Why BofA Still Loves ConocoPhillips

In a report published Thursday, BofA Merrill Lynch analysts maintained a Buy rating on ConocoPhillips COP, while raising the price objective from $75 to $77. The company had preannounced its capex and growth outlook on March 17. A detailed portfolio review now highlights the management's commitment to a sector-leading dividend. In the report BofA Merrill Lynch noted, "Exploration and appraisal drilling still represents a material slug of discretionary spending so that should oil prices remain depressed, COP has the flexibility to live within cash flow. Should prices recover, growth can accelerate from reloaded portfolio depth in the Bakken and Eagle Ford with visibility on future growth from a newly disclosed 1bn boe position in the Permian." Cost reduction should also support improved cash flow, which ConocoPhillips indicating that it can reduce opex by $1bn by 2016. With improving capital flexibility, the cost reduction could boost current production targets, with additional cash being allocated to short cycle projects despite demonstrable portfolio depth that can sustain growth beyond 2017. "ConocoPhillips still sits awkwardly between the large E&P's and Global majors. On the basis of scale and its commitment to a ‘compelling' dividend, we continue to view COP as within the oil majors, and in this respect, planned growth and margin expansion is competitive," the analysts wrote. Due to greater exposure to the US unconventional oil, ConocoPhillips has significant leverage to industry cost deflation and to any recovery in oil. "Taken together, we view ConocoPhillips with meaningful upside versus the major oils but with a yield that essentially pays investors to wait," the analysts added.