ConocoPhillips: Why the Sell-off?

Wow, I go hiking and fly-fishing in the South San Juan Wilderness for four days and come back to this?! ConocoPhillips (COP) was at $88 when I departed and now that I am back in Wi-Fi space I log in to find it trading at $81 and change? What in the world happened? I figure oil must have dropped to $50/barrel or that natural gas must be trading at $5. Hmmm... nope, oil is at $130... natural gas at $10.60. Perhaps COP cut the dividend? Nope... no news of that either. The dividend is yielding over 2% and if history is any indication, more dividend rate increases are surely in the cards.

So, why the selloff in COP? How come a company that is expected to earn $12/share in 2008 is trading at $82? Has management lost its head? Nope - CEO Jim Mulva continues to make deals in foreign energy markets that other oil companies can only dream about. Are people not buying Conoco gasoline? Well, if the Conoco stations here in Colorado are any indication, they are doing a very brisk business (of course I always fill up with COP gasoline). It's a small point, but Conoco stations are prevalent in the areas of Colorado that are growing gangbusters due to the energy plays being made these days.

Perhaps it was the article in the Wall Street Journal over last weekend about how the major oil companies won't be around in 10 or 15 years that has caused the sell-off. Good luck on that idea. At the rate at which the world is shifting to alternative energy, oil will be around for many decades to come. Of course, those who read my submissions on Seeking Alpha know I am a believer that worldwide oil supply will not keep up with worldwide oil demand, and that growing oil production will be hard for the majors. That said, Conoco's positions in LukOil, domestic US natural gas, Alaska oil and nat gas, the Middle East, and its excellent CEO mean Conoco will not only be around for decades, but will be making oodles of cash. $12 in 2008 and trading at $82? Gimme a break!

While I am at it... the entire energy sector appears to have sold off in a big way this week while I was off catching trout in the mountains. This sell off reminds me of early 2007 when the energy sell off scared out the weak of heart, the big guys came in and swooped up shares, and energy went on to return about 30% for the year. I'd be surprised if we don't witness the same thing this time. I mean come on, oil is still at $130 and billions of Chinese and Indians are trading in their bicycles for automobiles powered by internal combustion engines. What has changed to cause this sell off in energy? Answer: not a thing. Take advantage of this sell off to increase your energy holdings across the board.

Look at the last hour of trading in COP yesterday. Looks like people were loading up at $82. This stock is at least 25% undervalued. I bet it hits $100 in 2008. This stock is golden... just like the picture of this golden brown trout that I am including.

Disclosure: Long COP

Comments

[Brian Pursley]

Mr. Market is an interesting fellow.

"40 percent of a stock's price movement is due to the market, 30 percent to the sector, and only 30 percent to the stock itself" -- Stevie Cohen

[investor88]

The $12 earnings for 2008 [single digit p/e ratio for a blue chip with strong future prospects] and the basic strength of the company would suggest that this is good entry level for investors with a view of 1 year or more. $100 is achievable target for end 2008 especially if oil price rebounds as Goldman predicts it will to us$149 by end of year. "take advantage of this sell off to increase energy holdings across the board" - I agree!

[David Barsan]

nice fish...I enjoy fly-fishing and buying undervalued stocks as well =)

[CT Programmer]

I pushed the button and sold my CHK last week at about $62, just when it was starting to slide. I was thinking about picking it back up here while its in the low $50's. But all the articles hyping CHK and Cramer screaming how great it is, plus the paltry dividend, made me rethink. It's still a fwd PE of about 13-14 at the current price, which while historically low isn't as low as COP at 6.2. I am bullish on gas, and COP just seems the better value, so I plugged my money into it today to replace CHK as my gas play. But I also hold two pipeline companies (EEP and OKS) plus a non-traditional Canadian Oil Sands producer (PGH) to round it out. Thanks Fitz for the always sensible posts... and nice fish.

