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  • 1.  CONOCOPHILLIPS  Author:  Vy  Danay  Course:  Fundamentals  of  Investment  Professor:  Francis  Thomas  The  Richard  Stockton  College  of  New  Jersey  6 0 0   N o r t h   D i a r y   A s h f o r d ,   H o u s t o n ,   T X   7 7 0 7 9  
  • 2. I. Company Structure: ConocoPhillips is an international, integrated energy company. The merger between Conoco and Phillips was consummated on August 30, 2002. Headquartered in Houston, Texas, ConocoPhillips operates in more than 30 countries. As of March 31, 2011, the company had approximately 29,600 employees worldwide and assets of $160 billion. ConocoPhillips stock is listed on the New York Stock Exchange under the symbol COP. Market capitalization as of March 31, 2011, was approximately $113 billion. • Exploration and Production (E&P)— This segment primarily explores for, produces, transports and markets crude oil, bitumen, natural gas, liquefied natural gas (LNG) and natural gas liquids on a worldwide basis. • Midstream— This segment gathers, processes and markets natural gas produced by ConocoPhillips and others, and fractionates and markets natural gas liquids, predominantly in the United States and Trinidad. • Refining and Marketing (R&M)— This segment purchases, refines, markets and transports crude oil and petroleum products, mainly in the United States, Europe and Asia. • LUKOIL Investment— This segment consists of ConocoPhillips’s past investment in the ordinary shares of OAO LUKOIL, an international, integrated oil and gas company headquartered in Russia. • Chemicals— This segment manufactures and markets petrochemicals and plastics on a worldwide basis. The Chemicals segment consists of 50 percent equity investment in Chevron Phillips Chemical Company LLC (CPChem). • Emerging Businesses— This segment represents the investment in new technologies or businesses outside the normal scope of operations.II. Economic Analysis: Economics risks are beyond ConocoPhillips’s management but have direct effects in its operations. 1) Domestic and worldwide political and economic developments could damage the Company’s operations and materially reduce its profitability and cash flows. Actions of the U.S., state and local governments through tax and other legislation, executive order and commercial restrictions could reduce ConocoPhillips’s operating profitability both in the United States and abroad. The U.S. government can prevent or restrict the Company from doing business in foreign countries. These restrictions and those of foreign governments have in the past limited its ability to operate in, or gain access to, opportunities in various countries. Due to the fact that approximately 60 percent of ConocoPhillips’s hydrocarbon production was derived from production outside the United States in 2011, and 56 percent of its proved reserves, as of December 31, 2011, was located outside the United States, the Company is subject to risks associated with operations in international markets, including changes in foreign governmental policies relating to crude oil, bitumen, natural gas, natural gas liquids or refined product pricing and taxation, other political, economic or diplomatic developments, changing political conditions and international monetary fluctuations. 2) Changes in governmental regulations may impose price controls and limitations on production of crude oil, bitumen and natural gas. The Company’s operations are subject to extensive governmental regulations. From time to time, regulatory agencies have imposed price controls and limitations on production by restricting the rate of flow of crude oil, bitumen and natural gas wells below actual production capacity in order to conserve supplies of crude oil, bitumen and natural gas. 3) ConocoPhillips expects to continue to incur substantial capital expenditures and operating costs as a result of its compliance with existing and future environmental laws   ConocoPhillips’s  Analysis-­‐Page.2  
