Conoco Phillips (COP)
Conoco Phillips (COP) is the 3rd largest integrated energy company in the United States. The company explores and produces oil, natural gas, and natural gas liquids in several countries around the world. Conoco Phillips’ stock price has been absolutely battered since the economic downturn, and I believe now may be a great time to buy.
COP traded around its 52-week high of $95.96 in June of 2008. Since then, the company’s stock price has tanked as the prices of oil and natural gas have plummeted. The stock last traded at $37.39, about three dollars above its 52-week low of $34.12. Was there merit to this steep drop in price?
Conoco Phillips posted a massive $31 billion loss in the 4th quarter of 2008 that resulted from a $34 billion write down of asset value. COP suffered from horrible timing. The company rapidly expanded its oil exploration and production when crude oil was valued above $130 a barrel. At the same time, the company acquired major natural gas fields when natural gas was worth over $17 per 10,000 mmBtu (measuring units for natural gas).
Now, crude oil is valued at $46 a barrel and natural gas is worth $4. Conoco bought while prices were very high, and as a result, the company lost billions of dollars in the value of its assets. I have trouble determining whether or not to place the blame on the company’s executives. Current CEO, James Mulva, entered the company a few years ago and was a major proponent of expansion. Nevertheless, few people were able to predict the downfall of energy products, and I would chalk up the losses to poor timing instead of poor management.
The company has responded to the drop in oil prices by reducing capital expenditures. After releasing the tragic 4th quarter earnings report, Conoco announced that it would be cutting capital spending by 37% in 2009. This troubles me. While I understand that the company simply cannot afford to be expanding its business right now- after all, it does have to stay afloat- it is again falling victim to poor timing. COP is buying high and selling low! Expansion would be cheaper than ever now that oil and natural gas are priced so low, but the company isn’t making any moves.
Despite unfortunate circumstances that resulted from terrible timing, I think Conoco Phillips is still undervalued. The company boasts a massive balance sheet with almost $143 billion in assets. Even though the purchases made in recent years were overvalued, they still will generate cash for COP in the future. The success of the company ultimately boils down to the movement of oil and natural gas prices.
As I stated earlier, oil is trading at $46 a barrel and natural gas is trading at $4. While I can’t see oil and natural gas rising to the high levels seen in early 2008, I think they are bound to rise by late 2009 and early 2010. Oil production has steadily been cut by many companies around the world, so supply is down. The demand for energy products have dropped as the economy has headed south. Basic economic principles tell us that low supply and high demand equates to high prices. When demand for oil picks up, Conoco will be able to provide it for more money.
If you agree that oil will pick up in the coming months, Conoco Phillips is the single most valuable major energy play you can make. Chevron (CHX) and Exxon (XOM) are off 35% and 30% from their 52-week highs respectively, while Conoco has dropped a dramatic 60%. When you consider Conoco’s potential for improvement compared to its competitors, the $37 ticket for a share of COP begins to look very cheap.
-Matt Schwartz
College Trillionaire
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