Strong 2Q 2007 results, but no change to Neutral rating July 26, 2007 Goldman Sachs
What's changed
ConocoPhillips reported adjusted 2Q 2007 EPS of $2.89, ahead of the $2.68 First Call consensus expectation and our $2.65 forecast. Strong refining results and Lukoil earnings drove the outperformance versus our forecasts. On its conference call, Conoco provided updated E&P volume guidance, which was generally in line with our expectations following its exit from Venezuela, though higher Lukoil production may suggest lower legacy Conoco volumes even adjusting for Venezuela. In addition, management noted that capital spending may be up in 2008 by around $1 billion versus its 2007 budget. We have updated our EPS estimates.
Implications
Conoco continues to be favorably leveraged to our bullish crude oil and refining outlook, which came through clearly in 2Q results. Our Neutral rating is a function of the fact that the combination of Conoco's returns on capital and expected E&P volume growth look uninspiring versus alternatives within the sector and we think point to a lid on its relative valuation (absolute upside exists based on our bullish commodity view). In our view, questions over its volume guidance ex-Lukoil as well as the company's potential to spend an additional $1 billion in CAPEX in 2008 we think will do nothing to change the Street view of its organic E&P growth potential and relative ROCE. With that said, we view positively Conoco's decision to repurchase up to $15 billion of stock through 2008.
Valuation
Conoco is trading just above our unchanged $80, 12-month target price, based on asset value, cash flow and P/E valuation analyses. Given our bullish commodity view, additional upside could exist toward a $95 high-end trading value.
Key risks
Key risk is a sustained decline in commodity prices. |
