On May 21, we issued an updated research report on ConocoPhillips (COP). The company’s recent performance was backed by a continued portfolio shift to liquids and higher production from new development programs, as well as upstream ventures in key projects. However, this was partially offset by lower oil realizations. ConocoPhillips is progressing on other North American shale plays, including several emerging areas.
This Zacks Rank #3 (Hold) stock has delivered positive earnings surprises in all the last 4 quarters with an average beat of 10.5%. The company’s first-quarter earnings of $1.81 per share, surpassed the Zacks Consensus Estimate of $1.57 per share and increased 27.5% from the year-earlier profit of $1.42. The year-over-year growth was mainly attributable to production from new development programs as well as upstream ventures in key projects.
With leading positions in both natural gas and heavy crude oil in North America, as well as a legacy position in the North Sea and growing exposure to lucrative international regions, ConocoPhillips expects to replace reserves and sustain production growth over the long term. ConocoPhillips' liquids-rich exploration initiatives are gaining momentum through the Eagle Ford, Bakken and North Barnett shale plays.
ConocoPhillips’ initiatives toward liquids-rich plays are gaining momentum through the Eagle Ford, Bakken and Permian plays. The company is also poised to benefit from a pipeline of projects in the Gulf of Mexico (GoM), Malaysia, the liquefied natural gas (LNG) project in Australia, the U.K., Norway, and the Canadian oil sands, apart from the US Lower 48 liquids-rich plays. Oil sands expansion projects are also on track.
Since Apr 2012, when the company spun off its refining operations to Phillips 66 (PSX), it has delivered total shareholder returns of 22%. With this, ConocoPhillips has shifted its total focus to upstream operations and thus oil and gas prices play a major role in determining its performance. The company plans to grow production by maintaining its focus on growth in reserves, through global drilling programs in legacy assets, unconventional assets and major projects.
However, with the completion of the spin-off, the company has shifted its total focus to upstream operations and thus oil and gas prices play a major role in determining its performance. In addition, natural decline and downtime in the fields are also expected to result in weak production. Moreover, the company remains vulnerable to unstable movements in crude oil and natural gas prices.
ConocoPhillips’ margin growth drive would also be helped by its shift of production mix to higher-value products. The company expects to spend $16 billion on average annually and will allocate 95% of its capital to investments that deliver above-average margins. The recent activity aims offshore prospects in Australia Angola and Senegal, conventional exploration in Norway and Indonesia, and unconventional exploration in North America, Poland and Colombia.
Overall, a restrained risk-reward balance in the near term has prompted negative estimate revisions for 2014 and 2015 in the last 30 days. As a result, the Zacks Consensus Estimate for 2014 and 2015 are pegged at $6.25 and $6.05 per share, down 7.8% and 7.2%, respectively.
Key Picks in the Sector
Currently, we prefer to remain at the periphery regarding ConocoPhillips. However, some better-ranked stocks in the oil and gas sector such as Emerge Energy Services LP (EMES) and Athlon Energy Inc. (ATHL), sporting a Zacks Rank #1 (Strong Buy), are worth reckoning.
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