[User 228196]

If COP is undervalued by at least 25% then Shell is a double. Having worked for both companies in this decade, I know that every argument made on behalf of COP is true to an even larger extent with Shell. U.S. investors are particularly unaware of the financial power of RDS.

[X-terminator]

Hopefully you catch and release! Let that beautiful fish live. Al Gore

[Scammr]

I'm sleepin like a baby with my long COP position!

[jimmy46]

COP is weak because their oil production is in steep decline.
The company is liquidating it's assets.

And the "income" they report from their Lukoil stake is
suspect.
How much is an "investment" in thuggish russia worth?

[The watch dog]

Jimmy, don't be so negative and distrustful. I worked for PwC in Russia and audited companies like Lukoil. Believe me we scrutinized every little thing just like we do in the US. Of course you are aware that you are not protected from fraud and corruption in the your perfect world either. Stereotyping is not very smart.

[GregY]

The watch dog - did you watch over Enron as well? Your confidence vote for Russian business practices, makes me run and dump COP as soon as I can. There is nothing more reassuring than corporate audits.

[mkreisel]

XOM went down 50% in 1974 while oil price tripled.

XOM went up 200% from 1985 to 1987 while oil price got cut in half.

COP, XOM both have large refining operations that make money independently of the price of the crude.

And they follow S&P 500 more than they follow the price of crude.

The author should study the market more!

[Mmarrkk]

Jimmy..."steep&qu... decline? a couple of percent isn't "steep" and they are looking at projections of 2%. "liquidating its assets": can you tell us what they are selling? All I've heard of is Neatherlands which are smallish and gas stations which don't make any money anyway!

[The Fitzman]

Thanks for all the comments. As usual, I like to jump in....

User: I am not as familiar with RDS. That said, I told my son to buy some COP a few years back, and he came back and said he bought RDS instead. Not sure if that was just a son rebelling or if he was onto something there. Regardless, I will research it some.

X-term: yes, I catch and release except on certain occaisions...if I am backpacking and have run out of food...or, if my Mom makes a special request for my fried trout...which she loves. 99% of the fish I catch go back in the water...and all native trout do.

jimmy: "steep decline"?? i think you should look at their production numbers again. "steep" is not the word that comes to mind...more like stagnant, but so is XOM and so is CHV...why sell all your oil today when you can wait a year and sell it much higher? LukOil income suspect? The venture has already paid for itself. I agree that some of the dealings in Russia have been terrible (XOM and BP come to mind). That said, Mulva seems to have good relationships with foreign governments (Venezuela being the exception I suppose, but even that hasn't been settled yet). Besides, what is US big oil supposed to do? You have to play where the oil is...and it just ain't in the lower 48 anymore.

mkreisel: sure they have refining operations, and sure margins are tight there. but god man, the oil the produce is selling for $130/barrel and the nat gas over $10! wrt to me following the market more, and these companies following the S&P...perhaps you should do so. COP has waaay outperformed the S&P over the last 10 years. Over just the past 5 years, not counting dividends:
COP: $28-$83 or 190%
S&P: $1000-$1260 or 26%
perhaps it is you that needs to study the market more? the 10 year numbers are even more in my favor as the S&P was close to $1000 in 1998. S&P is dead money and will be as we watch oil head ever higher in the years to come. next time, check your figures before you cut me down, ok?

Mmarrkk: well said, and I agree. not sure where jimmy is coming from on that post.

[jayz]

Yea, keep waiting for the "big guys", moron, the big guy will tell you the commodity party is over, so is your pathetic COP

[The Fitzman]

jayz: stick to rapping: if earning $12/share, paying a 2.3% dividend, and pumping the oil and natural gas the world (and you!) so badly need is "pathetic", then perhaps YOU are the moron and not me. good luck waiting for oil to come down so you can party and rap. meantime, perhaps you should mature a lil bit from the name calling days of grade school and try to contribute something substantial with your Seeking Alpha comments. i don't mind that you disagree with me, just the manner in which you do so.

