Conoco Phillips Spearheading S&P 500 Energy Stocks

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Dec 29, 2014

Energy industry stocks are currently in pullback mode as oil prices are falling drastically and oil supply is reaching new highs. Energy industry companies are seeing drops in their stock price daily due to revenue threats from lower global oil prices. Conoco Phillips (COP, Financial), the world’s largest independent exploration and production company, is directly affected by these energy industry factors. However, its diverse product mix and superior dividend yield in comparison to its S&P 500 energy sector peers gives its stock an edge in the current market environment.

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Falling oil prices

Oil prices have consistently been on a downward slope. According to the U.S. Energy Information Administration, the energy industry has seen Brent crude oil spot prices fall from a peak of $114.29 in June 2014 to a current low of $59.77. The drop has been caused by an overabundance of supply in the energy market. International Energy Agency data shows the third quarter stock level of oil inventory worldwide up 2.40% from the end of 2013. In the Asia Oceania region the oil supply level increased 5% with 8.58% growth in New Zealand. In the Americas oil supply levels have also consistently been rising with 2.76% growth across the region over the three-quarter period. In the U.S., the oil supply level for the three-quarter time period was 2.61% higher and in Canada supply was up 5.68%. Increasing oil supply levels are expected to continue as output production levels worldwide remain high.

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While consumers have greatly benefited from the falling oil prices, S&P 500 energy stocks have consistently been falling as revenue is threatened. Year to date energy sector market capitalization leaders Exxon Mobil (XOM, Financial) and Chevron (CVX, Financial) have been among the hardest hit. Exxon Mobil has seen its stock fall 7.90% while Chevron has fallen 9.33%. The revenue threats are likely to cause energy industry companies to tighten their capital expenditure budgets for 2015 resulting in further devaluations for S&P 500 energy industry companies.

Conoco Phillips has been ahead of the industry in announcing its own budget tightening. On December 8, 2014, the company reported it would be decreasing its 2015 capital expenditure budget by 20% to $13.5 billion. The announcement to decrease capital expenditures comes at an opportune time for the company which is currently wrapping up a number of development projects. The ending of these projects will allow the company to focus its capital on new production facility launches that will contribute to production growth while steering away from expensive exploratory development projects.

In a recent presentation at the Bank of America (BAC, Financial) Merrill Lynch (IPB, Financial) Global Energy Conference, Conoco Phillips’ CFO, Jeff Sheets, highlighted the company’s capital expenditure focus, noting that its lower capital investments associated with major projects would give it increasing levels of capital flexibility. Other companies in the energy sector are likely to follow Conoco Phillips’ lead, with a capital expenditure focus shifting to maintenance of current operations and away from exploratory development projects.

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Another key advantage for Conoco Phillips is its ability to downplay its emphasis on low margin products such as natural gas and overweight production from high margin products such as conventional oil operations. Conoco Phillips has a versatile product mix which includes unconventionals, liquefied natural gas, oil sands and conventional oil production. Its versatile product set and ability to adjust its portfolio during various pricing cycles make it appealing to investors. According to Jeff Sheets, having the ability to adjust investments among the company’s diverse product categories is an advantage that allows the company flexibility to respond to different environments.

Dividend yield comparison

In addition to the company’s diverse product set, another high priority for management is the company’s dividend payout. Industry-wide stock values have been declining however Conoco Phillips’ commitment to its dividend has helped it to remain resilient.

In October 2014 the company declared a dividend of $0.73. This dividend has helped the stock to achieve a trailing twelve month dividend yield of 4.06%. At 4.06% the dividend yield leads its blue chip market cap peers in the S&P 500. According to Morningstar (MORN, Financial), it also leads the blue-chip peer group in forward-looking dividend yield at 4.18%.

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In a tough energy market with consistently declining stock values, this dividend policy has helped Conoco Phillips rise above its peers. It has also helped its stock value to ward off declines. Year to date Conoco Phillips has managed to stay ahead of the energy industry sector overall with a stock value return of -1.09% versus -9.49% for the S&P 500 energy industry group.

Poised for future success

Conoco Phillips has captured the hearts of energy stock investors for years. Its diverse product set is currently providing for flexibility during a difficult economic cycle while also allowing for positioning to benefit from future energy price increases. Management’s commitment to a high dividend payout rate however is what makes the company most endearing. In the current environment, investors can buy the stock at market lows setting themselves up for future gains while also reaping the benefits of a high stock dividend yield.