Must-know: Key takeaways from ConocoPhillips’ Q2 earnings (Part 8 of 8)
Among its peers in the upstream exploration and production space, ConocoPhillips (COP) is the largest player by sheer size when measured by enterprise value (or EV, which is roughly the summation of a company’s market capitalization and its net debt).
Plus, even when measured by market capitalization (that is, the total value of the company’s equity calculated by multiplying the number of shares by share price), COP is the largest in the market, closely followed by Occidental Petroleum (OXY).
Price-to-earnings ratio (P/E)
In terms of P/E (the ratio of a share price to the earnings per share or EPS), Anadarko Petroleum (APC) ranks highest. This shows the market’s willingness to pay a premium for the company given its high margins and expectations of future growth.
COP, on the other hand, not only has a trailing 12-month (or TTM) P/E closer to its peer average, but its forward P/E (using analyst estimates for future EPS) is the lowest among its peers. This shows expectations of strong profit growth for the company and also its relative cheapness.
When you scale the size (using EV) of the company’s comparable peers by EBITDA (or earnings before interest, taxes, depreciation and amortization), Apache Corp. (APA) comes across as the cheapest company. But this would be an incomplete picture without taking into account its debt.
You should keep in mind that EV also includes the amount of debt that a company carries. Indeed, APA does have one of the higher levels of debt when scaled in terms of its EBITDA.
Again, COP comes across as cheap given its low net debt-to-EBITDA ratio and its lower forward EV/EBITDA ratio (using analyst estimates of future EBITDA). The latter also shows analysts’ expectations for strong EBITDA growth.
Returns and dividends
In terms of returns too, COP shines when its profitability is scaled by its shareholder equity. This is called a return on equity (or ROE). COP’s stands at almost 18%.
In terms of more “direct” returns to shareholders too, COP stands out among its peers with a dividend yield (dividends divided by share price) of ~3.5%.
This compares very favorably to fixed income returns from Treasury bonds, particularly given that the company’s growth would be an added bonus for an investor.
Diversified exposure using ETFs
While you could consider COP as a potential inclusion in your energy portfolio, you should also consider other good names like OXY, which has a lot of things going in its favor too.
One of the best and safest ways to diversify your exposure to an industry is using ETFs . The companies we discussed in this post are all components of the Energy Select Sector SPDR ETF (XLE).
Browse this series on Market Realist:
- Part 1 - Must-know: Key takeaways from ConocoPhillips’ Q2 earnings
- Part 2 - A deeper look into ConocoPhillips’ 2Q14 financial performance
- Part 3 - ConocoPhillips’ operational performance and production forecast
- Basic Materials Industry