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A Successful Spin-Off Frees Long-Term Growth

April 29, 2014 | About:

A recovering world economy placed an additional pressure on energy supply. While the Chinese economy appears to take a breath, North America steps on the accelerator, as Europe continues to look for the ignition. All that activity implies an additional stress on oil and gas supplies. North America has seen a gas boom on which it continues to ride. Also, unconventional reserves are still an important part. On the other hand, fracking remains a relatively new production technique.

But Europe has not been able to secure its own resources, depending on Russia for gas and Africa and the Middle East for oil. Hence, the greater activities experienced by the industry respond to a greater global demand. ConocoPhillips (COP) is one of the worldwide companies looking to absorb this market synergy. With operations in over 30 countries, the company continues to look for ways to increase reserves and production levels. But, can it reward long-term shareholders at the same time?

Strong Performance, Good Outlook and Perfect Donations

The first characteristic which catches the attention of the potential investor is stock market performance, and ConocoPhillips has performed well. Since its entrance to the stock market, face value has increased with only one major slowdown: the 2007 economic crisis. Nonetheless, the stock recovered well and quickly reaching new record heights. Hence, it is not a cheap stock but a proven and profitable long-term option. Analysts agree with the assessment. Four financial institutions boosted target price during the last month, and the same number thinks the stock will stay with the market. Only Bank of America rates the stock “Underperform.”

For fiscal year 2013, ConocoPhillips reported $9.2 billion in earnings, or $7.38 per share, compared with full-year 2012 earnings of $8.4 billion, or $6.72 per share. Most important for an oil and gas company, annual organic reserve replacement of 179 percent from reserve additions of approximately 1.1 billion barrels of oil equivalent. While capital investment signaled project startups at Ekofisk South and Jasmine, with preparations underway for full-field startup at Gumusut and Siakap North-Petai. “We delivered on our non-core asset sales, progressed our growth programs, achieved conventional and unconventional exploration success, and increased our dividend,” said Ryan Lance, chairman and chief executive officer.

The interesting part about ConocoPhillips is the investment made on the capacitation of human resources. In the first quarter of 2014, the company has donated $1 million to Oklahoma State University toward building a new home for Oklahoma State University’s Spears School of Business. Texas Tech University was the recipient of another $1 million donation, to establish a student recruitment and support center in the Edward E. Whitacre Jr. College of Engineering. Last, Texas A&M Engineering was granted a $6 million contribution to support construction of the new Engineering Education Complex.

Keep on Growing

The positive results achieved during by ConocoPhillips are the fruit of a business strategy which has balanced accelerated production with value. Being the additional condiment, the late entrance into the shale play by oil giants like ExxonMobil (XOM). Hence, competition was not as tight as one may think, and the company graved a hold of 200,000-plus acre position in the Eagle Ford and a solid 600,000-plus acre position in the Bakken with three other shale plays currently being appraised. In the end, the firm achieved the lowest cost of supply on the industry.

Looking forward, ConocoPhillips will continue to focus on its assets in North America, while portfolio continues to tilt towards liquids and higher-margin areas. Also, with leading positions in both natural gas and heavy crude oil in North America, as well as a legacy position in the North Sea and growing exposure to lucrative international regions, long-term growth is guaranteed. An additional push is expected as a result of undergoing projects in the Gulf of Mexico, Malaysia, Australia, the UK, Norway and Canada.

Currently, ConocoPhillips trades at 11.6 times its trailing earnings, carrying a 59% discount to the industry average. Return on capital invested and equity is one of the highest in the industry, and debt-to-equity ratio is above average. Most important, the divestiture plan has given a great cash influx to the model, widening operating margins and attracting new investors. James Barrow (Trades, Portfolio), Warren Buffett (Trades, Portfolio), and Pioneer Investments (Trades, Portfolio) are just some of the names going for the long stride with this company. You should consider this company for the same purpose, as it pays $0.69 quarterly dividends for an annual yield of 3.70%.

Disclosure: Vanina Egea holds no position in any of the mentioned stocks.

About the author:

Vanina Egea
A fundamental analyst at Lone Tree Analytics

Visit Vanina Egea's Website


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