Options Trade – ConocoPhillips (NYSE:COP) Calls 
Tuesday, October 28, 2014

**OPTIONS TRADE: Buy the COP Jan 2015 70.000 call (COP150117C00070000) at or under $2.40, good for the day. Place a protective stop loss at $0.95 and a pre-determined sell at $4.00.

by Ian Harvey

October 28, 2014


ConocoPhillips (NYSE: COP), the largest independent oil and gas exploration and production (E&P) company in the world -- in the U.S. it is the largest independent exploration and production firm, doubling its closest competitor in terms of production volumes -- will report its third-quarter results before the market opens on October 30. Analysts have forecast earnings of $1.28 per share, down from $1.47 during the same period last year. Like most energy stocks, COP has been weak over the last two months, however thanks to a small rebound over the last week the stock is currently up 3.3% on the year.

Looking at production volumes, ConocoPhillips is twice as large as its closest peer. With operations in Europe, Canada and the Asia Pacific/Middle East region, the company believes that growth will come from major projects in the North Sea, Malaysia and its LNG project in Australia. Moreover, it should benefit from an increase in natural gas prices, as it still holds a large amount of Lower 48 natural gas reserves.

Thanks to a lot of concerns about the global growth dynamic, large oil and gas companies have become much cheaper. The selloff in oil and gas companies provides an opportunity for this options trade.

So far, OPEC has yet to step in and collectively lower production in order to combat the recent dip in oil prices, but analysts believe it may decide to do so when it next meets on November 27. Should OPEC take that step, there should be a nice jump in oil stocks across the board, COP included. Ample supply is not the only reason why oil prices are falling… as concerns over problems in Europe and a slowdown in China have spiked concerns about future demand. Falling oil prices are likely to have had a negative impact on COP's quarterly earnings, which are expected to drop 15.6% from the same period last year.

The good news is that the weak forecast has already been priced into the stock, which is currently trading with a P/E of just 9.5. With such a low valuation, the stock has limited downside, barring any huge earnings miss. None of the major oil stocks have high valuations at the current time, but COP's valuation is lower than most of its competitors, so there is plenty of upside should earnings come in better than expected.

Technical Details

COP was recently trading at $70.26, down $16.83 from its 12-month high and $7.52 above its 12-month low. The stock has support above $67.35 and recent resistance below $71.45.

ConocoPhillips forward earnings compared to valuation multiples in the peer group, which have contracted notably from around 11-13x forward earnings at the beginning of September – making the peer group average P/E ratio now stand at only 11x forward earnings, with ConocoPhillips being even cheaper than that.


ConocoPhillips last issued its quarterly earnings data on Thursday, July 31st. The company reported $1.61 earnings per share (EPS) for the quarter, beating the consensus estimate of $1.60 by $0.01.

During the same quarter in the previous year, the company posted $1.41 earnings per share. On average, analysts predict that ConocoPhillips will post $5.99 earnings per share for the current fiscal year.

Expected Earnings: Analysts polled by FactSet expect, on average, ConocoPhillips to report earnings of $1.19 a share, compared with $1.47 a share a year ago.

Expected Revenue: Sales are seen at $13.6 billion, from $15.4 billion a year ago, according to FactSet.

Continued Growth

Well Positioned

ConocoPhillips holds large acreage positions in the Eagle Ford, Permian and Bakken that can be developed with attractive economics while delivering high cash. Further, its SAGD assets in Canada are the lowest-cost and best-performing of all. Further, a rebound in natural gas prices will benefit the firm because it holds a large position in U.S. natural gas.

Growth Prospects

The company plans about 400,000 barrels of oil equivalent per day of production by 2017. Additionally, these projects are going to contribute to a higher margin. As a matter of fact, the firm is targeting a 3% to 5% margin growth which we consider good and achievable. With the addition of these projects, the company's portfolio should deliver higher returns as well as cash flow in the near future. Cash flow is generated from the divestiture of noncore assets. The company has reached agreements for almost $14 billion in asset sales.

Analysts Opinions

Jefferies Group reaffirmed their hold rating on shares of ConocoPhillips (NYSE:COP) in a report issued last Tuesday. They currently have an $86.00 target price on the stock, down from their previous target price of $89.00.

The company has also been the subject of a number of other research reports:-

• Analysts at Morgan Stanley reiterated an equal weight rating on shares of ConocoPhillips in a research note on Monday. They now have an $85.00 price target on the stock, down previously from $90.00.

• Separately, analysts at Zacks downgraded shares of ConocoPhillips from an outperform rating to a neutral rating in a research note on Monday, October 6th. They now have a $79.00 price target on the stock.

• Finally, analysts at Bank of America upgraded shares of ConocoPhillips from an underperform rating to a neutral rating in a research note on Tuesday, September 9th. They now have a $90.00 price target on the stock, up previously from $84.00.

Eight equities research analysts have rated the stock with a hold rating and ten have assigned a buy rating to the company. The stock has an average rating of Buy and an average target price of $88.94.


• ConocoPhillips' shares have consolidated heavily since July and are now down 2% year-to-date.

• The selloff has been driven by lower global economic growth estimates, which cast a shadow on the stock market, but allows for plenty of come-back.

• ConocoPhillips' now trades at 10.7x earnings, and offers investors a great opportunity.


ConocoPhillips is still one of the most relevant oil and gas businesses in the world, and it remains committed to both production and dividend growth. The decline in valuations in the U.S. energy sector over the last three months has caused quite a few companies to trade at absolute bargain prices. It is believed that valuations for quality companies like ConocoPhillips have fallen way too far.

Therefore, based on the facts above the following options trade is recommended…..

**OPTIONS TRADE: Buy the COP Jan 2015 70.000 call (COP150117C00070000) at or under $2.40, good for the day. Place a protective stop loss at $0.95 and a pre-determined sell at $4.00.

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