ConocoPhillips (COP): Three Reasons to Buy this Oil and Gas Company

Even Anadarko Petroleum is investing heavily in Niobrara with an investment budget of $1 billion per year. It has an inventory of around 4000 wells, and plans to drill around 300 wells during 2013. But the management of ConocoPhillips announced that Niobrara wells have high crude yields, which hints towards high margin crude production. This would result in balanced growth, instead of leveraging a single sector.

Investors’ delight

Since 2011, ConocoPhillips (NYSE:COP) has been distributing quarterly dividends of $0.66 per share or an annual payout of $3.22 billion. This equates to a lucrative annual yield of 4.28% with a modest payout ratio of 43% Besides that, the company has also repurchased 4.4% of its shares outstanding over the last year, for an estimated $5.15 billion.

Share buybacks not only highlight the board’s faith and confidence in the company’s future, but also reduce its dividend burden. Such repurchases leave room for dividend hikes in the future.

During its annual shareholders meeting, one of the shareholders suggested that ConocoPhillips terminate its future share buyback plans and spends its entire distributable cash on dividends. Its management stated that having a balanced approach is a better option, which suggests that ConocoPhillips would most likely continue with its share repurchases.

As a result of this balanced approach, ConocoPhillips (NYSE:COP) has returned around $8.4 billion to its shareholders in the form of share buybacks and dividends over the last year. This value distribution has been a major contributor to its impressive 2012 fiscal year EPS growth rate of 15.19%.

Conclusion

With rising gas prices and lower tax rates, the management of ConocoPhillips (NYSE:COP) is expecting a margin expansion of 300-500 basis points. This coupled with the mentioned reasons calls for significant upside in its share price. According to analyst consensus, its annual EPS is estimated to grow by 9.69% over the next year. However, analysts at Barclays are particularly bullish on ConocoPhillips with a price target of $80 per share — a 30% premium.

Piyush Arora has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

The article 3 Reasons to Buy this Oil and Gas Company originally appeared on Fool.com.

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