COP

[Marshac]

Yup, the oil company. I received a nice thick packet of information from them this week, and have been reading it over prior to going to bed. Glossy paper. Very nice. Anyways, their oil reserves are all in 'safe' regions, and although I know that many of their fields are in decline (North Sea, Prudhoe Bay, etc), how many oil fields are left that AREN'T in decline? Regardless, let's talk numbers. With a PE of 6.85, a yield of 2.30%, and a heck of a lot of oil still in the ground, why does COP seem so cheap? Is there something major I missed?

 

[JPatrick]

I don't see anything wrong with it as a longterm holding, but I'd bet you have a 50/50 chance of seeing it down at that $58 level sometime in the next 30 days.

 

[laurence]

Hey, welcome back Marshac! Think you could just sneak back in quietly after being gone so long? Hope all is well with you.

I've heard there is a $10-$20 premium on oil due to all the war/political unrest, so by betting on this company are you saying you think we're going to stay unstable in that region and keep prices shored up?

 

[Marshac]

I've heard there is a $10-$20 premium on oil due to all the war/political unrest, so by betting on this company are you saying you think we're going to stay unstable in that region and keep prices shored up?

I'm primarily betting on peak oil, but to answer your question, I don't think the middle east will suddenly stabilize anytime soon. Anyways, the published reserve numbers for the middle east are highly dubious anyways since there is an incentive to lie- the larger your reserves, the more you can pump in OPEC. I really have no idea what the fear premium is right now... or what really would abate those fears.

I'm doing well- just putting in my time until I can go back to school.

 

[Leonidas]

I don't see COP as that great of a deal. Upside in energy company stock appreciation looks a little limited out for the next several years, but who knows what might happen next week. Still, I think there are bigger players with better moves than COP. BP and XOM both have either raised production 5% or will most likely have done so by the end of the year (BP in the Gulf of Mexico and Russia, XOM in Alaska and new recovery technologies). COP's recent additions seem to be mostly from buying Burlington and owning a peice of Lukoil. COP does have it's strengths (cash flow looks good), but when you look at the big boys you can see them making moves that will continue to keep cash flowing and profits up far into the future.

 

[Leonidas]

COP beat expectations and shot up today, but seems to be about where it was a couple of weeks ago and not likely to go higher. The "smart money" on the street had already figured that COP (and most other oil companies) were going to have good earnings based on the price of oil, but this report was probably a little better than most thought. But with the price bumping up and then coming back down, I guess that means that a lot of people think that COP is not in a good place to improve profits in the long haul. Any opinions?

 

[wabmester]

Why would you choose COP over some random energy sector fund (which would reduce your risk)?

Here's COP vs Vanguard's fund over the last 5 years:

Generally, it's the asset class or sector that matters, and not the individual stock.

Having said that, I have to admit that I bought some Eni SpA (NYSE:E) during the last Big Dip because:

1) Vanguard has them as a significant holding in their energy fund

2) They pay a large dividend

3) I wanted some more international exposure

I glanced at their fundamentals, but I trust the market to price them correctly. 

 

[maddythebeagle]

lol....he makes his own fuel and is looking for oil investments to soak it to the rest of us methinks.....

 

[AltaRed]

Yup, the oil company. I received a nice thick packet of information from them this week, and have been reading it over prior to going to bed. Glossy paper. Very nice. Anyways, their oil reserves are all in 'safe' regions, and although I know that many of their fields are in decline (North Sea, Prudhoe Bay, etc), how many oil fields are left that AREN'T in decline? Regardless, let's talk numbers. With a PE of 6.85, a yield of 2.30%, and a heck of a lot of oil still in the ground, why does COP seem so cheap? Is there something major I missed?

The main differences in my view are:

1) COP's reserves in aggregate, relative to the other majors, are not in as safe regions as the other majors. Nothing in Russia is safe and is highly subject to re-nationalization. Appears nothing is safe in Venezuela either.

2) COP gets (or at least did before Burlington purchase) a larger proportion of their earnings from downstream refining operations. That has played out well for 2 years now, but upside is limited relative to the other majors. I think the Burlington purchase was designed to bring more of an E and P focus back to the company.

Having said that, I believe they are a pretty robust company, subject only to Jim Mulva's appetite for acquisitions.

 

[HFWR]

Jim Mulva...

Wasn't he in a Seinfeld episode once...

 

[unclemick]

Sooooo - 2.48% of Warren Buffett's latest porfolio filing.

Like BUD - what does he think he see's that we can't?

heh heh heh heh heh heh heh

 

[Leonidas]

Jim Mulva...

