Tuesday, November 30, 2010

ConocoPhillips Is Cheaper Than Rivals but Has Plenty to Prove

From Y Charts.Com......

Oil prices are creeping back up, mirroring the expanding (if still sickly) global economy, and so one wonders: which major oil company to buy?

Exxon Mobil (XOM) and Chevron (CVX) are well managed, diversified and trading at bargain prices, according to YCharts Pro Ratings. But ConocoPhillips (COP), which lags behind its bigger rivals, is by some measures even cheaper. All the company has to do is make good on its many promises, which, of course, is easier said than done.

On a price to sales basis, ConocoPhillips looks like a steal. Its p/e ratio is also super low. And if you’re making comparisons to bond yields, ConocoPhillips’ earnings yield puts most junk bonds to shame. All that disrespect by investors means ConocoPhillips’ dividend yield is pretty rich, too. Why so cheap? Well, ConocoPhillips carries a higher debt load than its bigger rivals. And it holds less cash, though recent sales of LUKOIL shares have fattened the cash account.

And even though the company is eight years into the merger of Conoco and Phillips, there are signs it’s still working to get its act together. CEO James J. Mulva, though he’s nearing age 65, swept much of top management out the door in early October, bringing in some outside talent. And Mulva is pushing a financial strategy, reduced capital expenditures, debt reduction, rising buybacks and dividends, that seems like the right idea, but perhaps a little late in arriving.

ConocoPhillips has more oil and gas properties around the world than it can reasonably develop, so it is selling some to raise cash and pay down debt. Super, though the assets might have fetched more when oil prices were sky high a few years back. And like all major oil companies, ConocoPhillips faces the daunting task of replacing the oil and gas it pumps and sells each year, a task that is growing ever riskier and more expensive.

So, when oil prices surge, and they will, you might get a little extra bounce with shares of unloved ConocoPhillips, though Exxon and Chevron will certainly rise, as well. Warren Buffett bought ConocoPhillips in the low $70s, so you can buy it more cheaply. The Berkshire Hathaway (BRK.A) CEO overpaid because oil prices soon fell. But relative to other major oil companies, did he see a bargain?

Here's the Y charts showing the comparison to Exxon and Chevron


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