Message Font: Serif | Sans-Serif
No. of Recommendations: 2
Is It Time To Sell ConocoPhillips As It Continues To Sell Off More Assets?

ConocoPhillips (COP) announced on Wednesday this week that it planned to sell 86,000 acres of Bakken oil fields to Denbury (DNR) for an estimated $1.05 billion. This all comes after just last month when the company announced that it had made $3.5 billion in assets sales. Conoco over the last year has been involved in a strategic asset selling program that the company hopes will allow its oil production to grow at a rate of 3% - 5% per year. After this week's sale, the company announced that in the past year it has raised nearly $12 billion from its asset sale program. This surpasses the firm's goal of generating $8 - $10 billion in cash for this year.

Conoco's ultimate goal is to consistently maintain a 3% - 5% output rate while still being able to pay a 4.5% dividend. These goals are very aggressive especially compared to the firm's main competitors like Exxon Mobil (XOM), Chevron (CVX), BP plc. (BP), Total (TOT), and Royal Dutch Shell (RDS.A). These aggressive growth rates do come at a cost to the company, especially a large oil company. Oil reserves are essentially the life blood of any oil company and as reserves decrease new reserves must be continually discovered to replace old and retired ones.


In order for Conoco to maintain this projected high replacement rate, it requires a great deal of capital infusion. Capital expenditures for the company last quarter topped $15 billion, while operating income came in at $10.05 billion. That still doesn't take into account that the company currently pays out roughly $3.2 billion in dividends. The $5 billion (excluding dividends) spending gap can only be covered by asset sales for so long. The current $12 billion that Conoco has sold this year technically should hold it over for the next two years, but eventually production efficiencies need to be made to further offset this gap.


Even with all of these headwinds, the stock has still been able to rise almost 10% in the past year. The stock has seen its P/E multiples rise from around 8 time earnings at the beginning of last year, to its current multiple of 10.6. Conoco's ability to execute on its increased output plan is still very dependent on energy prices remaining high, with no unforeseen supply distributions in the immediate future that would further offset cash flow. The main positive for Conoco is that the company has an extremely diverse portfolio of assets that can continue to be sold to help bridge the firm's cash flow gap.

On the bright side, I tend to believe that Conoco's bullish projections on the price of energy are accurate long term and will pay off for the company. I have outlined below several reasons why I believe that high energy prices will remain, even with the newly discovered oil in the U.S.


Overall, Conoco may have a bit of a tough road ahead of it in the short term, but if management is able to continue to strategically sell off non-performing assets for a premium price, while still working to increase output each year by 3% - 5%, I feel that any major sell-off in the stock price presents a significant buying opportunity for long-term holders.
Print the post  


When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.