An Upside and Downside Case for ConocoPhillips

-2.22%
Downside
127
Market
124
Trefis
COP: ConocoPhillips logo
COP
ConocoPhillips

The stock price of ConocoPhillips (NYSE:COP) has mounted a steady climb this year, up 18% to above $80, but still has a bit more to go in order to reach its all time high of roughly $95. Rising crude oil prices sparked a 27% increase in the company’s sales and operating revenues in 2010, while net income jumped by more than 150% and forced many Wall Street analysts to revise their price targets for ConocoPhillips. ConocoPhillips is the third largest integrated oil & gas company in the world and competes with other oil producers like Exxon (NYSE:XOM), BP (NYSE:BP), Anadarko (NYSE:APC) and Chevron (NYSE:CVX).

Our price estimate for ConocoPhillips stands at $75.32, roughly 5-10% below market price.

Relevant Articles
  1. Up 15% In Last Six Months, Will ConocoPhillips Stock Continue To Grow Post Q3?
  2. ConocoPhillips Q2 Earnings: What Are We Watching?
  3. What’s Next For ConocoPhillips Stock?
  4. ConocoPhillips Stock To Likely Trade Higher Post Q4
  5. This Stock Appears To Be A Better Bet Than EOG Resources
  6. Earnings Beat In The Cards For ConocoPhillips Stock?

Production of crude oil & natural gas liquids is the most valuable segment for ConocoPhillips and constitutes about 19% of our price estimate for the company. Below we examine upside and downside scenarios for ConocoPhillips based on two key drivers to the company’s profitability.

6% Upside – Rise in Crude Oil Prices

The sale price of crude oil & natural gas liquids for ConocoPhillips increased from $56 in 2006 to $80 in 2008 before falling back down towards $49 in 2009. ConocoPhillips’ stock price is highly sensitive to crude oil prices as the company derives almost a fifth of its value, by our estimates, from the sale of these products. Leading investment banks such as Goldman Sachs, Morgan Stanley and JPMorgan Chase are expecting oil prices to climb above $100 per barrel in 2011. If this were to happen and prices remain elevated during our forecast period, our $75.32 price estimate for ConocoPhillips could rise by as much as 6%.

5% Downside – Weak Refining Margins

Gasoline EBITDA margin increased from 14% in 2006 to 23% in 2008 as the prices of refined products increased. Global refining margins remained weak in 2009 during which EBITDA margins on gasoline decreased to an estimated 10%. Demand for refined products dropped in 2009 due to the global economic slowdown. In addition, the differential in prices for high-quality crude oil, compared with that of lower-quality crude oil, reduced margins for those refineries configured to capitalize on the ability to process lower-quality crudes. Excess production capacity could prevent the margins from increasing back to its pre-crisis level. If margins remain at current levels, our price estimate for ConocoPhillips could drop by 4-5%.

See our full analysis for ConocoPhillips stock here