an investor should use to create long positions and let the money do its work for the next 1-3 years. Thankfully, the market presents such an opportunity now. The weekly COP price chart is shown below to highlight the year-long uptrend that the stock has followed. Buyers have clearly entered near the dips to strengthen the stock for the next leg of the rally.
But, Is This Trend So Formidable?
To an extent, yes, it is. The massive damage that occurred in the oil space has been depicted in the weekly Brent crude oil price chart below. Brent slipped below its key support level decisively, opening the gates to further losses.
This sentiment is driving the market price of COP lower. Investors are plainly looking at the Brent crude and mistaking that a further cut would be detrimental to COP without even acknowledging that the commodity has a strong support near $45.50. From the current level of $51.76, it represents a downside of roughly 12 percent. So, should this drop cause the stock to break its year-long downtrend and head to $40? Logically, not. Because the company has generated sufficient cash flows to cover capital expenditures and dividend payouts for two consecutive quarters now, at an average of $45-$50 Brent prices. This means that even if the commodity drops to its strong support, it wouldn’t create many problems for the company which has been consistently focusing on cost reduction and preparing for longer periods of low price environment.
In a recent interview, COP CEO Ryan Lance said that the company is betting on oil “lower for longer” and a lot of volatility ahead because the world is well-supplied. Lance said that "we may see $70, $80 in the next couple of years. If we do, we’re going to see $40 on the back end of it."
The company is preparing for oil in the lower $50s for the next couple of years and is focusing on thriving in such prices. This is essentially saying that the company will earnestly strive to achieve the lowest breakeven costs in the industry.
So, What Could Cause The Stock To Breakdown?
Having mentioned that I do not believe that the market would severely punish the stock even if Brent slipped to $45, I think a violation of the $45 support will embolden the bears to crack the one-year uptrend. If Brent falls below $45, COP will face heightened selling pressure which can easily push down the price to $40 or possibly lower.
ConocoPhillips is a buy right now as the one-year uptrend remains intact and the current price offers an attractive risk-reward ratio for the investors. I am of the opinion that the stock will not break down even if Brent crude slipped to $45 since the company has the potential to generate sufficient cash flows to cover capital expenditures and dividend payouts even at that price. Additionally, the management is taking a cautious approach to the oil markets and sees a period of lower prices in the next couple of years with increased volatility. With this approach, the company is strictly working on bringing down the costs to not only survive but thrive in a low price environment.
But, in the near term, if Brent pierces the $45 support, COP will come under pressure and slide to $40 or even lower. So, investors should be prepared for that event as well.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Investors are always advised to complete their due-diligence before making an investment decision.