Analysts promote ConocoPhillips over Occidental Petroleum


One nationally-known investment analyst, Motley Fool is giving high marks to ConocoPhillips as an oil and gas company to make investments.

ConocoPhillips is the largest independent oil and gas producer. The company’s patient, yet deliberate growth strategy has driven its selectiveness when it comes to new investments.

ConocoPhillips has funded its growth with solid cash flow and less debt than Occidental. Although it’s a larger company, it has just one-sixth the net total long-term debt of Occidental.

OXY Debt To Capital (Quarterly) Chart

ConocoPhillips also has healthy debt-to-capital and debt-to-equity ratios, signaling it is more reliant on cash flow than debt to fund its business.

ConocoPhillips has consistently managed to keep a strong balance, but it isn’t immune to the challenges of lower oil and gas prices. On March 18, ConocoPhillips invited analysts to a conference call that outlined the measures the company is taking in response to the current market.

The measures included cuts to spending and production, as well as raising liquidity without cutting the dividend. ConocoPhillips noted that it can achieve at least a 10% return on its Lower 48 assets even when oil is in the high $20s, which indicates that the company’s portfolio is strong.

The advantage for ConocoPhillips over Occidental is that it can handle more debt without straining its balance sheet or having to cut its dividend. It can also afford to bring back some of its production as prices rise. ConocoPhillips had shut down around a third of its production in May and June, but CEO Ryan Lance hinted that the company might restore some of its curtailed production in July if prices stabilize.

Even with production cuts, ConocoPhillips is still producing just 5% less than the first quarter and around the same as it was in the second quarter of 2019.

The main difference between ConocoPhillips and competitors like Occidental Petroleum is that ConocoPhillips has time on its side. Instead of selling oil on razor-thin margins or selling assets for a fraction of what they were worth a year ago, ConocoPhillips can simply take out a few loans and spend less money. In a $40 oil market, what matters more than anything is the health of a company’s balance sheet.

Comparing Occidental to ConocoPhillips frames the contrast well, but the same logic extends across the industry.

ConocoPhillips is a good starter energy stock to add to your portfolio. There’s arguably already enough risk in upstream to venture much further than that, especially with the uncertainty surrounding transportation demand for gasoline, diesel, and jet fuel. But if you decide to venture further, check that the company can handle quarter after quarter of low oil and gas prices without drowning in debt or cutting its dividend.

Source: Motley Fool