[samadams]

I believe Buffett has a small stake in COP as well but maybe he doesn't know what he's doing

Well said Fitzman and great post

[Duke]

Oil trades in US dollars according to OPEC rules. When the US monetary supply is increased the value of the dollar declines and the price of oil increases to compensate for the currency loss. Unless the US stops producing more currency, which is needed for all the financial bailouts , and the interest rates begin to increase oil will remain over valued. Fossil fuels will dominate in global energy production at approx 94 % , even if solar and wind increase they are at such small levels today, 0.2% and 2.0%, they are also limited by production capacity and will not replace fossil fuels soon. In addition the pacific rim countries are expanding with new roads and utilities thus global energy demand will remain high. The decline in the oil sector was related to the recent reports of opening up domestic oil reserves which prompted the recent decline in oil, now defeated by Congress , thus oil will remain high, Futures contracts at 2013 are still in the $135/barrel range.

[Bob Gary]

This is just moving down in sympathy with crude.

[Jameel]

Wow, bear markets just make some people soooo angry!! Where does all that hostility come from. Fitz, you are right on with this article. And mkreisel is right they make a heck of a lot of money from refining, tight margins or not. It's not that hard to see. Just take a look the annuals and see the growth of the refining. I too sleep comfortably long COP every night.

[Jack Yetiv]

But wouldn't a pure E & P company that does NOT refine and also trades at low PE's and yields in excess of 12% be a better play?

I am thinking, of course, of the Canroys like PWE, AAV and PVX.

And if dividend isn't an issue, how about the more aggressive E & Ps' like CHK, EOG and COG?

Jack

[mkreisel]

I should have used word "correlation"... instead, but I apparently overestimated your market knowledge in this case.

When S&P goes into the gutter, so will your beloved COP.

[Philip Obal]

COP and other majors that have refineries are stuck with many times buying oil at high prices, refining the product, and barely making a few cents at selling it. Case in point - is XOM, which has to buy oil on the market, as it refines more crude, than it produces (from the wellhead) each month.

The majors that do NOT have refineries, but just have E&P (exploration and production), will actually have better margins - since they just sell the oil & gas from the wellhead.

[long_on_oil]

Check the trend line of COP and you will find that it has been making higher highs and higher lows until that changes you do not have a bear market trend. COP increases its dividend, thus protecting the bottom. For example I purchased BP in 2003 for $34 when it was paying a 5% dividend. BP now sells for $62 and still pays a 5% dividend but my orginal purchase is yielding 9.5% and that is only 5 years. If you are an investor you have to be long in oils for the above reasons.
BP has been the worst of the big 5 energy companies and it has been great. I currently own BP, COP, NOV and RIG and I look at these pullbacks as time to buy, at least that has been the case the past 5 years. Don't fight the trend.

[truthinvesting]

The integrateds will finally make money and of course lower nat gas will cause COP to drop. Long term the company is fine. In my website's natural gas thread the top and bottom were called

[Steve Chasko]

Beautiful fish!

Steve Chasko

[The Fitzman]

samadams: had a couple the other night, and yeah, as far as i know buffet is still a COP stakeholder.

duke: i also think the big drop in nat gas prices affected COP, but it's overdone IMHO. also, if oil is selling for $135/barrel in 2013 that will mean zero appreciation in oil for 5 years. i don't see this happening. we have oil at $135 today, yet no real shortages. wait until the oil shortages start to happen and you'll see oil skyrocket. you'll see this, according to many (such as the CEO's of COP, RDS, and Hess) by 2015. so, 2013 is real close....i bet you'll see oil over $200/barrel by 2013, baring a world-wide depression, which of course is possible considering the financial "leadership" shown by the US, its markets, and its government over the past 8 years or so.

bob gary: you're probably right...my point is that crude is still $130/barrel (!) which for some reason seems "low" now? COP is priced for oil at $70/barrel. doesnt make sense to me...but as some have pointed out, perhaps i AM a moron...

