Shares not expensive, but lackluster growth and ROCE - Goldman Sachs - October 25, 2007
What's changed
ConocoPhillips reported adjusted 3Q 2007 EPS of $1.94 ($2.23 on a reported basis), which was below both the $2.17 First Call consensus and our $2.20 forecast. On its earnings conference call, management noted several items that were not counted as “special” but did negatively impact the “adjusted” results. Adding back the $0.09 negative impact from foreign currency fluctuations, we see $2.03 as being a comparable figure to both our and consensus estimates. The shortfall in 3Q was primarily related to international E&P, where lower-than-expected realized prices and higher-than-expected costs and taxes drove the negative variance. We have updated our 2007-2012 EPS estimates.
Implications
The expropriation of Conoco’s Venezuela E&P assets has not made any easier its challenge to show either improved relative ROCE or faster E&P volume growth. Both metrics we see as being below average versus large-capitalization integrated oil and E&P peers. Given Conoco’s lack of a meaningful exploration program, we believe acquisitions will likely be needed if it is to show E&P volume growth. E&P volume growth is not necessary for its shares to outperform the sector. However, in the absence of volume growth, a plan to improve relative ROCE is likely needed, without which we think it will likely remain at a discounted valuation.
Valuation
There is no change to our $95, 12-month target price, which is based on asset value, P/E and cash flow valuation analyses. On 2008E metrics, Conoco trades at 5.6X EV/DACF, 6.9X P/E, and at a 9% free cash yield, all of which look inexpensive versus the respective 6.1X, 8.8X, and 6.5% Americas integrated oil average valuations.
Key risks
Key risk is sustained lower commodity prices. |
