Is ConocoPhillips ready for a rebound?

Shares fell 9 percent during the quarter, which offers a compelling entry price now.

By Staff Aug 27, 2014 11:31AM

A ConocoPhillips filling station seen on July 14, 2011, in Irving, Texas © Tony Gutierrez /APBy Marc Courtenay, TheStreet

ConocoPhillips (COP) is a popular energy holding for investors wanting growth and income. That's why it surprised me to learn that perhaps the smartest investor of all time, Warren Buffett of Berkshire Hathaway (BRK.A) made major reductions in his exposure to the company this year.

Buffett is the quintessential buy-and-hold investor who once quipped, "Someone is sitting in the shade today because someone planted a tree a long time ago." He'd rather buy a company in its "seedling" stage and patiently wait for it to grow to maturity before he decides to be seller.

That seems to be his view of the oil giant. According to Berkshire's latest report, it reduced its Conoco holdings by nearly 88 percent although it still owns 1,355,228 shares worth over $1.09 billion as of June 30. logoThe selling prices for COP shares were between $69.48 and $86.10, Buffett's company reported, with an estimated average price of $77.79. A report from his blog explained part of the reason for the huge reduction in COP shares: "In all honesty, the move Buffett made in lowering his position in Conoco Phillips...are likely the result of Berkshire looking to limit the potential falling oil prices downside."

What it doesn't say is of equal importance: Since hitting its 52-week high of $87.09 on July 24, shares of ConocoPhillips corrected nearly 10 percent. Shares, at around $81, are up 14 percent for the year to date but still 7.5 percent below the recent high.

This summertime correction could lead Berkshire and other investors to buy more Conoco shares.

Not only have energy prices have corrected as anticipated, but ConocoPhillips management is willing to sell assets to fund its shareholder-friendly approach. The $2.92 annual dividend offers a generous yield with a sustainable payout ratio of 38 percent, opening the possibility of additional increases.

Director of External Communications and Media Relations Daren Beaudo, in speaking about COP's  prospects, reiterated two comments CEO Ryan Lance made at a recent analysts meeting.

"Our goal is to deliver double-digit returns to our shareholders on an annual basis," Beaudo said. "That double digit is really important because we think there's a clear place for this kind of energy stock, one that has steady, consistent, predictable, stable and low risk returns."

Beaudo said the company plans to do that through "delivering 3 percent to 5 percent production growth, 3 percent to 5 percent margin expansion with a dividend today that is yielding in excess of 4 percent. We think this is a pretty compelling formula."

Here's a one-year price chart including a look at the energy behemoth's trailing 12-month operating margin.

A nearly 25 percent operating margin is impressive when compared to industry leader Exxon Mobil (XOM) with an operating margin of only 11 percent. The chart also highlights the low debt-to-equity ratio, another indicator that there's plenty of room for shares of COP to rise in the months ahead.

Beaudo noted that with the company's growing cash margins and cash flows, "we didn't forget about our shareholders and increased our dividend, which has been our promise and our commitment."

If you remained a Conoco shareholders through 2013, "you achieved over 22 percent return in excess of our integrated competition and well in excess of our independent peers, and in fact exceeded the S&P 500," said Beaudo.

My 12-month price target of $92 reflects those bullish points. Buy some shares before Warren Buffett decides to increase his stake in ConocoPhillips after all.

At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.

More from TheStreet

Aug 27, 2014 12:01PM

We know whats not in a rebound.  And that is the forecasted GDP growth for 2014 being lowered to a measly 1.5%.


It will be revised even lower in the coming months.  This is obama's "recovery" after 5.5 years of his policies

In all honesty, I do not care what W. Buffett does.  I care what I do and I own COP.
Aug 27, 2014 12:37PM

Buffet certainly made a "short term" mistake this time...And some others have done great...

But over time it may play out on XOM, only because it was a "sweet deal", not always wisdom..

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