We Still Like COP (Conoco Phillips)

It’s Not Too Late

A few months ago we featured the oil and gas markets in our analysis. We specifically dug into Conoco Phillips. Our conclusion at the time (when COP was around $56) was that we liked the oil and gas market in 2018 and we liked COP. Our short-term trade got shaken out when oil markets reacted to geopolitical events. Since then, they have recovered. COP is up approximately 25%, XLE is up approximately 8.94% on the year and the XES is up 9.7%. The question now becomes: What do we think of COP today?

Oil and Gas Markets – Second Half of 2018

These markets are quite unpredictable, as many of you can testify. The real driver of values is clearly oil prices. Our analysis has to start there.

Where do oil prices go from here? We have to look at OPEC, US output levels, consumption levels and the overall world economy. OPEC continues to limit supply, this is good for oil prices remaining firm. US output levels have increased and exports have also increased. This is good, as long as the supply doesn’t overwhelm demand and drive prices back down. We think there is a small chance this happens. Levels of oil consumption have been strong, with recent drawdowns in oil supplies having occurred. We think this modestly continues. Lastly, the world economy continues to be strong and that bodes well for oil demand.

The long and short is: oil prices will likely remain firm and possibly increase slightly into the second half of 2018.

The Future Looks Energetic

As we commented in our piece on COP a few months back, the company has brought down its expenses and expenditures as a result of the past oil market selloff. It has tightened its belt and managed to do more with less. Three positive earnings reports also prove that this is working. As long as oil prices remain stable, we think COP can continue to remain profitable.

Remember, too, that energy is a good late-cycle sector. As the economy heads for its next recession energy should stand up well.

We Still Like COP

Our valuation model puts the stock price between $77-$89. We have definitely seen good strong gains in the stock and we think there are still some gains left. We think the stock slows down in its appreciation at this point and waits for the oil market to show its hand further. New money at this point is probably not advised, but if we see a mild pullback then it would not be a bad idea. The stock pays a decent dividend and looks stable for the near future. It could make a solid holding for your energy exposure in your portfolio.

Technically Speaking

From a technical perspective, we might want to exercise some patience in terms of getting long. Waiting for a correction lower towards $63-$66 would be prudent. From there, consider building longs.

Areas to note on the chart:

  • Declining momentum as seen in the stochastics. Prices making new high but not the oscillator. Classic 5th wave characteristic
  • Wave (iii) has stalled at a classic termination level for Wave 3’s….the 161.8% Fib projection of Wave (i) projected from Wave (ii)
  • Below $61 and we would re-evaluate
  • Based on the wave counts below and doing some basic Fibonacci projections, the ‘technical target level’ comes in around $80.

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