A Contrary Call ConocoPhillips

04/07/2020 5:00 am EST

Focus: ENERGY

Ian Wyatt

Publisher & Chief Investment Strategist, Wyatt Investment Research

It will certainly strike some as odd, but one company I’m feeling positive about is ConocoPhillips (COP), note income and growth experts Ben Shepherd and Ian Wyatt in Wyatt Research’s Personal Wealth Advisor.

Riding high after I first recommended it last April, it has since lost just over half its value as the price of West Texas Intermediate has plunged to just under $25.

Worries that a recession will dampen oil demand even as Saudi Arabia, Russia and other countries are ramping up production has caused that plunge in oil prices.

There’s no way to sugarcoat this; no one can currently produce oil economically at $25. That’s even more worrisome since some energy watchers are predicting oil could continue its drop, ultimately settling under $20 a barrel.

That’s a scary prospect for the energy business, especially as bond buyers are predicting a wave of debt defaults in the energy patch.

ConocoPhillips hasn’t been caught flatfooted by this turn of events, though. It restructured its exploration and production program after the oil bust we saw in 2014 and trimmed its capital expenditures to the point that it can now break even with oil at $40 a barrel.

It has also cut, but hasn’t totally suspended, its share buyback program and made other economies for the past month or so.

I don’t want to leave you with any illusions of profitability, at least not in the near term. But ConocoPhillips currently has more than $5 billion of cash on the balance sheet and another $5 billion in short-term investments, so it has a cash cushion of more than $10 billion.

It’s also been cash flow positive over the past few quarters, even after paying $1.5 billion in quarterly dividends and buying back nearly twice that amount in stock every quarter.

Given its economies, I don’t see its dividend – which is currently yielding 5.7% – as being in immediate danger. I believe the company will be able to weather the storm, thanks to both a strong business and  solid balance sheet.

In fact, if you’re in a position to take on some risk, I consider ConocoPhillips a bargain at this price, with the caveat that there will be more volatility.

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