ConocoPhillips (COP): Valuation inexpensive, but remains Neutral rated for now - Goldman Sachs - March 13, 2008
What's changed
ConocoPhillips hosted its annual analyst meeting on March 12, providing an update on its outlook and key initiatives.
Implications
We maintain our Neutral rating on ConocoPhillips following today’s analyst meeting, though we did come away incrementally more positive about the company’s outlook. In particular we view favorably Conoco’s progress with Burlington Resources, our improving relative ROCE expectation, and the company’s greater commitment to returning cash to shareholders via share buybacks. While many on the Street will likely view Conoco lowering its long-term production growth target to 2% from 3% unfavorably, we see the revised target as a more realistic goal and partly a result of the company’s declining reinvestment rate relative to peers, which bodes well for future relative ROCE. Relative to other integrated oils we cover, Conoco shares appear increasingly inexpensive, trading at 2008E EV/DACF of 4.2X, versus ExxonMobil at 6.4X, Chevron at 5.2X and the North American integrated oils average of 4.6X. Given its inexpensive valuation and favorable leverage to our above-consensus crude oil, natural gas, and refining margin forecasts, we consider Conoco our second-favorite integrated oil behind only Buy-rated Marathon Oil. Following the significant recent strength in crude oil prices, we are weighing the risk of a potential pullback in crude oil prices vis-à-vis Conoco’s already-inexpensive valuation and for now have decided to stick with a Neutral rating.
Valuation
We see 30% upside potential to our unchanged, $100 12-month target price, which is based on asset value, P/E and cash flow valuation analyses.
Key risks
Key risk is sustained lower commodity prices. |
