As you’ve probably noticed, I really like analyzing smaller or less well-known companies. It’s just interesting to learn about companies that no one else really covers, and hopefully teach people about dividend growth companies they may not have considered yet. Yet I also want to touch on the bigger, “common” companies too. There’s a lot of them I don’t own, but want to. Dividend stalwarts like XOM, LMT, CL, and HRL come to mind. There’s one company in particular I’ve wanted to analyze for a while. It’s an energy company that I always thought was lower-quality than I’d like, and I want to see if I was wrong or not. It’s an exploration and production company, a pure play since it spun off its refining assets a few years ago. Yep, that company is ConocoPhillips (NYSE:COP).
Quick Background:
Quoting from Scottrade:
ConocoPhillips is an independent exploration and production (E&P) company, based on proved reserves and production of liquids and natural gas. The Company explores for, produces, transports and markets crude oil, bitumen, natural gas, liquefied natural gas (LNG) and natural gas liquids on a worldwide basis. As of December 31, 2013, its continuing operations were producing in the United States, Norway, the United Kingdom, Canada, Australia, Timor-Leste, Indonesia, China, Malaysia, Qatar, Libya and Russia. The Company manages its operations through six operating segments, which include Alaska, Lower 48 and Latin America, Canada, Europe, Asia Pacific and Middle East, and Other International.
The company was created in its current form in 2002, and is based in Houston, Texas. It is number 47 on the Fortune 500, and is a component of the S&P 500. As mentioned above, with the spinoff of PSX in 2012, COP is now the world’s largest independent E&P company. COP defines its operations by geographic sector: Alaska, Lower 48 (US), Canada, Europe, Asia/Pacific/Middle East, and Other International. It has operations in most major plays in the USA, including the Bakken, Eagle Ford, and the Permian Basin. The company produces 1.545 million barrels of oil a day, and has 43 billion barrels of oil or equivalents in reserves, of which 8.5 billion are proven. The company’s main competitors include ExxonMobil (XOM) and Chevron (CVX).
For more basic information, check out the company’s website and the 2013 annual report.
Fun fact: An investment of $10,000 in December 2000 would be worth $36,597.86 today, all dividends reinvested. This yields a annual rate of return of 9.8%. (Source: FAST Graphs)
Investment Criteria:
So now that we have a basic understanding of who COP is and what it does, let’s run our basic screening criteria on it, with the help of David Fish’s US Dividend Champions List:
- Pays a dividend: Yes
- Has 5+ years of dividend increases: Yes (14 years)
- Has not frozen dividend for over 8 quarters: Yes and No
- COP froze the cash dividend for 10 quarters, but there was a stock dividend of sorts with the PSX spinoff in 2012
- Has a Chowder number of 12 or more: Yes (17.3)
- Has am EPS payout ratio of less than 70%: Yes (44.99%)
- Pays a dividend monthly or quarterly: Yes (Quarterly; February, May, July, October)
COP fails on the frozen dividend criterion, but passes the rest.. Let’s use FAST Graphs for the next round of criteria:
15 year look
3 year look
- Has an S&P Quality Ranking of ‘A-‘ or better: No (B+)
- Has generally increasing earnings over the past 10+ years: Yes
- Is fairly valued/undervalued according to the Normal P/E ratio (blue line): No
- Is fairly valued/undervalued according to the Intrinsic P/E ratio (orange line): Yes
Other Bonus Ratings:
- S&P Capital IQ: 4-star buy
- Scale is 1-5, 1 being ‘strong sell’, 5 being ‘strong buy’
- Thompson Reuters StockReport: 8 (optimized score of 3)
- Scale is 1-10, 10 being best, 1 being worst
- Optimized scores weight insider trading and price momentum heavier than other criteria
- Value Line: 1 for safety; 2 for timeliness
- Scale is 1-5, 1 being best, 5 being worst
Financial Overview:
COP has a downright sexy dividend yield of 4.15%. The payout is $0.73 per quarter, $2.92 annually. Although COP did freeze its cash dividend from February 2011 to May 2013, we must also remember that COP spun off Phillips 66 (PSX) during this time. Although the cash dividend was constant, which is what I normally look at, I count the shares of PSX gained as a special stock dividend, and therefore am not bothered by this “freeze”. Excluding this, the dividend growth rate is phenomenal. The 10 year growth rate is 15.7%, and the 1, 3, and 5 year DGR fluctuate between 13.3% and 17.7%. The company’s debt/equity ratio of 0.38 is reasonable for an oil company, and is perfectly in line with the peer group’s average.
The P/E ratio is pretty attractive at 12.04, and Morningstar has a one year forward P/E ratio of 14.2. This is actually a bit discouraging, as it indicates that earnings are expected to decrease over the next year. Since it is unknown how long oil prices will be depressed, it remains to be seen how long earnings for COP will also suffer. Compared to its peer group, COP’s gross, operating, and net profit margins are all better (43.34% vs 13.13%, 17.90% vs 3.17%, and 13.40% vs 2.88%) (Source: Scottrade). I’m not sure how accurate this is, as the peer group also may include refiners, not just E&P companies. Since refiners often have lower margins, it may cause COP to look better than it is. However, it still looks interesting. Finally, Morningstar rates the economic moat as ‘narrow’ and leadership as ‘standard’.