  • 3. and regulations. The nature of its businesses is subject to numerous laws and regulations relating to the protection of the environment. These laws and regulations continue to increase in both number and complexity and affect its operations with respect to, among other things: • The discharge of pollutants into the environment. • Emissions into the atmosphere (such as nitrogen oxides, sulfur dioxide and mercury emissions, and greenhouse gas emissions as they are, or may become, regulated). • The handling, use, storage, transportation, disposal and cleanup of hazardous materials and hazardous and nonhazardous wastes. • The dismantlement, abandonment and restoration of the properties and facilities at the end of their useful lives. • Exploration and production activities in certain areas, such as offshore environments, arctic fields, oil sands reservoirs and shale gas plays.III. Industry Analysis: Industry risks are risks occurred in a specific industry and associated with the industry’s characters. 1) The effects of changing commodity prices and refining margins. The revenues, operating results and future rate of growth are highly dependent on the prices that the Company receives for the crude oil, bitumen, natural gas, natural gas liquids, LNG and refined products. The factors influencing these prices are beyond the Company’s control. 2) Any material change in the factors and assumptions underlying ConocoPhillips’s estimates of crude oil, bitumen and natural gas reserves could impair the quantity and value of those reserves. ConocoPhillips’s proved reserve information included in its annual report has been derived from engineering estimates prepared or reviewed by the Company’s personnel. Any significant future price changes could have a material effect on the quantity and present value of its proved reserves. Future reserve revisions could also result from changes in, among other things, governmental regulation. Reserve estimation is a process that involves estimating volumes to be recovered from underground accumulations of crude oil, bitumen and natural gas that cannot be directly measured. As a result, different petroleum engineers, each using industry-accepted geologic and engineering practices and scientific methods, may produce different estimates of reserves and future net cash flows based on the same available data. Any material changes in the factors and assumptions underlying ConocoPhillips’s estimates of these items could result in a material negative impact to the volume of reserves reported. 3) Barring a successful addition to ConocoPhillips’s existing proved reserves, its future crude oil, bitumen and natural gas production will decline, resulting in an adverse impact to the business. This is typical of energy companies. The rate of production from upstream fields generally declines as reserves are depleted. This depends on the extent that ConocoPhillips conducts successful exploration and development activities, or, through engineering studies, identifies additional or secondary recovery reserves. It’s proved reserves will decline materially as it produces crude oil and natural gas.IV. Fundamental Analysis: Intrinsic value provides a measure of the underlying worth of a share of stock. Fundamental analysis is closely linked to the notion of intrinsic value because it provides the basis for projecting a stock’s future cash flows. A key part of this analytical process is company analysis, which takes a close look at the actual financial performance of the company.    ConocoPhillips’s  Analysis-­‐Page.3  
