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ConocoPhillips (COP)

September 06, 2024

Compared to: Canadian Natural Resources Ltd. (CNQ) | EOG Resources, Inc. (EOG) | Energy Select Sector SPDR Fund (XLE)

Our reasoning

ConocoPhillips appears moderately undervalued based on its current P/E and EV/Sales ratios, which are below industry averages, suggesting the market may not fully appreciate its strong financial performance and growth prospects. The company's diverse asset portfolio, expanding LNG business, and pending Marathon Oil acquisition provide significant upside potential that isn't fully reflected in the current stock price.

Key takeaways
  • ConocoPhillips is a financially strong company with a diversified portfolio of assets and a commitment to shareholder returns.
  • The company's financial performance is being impacted by lower commodity prices and production volumes, but its profitability remains strong.
  • ConocoPhillips is well-positioned to benefit from the growth of the LNG market and the expansion of its unconventional resource plays.
  • The company's planned acquisition of Marathon Oil is expected to have a significant positive impact on future earnings and cash flows.
  • ConocoPhillips faces significant risks, including commodity price volatility, operational hazards, environmental liabilities, and climate change regulations.
  • Despite the challenges, ConocoPhillips is well-positioned to navigate the evolving energy landscape.
  • ConocoPhillips' valuation is currently attractive, with a P/E ratio below the industry average and an EV/EBITDA ratio that is in line with its peers.
  • The company's stock price has been volatile in recent months, but it has generally outperformed the Energy Select Sector SPDR Fund (XLE) over the past three years.
  • ConocoPhillips is a solid investment option for investors seeking exposure to the oil and gas sector.
Undervalued
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Evaluation summary

  1. Company Overview:

    • ConocoPhillips is a leading global exploration and production (E&P) company with a diverse portfolio of assets across North America, Europe, Asia, and the Middle East. The company's core business is the exploration, production, transport, and marketing of crude oil, bitumen, natural gas, natural gas liquids (NGLs), and liquefied natural gas (LNG). ConocoPhillips sells its products to a variety of customers, including local distribution companies, utilities, industrials, and marketing companies. The company's major competitors include other large independent E&P companies as well as state-owned oil companies.
    • ConocoPhillips' revenue is generated from the sale of its oil and gas products. The company's revenue is highly dependent on commodity prices, which can fluctuate significantly. In recent years, ConocoPhillips has been expanding its LNG business, which is expected to be a key growth driver in the future.
    • ConocoPhillips' target market is global, with a focus on markets with high demand for oil and gas. The company is also targeting markets with growing demand for LNG, such as Europe and Asia.
    • For comparative analysis, we will be using the Energy Select Sector SPDR Fund (XLE) as a benchmark and EOG Resources, Inc. (EOG) and Canadian Natural Resources Ltd. (CNQ) as industry peers.

  2. Financial Performance:

    • ConocoPhillips has a strong financial performance, with a high level of profitability and a conservative capital structure. The company's revenue has been declining in recent quarters, driven by lower commodity prices and production volumes. However, the company's profitability has remained strong, with a high return on average assets (ROA) and return on average total capital (ROIC).
    • The company's net profit margin has been declining in recent quarters, but it remains higher than the industry average. This indicates that ConocoPhillips is still able to generate profits efficiently, despite the challenging market conditions.
    • ConocoPhillips' ROA and ROE have been consistently higher than the industry average, indicating its strong operational efficiency and ability to generate profits. However, both metrics have been declining in recent quarters, reflecting the impact of lower commodity prices and production volumes.
    • Compared to its peers, ConocoPhillips has generally provided lower annualized returns than EOG and CNQ. However, COP has also been consistently less volatile than its peers, suggesting a lower risk profile.

