Options Trade of the Week  ConocoPhillips (NYSE:COP) Calls  Monday, March 16, 2015

**OPTIONS TRADE OF THE WEEK: Buy the COP May 2015 60.000 call (COP150515C00060000) at or under $3.80, good for the day. Place a protective stop limit at $1.75 and a pre-determined sell at $6.50.


by Ian Harvey

Monday, March 16, 2015


**Time for a Bounce for ConocoPhillips!**

The oil market is roiling right now, with crude oil prices still about half what they were less than a year ago. This is the time, based on knowing the difference between a beaten-down stock and a company that is in trouble, to become greedy – when the market is fearful and prices are way down – and take a measure of the following options trade.

ConocoPhillips (NYSE: COP), an independent exploration and production company, based on proved reserves and production of liquids and natural gas, is one of the best oil stocks because it has a strong balance sheet, offers global diversification, and has put a priority on growing both production and margins. Those key features enable the company to withstand weak oil markets and then thrive once conditions improve.

And ConocoPhillips is quite confident on its ability to deliver volume and margin growth in the 3% to 5% range with a reasonable dividend, even in a tough pricing environment where the oil price is declining continuously.

ConocoPhillips reached a new 52-week low during mid-day trading on Friday, according to American Banking & Market News reports. The company traded as low as $60.57 and last traded at $61.06, with a volume of 3,537,848 shares trading hands. The stock had previously closed at $61.36.

However, looking at the chart it appears that a bounce is imminent and this is where this recommended options trade will come into play.

Technical Oulook

ConocoPhillips traded up 0.46% on Friday, hitting $61.64. 8,255,782 shares of the company’s stock traded hands.

ConocoPhillips has a 1-year low of $60.57 and a 1-year high of $87.09. The stock has a 50-day moving average of $65.00 and a 200-day moving average of $70.

The company has a market cap of $75.91 billion and a price-to-earnings ratio of 11.19.


ConocoPhillips last released its earnings data on Thursday, January 29th. The company reported $0.60 EPS for the quarter, missing the Thomson Reuters consensus estimate of $0.87 by $0.27.

During the same quarter in the prior year, the company posted $1.40 earnings per share. Analysts expect that ConocoPhillips will post $0.84 EPS for the current fiscal year.

Positive Drive

1. As we saw over the past year, the price of oil can turn on a dime, which is why having a strong balance sheet is a must. ConocoPhillips has an investment-grade credit rating and its debt trades in the A to AA range. The company also has no near-term debt maturities, plenty of credit capacity, and a lot of cash on its balance sheet. This strong balance sheet not only provides ConocoPhillips with significant security during the downturn, but it gives the company tremendous flexibility to create value should a compelling opportunity arise.

2. The other big difference between ConocoPhillips and most other U.S. independent oil companies is its vast geographic diversity. The company's operations span the globe, as well as different energy projects. These include operations in all key U.S. shale plays, oil sands operations in Canada, offshore production in the North Sea, LNG assets across several continents, and deepwater exploration programs around the world. This gives the company the flexibility to invest wherever it can earn the highest returns.

3. Return-driven growth is what really differentiates ConocoPhillips from other large oil companies. Its focus isn't on simply growing production, but on growing its highest-margin production. The company plans to boost production and margins by 3%-5% per year, which would provide annual cash flow growth of 6%-10%, adjusted for commodity prices. That's the opposite approach of most other energy companies that must rely almost solely on production growth.

4. ConocoPhillips is witnessing solid momentum in its volume growth, accelerated by the commencement of several key projects during the year in APLNG, Malaysia the oil sands and Europe. Also, there’s continued growth experienced from its unconventionals in North America along with significant progress on its exploration actions that include the finding of an innovative oil play offshore Senegal. Further, the start of key projects in 2015 is projected to generate significant and stable cash flows in the future.

5. The company is cutting its non-strategic spending while continuously enhancing investments in its top margin small cash cycle projects in the Bakken and the Eagle Ford. These two projects are believed to be the highest returns on its portfolio and promote it to achieve its volume target of 3% to 5% with slightly less capital for next year.

The wise capital allocation of ConocoPhillips is believed to enable the company in reducing costs while supporting its major strategic investments necessary for accelerating growth.

6. ConocoPhillips successfully delivered its targeted margin and volume growth in the quarter. It enhanced the key shareholder dividends and maintained an extremely solid balance sheet with approximately $6 billion of cash in hand and near-term investments.

7. The ongoing key cost-cutting efforts of the company are illustrated from the solid cash levels on its balance sheet, allowing ConocoPhillips to sustain its targeted shareholder dividends and encourage it to enhance the production at current locations.

8. At present, ConocoPhillips is keen on expanding several stack horizons in the Permian for the Delaware Basin. In addition, it is testing many options for innovative completion techniques and different well configurations in Niobrara.

Analysts Opinions

Oppenheimer said that ConocoPhillips’ valuation is “attractive,” raising its price target by $5 to $80. ConocoPhillips has cut its capex by 32 percent from 2014, which will help the company protect its dividend and achieve “cash flow neutrality” in 2017.

In 2015 and 2016, Oppenheimer projected earnings of $1.4 billion and $3.6 billion, with operating cash flow of $11 billion and $13.7 billion, respectively. With capex and dividend expenditures, ConocoPhillips’ free cash flow will show a deficit of $4.1 billion this year and 1.4 billion in 2016.

Over the past three- and five-year periods, Oppenheimer pointed out; ConocoPhillips outperformed its peers, though it lagged performance of the S&P 500. Moving forward, Oppenheimer said that ConocoPhillips’ stock would reflect how quickly the company can “adjust to industry conditions.”

A number of other research reports have been presented recently, these are as follows:-

• Analysts at Goldman Sachs initiated coverage on shares of ConocoPhillips in a research note on Monday, March 9th. They set a “neutral” rating and a $65.00 price target on the stock.

• Analysts at TheStreet downgraded shares of ConocoPhillips from a “buy” rating to a “hold” rating in a research note on Monday, March 2nd.

• Analysts at Citigroup Inc. lowered their price target on shares of ConocoPhillips from $85.00 to $80.00 and set a “buy” rating on the stock in a research note on Thursday, February 26th.

• Finally, analysts at Oppenheimer raised their price target on shares of ConocoPhillips from $75.00 to $80.00 and gave the company an “outperform” rating in a research note on Thursday, February 19th.

One research analyst has rated the stock with a sell rating, eight have assigned a hold rating and thirteen have assigned a buy rating to the company’s stock. The company has an average rating of “Buy” and a consensus target price of $80.47.


One other area to consider is that with this week’s clashes in Libya driving up the Brent crude benchmark above $61 yesterday, it serves as a reminder that supply — and access to it — can vanish in a moment.

It’s no wonder that the futures market — which has been driving prices lower during the past several months — is now projecting higher prices.

Finally, investors have been advised to invest into the ConocoPhillips Inc. looking at the robust profit margin of 16.35% and very reasonable valuation levels with P/E ratio of 8.58, better than most of the competitors.

Add it all up and ConocoPhillips is one of the best overall oil stocks for the investor.

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

**OPTIONS TRADE OF THE WEEK: Buy the COP May 2015 60.000 call (COP150515C00060000) at or under $3.80, good for the day. Place a protective stop limit at $1.75 and a pre-determined sell at $6.50.

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