  • 4. 1) Key Ratio Analysis:ConocoPhillips as well as all public companies have to release a 10-K report annually. The 10-Kreport delivers the financial information during the fiscal year to the Company’s shareholders.However, to understand what accounting statements really have to say about the financialcondition and operating results of a firm, one must turn to financial ratios- the study of therelationships between various financial statement accounts. a) Profitability ratios: is a class of financial metrics that is used to assess a businesss ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time. Ø Rate of Returns: The table shows key profit measures of ConocoPhillips during the last 10 fiscal years (from December 2002 to December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he   profitable   key   ratios   graph   (as   a   percentage   of   revenue)   suggests   the   probable  points   in   the   ConocoPhillips’s   financial   statement   that   an   investor   should   dig   deeper   into.  During  the  last  10  fiscal  years  from  2002  to  2011  ended  in  December,  Cost  of  Goods  Sold  and  Gross   Profit   as   the   percentage   to   Total   Sales/Revenue   remained   constant,   if   not   improved,  even   in   2008.   All   other   indicators   in   profitability   fell   hard   during   2008   fiscal   year.   So   an  investor  can  predict  that  something  negative  happened  between  the  Expenses  sections  and  Net   Income   in   2008.   A   2008   Income   Statement   of   the   Company   shows   a   huge   impairment   on  Goodwill  of  $25.44  billion,  and  on  LUKOIL  investments  and  other  impairments  of  $9.1  billion.  These   impairments   were   posted   in   the   last   quarter   of   2008.   To   explain   for   the   huge   loss  ConocoPhillips   incurred   in   2008,   the   Chairman   and   Chief   Executive   Officer   James   J.   Mulva  wrote   in   its   letter   to   shareholders   of   the   company:   “With   the   recent   substantial   decline   in  commodity   prices   and   worldwide   equity   markets,   I   expect   to   recognize   several   significant  noncash   impairments   in   the   fourth   quarter.   The   largest   of   these   is   a   $25.4   billion   after-­‐tax  impairment   to   goodwill   related   to   our   Explorations   &   Productions   segment.   I   also   plan   to     ConocoPhillips’s  Analysis-­‐Page.4  
  • 5. reduce   the   carrying   value   of   our   equity   investment   in   LUKOIL   by   $7.3   billion   after-­‐tax,   and  record  other  asset  impairments  totaling  $1.3  billion  after-­‐tax.  These  impairments  are  primarily  a   function   of   falling   commodity   prices   and   the   decline   in   the   market   capitalization   of  ConocoPhillips   and   of   LUKOIL.   These   noncash   charges   do   not   impact   the   strategic   value   of  ConocoPhillips’  assets,  including  our  LUKOIL  Investment;  our  estimated  resource  base  of  more  than  50  billion  barrels  of  oil  equivalent;  or  our  ability  to  generate  cash  flow”.     As   to   General   Accepted   Accounting   Principles   (GAAP),   Goodwill   resulting   from   a  business  combination  is  not  amortized  but  is  tested  at  least  annually  for  impairment.  