ConocoPhillips (COP): Reiterate CL Buy on inexpensive valuation, commodity leverage - Goldman Sachs - April 25, 2008
What's changed
ConocoPhillips reported 1Q2008 adjusted EPS of $2.52 (excluding +$0.10 per share of special items), above both the First Call consensus estimate of $2.42 and our estimate of $2.37. The variance versus our estimate was driven by higher E&P earnings, greater Lukoil income, and lower corporate expense than we had been forecasting. Higher realized international gas prices drove the E&P earnings beat, as total production of 1,791 MBOE/d was in line with our estimate. Adjusted R&M income of $407 million was below our $553 million estimate. We have modestly boosted our 2008-2011 EPS forecasts (to $12.00, $14.45, $16.05, $16.55 from $11.60, $14.35, $15.80, $16.10).
Implications
We reiterate our Conviction Buy rating on Conoco’s shares, which continue to look very inexpensive to us. We believe 1Q earnings highlight Conoco’s leverage to our bullish commodity price outlook, a key component of our favorable view of the company’s shares. In particular, Conoco should continue to benefit from sustained higher natural gas prices, both internationally, as demonstrated in 1Q, as well as domestically given its disproportionate exposure to US natural gas assets. The combination of commodity price leverage and a decreasing reinvestment rate relative to its peers we think positions the company well to improve relative returns on capital employed in coming years—a key catalyst to narrowing the company’s significant valuation discount. We also view favorably management reinforcing its commitment to return the bulk of excess cash to shareholders on the company’s earnings call.
Valuation
We see 18% potential upside to our unchanged, $96 price target, which is based on asset value, P/E and cash flow valuation analyses.
Key risks
Key risk is sustained lower commodity prices. |
