ConocoPhillips (NYSE:COP) stock is on the move this morning as the company beat revenue and earnings estimates in its quarterly report. With oil prices rising, the Houston-based exploration and production firm finds itself in an increasingly stronger position. But that only is the short-term story on COP stock.
Given the cyclical nature of its industry, COP investors may see the challenge lies more in holding gains than in earning profits.
COP stock blew away estimates
In its Q1 report, COP reported earnings per share (EPS) of 96 cents. This exceeded analyst EPS estimates of 29 cents. COP lost 14 cents per share in the same quarter last year. Like earnings, revenues also beat estimates. Revenues came in at $8.96 billion, $130 million above estimates and a 15.7% increase over year-ago revenues.
COP management has already started putting these profits to good use. The company paid down $2.7 billion worth of balance sheet debt. They also raised the dividend by 7.5%. Share repurchases have also increased by 33%. ConocoPhillips also remains on track to buy back $2 billion worth of shares this year.
Despite all of this spending, cash from operating activities exceeded that of capital expenditures, dividends, and share buybacks. Its operations excluding Libya are now producing 1,224 million barrel of oil equivalents per day. Also, production in the continental U.S. grew by 20%.
The company has benefitted from increased demand that has driven the price of crude above $68 per barrel. The COP stock price has responded in kind. It now trades at over $66 per share, close to its highest price since the peak of the last oil boom in 2014. That represents a small increase from three months ago when I recommended buying COP stock.
Understand the Upstream Oil Business
Investors need to remain aware that COP and peers such as Anadarko Petroleum Corporation (NYSE:APC), Occidental Petroleum Corporation (NYSE:OXY), and EOG Resources Inc (NYSE:EOG), operate on the upstream (meaning exploration and production) side of the oil business.
Unlike Exxon Mobil Corporation (NYSE:XOM) or Chevron Corporation (NYSE:CVX), they do not sell petroleum products on a retail level. This leaves the company subject to the extremes of both sides. With rising prices, ConocoPhillips will benefit. However, if a downturn comparable to that of 2014-16 occurs, revenues slow to a trickle and losses mount.
For that reason, owners of COP stock always need to keep one eye on the exit. I would still recommend having a position in this stock as oil prices are trading at moderate levels from a historical perspective. However, given that the stock trades more than 20% higher than the levels seen as late as March 19, I would pay to wait for a pullback to buy.
If oil prices stabilize at these levels, COP stock stands at a fair value. If crude keeps rising (and I think it will), company profits, and by extension COP stock, will likely increase with it.
Holding Gains Can Be Harder than Earning Profits
Still, even if profits increase, holding the gains may prove itself a more difficult challenge. Reaping long-term gains in upstream oil investing means understanding the cycle. If oil prices return to 2014 levels, current investors should look for an exit and move on to other investments.
If oil prices reach those highs and then return to the low levels seen in 2016, a buying opportunity for COP and other upstream oil stocks could again take shape.
As experienced investors now, timing comes with great difficulty. Investors who sell at a good time may have to wait years for upstream stocks to fall and more years to find that low-price entry point. However, we know oil prices have a history of fluctuating to a high degree. Having the perspective and patience to play this cycle will make investors a lot of money in the long term.
The Bottom Line on COP Stock
COP stock is again on the rise, but investors may find holding profits more challenging than making profits with ConocoPhillips stock. COP blew away revenue and earnings estimates. It is using these earnings to position itself to increase profits further, stabilize its balance sheet, and reward shareholders.
I think this stock can profit investors at the right entry point. However, upstream oil stocks behave cyclically. Making and holding profits in COP stock requires investors to both understand oil price cycles and to exercise the patience to act accordingly. Investors can make a lot of money playing with the right perspective and discipline.
However, those who lack either perspective or patience should invest elsewhere.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.
