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Up to Date with ConocoPhillips: Relative Valuation in December 2015

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ConocoPhillips’s relative valuation

In the previous part of this series, we compared ConocoPhillips’s (COP) EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple against its own historical levels. In this part, we’ll be looking at the company’s valuation against the multiples of its peers.

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ConocoPhillips’s EV-to-EBITDA

A peer group comparison shows that ConocoPhillips’s forward EV-to-EBITDA multiple of ~10.2x is lower than the multiples of its close competitors. For example, as of December 3, Pioneer Natural Resources (PXD) was currently trading at a forward EV-to-EBITDA multiple of ~14.4x. By comparison, EOG Resources (EOG) was trading at a multiple of 12.7x as of December 3.

Meanwhile, other major competitors including Anadarko Petroleum Corporation (APC) and Occidental Petroleum Corporation (OXY) were trading at forward EV-to-EBITDA multiples of ~11.5x and ~12x, respectively, on December 3. Together, these companies make up ~14% of the Vanguard Energy ETF (VDE).

This means that ConocoPhillips could be undervalued compared to its peers and to the industry average of ~12.2x.

ConocoPhillips’s returns and dividends

In terms of returns, ConocoPhillips offers slightly better returns, albeit negative, when its profitability is scaled by its shareholder equity. This calculation is called ROE (return on equity). ConocoPhillips’s ROE stands at negative 2%, and this negative ROE comes as a result of the company’s negative net earnings or net loss. Among the company’s peers, Anadarko Petroleum has the lowest ROE, at negative ~34%, and Pioneer Natural has the highest ROE, at ~10%.

In terms of more direct returns to shareholders, ConocoPhillips offers better returns, with a dividend yield (dividends divided by share price) of ~5.7%. Pioneer Natural has the lowest dividend yield.

A conclusion—before concluding

ConocoPhillips has been cutting costs, enhancing production, and moving its portfolio to higher returns and more flexible investment opportunities—all while scaling back on long-cycle and low returns opportunities. Markets seem to support this strategy, as can be seen in the company’s share price appreciation late in 3Q15 (see Part 1).

Ryan Lance, ConocoPhillips’s Chair and CEO, said in the earnings release that the company would be “exercising flexibility in our capital program, dramatically lowering our cost structure and divesting assets that do not compete for funding in our portfolio.” Lance added that these steps would “make us more flexible and resilient for the future,” specifying that the company would “remain committed to a compelling dividend, affordable growth, and strong financial performance.”

In the next and final part of this series, we’ll look at the key factors driving ConocoPhillips’s stock performance in 2015.

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