  3. Operational Efficiency:

    • ConocoPhillips has a strong balance sheet, with a high level of liquidity and a low level of debt. The company's working capital has been declining in recent quarters, but it remains at a healthy level.
    • ConocoPhillips' cash flow from operations has been declining in recent quarters, driven by a decline in net income and changes in working capital. However, the company's free cash flow margin has remained stable, indicating a consistent ability to generate cash flow from operations.
    • ConocoPhillips' capital expenditure efficiency is high, with investments supporting revenue and profit growth. The company's acquisition strategy is focused on acquiring high-quality, low-cost assets, as evidenced by the Surmont and Marathon Oil deals.
    • ConocoPhillips' dividend growth is sustainable, with a strong track record of dividend increases. The company's share repurchase program is effective in returning capital to shareholders.
    • ConocoPhillips' capital allocation strategy is balanced, with a focus on both organic growth and shareholder returns.
    • Compared to its peers, ConocoPhillips has generally offered a better risk-adjusted return than EOG and CNQ, as evidenced by its consistently higher Sharpe Ratio. This suggests that COP has been able to generate better returns for the level of risk it takes on.
    • ConocoPhillips' short-term and long-term liquidity ratios are strong, indicating a high level of financial flexibility. The company's debt-to-equity and leverage ratios are low, indicating a conservative capital structure.

  4. Growth Opportunities:

    • ConocoPhillips has a number of growth opportunities, including the expansion of its LNG business, the development of new oil and gas fields, and the acquisition of new assets.
    • The company's planned acquisition of Marathon Oil is expected to have a significant positive impact on future earnings and cash flows, adding high-quality, low-cost assets and additional LNG capacity.
    • ConocoPhillips is also investing in research and development (R&D) to improve its operational efficiency and develop new technologies.
    • ConocoPhillips is expanding its geographic footprint, with a focus on markets with high demand for oil and gas.
    • ConocoPhillips' strategic focus areas include the development of its LNG business, the expansion of its unconventional resource plays, and the optimization of its portfolio.
    • ConocoPhillips has a strong track record of executing its strategic plans. The company has successfully completed a number of acquisitions and investments in recent years.

  5. Risks and Threats:

    • ConocoPhillips faces a number of risks, including commodity price volatility, operational hazards, environmental liabilities, and climate change regulations.
    • The company's business is highly dependent on commodity prices, which can fluctuate significantly. This volatility can impact the company's revenues, cash flows, and asset values.
    • ConocoPhillips' operations are subject to a number of operational hazards, including accidents, spills, and fires. These hazards can result in significant costs and liabilities.
    • ConocoPhillips faces a number of environmental liabilities, including the cleanup of contaminated sites and the mitigation of greenhouse gas emissions. These liabilities can result in significant costs and liabilities.
    • ConocoPhillips is also facing increasing pressure from regulators to address climate change. This pressure could result in new laws and regulations that impact the company's operations and increase compliance costs.

  6. Valuation Analysis:

    • ConocoPhillips' valuation is currently attractive, with a P/E ratio below the industry average and an EV/EBITDA ratio that is in line with its peers.
    • Compared to its peers, ConocoPhillips is trading at a discount to its peers on a P/E basis, suggesting that the market may be undervaluing the company's growth potential.
    • Potential catalysts for ConocoPhillips' stock price include the successful completion of the Marathon Oil acquisition, the continued expansion of its LNG business, and the development of new oil and gas fields.

  7. Price Performance:

    • ConocoPhillips' stock price has been volatile in recent months, but it has generally outperformed the Energy Select Sector SPDR Fund (XLE) over the past three years.
    • ConocoPhillips' stock price has been more volatile than the overall market, as evidenced by its beta value, which is consistently above 1.
    • Compared to its peers, ConocoPhillips has exhibited a mixed performance. While COP has outperformed its peers in some periods, it has underperformed in other periods. Notably, COP has consistently underperformed CNQ over the longer timeframes.

  8. Future Outlook:

    • ConocoPhillips' management team is confident in the company's future prospects, citing the strong demand for oil and gas, the growth of the LNG market, and the company's commitment to shareholder returns.
    • Analyst estimates for ConocoPhillips' earnings and revenue growth are generally positive, suggesting that the market expects the company to continue to perform well in the future.
    • ConocoPhillips' future performance will be driven by its ability to execute its strategic plans, including the expansion of its LNG business, the development of new oil and gas fields, and the acquisition of new assets.

