3 ConocoPhillips trades as energy prices rise and stocks reach multi-year highs

Houston, Texas-based oil group ConocoPhillips is up more than 90% since early 2021.
The recent OPEC+ announcement has boosted crude oil prices, which also helps energy names like COP stocks
Long-term investors should consider buying dips in COP stocks, especially if they fall toward $73.

Investors in the energy giant ConocoPhillips (NYSE:) stocks have seen returns of about 75% since early 2021. In comparison, the Jones U.S. Oil & Gas Index is up about 52.4%.

On Jan. 5, shares of COP intraday went above $78 and closed at $75.65 to hover around multi-year highs. The current price supports a dividend yield of 1.11%, which equates to a quarterly payout of 20 cents per share.

COP stocks have a 52-week range between $39.70 and $78.27. Its market capitalization (cap) stands at $99.78 billion as of yesterday's close.

Meanwhile, both prices and prices have recovered from their recent declines triggered by questions about the global economic effects of the Omicron variant.

The revenues and revenues of oil companies are usually linked to the oil price. On December 2, decided to increase oil production. OPEC members, Russia and allies (collectively known as OPEC+) also sounded more optimistic about Omicron's potential effect on global demand. As a result, oil prices have risen.

ConocoPhillips released third quarter financial data on Nov. 2. Total production, excluding Libya activities, averaged 1,514 thousand barrels of oil equivalent per day (MBOED) for the nine months ended September.

Revenue grew 165% year-over-year (YOY) to $11.6 billion. Adjusted earnings were $2.4 billion, or $1.77 per share, versus an adjusted loss of $331 million, or a loss of 31 cents per share a year ago in the third quarter of 2020. Cash and equivalents closed the period at $10.2 billion.

After this, CEO Ryan Lance reminded shareholders of the oil major's triple mandate to:

"…meeting future energy demand with the lowest production costs through the energy transition, delivering competitive returns and meeting…a net zero ambition for operational emissions."

Prior to the release of the quarterly results, COP stock was about $74. Since then, shares have crept higher, but continued to trade within a margin.

On December 6, the company also shared its investment plans and changes to its shareholder return program. Accordingly, through an outlined three-pronged framework, the company expects to increase its return of capital to shareholders by $7 billion in 2022 through dividends and share buybacks. That is an increase of about 16% YOY.

Meanwhile, planned company-wide capital expenditures by 2022 are expected to be approximately $7.2 billion. ConocoPhillips will announce its fourth quarter earnings on February 3 before the opening bell.

Readers may also be interested to know that the next OPEC-non-OPEC ministerial meeting will be held on February 2. Therefore, there may be more jerkiness in the COP stock around those dates.

What to expect from ConocoPhillips Stock

Of the 29 analysts surveyed via Investing.com, COP stocks have an outperform rating.

Chart: Investing.com

Analysts also have a median 12-month price target of $90.96 for the stock, representing an increase of approximately 20% from current levels. The 12 month price range is currently between $65 and $117.

Source: InvestingPro

Similarly, the average fair value for COP stocks through InvestingPro is $92.10, implying a potential upside potential of nearly 22, according to a number of valuation models, such as those that show P/E or P/S to consider multiples or terminal values. %.

In addition, we can look at the financial health of the company determined by ranking more than 100 factors relative to peers in the energy sector. In terms of growth, cash flow, profit and price momentum health, ConocoPhillips scores 4 out of 5 (top score). Overall performance is rated "great."

Currently, the P/B and P/S ratios for COP stocks are 2.3x and 2.8x. By comparison, those stats for Exxon Mobil (NYSE:), another major oil company, are at 1.8x and 1.2x.

In January, we expect COP stocks to continue trading sideways, possibly between $67.5 and $77.5. However, the start of February could be volatile as investors process quarterly earnings and any OPEC+ announcements.

Nevertheless, despite a possible short-term decline, we are optimistic about COP stocks for the rest of the year.

COP bulls with a two- to three-year horizon who are not concerned about short-term volatility may consider buying the stocks around these levels for long-term portfolios. The target would be $90.96, the analysts' consensus expectation.

As an alternative, investors may consider buying an exchange traded fund (ETF) that has COP as its stake. Examples include:

Energy Select Sector SPDR® Fund (NYSE:)
iShares U.S. Energy ETF (NYSE:)
SPDR S&P® North American Natural Resources ETF (NYSE:)
WBI BullBear Yield 3000 ETF (NYSE:)

Finally, investors who believe COP stocks could continue to hit new highs into the new year should consider selling a cash-backed put option in ConocoPhillips stock – a strategy we discuss regularly. Because it concerns options, this setup is not suitable for all investors. want to receive premiums (from put sales) or possibly own COP stocks for less than their current market price of $76.50 at the time of writing on Wednesday intraday.

A put option contract on ConocoPhillips shares is the option to sell 100 shares.

Let's assume that an investor wants to buy COP stock, but does not want to pay the full price of $76.50 per share. Instead, the investor would prefer to buy the shares at a discount in the coming months.

One possibility would be to wait for ConocoPhillips stock to fall, which it may or may not do. The other option is to sell one contract of a cash-backed COP put option.

So the trader would typically write an at-the-money (ATM) or an out-of-the-money (OTM) put option while simultaneously setting aside enough cash to buy 100 shares of the stock (hence "cash secured").

Let's assume that the trader executes this trade until the option's expiration date of March 18. Since the stock is at $76.50 at the time of writing, an OTM put option would have a strike of $70.

So the seller would have to buy 100 COP shares at the $70.00 strike if the buyer of the option were to exercise the option to allocate it to the seller.

The COP March 18 70 strike put option is currently offered at a price (or premium) of $2.25. An option buyer would have to pay $2.25 X 100, or $225, in premium to the option seller. This premium amount belongs to the option seller, no matter what happens in the future. The put option will stop trading on Friday, March 18.

Assuming a trader entered this cash-backed put option trade now for $76.50, the maximum return for the seller would be $225 at expiration on March 18, excluding trading commissions and fees.

The seller's max profit is this premium amount if COP shares close above the strike price of $70.00. If that happens, the option will expire worthless.

If the put option is 'in the money' (meaning that the market price of ConocoPhillips shares is below the strike price of $70.00) anytime before or upon expiration on March 18, this put option can be assigned. The seller would then be required to purchase 100 shares of COP stock at the put option's strike price of $70.00 (i.e. $7,000 in total).

The breakeven point for our example is the strike price ($70.00) minus the option premium received ($2.25), i.e. $67.75. This is the price at which the seller would lose money.

Cash-secured put selling is a fairly more conservative strategy than buying a company's stock at the current market price. This could be a way to take advantage of any jerkiness in ConocoPhillips stock in the coming weeks, especially around the earnings announcement.

Investors who end up owning COP shares as a result of selling puts may further consider setting up covered calls to increase the potential return on their shares. Thus, selling cash-backed puts could be considered the first step in owning stock.

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