A few days ago, I wrote about the fact that oil prices have been surging for the last few weeks. While the price of West Texas Intermediate (WTI) crude has dropped a bit from a peak a little above $76, it remains close it, sitting as of this writing just a little below $74 per barrel. This latest surge has pushed oil prices to levels not seen in four years, when oil in the midst of an historical plunge that didn’t find a bottom until the beginning of 2016. If you work forward from that low, which came around $28 per barrel until now, oil has been one of the best bets to make in commodities for the past couple of years. For oil stocks, the decline that began in mid-2014 and continued for the next 18 months put major pressure on the entire industry; the companies that were smart enough to have built up significant levels of cash while prices were high found themselves trying to ride out the bearish wave; that generally meant that the largest companies, like Exxon Mobil (XOM), Chevron (CVX) and ConocoPhillips (COP) did okay, while many of their smaller, less disciplined brethren suffered a lot more.
As a value-oriented investor, the energy sector in general, and oil stocks in particular have been a great place for me to go looking for value once oil prices began to stabilize in 2016. The sector’s improvement lately, has finally started to shift the narrative about the oil industry in my mind away from what a really good value actually is. Does that mean oil stocks aren’t a good investment option any more? It’s hard to say that for sure, especially if you consider some of the macro and microeconomic factors that are expected to drive oil prices in the near future.
The truth is that compared to its historical highs, oil prices remain more than 25% below the all-time highs they saw in 2014, despite their impressive rise over the last two and a half years. There’s still room to keep moving higher, and while I’m not sure we will see oil drive back into those highs, I’m also pretty confident it isn’t going to drop back to its 2015 levels. The truth about the oil industry right now is that the decline in prices forced oil companies to learn how to run very lean and efficiently, which is why when oil was around $45 per barrel a lot of executives were on record saying they could be very profitable with oil that price area. We’re well above that level now, and so if you’re looking at a company with a strong balance sheet, including conservative debt levels and healthy cash flow, there’s a pretty good argument that they should remain profitable for the foreseeable future.
To say that a stock, or even an entire industry might not represent a great value doesn’t automatically mean it’s a bad investment – but it does mean that you have shift your mindset about the kind of opportunities you want to focus on in the stock market. If, for example, you want to focus on high-growth stocks, whether or not a stock is a great value right now isn’t a major question you worry about. One of the differences between value investing and growth investing is that value investing focuses on a stock’s past values to compare against its current prices, while growth strategies puts a bigger emphasis on the stock’s future opportunities. A stock might be higher than its historical averages, but if its business is growing nicely and expected to keep moving higher for the foreseeable future, most growth investors will want to ride what they expect will still be a bullish wave. The fact that the stock may already be at or near historical highs in that case may simply suggest to these investors that the stock is breaking new ground and should keep moving higher.
COP is a very good example of what I mean. This is a stock that has nearly doubled in price since August of last year, and year-to-date has increased by nearly 43%. It is presently only about 10% below the all-time high prices it set before oil prices collapsed in 2014, which means that it stopped being a stock I could think of as a legitimate value play a while ago; but if the stock is only about 10% below its highest point, and oil is still more than 25% below its highest levels, a growth investor could make an argument that the longer oil prices remain stable, or possibly even rise higher, the higher COP’s price could go. Great value? No; but could it be a good growth opportunity? Take a look at the numbers and decide for yourself.
Fundamental and Value Profile
ConocoPhillips is an independent exploration and production company. The Company explores for, produces, transports and markets crude oil, bitumen, natural gas, liquefied natural gas (LNG) and natural gas liquids. The Company operates through five segments: Alaska, Lower 48, Canada, Europe and North Africa, Asia Pacific and Middle East, and Other International. The Alaska segment explores for, produces, transports and markets crude oil, natural gas liquids, natural gas and LNG. The Lower 48 segment consists of operations located in the United States Lower 48 states and the Gulf of Mexico. Its Canadian operations consists of oil sands developments in the Athabasca Region of northeastern Alberta. The Europe and North Africa segment consists of operations and exploration activities in Norway, the United Kingdom and Libya. The Asia Pacific and Middle East segment has exploration and production operations in China, Indonesia, Malaysia and Australia. COP’s current market cap is $91.1 billion.
- Earnings and Sales Growth: Over the last twelve months, earnings increased almost 678% – no, that isn’t a typo – while sales growth was modest, increasing about 4%. In the last quarter, earnings grew 13%, while sales increased a little over 3%. COP’s margin profile is impressive, with Net Income over the last twelve months that was 13.2% of Revenues, and improved to 17.7% in the last quarter.
- Free Cash Flow: COP’s free cash flow is very healthy, at more than $6.5 billion for the trailing twelve month period and translates to a Free Cash Flow yield of 7.2%.
- Debt to Equity: COP has a debt/equity ratio of .48, a relatively low number that indicates the company operates with a conservative philosophy about leverage. They reported a little over $6 billion in cash and liquid assets in the last quarter, which along with operating profits that are more than adequate to service their debt, gives them excellent financial flexibility.
- Dividend: COP pays an annual dividend of $1.22 per share, which translates to a yield of 1.55% at the stock’s current price.
- Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for COP is $26.87 per share and translates to a Price/Book ratio of 2.91 at the stock’s current price. Their historical Price/Book average is 1.66, which suggests that the stock is trading at a premium right now of more than 43%. Their Price/Cash Flow ratio offers a similar perspective, since it is currently running 29% below its historical averages. Between the two measurements, the long-term target price, based strictly off of value analysis could lie anywhere in a range between $44 and $56 per share. This is the central reason I can’t call the stock a good value right now; but the stock’s fundamental strength, along with its long-term upward trend and general economic forecasts that seem to bode well for the industry in general could still make it a good growth opportunity.
Here’s a look at the stock’s latest technical chart.
- Current Price Action/Trends and Pivots: The red diagonal line traces the stock’s upward trend over the past year and which only recently reached its high at around $80. It also informs the Fibonacci retracement lines shown on the right-hand side of the chart. The stock is only a little below that high right now, with the nearest support level around $73 based on previous pivot highs that occurred in that area in August. The stock also has important trend support at around the 38.2% retracement line, which is around $68 per share; a drop below that point, while not currently a likely event given the long-term trend’s strength, would mark a major trend reversal. The stock’s current bullish strength would be confirmed by either a break back above $80, or by a correction to anywhere between $68 to $73 that is followed by a pivot low and rally back above $73.
- Near-term Keys: It would be hard to suggest taking a long-term position in a stock like COP right now, given the already extended state of the stock’s bullish trend and its current position so close to a 52-week high; however if the stock gives either of the bullish signals I just outlined, there could be a very nice short to intermediate-term opportunity to either buy the stock or use call options. A bearish trade using put options or shorting the stock is a very low-probability trade right now, and really shouldn’t be considered unless or until the stock breaks below the $68 currently identified by the 38.2% Fibonacci retracement line.