ConocoPhillips Might Be The Most Underappreciated Stock For An Oil Recovery

Although ConocoPhillips COP has always been viewed as a high cost producer, it could become the lowest cash breakeven name from 2017 onwards, Deutsche Bank’s Ryan Todd said in a report. The analyst maintained a Buy rating for the company, with a price target of $62. He commented that ConocoPhillips possessed “underappreciated leverage” to an oil recovery.

Oil prices have made a rebound from their February lows, and investors appear “cautiously optimistic” about the sustainability of this recovery, analyst Ryan Todd mentioned. He added that ConocoPhillip had made efforts to lower its cost structure.

Leverage To Oil Recovery

The company has not been able to shed its reputation of being a high cost producer. However, cash outlays per barrel have declined by ~53 percent versus the 2014 peak. Todd believes ConocoPhillip would have the lowest cash breakeven from 2017 onwards.

“With ~$2.5 Bn in CFO for each $10/bbl move in crude and a meaningful inflection point at $45/bbl at Surmont/APLNG, COP’s crude leverage provides peer-leading FCF sensitivity to a moderate recovery in crude,” the analyst wrote.

Management has indicated that apart from maintaining stable production, at a rate of ~1 percent long-term growth, and possibly some modest debt reduction, the company’s top priority would be returning cash to shareholders.

“We see COP’s efforts to lower its cost structure as underappreciated, with COP now screening as the lowest breakeven (capex + dividend) operator in our coverage, with a stable multi-year production outlook, peer-leading free cash flow sensitivity to a moderate recovery in crude, and a strong commitment to return excess cash to shareholders,” Todd stated.