If  the  fair   value   of   a   reporting   unit   is   less   than   the   recorded   book   value   of   the   reporting   unit’s  assets   (including   goodwill),   less   liability,   then   a   hypothetical   purchase   price   allocation   is  performed  on  the  reporting  unit’s  assets  and  liabilities  using  the  fair  value  of  the  reporting  unit   as   the   purchase   price   in   the   calculation.   If   the   amount   of   goodwill   resulting   from   this  hypothetical   purchase   price   allocation   is   less   than   the   recorded   amount   of   goodwill,   the  recorded  goodwill  is  written  down  to  the  new  amount.  Therefore,  the  total  of  $34.5  billion  in  impairment   on   the   Income   Statement   is   added   back   to   the   Company’s   Statement   of   Cash  Flows.   Ø Findings:    • From   an   accounting   standpoint,   what   appeared   to   be   a   profit   loss   in   2008   at   ConocoPhillips  is  actually  an  impairment  write-­‐off.  This  noncash  loss  didn’t  derive  from   the   strong   fundamentals   in   234435("$56$/5447& 001 ConocoPhillips’s   business.   In   !"#$%#& ()$%#& *&)$%#& +#,$%#& -./ fact,   it   reduced   the   company’s   !"#"$%"&($)*+,"-.$/01"& =0&+&($)>?@"$&"& 234225 9<4:<9 674727 374298 684767 384<:8 994:;9 6245<: 59348<5 59:46;2 Income   taxes   in   the   4th   .$/01"AB0&&CD"E0-".$/01"+(?"& 6423< :4<85 :49<5 A7;47<2C A74257C F-0#G&G0$E0-.$/01"+(?"& 7498; 94723 9456: 8473; 8749;2 Quarter  when  posted.     H"+.$/01"AB0&&C 9482< 24923 245;7 A784692C A834:5<C  • From   a   financial   standpoint,   the   loss   in   2008   is   believed   to   be   a   financial   strategic   movement   for   a   7829 !"#$%&()"$*+#",$-./"0 better   financial   structure.   As   this   table   breaks   down   -(#.1$2345#6 the   Total   liabilities   as   %   to   Total   Assets   and   Total   !"#$%&()"$*+#",$-./"0 Stockholders’   Equity   as   %   to   Total   Assets.   ROE   was   23*4 -(#.1$*00"#0 down   to   -­‐23.6%   and   ROA   declined   to   -­‐10.6%.   The   Income   Statement   already   showed   the   total   loss   of   almost   $17billion   in   2008.   To   understand   the   total   effect   of   the   decline   in   ROE   and   ROA   in   2008,   a   step   into   Equity   and   Assets  analysis  is  much  needed.  The  capital  structure  is  formed  by  liabilities  and  equity.   From  2002  to  2007,  ConocoPhillips  decreased  its  liabilities  over  time.  As  a  result,  equity   increased   during   that   period   until   they   met   in   2006   and   2007.   The   main   responsibility   of   a  financial  manager  is  to  maximize  the  wealth  of  his  shareholders.  Debt  can  be  acquired   at   a   cheaper   expense.   In   addition,   what   makes   debt   more   attractive   is   tax   deductible.   Combined  both  factors  of  debt,  funding  the  Company’s  assets  with  debt  is  a  lot  cheaper  as   compared   with   equity   which   is   not   tax   deductible   and   higher   required   rate   of   return.   I   believe   the   ConocoPhillips’s   Executives   decided   to   take   a   bigger   hit   with   ROE   together   with  the  loss.  It  is  also  a  chance  for  the  company  to  restructure  its  financial  plan  for  the   upcoming  years.  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       ConocoPhillips’s  Analysis-­‐Page.5  
