Market Commentary: 1 Oil Stock With Barrels of Upside

While the S&P 500 rallied from its October lows, crude oil prices and the shares of energy companies like Conoco Phillips, have declined. This trend, however, may present an investment opportunity as undervalued assets like COP become attractive.

Conoco Phillips’ stock, tracking the oil futures, showed a decline until a notable recovery in mid-December, raising questions about renewed investor interest in oil stocks and the potential timing for investing in COP.

There are lots of reasons to be excited, not least the free cash flow yield north of 7% and ROIC closing in on 20% alongside a moderate debt-to-equity ratio of under 40%. These indicators suggest Conoco Phillips is financially robust, but whether it’s the right investment now is the the million dollar question?

Key Points

• Conoco Phillips produces over 7% free cash flow yield, nearly 20% ROIC, and a debt-to-equity ratio below 40%.
• Potential for significant gains if geopolitical events spike oil prices.
• Offers a 4% yield with strong financial backing, ensuring sustainable dividends.

What Does Wall Street Think?

Over two dozen analysts collectively estimate it to be just shy of 19% below its fair value, with a consensus price target of $136 per share. A DCF forecast aligns with those projections.

These valuations are particularly significant considering they incorporate an anticipated sales decline at a CAGR of -8%. This projected decrease would represent a loss of around $5 billion a year from the top line, for the next 5 years if accurate.

Nonetheless, evidence of COP’s undervaluation is seen in the company’s low price-to-earnings ratio, suggesting a considerable risk mitigation for investors interested in purchasing COP stock at its current price.

An under-appreciated proxy call option for the firm would mint if oil prices were to rise due to a geopolitical conflict. Conoco Phillips, with its share price closely linked to crude oil futures, could see significant gains from such an event.

Is It Worth Buying For the Dividend?

For those focused on income, Conoco Phillips offers a compelling dividend yield of 4%. With a low payout ratio and solid balance sheet alongside $18 billion in levered free cash flow, investors have little to worry about the company fulfilling its obligations to pay out.

Plus, massive revenues of $80 billion mean shareholders can rest assured that the top line, even if declining, is sufficient to keep the dividends flowing to the tune of almost $5 per share.

Final Analysis

This year, Conoco Phillips’ market performance has been subdued, largely due to the downturn in oil prices. However, despite bearish forecasts for its top-line growth, analysts remain optimistic about the stock’s value, estimating an 18% undervaluation. This assessment is supported by a DCF calculation.

The company not only offers an appealing and progressively increasing dividend but also presents itself as a sound investment choice at its current valuation. In the event of a spike in oil prices, perhaps triggered by military tensions, COP’s revenues and stock price could see a significant boost.

Considering the volatile global landscape, the full impact of military conflicts or threats thereof may not be fully reflected in current market prices or in Conoco Phillips’ stock valuation. Therefore, for investors considering the implications of global events on the energy sector, Conoco Phillips should be a strong contender in their investment considerations.