For the next five years, it is projected that COP’s earnings will grow 7.8%, and that the estimated total return will be 13.0%, which is a good return as-is. For comparison, XOM’s five year ETR is 9.2% and CVX’s is 14.2%. This hints that COP will perform well against its peer group in the next few years. (Source: FAST Graphs)
Risk Factors:
I’ll quote Morningstar for this:
Persistently low oil and gas prices would hurt cash flow and force ConocoPhillips to reduce its capital plans or raise debt to fund growth. The company’s large projects run the risk of delays, cost inflation, and falling commodity prices, which could ruin their economics. Global operations and partnerships with national oil companies expose the company to the threat of expropriation of assets and modification of contract terms by governments. …
ConocoPhillips’ long-term growth rate of 3%-5% is low compared with E&P peers’, while its ability to expand margins rests on commodity prices remaining at current levels. …
The company’s efforts to high-grade the portfolio by divesting higher-cost assets may fall short given a lack of interested buyers. It has been unable to sell some of its Canadian assets.
Some good SeekingAlpha articles on COP can be found here (bullish), here (neutral), and here (bullish).
Final conclusion:
On first glance, I do not believe COP is an attractive investment. There are several things to not like, such as the quality ranking and the fact that earnings fluctuate a lot. More importantly, they have’t really grown over the long term. The dividend issue is also there, but can be partially justified by the PSX spinoff. Conversely, the cash dividend generally has been increasing nicely, and the Chowder number is well above what I need. Honestly, I’m just kind of ‘meh’ on the company overall. It’s a comparison between a good and growing dividend and slightly lower quality than I like. I’m a little curious to see how the other E&P companies on my wishlist perform before I make a true call on COP. But right now, I feel that I wouldn’t really object to owning it per se, especially since it seems to present a decent value. But I wouldn’t own much of it, and it would definitely be a second-tier investment behind other oil majors, like XOM and CVX. Basically, if I had some money left over, I would buy it, but wouldn’t go out of my way for it. Tentative long.
What do you think? Does COP make the cut for your portfolio? Also, how can I improve future analyses?
Disclosure: Long CVX
All data is accurate as of market close, 11/14/2014. My stock analysis archive page has been updated accordingly. Please read my disclaimer here before choosing to invest. Company logo image source is available here. Data source is FAST Graphs or company materials, unless otherwise indicated.
13 Comments
I like COP and especially at these levels lately. I have a bit and wouldnt mind adding a bit more if oil hits the 60s
Asset-Grinder recently posted…$2,160,878 My Net Worth Update October 2014
If that happens, I’ll be buying every energy stock that’s listed. Thanks for stopping by!
COP is a pretty large holding for me and I think you understated the dividend growth shareholders really got with the PSX spinoff… Prior to the spin in 2011 I was getting 0.66 quarterly div, now its 0.73 + 0.25 (0.50 * 1/2 share of PSX per COP) for a total of 0.98… 0.66 to 0.98 from 2011 to 2014 and it was a 4.5+% yield to start. No complaints from me as a shareholder.
CVX and XOM have the more conservative balance sheets, no argument on that – I own quite a bit of CVX as well. But I think in terms of recent execution COP is far ahead of either in terms of shale/unconventional production, and has succeeded in growing total production.
As far as the current price – kind of “meh” to me right now, not a bad value but not where I’d say you better hurry up and buy before it gets away from you either. I think odds are pretty good there’ll be a better opportunity than now to buy any of the energy names sometime in the next 6 months.
Long 550 COP + 200 PSX + 250 CVX
You are right that I probably didn’t give PSX the treatment it deserved. I really kind of looked at it through the lens of what is COP now, at this instant. I don’t really think of them as a pair anymore, so I didn’t focus on PSX. If you were already a shareholder in 2012, then it’s much more important to look at, because that helped define your total return. I certainly hope we get better prices in energy; there’s quite a few names I’m interested in. Hope the drop comes in before my Christmas bonus does!
*Correction was made, thanks!
Including PSX probably clouded the point I was trying to make about the dividend history – so let’s try it this way instead. If you want to analyze only COP, on the day of the spin you could have cashed out your 0.5 share PSX and used it to buy ~0.3 share COP. So going forward you have 1.3 shares of COP… so in reality it was much more like a 30% dividend increase in 2012 even though the per share dividend history calls it a freeze that year.
Good luck with the Christmas shopping for energy stocks, if nothing else there should be some additional tax loss selling near year end since they’re well off highs.
No, I feel I understand. Although the cash dividend was constant, you received a stock dividend via PSX (which could have been kept or sold). I am normally focused on cash increases only, so that’s why I “failed” COP on that criteria. But you are correct in saying there was an increase of any sort, so maybe COP didn’t “fail”, strictly speaking.
Because it’s a pure play now, rather than a major/integrated like CVX and XOM, I would imagine COP outperforms both of those with reinvested dividends over the long-term. I think they’re in a better position to grow, as well. Why worry about which of us is right, though? Just buy em all =)
You may be right that it outperforms, but it also runs the risk of being more volatile too. If COP gets a streak of duds or underperforming reserves, it could cause a lot of issues. Hahaha, I like the way you think!
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Thanks for sharing…I’ve added you to our stock collection and will be posting an update on our collection soon.
Keep up the great work! Best Wishes. AFFJ
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Thanks!
I personally would not want to own COP for its lack of consistency in sales (http://www.wikinvest.com/stock/ConocoPhillips_(COP)/Data/Total_Revenues).
But I do like CVX, ATW, NOV, HP.
Interesting. I can’t really make up my mind there either. Don’t really think I’m actively watching it anymore. There are other oil companies I trust more. Yet most of the DGI community likes them, so to each their own.