Today we are moving ConocoPhillips (COP) from Hold to Sell. Conoco is a strong, well-managed company with outstanding assets that are producing immense free cash flow – much of which it is returning to investors.
However, the shares have crossed above our recently raised 89 price target, and, as outlined in our monthly letter yesterday, the risk/return trade-off has become balanced and now incrementally tilted to the downside.
Conoco’s earnings report, released earlier today, displayed the company’s strengths. Fourth-quarter profits of $3.0 billion compared to a $(0.2) billion loss a year ago and were 25% higher than the impressive third-quarter profits of $2.4 billion. Rising oil prices combined with restrained spending helped drive earnings higher.
But without higher energy prices, Conoco’s guided cash return to investors for 2022 is fully priced-in. The company said it would pay out $8 billion, but this would provide an all-in yield of less than 7% on Conoco’s current $120 billion market cap. That’s not enough to justify the risks that warmer temperatures, easing of Ukraine tensions, slowing economic growth and more production from OPEC+, the U.S. and others weigh on oil prices.
We readily acknowledge that we could be wrong. If any of the reasons we listed above are proven wrong, oil could push to over $100/barrel. Outright war in Europe or the Middle East, a sharp fall-off in the U.S. dollar or other catalysts could drive oil to $150/barrel or higher. As such, investors may want to retain a portion of their energy company shares.
Investing is a balancing of risks and potential returns. The Conoco investment produced about a 39% total return since our initial recommendation last September. Sell