Marcial: ConocoPhillips, a Cheap Big Oil Play

The sharp drop in the price of crude oil—which traded at $55 per barrel in New York on Nov. 18, down from a record high of $147 in July&mdash has taken the pizzazz out of the shares of energy behemoths that not too long ago were Wall Street's top favorites. But for value investors, beaten-down oil stocks are an opportunity not to be missed.

In other words, now may be the time to snag a piece of Big Oil on the cheap.

One undervalued giant whose moves to improve and expand its reach have not been fully recognized on Wall Street is ConocoPhillips (COP). The stock has been slammed, sliding to 47 a share on Nov. 18 from a 52-week high of 95.96 on June 17. True, other oil issues and the rest of the stock market have also been pounded. ConocoPhillips, however, has a lot of positives that investors may be overlooking.

For starters, ConocoPhillips, the second-largest integrated oil company in the U.S.—and No. 4 in the world—is also North America's largest natural gas producer and the nation's second-biggest oil refiner. The company operates in 41 countries, but 71% of its revenues come from its U.S. operations.

Promising Acquisitions

In spite of the rapid and steep decline in oil prices, ConocoPhillips "remains an awesome company and [is] compelling when crude prices are in the 50s," says Sheraz Mian, an oil analyst at Zacks Investment Research.

Mian recommends the stock as a buy and sees significant upside potential based on the company's financial health now and prospects for growth—even with oil at its current levels. Like other analysts, Mian, whose earnings estimates were calculated when crude oil was selling at $90 to $100 a barrel, will likely have to reduce his estimates to adjust for the fall in prices. But he still expects Conoco to thrive. "I am more than confident that even if oil prices drop to the $45 level, ConocoPhillips will still be cash-flow positive and will be able to meet its capital and dividend requirements," says Mian.

Through acquisitions, alliances, and joint ventures in the recent past, ConocoPhillips has become a strong contender to join the "supermajors," the global elite of energy companies, according to Mian. The members of that top-tier group are ExxonMobil (XOM), Chevron (CHV), Total (TOT), BP (BP), and Royal Dutch/Shell (RDSA). In evaluating ConocoPhillips, he says, investors should no longer categorize it as a tier-two oil company, which should support an upward valuation of ConocoPhillips' stock by Wall Street.

The company has significantly strengthened its upstream (refining) operations over the past few years through its acquisition in 2006 of Burlington Resources for $43.8 billion, Mian notes. Burlington was a major independent exploration and production company with significant reserves in North America focused on natural gas. And ConocoPhillips' 2007 acquisition of a 20% equity stake in Russia's major oil company, Lukoil, also significantly increased its upstream growth prospects. Lukoil provides access to the lucrative Russian oil market, according to Mian. Its stake in the Russian company, he says, already contributed to ConocoPhillips' earnings in the first six months of 2008.

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