ConocoPhillips (COP) is an exploration and production giant operating in 15 countries. The company’s diverse, low-cost supply portfolio comprises resource-rich unconventional and conventional plays in North America, Europe, and Asia; LNG developments; and an inventory of exploration assets all over the globe.
Last year, the company completed the acquisition of Concho Resources for $9.7 billion in an all-stock deal, boosting the output capacity of ConocoPhillips to 1.5 million barrels per day.
Further, just over a month ago, the company completed the acquisition of Shell Enterprises’ basin position for $9.5 billion in cash, including ~225,000 net acres and producing properties, and more than 600 miles of operated crude, gas and water pipelines and infrastructure. With these assets, ConocoPhillips could increase its Permian output of oil by 40%, while the deal should result in great synergies, as the company is now the second-largest producer in the Permian, behind only Pioneer Natural Resources (PXD).
In my view, the company’s most recent results were rather pleasing, while ConocoPhillips’ dividend is relatively robust. That said, I don’t think the stock trades at a discount at its current price levels. For this reason, I am neutral on ConocoPhillips.
Latest Results
ConocoPhillips just released its Q4-2021 and year-end results, with numbers coming in quite strong. Excluding Libya, the company achieved Q4 production of 1,567 thousand barrels of oil equivalent per day (MBOED), an increase of 423 MBOED year-over-year.
Earnings came in at $2.6 billion, or $1.98 per share, compared with a loss of $0.8 billion, or ($0.72) per share last year. Earnings growth was driven by higher realized prices and volumes, partially offset by higher operating costs related to higher production volumes. ConocoPhillips achieved a total average realized price of $65.56 per barrel of oil equivalent (BOE), 97% higher year-over-year as production remains unhedged and thus realizes the full advantage of higher market prices.
Following better-than-expected results, ConocoPhillips announced a $1 billion increase in its expected 2022 capital returns to shareholders, boosting the amount to a new total of $8 billion. This suggests an increase of 30% over 2021. Hence, along with its declaration of its $0.46
ordinary dividend, the company also announced a second-quarter variable return of cash (VROC) payment of 0.30, a 50% increase over the first-quarter VROC.
What About the Valuation?
ConocoPhillips achieved EPS of $6.07 during FY-2021. Assuming relatively favorable pricing power and the company’s newly acquired assets contributing to the bottom line next year, we estimate FY-2022 EPS of around $8.50, which is close to consensus estimates. This suggests that the stock is currently traded at a forward P/E of 10.7.
While shares are not expensive based on this multiple, the company is enjoying a favorable trading environment, which means that its results are relatively inflated these days. Hence, while the stock may not be expensive indeed, I don’t think it is cheap either, should oil prices retreat in the medium term.
Wall Street’s Take
Turning to Wall Street, ConocoPhillips has a Strong Buy consensus rating, based on 15 Buys and three Holds assigned in the past three months. At $100.17, the average ConocoPhillips stock forecast implies 9% upside potential.
Conclusion
ConocoPhillips is a quality company in its sectors, and its recent acquisitions should empower its production capacity and operating synergies. While the company is operating in a favorable trading environment, recording very high profits, I believe that much of the stock’s medium-term upside potential has already been priced in the stock’s rally over the past year.
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