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Better Buy: Albemarle Corporation vs. ConocoPhillips

Reuben Gregg Brewer, The Motley Fool

ConocoPhillips (NYSE: COP) is an oil and natural gas company. Albemarle Corporation (NYSE: ALB) is a specialty chemicals company that's increasingly focused on lithium, which is used heavily in electric vehicle batteries. Both have fallen from recent highs, but one is a bet on the past, and the other a bet on the future. Which one do you want to own?

Oil drives the business

ConocoPhillips' business is all upstream, meaning the only thing it does is drill for oil and natural gas. That's an important fact to keep in mind, because energy is a commodity prone to swift and often volatile price swings. In fact, the deep and prolonged downturn that started in mid-2014 was largely responsible for the company cutting its dividend by 66% in 2016. To put it simply, ConocoPhillips wasn't making enough money to support its drilling programs and the dividend, so something had to give. Downstream businesses, like chemicals and refining, provide integrated energy companies an offset, since low oil prices lead to lower costs and, usually, fatter downstream profits. 

A hand pointing at a computer screen with a stock chart on it

Image source: Getty Images.

Oil prices have recovered from their lows, but they haven't suddenly become stable. For example, the commodity recently sank into a bear market, with prices dropping 20% from their highs. ConocoPhillips' stock is down about 16% in a little over a month. Before you jump in, looking at the downturn as a buying opportunity, think about the longer term, here. Without refining and chemicals operations, ConocoPhillips' performance will remain firmly attached to oil and gas. For reference, ExxonMobil Corporation (NYSE: XOM), which has both upstream and downstream exposure, was only down about 6% from recent highs. But it's the longer-term outlook that's more troubling for a drilling-focused energy company like ConocoPhillips.

Integrated energy giant ExxonMobil, for example, expects population growth and economic development in emerging markets to drive global energy demand higher by about 25% over the next 20 years or so. It expects oil demand to grow slowly, with growth in electricity demand the real driving force, increasing by 60% by 2040. Oil isn't really used that much for power generation; the biggest driver is the vehicle space. There, Exxon sees industrial demand for oil staying relatively strong, with commercial transportation and chemicals robust through 2040, but the electric vehicle transition will be a big headwind. Exxon is projecting demand from light-duty vehicles to peak in about a decade as electric vehicles see "significant growth."   

COP Chart

COP data by YCharts.

Oil and gas are depleting assets, and unlike oil, natural gas is used heavily in electricity generation. So, this outlook is hardly a death knell for oil and gas drillers -- someone will have to drill for oil and gas. However, if you are looking for a company with a robust growth opportunity ahead of it, ConocoPhillips probably isn't the best bet. It will be facing slowly increasing demand, with the likelihood of a peak in a key market as electric cars start to dominate the light-duty market.

Building for the future

This is why investors might want to take a closer look at Albemarle. Today, the company has three main divisions: one makes bromine (used in electronics), another makes catalysts used in the energy industry, and the third makes lithium, a key input into automobile batteries. It is a commodity, so supply and demand will play a big role in the price. For example, investor sentiment on lithium recently pulled back from a period in which it got a little overheated, which is why the stock has fallen around 28% over the past year or so. This pullback, though, could be an opportunity for long-term investors.

The key difference between the outlook for ConocoPhillips and Albemarle is that Albemarle is supporting the shift to electric vehicles. So, while demand for ConocoPhillips' oil business will be dealing with a headwind as consumers buy more electric cars, Albemarle will be there to benefit.

Just how big is the opportunity? Albemarle is projecting demand for lithium to increase roughly 18% a year between 2017 and 2025. The auto industry is the key, with demand increasing at an incredible 35% annualized rate over that span. The oil industry won't see demand growth like that. In fact, Albemarle is currently expanding production to meet that demand, with notable volume gains, not just commodity prices, expected to help push the top line higher.   

Lithium demand projections

Sector

Compound Annual Growth Rate '17 to '25

Transportation

35%

Electronics

8%

Other

3% to 4%

Total

~18%

Data source: Albemarle Corporation. 

With long-term debt at about 30% of the capital structure, the balance sheet is strong enough to fund the growth spending, which, it is worth noting, the company's two other businesses are also helping to support. So, lithium is the product to watch, but Albemarle is no one-trick pony today, even though it has hinted that it may eventually focus exclusively on lithium someday. And despite the stock price pullback, the company has been doing quite well: The third quarter was the eighth consecutive quarter of double-digit EBITDA growth. 

The takeaway

ConocoPhillips' drilling-focused energy business isn't going away anytime soon. But it isn't likely to be a high-growth company as the world's energy needs shifts toward cleaner options. Electricity is likely to be a big beneficiary in the future, with light-duty electric vehicles increasingly taking market share from gasoline-powered vehicles. That, meanwhile, will be the driving force at Albemarle, a company that is projecting robust demand growth for lithium, one of the key products it produces.

If you are looking for a company with robust growth opportunities, Albemarle is the better bet, here. And if you are looking for an oil company, the outlook for the industry suggests a conservative and diversified business model might be a better bet than ConocoPhillips' upstream-only approach.

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Reuben Gregg Brewer owns shares of ExxonMobil. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.