  • 6. b) Activity  Ratios:   Ø Cash   Conversion   Cycle:   The   cash   conversion   cycle   is   the   number   of   days   it   takes   a   company   to   run   cash   through   the   sales   process,   from   sitting   in   the   bank,   through   buying   the   inventory,   selling   the   inventory,   and   receiving   the   cash   from   the   sale.   Shorter  is  better.  !"#$%&(%)%&* +,,+-.+ +,,/-.+ +,,0-.+ +,,1-.+ +,,2-.+ +,,3-.+ +,,4-.+ +,,5-.+ +,.,-.+ +,..-.+!"#$%&"($%)*$+",-.,/$ 0120 01234 01256 78295 71253 71241 70287 5820 79293 77205!"#$%:,;(,+<=# 73244 06281 0>209 08284 072>4 07239 62>7 0927> 0729> 6207!"#$%?"#"@( 53205 58291 76270 76200 53237 >>277 57270 >323 >727> 54257A"$B%A<,;(=$.<,%A#C( 1247 320> 5255 0243 5286 D7211 D0233 D0259 D726> D>283   )#$ -./0$1.230$4506.7897:0$ -./0$;7<376=>/$ -./0$?./.@23$ A.0B$A=7<3>09=7$A/C23$ (#$ #$ &#$ %#$ "#$ #$ %##%!"%$ %##&!"%$ %##!"%$ %##(!"%$ %##)!"%$ %##*!"%$ %##+!"%$ %##,!"%$ %#"#!"%$ %#""!"%$ !"#$     ConocoPhillips   has   improved   its   Cash   Conversion   Cycle   (CCC)   since   the   huge  impairment   write-­‐off,   which   caused   profit   loss   that   the   company   reported   in   2008.   This  means   the   Company   has   been   able   to   convert   its   inventories   through   sale   to   cash   before   it  has   to   pay   for   the   goods   to   its   suppliers.   The   positive   trend   in   ConocoPhillips’s   CCC   has   been  significantly   improved   since   2007   and   remained   through   the   recession   in   2008.   The  Company   has   shown   a   strong   standing   in   its   business   cycle   and   has   been   getting   even  stronger  since  2008.     Ø Findings:   • To   enhance   my   point   from   a   financial   restructuring   (in   part   a)   in   ConocoPhillips   in   2008,  I  analyzed  the  Cash  Flows  Statement  over  the  past  10  years.    !"#$%%%& 01234565478429154 :79;<=31272>?@<712;<A2@>=B C8=<7127!D7=<7127&58C8678@><A C8=<7127!D7=<7127&58E<791547F978272 C8672@G78@258EEH!"%$%%%&!(#$%%%&!(%$%%%& !#$%%%& % #$%%% "%%")(" "%%*)(" "%%+)(" "%%#)(" "%%,)(" "%%-)(" "%%.)(" "%%/)(" "%(%)(" "%(()("     ConocoPhillips’s  Analysis-­‐Page.6  
  • 7. • The   graph   gathers   key   data   in   the   Statement   of   Cash   Flows   from   2002   to   2011,   which   are  Cash  Dividends  paid,  Repurchase  of  Common  Stock  (Treasury  Stock),  changes  in   Assets/   Liabilities   and   Cash   flows   from   investing   activities.   The   biggest   change   in   2008   is   probably   an   aggressive   increase   in   investing   activities,   specifically   in   acquiring  new  properties,  planning  and  equipment  (PPE)  of  $19  billion.  Even  though   the   company   incurred   a   big   loss   in   profit   in   2008,   it   continued   to   maintain   higher   payout   rate   (Cash   dividend   payout   +   repurchase   of   Common   Stock).   The   retained   earnings   was   used   to   purchase   more   inventory   in   2008,   when   the   gas   and   oil   price   was  at  record  low  (it  is  also  the  reason  that  ConocoPhillips  wrote  off  its  impairment   loss).    A  significant  capital  expenditure  to  acquire  PPE  of  $19  billion,  a  payout  of  $11   billion   in   Dividends   and   Repurchase   of   Common   Stocks,   and   $1.3   billion   increase   in   Inventory   can   offset   the   entire   loss   of   $17   billion.   ConocoPhillips   has   a   fabulously   strong  business  model.     • Notes:   ConocoPhillips   repurchased   $8.25   billion   of   its   Common   Stocks   during   the   market   crash.   Assuming   the   company’s   net   profit   remains   the   same,   its   EPS   will   increase   due   to   stock   repurchase   program.   Therefore,   PE   will   be   lower   and   become   more   attractive   to   common   investors.   ConocoPhillips’s   Board   of   Directors   probably   predicted   that   the   company   stock   would   have   a   negative   effect   after   the   financial   statements   were   released   in   2008.   Thus   they   decided   to   repurchase   $8.25   billion   worth   of   common   stock   to   keep   their   stock   trading   at   an   accepted   price.   