We are downgrading our recommendation for ConocoPhillips (COP) to Underperform from Neutral, reflecting lackluster first quarter results on account of lower production volume. The company's performance in the coming months is expected to be weighed down by unpredictable global economic conditions, erratic supply/demand fundamentals of oil and gas, and international business risks.
Furthermore, the company's future earnings will be decided by execution capability on the recently concluded acquisitions of two deepwater blocks in Angola, as well as receipt of 74 blocks in the Gulf of Mexico, with the planned appraisal of Tiber and Shenandoah wells later in 2012.
Thus, we believe there are no positive catalysts for ConocoPhillips and expect it to underperform the broader market. Our $47 price objective reflects a P/E of 7.1 on our 2012 EPS estimate, which is well within the historical trading range.
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