Tuesday, June 28, 2011

An Oil And Gas Company That Buffett Would Love

Investors that are bullish on oil prices can find some great yields in the oil and gas sector. It wasn’t that long ago that oil was trading over $100 a barrel and that people were paying $4 a gallon for gas. Gas prices have plummeted over the past few weeks as oil prices have dropped. This has caused oil stocks to dip and turned some companies into high yielders. Let’s take a look at an oil and gas company that has a good yield.

ConocoPhillips (COP) has been a holding of longtime value investor Warren Buffett. Buffett liked the strong cash flows that the company generates and has to like the solid dividend payouts. ConocoPhillips is the largest major integrated oil producer and fifth largest refiner. The company is a Fortune 500 firm boasting nearly $200 billion dollars in annual revenue.

ConocoPhillips has had a challenging time over the past 10 years because the company made a number of poor managerial decisions. These poor decisions hindered revenue growth and profitability. Now the company appears to be getting back to its core business model and is focused on increasing ROE. ConocoPhillips is heavily tied to the price of crude oil and has a lot more natural gas exposure than many of the other major oil companies.

Shares of ConocoPhillips currently trade for 8.8 times this year’s earnings. This is an average P/E for an industry in which many companies trade at single digit P/E ratios. Shares currently trade at 1.5 times book value which is reasonable. The stock trades at just 0.5 time sales which is cheap.

ConocoPhillips is currently paying a dividend of $2.64 per share. That is an annual yield of 3.7%. The company recently increased it dividend 20% just a few month ago. Conoco also announced a $10 billion dollar share repurchase program. The company has significant room for dividend increases since the current payout ratio is incredibly low at 29.6%. The company generated $17.6 billion dollars in cash flow from operations and $7 billion dollars in free cash flow.

The stock offers investors decent growth potential and a dividend that should continue to rise over the next few years.

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