ConocoPhillips (COP), Canadian Natural Resource Ltd (USA) (CNQ): Why You Should Consider Including Oil & Gas Exploration and Production in Your Portfolio

In every sphere of life and business, what differentiates the best from mediocrity is an aspect of efficiency, producing more from less, consuming less to go further, pay less to buy more.

After bolting on acquisitions for a decade, ConocoPhillips (NYSE:COP) is now on the road to becoming a leaner, more efficient and shareholder rewarding company. That being said, the downstream operations spin-off has allowed the oil giant to focus on its core strength. Here’s why you should be interested in making this $80.8 billion, 4.04% yielding stock a part of your portfolio.

ConocoPhillips (NYSE:COP)ConocoPhillips (NYSE:COP) is ranked 73rd on Forbes’ Global 2000 list and incorporates operations in exploration and production across the globe. As with a lot of companies in the commodity business, having geographical diversity helps maintain a stable demand and output in times of regional drop-offs. Furthermore, ConocoPhillips is also the world’s largest independent exploration and production company.

The company’s fundamentals are what made me interested in covering the company. On the financial front, the company has agreed with the government of Kazakhstan to sell a $5 billion in the giant Kashgan oil field – which is one of the largest oil discoveries in the world in a long time. Keeping this in mind, ConocoPhillips (NYSE:COP)’ should show a healthy net positive cash flow. Furthermore, I expect the splurge in cash to initiate a share buyback program along with a hike in dividend.

Indicator ConocoPhillips Canadian Natural Resources Occidental Petroleum Corporation
P/E TTM 11.2 22.5 16.8
Forward P/E 10.4 11.2 12.4
PEG Ratio 2.2 1.0 1.7
Operating Margin % TTM 24.5% 17.5 28.9
Dividend Yield
, %
4.04% 1.38% 2.56%
Current Price $65.97 $33.18 $92.03

Speaking of dividend – the company offers an extremely attractive dividend yield and has increased its dividend for the last ten consecutive years. In comparison with its peers, the 4.04% yield provides investors with a healthy cash benefit especially at only a 44.7% payout ratio.

Furthermore, ConocoPhillips (NYSE:COP) stacks up well against Canadian Natural Resource Ltd (USA) (NYSE:CNQ) and Occidental Petroleum Corporation (NYSE:OXY) in terms of valuation, since the P/E values suggest ConocoPhillips is the most undervalued stock of the three.

However, ConocoPhillips (NYSE:COP) has the worst PEG ratio of the three, which sheds light on concerns about the company’s ability exhibit growth in the future. Slow growth has been a problem for the company and can only compound over the next 4-5 years. If commodity prices, i.e. oil and gas, head south, it could mean trouble for the company’s financials, as it will require taking on more debt amid negative cash flow.

Canadian Natural Resource Ltd (USA) (NYSE:CNQ), on the other hand, has announced the acquisition of Barrick Energy. Much like ConocoPhillips (NYSE:COP), it has geographical diversification when it comes to assets, which enables it to consistently generate value, even in difficult macroeconomic conditions. Its heightened activity in the Canadian oil sands is expected to fuel growth for the next 4-5 years.

With the ousting of Ray Irani, Occidental Petroleum Corporation (NYSE:OXY)’s CEO since 1990, the company is looking to shift gears to experience higher growth for the future. Evidence of this is found offshore Qatar, where the company is spending more than $3 billion to upgrade Idd El Shargi North Dome oil field. Furthermore, the company is expected to sell some of its Middle Eastern and North American assets which will help swell up the cash flow, initiate a share buyback and relieve it from taking on debt even though its debt/equity rating is already below industry average.

At the same time, the company’s management has been equivocal about spinning-off into two or three pieces, though no signs of any recent developments have surfaced. In case the company does spin-off its operations, shareholders will be in for a huge win.