Jack: i have been watching and waiting on the canroys since you first alerted me to them. need to fiddle with my IRA some to make room as that is the best place for them tax-wise. i did end up getting a little PBT and HGT trust which are paying nice dividends, but they too have sold off lately :(

mkreisel: you back again? you apparently didn't read my last response stating the facts about the S&P returns versus COP (for 5 years, COP returned 190% versus 26% for the S&P500). for 10 years, it's even worse, but i was trying to be nice - work those numbers yourself. btw, the S&P IS in the gutter (and COP is not), and has been since bush was elected. have you been paying attention? apparently the only maket knowledge you overestimated was your own. i hate being so blunt, but you started it with some incorrect statements and personal attacks. so, ye who giveth taketh back.

long-on-oil: totally agree.

truth: *finally* make money? COP has been printing cash like the Fed for the past 10 years...it is, and has been, an income machine, much like XOM and CVX. they just don't seem to get the respect they deserve from a PE perspective. this will change when oil shortages begin to appear. and, in a big way IMHO.

steve: thanks! more pics of my colorado trip (and other trout) on my blog:
thefitzman.blogspot.co.../

[lblaine]

Nice post. COP will hit $100 in 5 months. The price of oil will continue upward, as the US$ is becoming worthless.

[goldilocks]

Like that trout !, heading to your blog now...

[fleetusa]

I think we have just seen a dramatic sector rotation. Is the market right about this rotation into financials? Who knows. Is the rotation overdone given the fundamentals of world economics? Who knows.

I'll stick with my long energy positions.

[ACEMAN]

Y'all don't like to sell and make some good ole' American profit? COP was a prime suspect to sell and take y'alls profits and buy somethin' cheap and valuable. The nature of the game is makin' money my daddy taught me. Don't be the patsy and if y'all can't figure it out, then the patsy is you.

[pachanguero]

I think you write and know more more about YOU than about OIL and NG.

You seem to want people to like you a lot while you provide nothing for this site.

[The Fitzman]

pachanguero: you crack me up...i want people to "like me"??? that would be easy...just say great things about bush and the republicans! hahaha. i mean come on, haven't you seen the beatings i take in the comment sections due to my criticizing the bush policies? as far as no contribution to the site...well...i take it you didn't like my analysis of why COP is a buy. why not? be specific please. also, i didn't get any feedback from you on my energy policy in which i have been trying to prepare and protect America from rising oil prices since oil was at $50/barrel. you seem to consider these contributions "nothing". what have you contributed to the site?

[COP Employee]

Fitz - Great article! Obviously your research and industry insight is spot-on... Major oils are getting pummled right now due to the drop in crude prices and a general negative psychology around oil. They will rebound. Look at the fundamentals...earning... PE, div, etc. COP is undervalued.

MKreisel - I echo Fitz's comments regarding your market "correlation"... COP has far outperformed the S&P and Dow for several years. Do some research... COP price for the past couple of years has followed the price of crude.... Lay a COP price chart over an Oil price chart... However as I said above, COP's fundamentals are strong and if oil continues to drop, COP's fundamentals will take over and mitigate the slide.


Jimmy - The asset sell-off that you're refering to is minor. COP is selling its company owned service stations and retail assets. The $ received will presumably be invested into our refining operations where the returns are much higher than retail marketing. That said, COP will still market its refined gasoline through its marketing network of several thousand service stations under the Conoco, Phillips 66, and 76 brands. Very strong brand presence throughout the western half of the U.S.

Fitz - It's been several years since I've been in the South San Juan's... Beautiful fish. I hope the natives are making a come-back... My last backpacking/fishing trip was 20+ years ago into the Black Canyon of the Gunnison. Awesome trip, awesome fishing. No human sightings for 4 days...

Thx again for the great postings. COP Employee