This   can   be   a   reasonable  assumption.     c) Liquidity  and  Leverage  Ratios:   Liquidity   measures   are   concerned   with   the   firm’s   ability   to   meet   its   day-­‐to-­‐day   operating   expenses   and   satisfy   its   short-­‐term   obligations   as   they   come   due.   To   understand  better  about  ConocoPhillips’s  liquidity  and  financial  trend,  a  comparison   between  the  Company  and  Exxon  Mobil-­‐  the  largest  leader  in  the  energy  sector  with   over  $400  billion  in  market  cap-­‐  is  analyzed.   !"#$"%"&()*"+,+-",.)/0,.&1 2332452 2336452 2337452 2338452 2339452 233:452 233;452 233<452 2353452 2355452 !"##$%&()&*+,!-. /012 /01 /034 /035 /032 /035 /034 /013 6054 60/1 7"*89()&*+,!-. /0:; /0:3 /042 /044 /024 /044 /023 /021 6 /015 <*%)%8*)=>$?$#)@$,!-. 504 50A 506; 50/: 6033 5 5023 50AA 5051 50:2 B$C&DEF"*&G,!-. /04A /0A1 /0:A /05 /051 /05: /0A3 /0A: /0:: /0:: !"##$%&()&*+,H-I 6062 605 60A 6021 6022 60A; 60A; 60/4 /03A /03A 7"*89()&*+,H-I /014 /036 60/5 6056 606; 6055 6064 /0;A /04A /044 <*%)%8*)=>$?$#)@$,H-I 50/2 603A 6035 601; 6035 6033 50/5 5066 50/4 506A B$C&DEF"*&G,H-I /0/3 /0/2 /0/2 /0/4 /0/4 /0/4 /0/4 /0/4 /0/1 /05   "#$"&& 0122345&6789& :1;<=&6789& >;474<;7?&@3A327B3& C3D5EFG1;5H& "#"&& "#("&& "#)"&& "#""&& )"")*+)& )"",*+)& )""(*+)& )""-*+)& )""*+)& )"".*+)& )""$*+)& )""/*+)& )"+"*+)& )"++*+)& !"#)"%& !"#("%& !"#"%& !"#$"%&      ConocoPhillips’s  Analysis-­‐Page.7  
  • 8.    The   trending   graph   is   calculated   by   subtracting   each   liquidity   ratio   of   COP   to   each   of   XOM.  The  difference  in  that  last  10  years  is  showed  in  the  graph.  Before  2009,  Current  Ratio  and  Quick   Ratio   was   weak   compared   to   Exxon   Mobil.   The   positive   trend   in   both   of   the   ratios  started  to  appear  after  2009.  Because  ConocoPhillips  has  improved  its  Cash  Conversion  Cycle  (part  B  findings)  since  2008,  the  positive  liquidity  trend  is  confirmed.  Leverage  ratios  didn’t  improve  significantly  but  the  Executives  are  focusing  on  a  more  attractive  leverage  ratios.     2) Stock  Price  Projection:  The  single  most  important  part  in  evaluating  a  company  is  to  project  how  it  will  perform  in  the  future.  Historically,  ConocoPhillips  (COP)  has  yielded  higher  return  than  its  competitors  as  well  as  the  market  as  a  whole.    As   of   March   9,   2012,   COP   was   trading   at   $77.16/share   on   NYSE.   Is   COP   an   undervalued  stock?   Ø Discounted  Free  Cash  Flows:  ConocoPhillips’s  Free  Cash  Flows  (FCF)  trend  from  2009  to  2017  will  probably  repeat  what  happened  from  2002  to  2008.  If  I  consider  2002  is  a  bottom  year  for  the  positive  FCF  trend,  the   new   trend   started   in   2009   has   !"##$%&($)*+$formed   very   similar   to   the   trend   (%$!!!"started   in   2002.   That   is   the   reason   I   (#$!!!"will  project  the  future  Free  Cash  Flow   (!$!!!"in   ConocoPhillips   for   the   next   5   years   $!!!"based   on   the   similar   trend   that   &$!!!" %$!!!"happened   from   2002   to   2009.   I   also   #$!!!"assume   that   roughly   every   6   or   7   !"years,   ConocoPhillips   will   incur   a   #!!#)(#" #!!*)(#" #!!%)(#" #!!+)(#" #!!&)(#" #!!,)(#" #!!)(#" #!!-)(#" #!(!)(#" #!(()(#"significant   downturn   like   they   had   in   2008.   Therefore,   I   can   create   a   projection   table   for   FCF  for  the  next  5  years,  and  it  will  increase  constantly  at  2%  a  year  after  that.   • Determine  Weighted  Average  Cost  of  Capital:  To  determine  WACC,  10  year  Treasury  bills  and  Market  return  must  be  estimated.     !"#$%&"(!)*"( 6 !%./0,&""(!)*"(1(23(4)&/"*(!"*$&-(0(!%./0,&""(!)*"5 +,(!"*$&-     ConocoPhillips’s  Analysis-­‐Page.8  
