Why ConocoPhillips Is the Energy Sector's Best Bargain

NEW YORK (TheStreet) – With 17% year-to-date investment returns, ConocoPhillips (COP) shareholders have few reasons to complain. The energy sector -- although improved -- has yielded gains of only 11%.

Shares closed Tuesday at $80.42, up nearly 14% for the year to date. 

Conoco's management deserves praise for the company's quicker-than-expected turnaround following its 2012 spinoff of its refining business, now Phillips66 (PSX). But the company is not done and remains committed to extracting more value for its investors.

The Conoco of today has a business that is easier to understand. After exiting out of the unpredictable downstream business, the company has become a pure play energy and exploration (E&P) company. Management's wants to capitalize on the expected recovery in U.S. energy production.

Even more impressive, despite Conoco's year-to-date outperformance, the stock is still cheap. Shares are trading at a P/E of 11, which is eight points higher than the industry average P/E of 19. Consider, both BP (BP) and Exxon Mobil (XOMtrade at higher valuations. This is even though both trail Conoco in gross margin, operating margin and revenue growth.

I think Conoco management is unfazed, however. They weren't available for comment on the valuation or how the company's progress is viewed on Wall Street.

From my vantage point, Conoco is one of the best bargains in energy. Even based on 2015 estimates of $6.60, these shares are only trading at a P/E of 12 -- still under the industry average. At around $98 per share, investors looking for a strong oil producer should consider Conoco. These share should reach $110 in the next 12 to 18 months.

The reason for my optimism is simple. First, at some point Conoco will surpass large exploration and production titans like Apache (APA) and Anadarko (APC). The company continues to make progress in the Eagle Ford Shale, which now accounts for roughly 25% of its production in the lower 48 states. This is one more example of how the company is moving in the right direction.

Investors should also be encouraged by the ongoing investments management is making in areas like natural gas, which should pay handsome dividends over the next couple of years.

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