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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

Conoco Phillips

June 8th 2012 Conoco Phillips
NYSE Symbol: COP
Industry: Oil & Gas
Price as of 6/8: $53.97

The recent correction has hit many sectors hard including energy, materials, and industrials. The global economic slowdown has put many investors on the defensive, shying away from companies with a majority of their sales coming from overseas. This week's reprieve has allowed the averages to bounce, but many believe there is more downside in the coming months. As a result, investors have flocked to defensive issues. Last year it was the utilities, healthcare, and consumer staples that shined. This year telecom and retail have moved to the top of the list with most of their sales coming domestically. Having said that, the beaten up energy space is very attractively valued for the long term. The sector may push lower once again, but hopefully the sector is already pricing in a significant retraction. This week we'll feature an energy company that recently split into two. The featured stock of the week is Conoco Phillips. ConocoPhillips last month completed the spinoff of its downstream businesses to its stockholders, Phillips 66 (PSX). With the completion of this transaction, ConocoPhillips is the world's largest independent exploration and production company, based on proved reserves and production of liquids and natural gas. Even with the spin off, Conoco has maintained their dividend bumping their yield up to nearly 5%, the best by far in the sector. This should provide support and hopefully limited downside to any further weakness. Long term, when the global slowdown subsides, Conoco is well positioned to benefit from global growth and a rebound in the price of oil.

Back in April the Houston based, Conoco Phillips reported a 3 percent profit decline because of production declines and lower refining earnings. Net income dropped to $2.94 billion, or $2.27 a share, from $3.03 billion, or $2.09, a year earlier. Revenue in the first quarter totaled $58.4 billion, little changed from $58.2 billion a year earlier. The company had $239 million of earnings related to Russia's OAO Lukoil in the first quarter of 2011, compared with none this year after it sold its stake in the producer. The company said first-quarter output of oil and gas fell 3.8 percent to the equivalent of about 1.64 million barrels of oil a day, citing asset sales and a suspension in China's Bohai Bay production due to an oil spill. For 2012, ConocoPhillips said it expects production to be 1.55 million to 1.6 million barrels a day, depending on the timing of asset sales. Besides the split off into two companies, Conoco is targeting $8 billion to $10 billion of asset sales over the next 12 months. ConocoPhillips plans to complete $5 billion of share repurchases in the first half of the year, with additional repurchases possible following asset sales. The recent split into Phillips 66 and Conoco is going to allow the company to focus its operations more keenly as it will divide the company's upstream operations from its downstream business. The move will allow each new division to pursue its own strategy and improve efficiencies and profit margins.

Conoco's current valuation is pricing in a lot of bad news. The stock trades for 1 times book value of $52 a share, 8 times earnings, and 1.5 times sales. Even if the earnings estimates come down, the stock is still cheap. The best part of the stock is the dividend yield of nearly 5%, one of the best yields in the S&P 500. Any investor looking at the beaten up energy sector might want to look at Conoco thanks to their broad geographic diversification, and the best dividend yield in the sector.