  • 9. From   the   U.S   Department   of   Treasury   (­‐center/data-­‐chart-­‐center/interest-­‐rates/Pages/TextView.aspx?data=yield),   10-­‐year   T   Bill   yield   as   of   March   9,   2012   is  2.051%.     A   conservative   market   return   in   2012   is   estimated   at   9%.   Therefore,   I   have   a  required  rate  of  return  for  Equity  roughly  10%.     *+,"()-#.") 23"$#4") !"#$%&() /#.0$+.1 5."$"6.)-#."The   average   Cost   of   Debt   is   the   average   of   the   next   5   year   7897 :9; <=;8>Interest   Rate,   which   is   5.01%.   Because   the   Corporate   Tax   for   789? 789< 9@7A7 9@B99 B=??> <=CC>ConocoPhillips  in  2011  is  45.65%,  the  effected  after-­‐tax  interest   789B 9@B9? <=A7>rate  is  (1-­‐45.65%)*5.01%=  2.724%.   789A -"D#++4)!"#$6 9@7;C 9<@88; B=B<> A=B7>Because   ConocoPhillips   doesn’t   have   any   Preferred   Stock,   its  capital  structure  contains  only  Debt  and  Equity  WACC:   5.65%   WACC   is   continuously   used   to   !"#$%&$()* !""#$%#&()%# +,-+# *+,*-discount   future   free   cash   flows   and   dividends   ."#$%&$/012*3 4","5#payouts.     • Discounting  Free  Cash  Flows:   !"#$%&()%*)+,#"+-)$)./)*0"+1"&&"2+3 4556784 4585784 4588784 4584784 4589784 458:784 458;784 458<784 458=784 ?@2A !"##$%&($!)*+ ,-.,/ 0-1/2 .-3/4 -"#$2B+C),!D! !%!$%(&56#$7$89*:;#<$="*>$:"#?;*@$A"#5<B 22/CD27 E11C017 ,23CF37 E,C2.7 ,,DCD17 E01C,,7 ED2CD27 17 G"*H#9A#<$!"##$%&($!)*+ /-/0D D-.1F ,D-D.3 ,D-33D 33-4D4 F-1,F 2-,F, 2-10D 8;<>5;6 G"##5A$I&)@# ,2-034 ,3-03/ 1/-41. 0-244 3-,/2 //-F/4Based   on   the   projection   of   FCF   for   ConocoPhillips,   the   Present   Value   of   Discounted   FCF  ($156,059  million)  is  the  sum  of  all  the  Present  Value  of  FCF  each  year  (the  last  line).  To  be  more   conservative   and   confident,   assuming   ConocoPhillips’   actual   PV   of   Discounted   FCF  would   be   80%   of   the   projection,   which   is   $124,847   million.   This   is   the   Enterprise   Value   of  ConocoPhillips.   In   order   to   determine   the   share   price,   I   need   to   adjust   by   adding   Cash  ($5,780  million)  to  the  Total  value  of  Discounted  FCF  and  subtracting  it  from  Long-­‐term  Debt  ($21,610   million).   This   is   current   data   from   the   Financial   Statement.   After   all   the   calculation,  that  number  is  divided  by  total  common  stock  outstanding  estimated  at  1.28  billion  shares  (from  Google  Finance).  The  fair  market  value  for  the  firm  is  determined  at  $85.17  a  share.  If  an  overall  market  supports  ConocoPhillips,  the  best  possibility  is  its  share  can  be  traded  at  20%  higher  than  the  projected  FCF,  which  is  $134.  An  average  stock  price  traded  at  projected  FCF  is  $109.50  a  share.  Right  now,  ConocoPhillips  is  trading  at  around  $77  a  share,  a  9.4%  below   the   fair   value   in   an   average   condition,   a   29.5%   below   fair   value   in   good   market,   and   a  42.42%  below  the  best  scenario.  ConocoPhillips   is   slightly   undervalued   as   of   March   9,   2012,   investors   should   consider   to  purchase  at  $60  a  share  (approximately  20%  under  the  fair  market  value).   • Dividend  Discount  Model:   !"#$%&()%*)+,#"+-)$)./)*01+."&&"2+#3 4566764 4564764 4568764 4569764 456:764 456;764 456<764 ?#@".%@), !"#$ !%"*A%*B)@ %&()*+),-./012)-3 45"663 !!"7!3 5$"543 5$"483 5"9#3 $"773 %&()*+),-:;<;,)1,= 4"$> $"!9 $">9 9"99 9"#$ 9"># <<=>> %&)=)1+-?0@A) 4"58 4"95 4"#$ 4"86 4"$6 #7"!