ConocoPhillips Poised For Growth Despite Cuts In Spending

On Aug 16, 2016, we issued an updated research report on a major global exploration and production (E&P) company ConocoPhillips (NYSE:COP) .

ConocoPhillips’ focus on North America, Australia and Asia is believed to largely improve its risk profile. The company intends to reduce its reliance on the weak North American natural gas market. This is evidenced by most new projects focusing on more profitable oil, including oil shale. Its impending exit from its remaining offshore interests is also a positive.

With crude oil and natural gas improving significantly from the multi-year lows the commodities slipped to earlier in 2016, ConocoPhillips’ business is expected to gain momentum.

Despite cuts in capital spending, ConocoPhillips expects major capital projects to be brought online this year. Surmount 2 and APLNG projects , as well as further ramp up of Foster Creek/Christina Lake is expected to facilitate production growth by 1% in 2016. The company also expects lower operating expenses during this period.

However, we remain cautious about the company’s weak near-term production level as the output is likely to be adversely impacted by divestitures. Additionally, downtime in the fields might reduce production. Further, the company has slashed its capital expenditure budget from the dystopian 2016 oil space based on assumptions of lower-than-expected oil prices. ConocoPhillips cut its 2016 capital budget to $5.5 billion from $6.4 billion estimated earlier and $5.7 billion estimated early in 2016.

Given that ConocoPhillips is a firm in the upstream industry its profit is influenced by commodity price fluctuations. With both oil and natural gas prices still remaining low, the company's revenues, earnings and cash flows are likely to be affected.

The company faces greater challenges than its larger peers in generating attractive growth due to its above-average exposure to the mature OECD regions. Also, the company lacks material exposure to the prolific non-conventional plays in spite of being one of the largest natural gas companies in North America.

Zacks Rank and Stocks to Consider

ConocoPhillips carries a Zacks Rank #3 (Hold). Some better-ranked players from the energy sector are Sasol Ltd. (NYSE:SSL) , Enbridge, Inc. (NYSE:ENB) and Total SA (TO:TOT) . All these stocks sport a Zacks Rank #1 (Strong Buy).