ModernGraham Valuation: Conoco Phillips (COP)

moneyCompany Profile (obtained from Google Finance): ConocoPhillips explores for, produces, transports and markets crude oil, natural gas, natural gas liquids, liquefied natural gas and bitumen on a worldwide basis. The portfolio includes assets in North America, Europe, Asia and Australia; growing North American shale and oil sands businesses; a number of international development projects, and a global exploration program. On May 1, 2012, the Company spun off the downstream portion of its operations to Phillips 66. In August 2012, it closed a transaction with LUKOIL for the sale of ConocoPhillips’ indirect 30% interest in NaryanMarNefteGaz (NMNG) and certain related assets. In August 2013, the Company announced that it has closed a transaction with the National Gas Company of Trinidad and Tobago Limited (NGC) for the sale of its wholly owned subsidiary, Trinidad and Tobago Holdings LLC. In November 2013, the Company completed the transaction with Pertamina for the sale of its Algeria business.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
  6. Moderate PEmg ratio – PEmg is less than 20 – PASS
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $262.52
MG Opinion Undervalued
Value Based on 3% Growth $98.87
Value Based on 0% Growth $57.96
Market Implied Growth Rate 0.80%
NCAV -$37.62
PEmg 10.10
Current Ratio 1.38
PB Ratio 1.65

Balance Sheet – 9/30/2013 

Current Assets $22,557,000,000
Current Liabilities $16,335,000,000
Total Debt $21,096,000,000
Total Assets $119,760,000,000
Intangible Assets $0
Total Liabilities $68,647,000,000
Outstanding Shares 1,225,100,000

Earnings Per Share

2013 (estimate) $6.65
2012 $5.91
2011 $8.97
2010 $7.62
2009 $3.24
2008 -$11.16
2007 $7.22
2006 $9.66
2005 $9.63
2004 $5.79
2003 $3.35
2002 $0.72

Earnings Per Share – ModernGraham 

2013 (estimate) $6.82
2012 $5.57
2011 $4.66
2010 $2.78
2009 $1.48
2008 $1.81


Conoco Phillips appears to be an undervalued company, but it does not qualify for either the Defensive Investor or the Enterprising Investor.  The company has a current ratio that is too low for either investor type, has not had stable earnings for the ten year period, and has not sufficiently grown earnings over the ten year period to satisfy the Defensive Investor.  As a result, value investors seeking to follow Benjamin Graham’s methods may wish to look for other opportunities, beginning with a review of ModernGraham’s valuation of Chevron Corp (CVX), which is suitable for these investors and is significantly undervalued.  From a valuation perspective the company looks great, though, after growing EPSmg (normalized earnings) from $1.81 in 2008 to an estimated $6.82 for 2013.  This level of growth far outpaces the market’s implied estimate of 0.8%, indicating the company may be undervalued at the present time.

What do you think?  Do you agree that Conoco Phillips is undervalued?  What would be your assessment?  Is the company not suitable for Defensive Investors or Enterprising Investors?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in Conoco Phillips (COP) at the time of publication and had no intention of changing that position within the next 72 hours.

Photo Credit:  Andrew Magill





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