Crude Kings: Top 5 Oil & Gas Cash Cows

Did you know Energy stocks were the top performers in 2021 and 2022, up 53% and 64%, respectively?

Everyone seems to have forgotten how profitable these companies are…

…everyone except financial pros.

Because our TrackStar data showed a pickup in searches for exploration and production (E&P) energy names.

The top five searches are all fantastic companies that generate oodles of cash.

However, we wanted to look into the group’s top pick, ConocoPhillips (COP), because we believe this is a great long-term investment for the average investor.

But don’t take our word for it.

Here’s our analysis so you can decide for yourself.

ConocoPhillips’ Business

Oil and gas companies operate in three segments: E&P (upstream), midstream, and downstream.

ConocoPhillips spun off from Phillips 66 (PSX) in 2012, and is now the largest independent oil E&P company globally, with operations in 13 countries and 9,900 employees.

As an E&P company, ConocoPhillips lives and dies by commodity prices.

2021-2022 were record-setting years for the company as oil and natural gas prices hit levels not seen since before the fracking boom in 2014.

Source: COP Q4 2024 Earnings

Subsequent declines in oil and gas prices brought 2023 revenues down by 29%, roughly in line with the drop in average realized price.

While the IEA expects oil supply and demand to remain balanced for the next two years, many analysts believe OPEC+ production cuts in March will cause the price of oil to rise throughout 2024.

Any gains in oil prices help ConocoPhillips’ bottom line.

Financials

Source: Stock Analysis

ConocoPhillips’ margins are relatively stable, which sounds odd since the price of oil changes from year to year.

This occurs because the company buys a significant amount of oil and gas. The margin on these transactions is fairly constant, creating stable margins.

Now, one reason investors gravitate towards ConocoPhillips is its incredible cash flow.

While 2022’s $16.0 billion in free cash flow was a new high, 2023 dropped to $5.4 billion as acquisitions and capex increased by roughly $4.0 billion.

Yet, management kept kicking out $5.6 billion in dividends and $5.4 billion in share repurchases for a total yield of 8.3%. 

They also said to expect similar in 2024.

Valuation

Source: Seeking Alpha

Relative to its peers, ConocoPhillips is a bit more expensive.

For example, Devon Energy (DVN) trades at just 8.0x forward earnings, 4.2x operating cash, and 9.7x free cash flow.

ConocoPhillips trades at 12.7x forward earnings, 6.6x operating cash, and 15.2x free cash flow.

However, Diamondback Energy (FANG) trades at 10.1x, 5.3x, and 26.1x, respectively.

Clearly, it’s a bit of a mixed bag, depending on Capex and acquisitions.

Keep in mind that DiamondBack is expected to merge with Endeavor Energy, which can always cause stock prices to move.

Growth

Source: Seeking Alpha

Revenue growth is fairly consistent across the companies, with APA Corp. (APA) standing out for its lower average growth in the last 3-5 years.

Interestingly, Devon and Diamondback Energy expect revenue and EBITDA growth in 2024 while the rest forecast declines.

Profitability

Source: Seeking Alpha

ConcoPhillips’ margins aren’t the best. In fact, amongst its peers, they’re the worst in nearly every category except free-cash-flow margin.

However, if you look back in history, you’ll find it’s maintained its margins far better and more consistently than any of its competitors.

Our Opinion 9/10

In the energy world, being large is a benefit. It gives you the money to buy up smaller assets for growth.

ConocoPhillips does an excellent job of managing its cash, returning a good amount to investors while improving its operations.

While we don’t expect the stock will deliver +50% returns anytime soon, we could see a steady 15%-20% average annual return over the next five years.