>ConocoPhillips   has   a   substantial   dividend   payout   ratio   of   approximately   16%   of   EPS.   As  assumed   in   FCF   trend,   the   dividends   trend   is   expected   to   be   similar   to   the   FCF   trend.  Projected   Change   %   is   what   actually   happened   from   2002   to   2009.   The   Cost   of   Equity   is  10.03%  and  is  used  to  discount  the  future  dividends  stream.  The  estimated  fair  market  value  of  ConocoPhillips  share  is  almost  $78.  It  is  8.2%  lower  than  using  discounted  free  cash  flows.  The  average  of  both  is  $81.50  a  share.  Using  Dividend  Discount  Model,  estimated  fair  market  is  $78  a  share,  very  close  to  its  current  trading  price  as  of  March  9,  2012-­‐  $76.16  a  share.          ConocoPhillips’s  Analysis-­‐Page.9  
  • 10. V. Conclusion:   The   Efficient   market   advocates   believe   that   the   market   is   so   efficient   in   processing   new   information   that   securities   trade   very   close   to   or   at   their   correct   value   at   all   times.   Throughout  this  analysis,  you  will  find  out  how  I  approach  to  determine  Weighted  Average   Cost   of   Capital   and   all   the   key   analysis   to   calculate   ConocoPhillips’s   intrinsic   value.     After   carefully  analyzing  the  company’s  financial  statements,  I  believe  ConocoPhillips  is  currently   trading   close   to   its   fair   market   value.   Investors   should   consider   very   carefully   about   the   company  itself  and  the  overall  stock  market.  After  the  financial  crash  in  2008,  which  was  also   the   company’s   reason   to   take   advantage   of   writing   off   billions   of   dollars   of   Goodwill   impairment,   COP   bottomed   out   at   around   $35   a   share.   It   reached   the   peak   in   early   March   2011  at  almost  $80  a  share.  That  is  a  128%  increase  in  26  months-­‐  A  fabulous  return  that  any   investor  dreams  of.    Even  though  ConocoPhillips  is  fundamentally  strong,  it  hasn’t  showed  a   significant   positive   trend   in   its   leverage   ratio   (the   measure   between   debt   and   assets/equity/Net  income).  ConocoPhillips  share  is  believed  to  be  in  a  correction  period  after   forming  2  tops  at  $80  a  share  in  2008.  For  investors  who  are  interested  in  owning  equity  at   ConocoPhillips,  I  strongly  suggest  to  wait.  For  investors  who  currently  own  some  shares  at   ConocoPhillips,  I  would  recommend  them  to  consider  selling  it  now  and  wait  to  buy  it  back   sometime   in   the   near   future.   I   target   the   considering   buy   price   at   below   $60   a   share   if   ConocoPhillips  share  price  can  drop  down  in  the  near  future.  Similarly,  the  targeted  selling   price  is  at  $109.   Notes:   ConocoPhillips  repurchased  $11  billion  worth  of  its  Common  Stock  at  the  end  of  2011.  The   company  is  expected  a  much  higher  Earnings  Per  Share  (EPS)  due  to  a  higher  projected  Net   Income   and   lower   Common   stock   Outstanding   in   2012.   The   company’s   accumulated   Treasury  Stock  as  of  December  31,  2011  is  almost  $31.8  billion.  Why  did  ConocoPhillips  have   such   a   grand   preserved   Treasury   Stock?  Is   a   more   attractive   EPS   a   prediction   for   a   declining   trend   in   stock   price   in   2012?   Or   is   ConocoPhillips   planning   to   make   a   substantial   acquisition   in  2012  for  its  business  expansion?     ConocoPhillips’s  Analysis-­‐Page.10