  9. Summary:

    • ConocoPhillips is a leading global E&P company with a strong financial position, characterized by high profitability, robust liquidity, and a conservative capital structure.
    • The company's financial performance is being impacted by lower commodity prices and production volumes, leading to a decline in revenue and profitability.
    • The company is effectively controlling operating expenses, with a decline in operating expenses driven by lower service costs and deflation in the Lower 48.
    • The company's cash flow generation remains strong, supporting debt repayment, dividend growth, and investment in organic growth opportunities.
    • The company's strategic initiatives, such as the Willow project in Alaska and LNG developments in the U.S. and Qatar, are expected to drive future growth and profitability.
    • The company's planned acquisition of Marathon Oil is expected to have a significant positive impact on future earnings and cash flows, adding high-quality, low-cost assets and additional LNG capacity.
    • The company faces significant risks, including commodity price volatility, operational hazards, environmental liabilities, and climate change regulations.
    • Despite the challenges, ConocoPhillips is well-positioned to navigate the evolving energy landscape, with a strong financial foundation and a commitment to shareholder returns.
    • ConocoPhillips' valuation is currently attractive, with a P/E ratio below the industry average and an EV/EBITDA ratio that is in line with its peers.
    • The company's stock price has been volatile in recent months, but it has generally outperformed the Energy Select Sector SPDR Fund (XLE) over the past three years.
    • ConocoPhillips' future performance will be driven by its ability to execute its strategic plans, including the expansion of its LNG business, the development of new oil and gas fields, and the acquisition of new assets.
    • ConocoPhillips is a solid investment option for investors seeking exposure to the oil and gas sector. The company has a strong financial position, a diversified portfolio of assets, and a commitment to shareholder returns. However, investors should be aware of the risks associated with the company's business, including commodity price volatility, operational hazards, environmental liabilities, and climate change regulations.
Peer fundamentals 
Fundamentals
Insights
  • ConocoPhillips is a leading global E&P company with a strong financial position, characterized by high profitability, robust liquidity, and a conservative capital structure.
  • The company's financial performance is being impacted by lower commodity prices and production volumes, leading to a decline in revenue and profitability.
  • The company is effectively controlling operating expenses, with a decline in operating expenses driven by lower service costs and deflation in the Lower 48.
  • The company's cash flow generation remains strong, supporting debt repayment, dividend growth, and investment in organic growth opportunities.
  • The company's strategic initiatives, such as the Willow project in Alaska and LNG developments in the U.S. and Qatar, are expected to drive future growth and profitability.
  • The company's planned acquisition of Marathon Oil is expected to have a significant positive impact on future earnings and cash flows, adding high-quality, low-cost assets and additional LNG capacity.
  • The company faces significant risks, including commodity price volatility, operational hazards, environmental liabilities, and climate change regulations.
  • Despite the challenges, ConocoPhillips is well-positioned to navigate the evolving energy landscape, with a strong financial foundation and a commitment to shareholder returns.
Analysis
  • Revenue - Revenue is decreasing, driven by lower commodity prices and production volumes. - The company's revenue growth is not sustainable, driven by lower commodity prices and production volumes. - The company's revenue growth is linked to its strategic initiatives, such as the Willow project in Alaska and LNG developments in the U.S. and Qatar. - The company's future revenue growth is expected to be moderate, driven by its strategic initiatives and investments.
    • Profitability
      • The company's profitability is strong, with a high return on average assets and return on average total capital.
      • The company's profitability is decreasing, as evidenced by the declining net profit margin and return on average total equity.
      • The company's profitability is higher than the industry average, indicating its strong operational efficiency and ability to generate profits.
      • The company's profitability margins are expected to remain stable, with the company seeing lower service costs and deflation in the Lower 48, while experiencing some inflation in the international segment.
    • Liquidity