Wasn't he in a Seinfeld episode once...

I think it was his sister, Delores, or was her name Regina?

Sooooo - 2.48% of Warren Buffett's latest porfolio filing.

Like BUD - what does he think he see's that we can't?

You keep pointing that out Uncle Mick, and it has made me curious enough to find out. So, while sipping a cool Bud I went to the horse's mouth: When asked in May '05 why he had bought BUD, he said that it was a business with a durable competitive advantage and that there was no generic label in the beer business.

I had to drink another beer while pondering that statement. It didn't help. The man owns more than 43 million shares of the company (an investment worth nearly $2 Billion) and that's the best he can come up with? Makes me wonder if the Oracle of Omaha ain't slipping just a tad. Maybe he's counting on a bazillion Chinese to drop their Tsingtao's and go crazy over Bud.

 

[unclemick]

Sooo - the theory is maybe WB skipped the cherry coke and had too many BUD's - when he bought COP

heh heh heh heh heh - I have read one book ?The Warren Buffett Way?? or something like that and various op ed articles analyzing his technique and have yet to see why he buys what he does.

Now - the Norwegian widow and dividends, Ben Graham's Appendix 1 to the 4th ed of Intelligent Investor - I finally think I got after thirty years - but COP and why Buffett bought so much - well Refining capacity?

 

[AltaRed]

COP is a good play on refining margins due to good capacity in USA and WB probably sees that as "a business he understands". COP is likely to be a fairly steady performer as long as the US does not start to import huge quantities of refined products from the Middle East.

However, I think the big money has already been made (huge share growth over past 5 years) and there are better opportunities elsewhere.

 

[wabmester]

there are better opportunities elsewhere.

Are you going to leave us hanging?

 

[Leonidas]

Sooo - the theory is maybe WB skipped the cherry coke and had too many BUD's - when he bought COP

… but COP and why Buffett bought so much - well Refining capacity?

Originally I said that I didn’t see COP as that great a deal – that was in response to the original question about it’s relative “cheapness”. Perhaps I should have said that I didn’t see it as “cheap” at its current valuation. That said, as to why WB bought it I think he sees that COP is trying to become one of the real big players in the industry.

I agree with some of the things that AltaRed has said – but find some exceptions too. Since buying Burlington and a piece of Lukoil, COP is currently making most of its money from E & P. Its refining and marketing segment took some hits and most recently only contributed about 30% of the company’s ’05 earnings. If those problems get fixed, and it seems like easy stuff to deal with, that will add to the bottom line. But I think fixing R & M problems is a given and mostly already factored in to the current price.

The risk comes in COP’s moves to improve E & P. Buying Burlington gave them a bigger piece of the gas sector – that was good. But like AltaRed said, the Lukoil thing is subject to some risk. They bought themselves some proven reserves, but there are a lot of joint ventures they are going into that are subject to geopolitical risk and are far distant in payoff. If it pays off then Mulva is a genius. If it doesn’t – oops. Some of the real big boys (like BP and XOM) are doing very similar things, but when you compare the depth of assets between them and COP I think you’ll see that it’s a lot riskier for a small company like COP.

If I were looking to put some more money in the bigass oil sector, COP would be getting some of it. But, it wouldn’t be the big play for me – I’d go with something like XOM, BP or maybe RDS-A first and then throw a little over to COP.

 

[AltaRed]

Are you going to leave us hanging? 

Depends on your perspective.  Hard to go against XOM that seems to be able to execute year in and year out with barely a ripple. Doesn't hurt  that they now have something like $24B(?) sitting in cash and are buying back shares while growing the dividend steadily. Investor returns will not likely be at the top of the pack very often, but they also won't surprise big on the downside.

RDS is still a bit of a wild card in my view but if your a bit contrarian, this might be a real good buy right now. They have yet to recover from their reserves writedown and to get their project execution back on track, but when they do, you will see the P/E ratio increase to the BP or XOM level.

Disclaimer: I have owned XOM for many years and the stock isn't cheap.

 

[JPatrick]

I don't see anything wrong with it as a longterm holding, but I'd bet you have a 50/50 chance of seeing it down at that $58 level sometime in the next 30 days.

Not so sure about that $58 level, but if we hit an oilslick over the next 60 minutes or so, COP could hit its' long term resistance of $59.50 or so. If it does we could get a nice pop (COP that is) come late today or Monday. OTH a penetration of this resistance could set up a further tumble. I think I'd bet on the pop, but I'd also probably sell after the pop.
I don't have a dog in this particular fight, but that's how it looks to me.