Is Conoco Phillips Stock Undervalued?

Unlike the S&P 500, which rallied from October lows, crude oil prices have been in a downtrend ever since and that has done no favors for the share prices of energy stocks, such as Conoco Phillips (NYSE:COP). But perhaps that’s where the opportunity lies as the calendar turns to the new year and capital flows to companies that are trading at bargain prices.

Following the trend of oil futures, Conoco Phillips has generally marched lower since October, bucking the trend of the major indices too, but by mid-December, it started to show signs of strength once again. Are buyers back on the hunt for oil stocks, and COP in particular? If so, is now the time to buy before a stampede of buyers follows.

Is Conoco Phillips Worth Investing In?

To get a sense of whether Conoco Phillips is worth investing in, we took a look at key performance metrics. What leaps off the pages of the financial statements is an energy stock that absolutely deserves further attention.

To begin, COP has a really high return on invested capital of 18.5%, suggesting its highly efficient at allocating capital to profitable ventures. Value investors will also be pleased to discover it has a free cash flow yield of 7.5%.

For an energy business that is highly capital intensive, a further green check box is the comparably low debt-to-equity ratio of 39.9%.

Other standout features include the firm’s 47.3% gross profit margin and 28.0% operating margin. 

So, it appears Conoco Phillips ranks well on many key financial ratios and margins, but is it a buy now?

Is Conoco Phillips Stock Undervalued?

According to 28 analysts, Conoco Phillips is 18.6% undervalued with a consensus price target of $136.81 per share.

Interestingly, a 5 year discounted cash flow analysis projection arrives at a similar, albeit slightly higher, figure of $141 per share. So too is a 10-year DCF forecast even more optimistic and has a $146 per share fair value target on the stock.

These estimates are noteworthy because they factor in a forecasted sales decline over the coming years. COP sales are expected to decline at a compounded annual growth rate of -8.0%.

For a company generating $61.3 billion in top line sales, that is very meaningful decline in absolute dollar terms. It contrasts sharply also with the 21.9% growth over the past half decade. And yet, COP appears to be trading at a price below its intrinsic worth.

Evidence of that can be found in the company’s price-to-earnings ratio of 12.4x also. Indeed, it’s a good deal below the 15x that Warren Buffett is regarded as viewing as a ceiling on earnings multiples if he is to deem it a value buy. As a result, it suggests there is a reasonable margin of safety to buying COP stock now.

Is It Time To Buy Conoco Phillips?

The fortunes of Conoco Phillips are largely tied to those of oil. Nowhere is that more evident than in the prices of the two over the past year with crude oil futures falling by about 8% on the year while COP share price is up by just 2%, vastly underperforming the major market averages, such as the S&P 500 up 23% for the year.

With analysts projecting declining sales over the coming 5 years, a case could be made that Conoco Phillips has serious upside potential if any geopolitical tensions spark a hike in oil prices over that time frame.

With its share price so directly tied to crude oil futures, even flat revenues in the coming years would beat analysts forecasts, and likely lead to higher prices that will reward shareholders. However, even without a spike in oil, there are other reasons to buy COP.

Conoco Phillips Dividend Is Enticing

For income-oriented investors, the COP dividend yield of 4.13% is more than appetizing. The payout ratio of 58% suggests it’s also safe and sustainable.

A quick look at the cash flow statement confirms this with the company reporting an extraordinarily high $18.5 billion in levered free cash flow last year while dividends set the company back by just $5.7 billion.

With $80 billion in revenue over that same time frame and $28.8 billion in operating income reported, shareholders can feel confident that their quarterly checks will keep flowing long into the future.

For every share owned, COP paid out $4.82 in dividends last year and has been on a 6 year growth streak of hiking that payout too.

Final Thoughts

Conoco Phillips has lagged the broader market this year but it’s performance has largely been constrained by the decline in oil prices this year.

Forecasts for the next 5 years are bearish for the top line and yet, in spite of that, analysts are still bullish on the share price, deeming it to be undervalued by 18.3%, a fact confirmed by both 5 and 10-year discounted cash flow analysis calculations.

Conoco Phillips is also a solid stock in paying out an attractive and growing per share payout over the past 6 years, so those on the hunt for predictable income can find comfort knowing the firm is both an income-producer and on sale now.

Indeed, any spike now in oil prices has the potential to materially affect COP revenues and in turn its share price. If you’re looking for a company that could benefit from any skirmishes around the world that could constrain the supply of oil or simply cause it to spike from a geopolitical shock in the next few years, Conoco falls squarely into the consideration set.

With so much speculation that China may make a move on Taiwan in 2024, the odds are the full extent of such a black swan event have not yet been priced into the market or the price of Conoco shares for that matter.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.