ConocoPhillips: J.P. Morgan Cut Its Target Price

On Wednesday, J.P. Morgan reduced its target price on ConocoPhillips (COP) by $5 to $75. CFRA also reduced its target price on the stock by $7 to $68 with a “strong buy” rating. Evercore ISI reduced the target price by $10 to $75.

ConocoPhillips: J.P. Morgan Cut Its Target Price

ConocoPhillips’s target price

For ConocoPhillips, analysts’ mean target price is ~$78.62, which implies a potential upside of ~32.1% based on its last closing price. Before the earnings results, the mean target price was almost unchanged, according to Reuters data. Among the 19 analysts tracking ConocoPhillips, 74% recommended a “buy” or “strong buy.” None of the analysts recommended a “sell” on the stock. The price reduction could be due to the lower outlook for oil prices.

Earnings and guidance

The price reduction came after ConocoPhillips released its second-quarter earnings in the last trading session. The company reported an adjusted EPS of $1.01, which was 3 cents below analysts’ consensus estimates. Initially, ConocoPhillips’s share prices fell after the earnings miss, but it closed 2.2% higher. As expected, stronger oil prices on a sequential basis in the last quarter reduced the risk from lower natural gas prices.

The EPS grew by 1 cent on a sequential basis. The total production in the second quarter was higher than the company’s guidance. In the third quarter, the total output will likely rise to 1,290 and 1,330 thousand barrels of oil equivalent per day. For 2019, the total production will likely be between 1,310 and 1,340 thousand barrels of oil equivalent per day.

ConocoPhillips’s key valuations

ConocoPhillips has a net debt-to-EBITDA ratio of 0.5x—the lowest among the S&P 500 Index’s (SPY) top five holdings in the upstream subsector. The company’s ability to generate free cash flow could be behind the attractive valuation. ConocoPhillips’s upstream assets are well diversified across the globe to insulate output pricing from regional headwinds.

In fact, ConocoPhillips’s net income sensitivity with every $1 change in Brent/Alaskan North Slope crude oil prices per barrel is between $155 million and $175 million. The company’s same relationship with WTI crude oil is ~$30 million–$40 million. In terms of the EV-to-EBITDA ratio, the company has the lowest multiple among its peers.

Dividend

Currently, ConocoPhillips trades at a dividend yield of 2.1%, the second-highest among SPY’s top five holdings in the upstream subsector. The company has a consistent history of paying dividends. The SPDR S&P Oil & Gas Exploration & Production ETF (XOP) has a dividend yield of 1.2%. If the Fed reduces the interest rate on Wednesday, a relatively higher dividend yield with an attractive valuation could drive investors.