ConocoPhillips, Cut by Warren Buffett, Can Be Yours on the Rebound

NEW YORK (TheStreet) --ConocoPhillips (COP) is a popular energy holding for investors wanting growth and income. That's why it surprised me to learn that perhaps the smartest investor of all time, Warren Buffett of Berkshire Hathaway (BRK.A) made major reductions in his exposure to the company this year.

Buffett is the quintessential buy-and-hold investor who once quipped, "Someone is sitting in the shade today because someone planted a tree a long time ago." He'd rather buy a company in its "seedling" stage and patiently wait for it to grow to maturity before he decides to be seller.

That seems to be his view of the oil giant. According to Berkshire's latest report, it reduced its Conoco holdings by nearly 88% although it still owns 1,355,228 shares worth over $1.09 billion as of June 30.

The selling prices for COP shares were between $69.48 and $86.10, Buffett's company reported, with an estimated average price of $77.79. A report from his blog explained part of the reason for the huge reduction in COP shares: "In all honesty, the move Buffett made in lowering his position in Conoco Phillips...are likely the result of Berkshire looking to limit the potential falling oil prices downside."

What it doesn't say is of equal importance: Since hitting its 52-week high of $87.09 on July 24, shares of ConocoPhillips corrected nearly 10%. Shares, at around $81, are up 14% for the year to date but still 7.5% below the recent high.

This summertime correction could lead Berkshire and other investors to buy more Conoco shares.

Not only have energy prices have corrected as anticipated, but ConocoPhillips management is willing to sell assets to fund its shareholder-friendly approach. The $2.92 annual dividend offers a generous yield with a sustainable payout ratio of 38%, opening the possibility of additional increases.

Director of External Communications and Media Relations Daren Beaudo, in speaking about COP's  prospects, reiterated two comments CEO Ryan Lance made at a recent analysts meeting.

"Our goal is to deliver double-digit returns to our shareholders on an annual basis," Beaudo said. "That double digit is really important because we think there's a clear place for this kind of energy stock, one that has steady, consistent, predictable, stable and low risk returns."

Beaudo said the company plans to do that through "delivering 3% to 5% production growth, 3% to 5% margin expansion with a dividend today that is yielding in excess of 4%. We think this is a pretty compelling formula."

Here's a one-year price chart including a look at the energy behemoth's trailing 12-month operating margin.

COP Chart
COP data by YCharts

A nearly 25% operating margin is impressive when compared to industry leader Exxon Mobil (XOM) with an operating margin of only 11%. The chart also highlights the low debt-to-equity ratio, another indicator that there's plenty of room for shares of COP to rise in the months ahead.

Beaudo noted that with the company's growing cash margins and cash flows, "we didn't forget about our shareholders and increased our dividend, which has been our promise and our commitment."

If you remained a Conoco shareholders through 2013, "you achieved over 22% return in excess of our integrated competition and well in excess of our independent peers, and in fact exceeded the S&P 500," said Beaudo.

My 12-month price target of $92 reflects those bullish points. Buy some shares before Warren Buffett decides to increase his stake in ConocoPhillips after all.

At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.

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This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.


TheStreet Ratings team rates CONOCOPHILLIPS as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:

"We rate CONOCOPHILLIPS (COP) a BUY. This is driven by a number of strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, attractive valuation levels, increase in net income, largely solid financial position with reasonable debt levels by most measures and solid stock price performance. We feel these strengths outweigh the fact that the company has had somewhat disappointing return on equity."

You can view the full analysis from the report here: COP Ratings Report

Marc Courtenay is a financial research analyst and the founder of Advanced Investor Technologies LLC as well as the publisher and editor of www.ChecktheMarkets.com.

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