ConocoPhillips (NYSE:COP) is one of the leading exploration and production (E&P) and distribution (pipelines) firms in the U.S. Six months ago, that would have been enough to signal a huge buy recommendation in COP stock. But now, oil is once again trading under $60 a barrel. Not too long ago, many people were wondering when oil was going to top $100.
The fact is, the energy patch is as volatile as housing, semiconductors or any other industry that has a cyclical nature to it. And those tides can shift quickly, especially now.
Just as when the Federal Reserve stepped into the markets after the financial crash a decade ago, we’re in brand new territory. No one knew if the central bank could save the economy from complete ruin. And now we don’t know what will happen as the Fed resumes its duties simply managing interest rate policy.
What’s more, the markets are now more volatile again and that means the economy is more difficult to predict, and there’s a great divergence between the markets and the economy.
All this is to say that it’s important to weigh great opportunities with their inherent risks. Trying to catch a falling knife is not the same as buying an oversold stock.
Since COP is an A-rated stock in my Portfolio Grader, I thought that this would be the perfect stock to analyze.
3 Cons for COP Stock
Global Growth Is Stalling. From all the indicators — energy prices being a big one — it looks like companies are warning about Q4 and next year’s growth outlook. Energy prices are reinforcing a slowing economy. The trade war is taking its toll on U.S. firms as well as the Chinese and Europeans.
U.S. Overproduction Grows Surplus. U.S. producers have been hard at work pumping oil and building up big surpluses. But the U.S. asked the Saudis to pump more oil to make up for the Iranian oil that was embargoed. And then we allowed some contracts with allies to continue with the Iranians for a while longer. This meant a lot of oil ends up in the markets while growth is cooling.
E&P Firms Are Hit the Hardest. When there’s oversupply, the first thing producers have to do is cut supply, and that means shutting down well production. While a lot of E&P firms are still profitable with oil around $50 a gallon, stock prices get hit as margins shrink.
3 Pros for ConocoPhillips
Natural Gas Prices Are Rallying. COP gets about 40% of its revenue from natural gas, and another 20% from natural gas liquids (NGLs) and bitumen. COP has a very large proportion of natural gas production in its portfolio, and that comes in very handy for seasonal demand and for industrial power generation.
U.S. Energy Exports Help Margins. U.S. oil exports have gone parabolic since the early 2010. And the same can be said of natural gas exports, which will be growing quickly as well. There are much bigger margins delivering energy outside the U.S. market, and that will help smart international firms like COP.
The Long-Term Global Economic Rebound Is Real, If Uneven. While there are stronger quarters than others, and there is more volatility than there was for the last decade, the global economy is headed in the right direction. And with a record of success going back more than a century, COP knows how to take advantage of every situation and come out stronger.
Louis Navellier is a renowned growth investor. He is the editor of four investing newsletters: Growth Investor, Breakthrough Stocks, Accelerated Profits and Platinum Growth. His most popular service, Growth Investor, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.