      • The company's liquidity position is strong, with a high level of operating cash flow.
      • The company's liquidity position is declining, as evidenced by the decreasing current ratio and quick ratio.
      • The company's liquidity position is lower than the industry average, indicating a lower level of short-term financial flexibility.
      • The company's strong liquidity position allows it to pursue strategic acquisitions, such as the pending Marathon Oil deal, which would add high-quality, low-cost assets and additional LNG capacity.
    • Solvency
      • The company's solvency is strong, with a low debt-to-equity ratio and a low debt-to-EBITDA ratio.
      • The company's solvency is increasing, as evidenced by the increasing debt-to-equity ratio and debt-to-EBITDA ratio.
      • The company's solvency is significantly lower than the industry average, indicating a lower level of financial leverage.
      • The company's strong liquidity position allows it to pursue strategic acquisitions, such as the pending Marathon Oil deal, which would add high-quality, low-cost assets and additional LNG capacity.
    • Operational Efficiency
      • The company's efficiency is high, as evidenced by its strong return on average assets and return on average total capital.
      • The company's efficiency is decreasing, as evidenced by the declining return on average total equity.
      • The company's efficiency is higher than the industry average, indicating its strong operational efficiency and ability to generate profits.
      • The company is effectively controlling operating expenses, with a decline in operating expenses driven by lower service costs and deflation in the Lower 48.
    • Cash Flow Analysis
      • Cash flows from operating activities are decreasing, driven by a decline in net income and changes in working capital.
      • Cash flows from investing activities are decreasing, primarily due to increased capital expenditures.
      • Cash flows from financing activities are increasing, driven by debt issuance and share repurchases.
      • The company's free cash flow margin is stable, indicating a consistent ability to generate cash flow from operations.
      • The company's capital expenditure efficiency is high, with investments supporting revenue and profit growth.
      • The company's acquisition strategy is focused on acquiring high-quality, low-cost assets, as evidenced by the Surmont and Marathon Oil deals.
      • The company's dividend growth is sustainable, with a strong track record of dividend increases.
      • The company's share repurchase program is effective in returning capital to shareholders.
      • The company's capital allocation strategy is balanced, with a focus on both organic growth and shareholder returns.
      • The company's future cash flows are expected to remain strong, driven by its strategic initiatives and investments.
      • The company's free cash flow is expected to continue to support debt repayment, dividend growth, and investment in organic growth opportunities.
      • The company's planned acquisition of Marathon Oil is expected to have a significant impact on future cash flows, adding high-quality, low-cost assets and additional LNG capacity.
    • Risk Factors
      • Commodity price volatility and prolonged periods of low prices could adversely impact revenues, cash flows, and asset values.
      • Failure to successfully develop resources or replace reserves could lead to a decline in the company's business.
      • Operational hazards, environmental liabilities, and climate change regulations could result in significant costs and liabilities.
      • Geopolitical tensions, trade disputes, and changes in government policies could disrupt operations and access to markets.
      • Cybersecurity threats and IT system failures could disrupt business operations and expose sensitive information.
      • Ongoing legal disputes related to the expropriation of assets in Venezuela, with ConocoPhillips seeking to enforce arbitration awards totaling over $8.5 billion.
      • Lawsuits filed by governmental entities alleging climate change impacts, though ConocoPhillips believes these claims are without merit.
      • Investigations and potential liabilities related to environmental regulations and remediation obligations at various sites.
    • Future Outlook
      • The company's future revenue growth is expected to be moderate, driven by its strategic initiatives and investments.
      • The company's profitability margins are expected to remain stable, with the company seeing lower service costs and deflation in the Lower 48, while experiencing some inflation in the international segment.
      • The company's future cash flows are expected to remain strong, driven by its strategic initiatives and investments.
      • The company's free cash flow is expected to continue to support debt repayment, dividend growth, and investment in organic growth opportunities.
