ConocoPhillips: Value Waiting to Be Noticed
By ANDREW BARY
December 24, 2006
online.wsj.com
COP is one of the biggest bargains among the world's largest publicly traded corporations, even though many investors haven't yet awoken to the fact.
The stock has the lowest price/earnings ratio of any of the Dow Jones Global Titans, the 50 largest companies world-wide, ranked by stock-market value. That P/E multiple also is below those of other big integrated oil majors, including XOM, CVX, RDS and BP. At their recent price around $71, COP shares were fetching a little above seven times the energy concern's estimated earnings of $10.10 a share for 2006 and less than eight times the $9.40 projected for 2007. No other member of the Dow Titans has a 2006 P/E ratio below nine.
"COP is too cheap to ignore," says the managing partner of Defiance Asset Management, an investment firm that holds the shares. "The stock is unsustainably undervalued if commodity prices stay around current levels." He values it at $90. "A valuation at nine times earnings wouldn't be unreasonable when XOM trades for 12 times earnings," he says.
The John S. Herold energy-research outfit of Norwalk, CT, values COP at $98, making it the top value among 25 major international energy companies tracked by the firm.
Investors effectively are paying only $9 for each of the company's 10 billion barrels of oil and gas reserves. And COP, which fell out of Wall Street's favor for making too many acquisitions -- something it has pledged to stop -- has sizable other assets, primarily the second-largest refining operation in the U.S., a big interest in Canadian oil-sands properties and investments in other energy ventures around the globe. Pure-play petroleum exploration and production companies typically are valued at $12 a barrel or more.
The company recently cheered Wall Street by reducing its 2007 capital-spending projection to about $13 billion from a prior estimate of $15 billion to $16 billion. The new figure is about even with this year's total. Assuming that energy prices don't crash, this decision should help free up funds for an expanded stock-repurchase program, which could total $4 billion to $5 billion in 2007, up from about $1 billion this year.
COP pays an annual dividend of $1.44 a share, producing a yield of 2%. The company earned $5.80 a share in 2004, a year in which petroleum averaged about $40 a barrel, versus the current $62. If crude were to slip back toward the 2004 level, the earnings might slip to $6 a share. In such a scenario, the stock might fall to $60, assuming investors would still be willing to pay 10 times earnings. |
