ConocoPhillips Now Has Substantial Upside Potential Due To Pullback!
** Buy the COP May 2013 57.500 call (COP130518C00057500) at or under $1.80, good for the day. Place a protective stop limit at $0.80 and a pre-determined sell at $3.20.
by Ian Harvey
February 13, 2013
The Energy sector is showing signs of recovery due to improving economic conditions. At the moment, global economy is showing slow recovery. However, global economy will recover at a much faster pace over the next two years. This provides a profitable time to enter the energy sector. According to valuation models, there is a lot of upside potential in ConocoPhillips. Furthermore, the stock is one of the best dividend payers out there. As a result, income investors are attracted towards this stock. ConocoPhillips provides the opportunity to collect dividends with substantial upside potential.
ConocoPhillips (NYSE: COP) shares started this year at around $57, and then quickly rallied with the markets up to about $62. However, the gains did not last after the company reported earnings, but the stock still appears to be in an uptrend and the recent dip is probably a solid buying opportunity.
It is well known that ConocoPhillips is the largest independent E&P (oil and oil equivalent) company in North America. Without delving into its future strategy, it is easy to infer that long-term sustainability of the company is not under any significant threat. ConocoPhillips has a major chunk of its production and reserves emanating from low risk destinations such as Europe, Canada and US/Lower. These assets account for 58% in reserves and 59% of the production. On the other hand, 21% of the production and reserves are located in Asia Pacific and the Middle East. Aside from Qatar, all the other exploration and production destinations lie Central, South and East Asian States, which are conflict free. The latest update for January 2013 sums this up by highlighting that 79% of ConocoPhillips' proved reserves lie in OECD countries.
ConocoPhillips explores for, produces, transports and markets crude oil, natural gas, natural gas liquids, liquefied natural gas and bitumen on a worldwide basis.
Key focus areas include safely operating producing assets, executing existing major projects and exploring for new resources in promising areas. The portfolio includes legacy assets in North America, Europe, Asia and Australia; growing North American shale and oil sands businesses; a number of major international development projects; and a global exploration program.
ConocoPhillips conducts exploration activities in 19 countries and produces hydrocarbons in 13 countries, with proved reserves located in 15 countries as of Dec. 31, 2011.
Headquartered in Houston, Texas, ConocoPhillips has operations in almost 30 countries.
As of May 1, 2012, the company had more than 16,000 employees worldwide.
As the chart above shows, ConocoPhillips has been trending higher, and it is now trading at the lower end of the recent trading range (as shown by the bottom white trendline). This, along with strong fundamentals, is reasons why this options play is applicable.
ConocoPhillips’ stock touched $62 in late January and is now trading just above $58. The stock reversed at $57 where it did back in late December, forming a double-bottom formation. Besides the double-bottom, the stock also formed a BOTTOMING TAIL (hammer candle) — which is a potential reversal sign — on Thursday when Wednesday’s high was surpassed.
ConocoPhillips fell after the company reported a decrease in profits. The stock fell by 5% in the regular trading hours. However, COP started to recover in the after-hours trading. Stock price for COP has shown a solid upward trend over the past four months. The company's strategy seems to be novel. From seeking a 100% reserve replacement ratio, devoting 75% of its cash flows to capital expenditure and the remaining to shareholders, there is very little that does not appeal to the eye. Growth and dividends appear to be guaranteed.
For the fourth quarter of 2012, the company earned $1.43 billion, or $1.16 per share. However, excluding certain charges, it earned $1.76 billion, or $1.43 per share. This was in line with consensus estimates of around $1.42 per share. The company provided guidance for a 3% production increase and for earnings for the first quarter to come in at around $1.58 to $1.60 per share.
Production for the quarter averaged 1.566 million barrels of oil per day, up from 1.483 million BOE from the year-ago quarter. That represents approximately 6% growth on an apples-to-apples basis. Among the milestones achieved during the quarter was the topping of 100,000 barrels in the peak daily production rate from Conoco's Eagle Ford properties. In other active areas, the company produced an average of 50,000 BOE daily in the Permian basin, and 24,000 daily BOE in the Bakken formation.
Through lease sales in the deepwater Gulf of Mexico, management expects to increase the total Gulf position by about 1.9 million acres. Internationally, production in Canada reached 475,000 BOE/D, while output in Alaska was 222,000 BOE/D, a slight decline year-over-year, based largely on normal field declines. Quarterly production from the Asia Pacific and Middle East regions grew by 10%. Production in Europe slid by about 22%, largely due to normal field declines and an increase in downtime.
A key to the changing composition of ConocoPhillips involves the company's sales, spin-offs, or abandonment of non-core assets. Last May 1st, the company spun off its downstream properties, including 15 refineries, 10,000 branded marketing outlets, and 15,000 pipeline miles. Those assets comprised what became Phillips 66 (NYSE: PSX ) , a generous gift to Conoco shareholders as it turns out, given the 87% increase in the value of the new company's shares since May Day.
ConocoPhillips trades for just about 10 times earnings while the average stock in the S&P 500 Index (SPY) trades for around 15 times. At current levels of around $57, the stock has upside potential. The median analyst price target for ConocoPhillips is $62. If this target is reached, it could provide capital gains of about 10% from current levels, and the solid dividend yield will reward investors while waiting for a higher share price.
From an analytical point of view, the company's international spread seems to be favorable from a transportation point view. Developed countries are the major consumers of oil and oil equivalents, and the proximity to these markets factors in as a huge positive for ConocoPhillips. Moreover, ConocoPhillips will spend $15 billion in capital expenditure that will lead to a compound annual growth rate of 3-5% over the next four years. In addition, divestment in mature oil fields in Northern Dakota, Nigeria and other spin-offs have led to capital availability of $8-10 billion. Additional capital can be re-allocated into high growth projects in the current year.
In the current world, the energy sector is going to be the defining catalyst of economic growth. Therefore, a lot of faith can be placed into energy stocks overall. The overall shortage having arisen from geo-political factors, will lead to an increased emphasis on exploration and diversification of energy resources. The stock currently trades at a P/E ratio of 6.29 and P/BV of 1.2. At the current price levels, COP can prove to be a great investment.
ConocoPhillips is in the process of divesting $9.6 billion in assets this year, and analysts at Oppenheimer expect the company to successfully apply proceeds to help fund new projects and increased production.
On February 8th, 2013, Oppenheimer reiterated an Outperform rating on ConocoPhillips and raised its price target to $70.00 (from $65.00).
Out of ten analysts covering the stock, four have a buy recommendation and two have sell recommendations. On the other hand, most of the analysts have market outperform rating, and four analysts have recently upgraded the stock. Average five-year annualized growth forecast estimate is 1.32%.
|Current P/E Ratio (ttm)||9.5649|
|Relative P/E vs. (SPX)||0.6383|
|Earnings Per Share (USD) (ttm)||6.0900|
|Est. EPS (USD) (12/2013)||5.4940|
|Est. PEG Ratio||1.7333|
|Market Cap (M USD)||70,709.36|
|Shares Outstanding (M)||1,213.90|
|30 Day Average Volume||7,670,289|
|Dividend Indicated Gross Yield||4.53%|
|Cash Dividend (USD)||0.6600|
|5 Year Dividend Growth||9.99%|
|Next Earnings Announcement||04/23/2013|
Therefore, based on the facts above the following options trade is recommended…..
**OPTION TRADE: Buy the COP May 2013 57.500 call (COP130518C00057500) at or under $1.80, good for the day. Place a protective stop limit at $0.80 and a pre-determined sell at $3.20.