We reaffirmed our Neutral recommendation on ConocoPhillips (COP) on Dec 12, 2013. We appreciate ConocoPhillips’ emphasis on creating shareholder value through operational excellence, strong project execution and dividend payout. However, the company’s growth and returns picture will likely be hindered by its productivity decline due to divestitures. ConocoPhillips carries a Zacks Rank #3 (Hold).
ConocoPhillips’ leading position in both natural gas and heavy crude oil in North America, as well as legacy position in the North Sea and growing exposure to lucrative international regions are expected to replace reserves and sustain production growth over the long term.
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. In July, Christina Lake Phase E witnessed first yield and the output is expected to accelerate over the next six to nine months. These ramped up activities are expected to aid in meeting its long-term production growth target.
ConocoPhillips is making headway with its divestment program, with about $12.4 billion already completed. The company expects to raise an additional $8.9 billion from the disposition program by the end of 2013. In this regard, ConocoPhillips is trying to shed part of its assets in Kazakhstan, Algeria and Nigeria. This is expected to enable ConocoPhillips to generate a healthy cash surplus in 2014. The proceeds are also expected to be utilized for portfolio optimization and increasing shareholder value.
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.
Stocks That Warrant a Look
While we expect ConocoPhillips to perform in line with its peers and industry levels in the coming months and advice investors to wait for a better entry point before accumulating shares, one can look at Zacks Ranked #1 (Strong Buy) stocks – Helmerich & Payne Inc. (HP), Harvest Natural Resources Inc. (HNR) and Matador Resources Company (MTDR), as a good buying opportunities for the short term.