      • The company's planned acquisition of Marathon Oil is expected to have a positive impact on future earnings, adding high-quality, low-cost assets and additional LNG capacity.
      • The company's balance sheet is expected to continue to grow, driven by its strategic initiatives and investments.
      • The company's financial flexibility is expected to remain strong, allowing it to pursue further acquisitions and investments.
Most recent earnings report
Financial statements 
All public filings
Comparative Analysis
Benchmarks (as of 2024-08-09)
Energy Select Sector SPDR Fund (XLE)
  • Performance Comparison: ConocoPhillips (COP) has exhibited a mixed performance compared to the Energy Select Sector SPDR Fund (XLE) over the past three years. While COP has outperformed XLE over the longer term (3 years), it has consistently underperformed XLE over shorter periods, including year-to-date, one-week, one-month, three-month, six-month, and one-year periods. This suggests that COP's performance is more volatile and less consistent than XLE's.
  • Risk and Return Analysis: ConocoPhillips (COP) has generally provided lower annualized returns than the Energy Select Sector SPDR Fund (XLE) over the past three years, with the exception of the three-year period where COP outperformed XLE by 2.19%. However, COP has also exhibited higher annualized volatility than XLE, indicating a higher level of risk associated with COP. This is further supported by the drawdown figures, where COP has experienced larger maximum drawdowns than XLE, indicating a greater potential for losses.
  • Risk-Adjusted Performance: The Sharpe Ratios of ConocoPhillips (COP) and the Energy Select Sector SPDR Fund (XLE) have been relatively similar over the past three years, suggesting that both instruments have offered comparable risk-adjusted returns. However, the Sharpe Ratios of both instruments have been volatile, indicating some inconsistency in their risk-adjusted returns. The beta values of both COP and XLE have been consistently above 1, indicating that both instruments are more volatile than the overall market and carry a higher level of risk.
  • Overall Assessment: ConocoPhillips (COP) has exhibited a mixed performance compared to the Energy Select Sector SPDR Fund (XLE) over the past three years. While COP has outperformed XLE over the longer term, it has consistently underperformed XLE over shorter periods. COP has also exhibited higher volatility and larger drawdowns than XLE, indicating a higher level of risk associated with COP. However, the Sharpe Ratios of both instruments have been relatively similar, suggesting that both have offered comparable risk-adjusted returns. Overall, COP appears to be a more volatile and riskier investment than XLE, but it has also shown the potential for higher returns over the longer term. Investors should carefully consider their risk tolerance and investment goals before making any investment decisions.
Peers Price History(as of 2024-09-04)
Canadian Natural Resources Ltd. (CNQ)EOG Resources, Inc. (EOG)
  • Performance Comparison: ConocoPhillips (COP) has exhibited a mixed performance compared to its peers, EOG Resources, Inc. (EOG) and Canadian Natural Resources Ltd. (CNQ). While COP has outperformed its peers in some periods, such as the 1-week and 1-month periods, it has underperformed in other periods, such as the 1-year and 2-year periods. Notably, COP has consistently underperformed CNQ over the longer timeframes.
  • Risk and Return Analysis: ConocoPhillips (COP) has generally provided lower annualized returns than its peers, EOG Resources, Inc. (EOG) and Canadian Natural Resources Ltd. (CNQ). However, COP has also been consistently less volatile than its peers, suggesting a lower risk profile. For example, in the 3-year period, COP's annualized return was 29.56%, while EOG's was 29.09% and CNQ's was 32.28%. However, COP's annualized volatility was consistently lower than its peers.
  • Risk-Adjusted Performance: ConocoPhillips (COP) has generally offered a better risk-adjusted return than its peers, EOG Resources, Inc. (EOG) and Canadian Natural Resources Ltd. (CNQ), as evidenced by its consistently higher Sharpe Ratio. This suggests that COP has been able to generate better returns for the level of risk it takes on.
  • Overall Assessment: ConocoPhillips (COP) presents a compelling case for investors seeking a lower-risk investment within the oil and gas production sector. While COP's returns have lagged behind its peers in some periods, its lower volatility and consistently higher Sharpe Ratio suggest that it has been able to generate better risk-adjusted returns. However, investors should be aware that COP's performance has been inconsistent, and it has consistently underperformed CNQ over longer timeframes.
Peers Fundamentals(as of 2024-06-30)
Canadian Natural Resources Ltd. (CNQ)EOG Resources, Inc. (EOG)

  1. Market Position and Size:

    • ConocoPhillips (COP) is the largest company in the peer group, with a market cap significantly larger than its competitors, EOG Resources, Inc. (EOG) and Canadian Natural Resources Ltd. (CNQ).
    • COP's size advantage is reflected in its financial performance, with higher revenue, EBITDA, and net income compared to its peers.
    • This size advantage could translate into benefits such as economies of scale, access to capital, and stronger bargaining power. However, it also comes with potential challenges such as increased complexity, regulatory scrutiny, and slower growth rates.

  2. Profitability and Efficiency:

    • COP demonstrates strong profitability, as evidenced by its high EBITDA Margin and Net Profit Margin, which are significantly higher than the industry average. This indicates strong operational efficiency and cost control.
    • However, COP's Net Profit Margin is lower than both peers and the industry average, suggesting potential challenges in managing expenses or achieving higher margins.
    • COP's return on capital metrics are generally in line with its peers and industry averages, but its returns on invested capital are lower, suggesting potential areas for improvement in capital allocation and efficiency.

  3. Financial Health and Stability:

    • COP exhibits a strong financial health profile, characterized by robust profitability, strong cash flow generation, and a solid balance sheet.
    • Despite a higher level of debt compared to its peers, COP's large shareholder equity provides a strong financial foundation.
    • However, COP's higher debt levels compared to its peers and the industry average indicate a higher level of financial risk.

  4. Valuation and Market Perception:

    • COP's valuation metrics are mixed compared to its peers and industry averages.
    • While its valuation relative to sales and earnings is lower than the industry average, its valuation relative to EBITDA and book value is higher.
    • This suggests that the market may be valuing COP's strong operational efficiency and profitability, but it may also be discounting its lower growth rates and higher debt levels.

  5. Cash Flow and Capital Management:

    • COP generates strong cash flow, as evidenced by its high Net Operating Cash Flow and Free Cash Flow, which are higher than its peers. This indicates a strong ability to fund operations and potentially return capital to shareholders.
    • However, COP's free cash flow is lower than CNQ, suggesting potential challenges in managing capital expenditures or achieving higher free cash flow.

  6. Growth and Future Prospect:

    • COP's growth metrics show mixed trends compared to the peer group average.
    • COP consistently shows higher growth in EBITDA, Net Income, Basic Earnings per Share, and Free Cash Flow, indicating strong operational efficiency and profitability growth.
    • However, COP consistently shows lower growth in Sales/Revenue, Total Assets, and Book Value Per Share, suggesting slower growth in its core business operations.
    • This suggests that COP may be focusing on maximizing profitability and cash flow generation, potentially at the expense of expanding its core business operations.

  7. Potential for Investment:

    • ConocoPhillips (COP) presents a mixed investment proposition.
    • While its strong profitability, robust cash flow generation, and dominant market position offer potential advantages, its slower growth in core business operations and higher debt levels raise concerns.
    • Investors seeking exposure to the energy sector with a focus on profitability and cash flow generation may find COP attractive. However, investors seeking high growth potential may prefer other companies in the peer group.

  8. Key Risks and Considerations:

    • COP's slower growth in core business operations and higher debt levels compared to its peers present potential challenges for maintaining its market leadership.
    • Investors should consider the sustainability of COP's growth rates, particularly in light of the recent acceleration in profitability and cash flow growth.
    • The potential for commodity price volatility and changes in operating conditions could impact COP's future performance.

  9. Overall Assessment:

    • ConocoPhillips (COP) is a financially strong company with a dominant market position. Its strong profitability, robust cash flow generation, and efficient operations contribute to its competitive advantage.
    • However, COP's slower growth in core business operations and higher debt levels compared to its peers present potential challenges for maintaining its market leadership.
    • Investors should carefully consider COP's growth trajectory, debt levels, and potential risks before making an investment decision.