ConocoPhillips: The Dividend Isn’t Worth The Potential Squeeze

ConocoPhillips: The Dividend Isn't Worth The Potential Squeeze
  • A bet on ConocoPhillips is a leveraged bet on oil.
  • Why there’s a good chance the dividend will be cut.
  • There are safer plays for a dividend investor looking to put money into an E&P.

I’ve heard many income investors pitching ConocoPhillips (NYSE:COP) as a great value at its current price and 6.4% dividend (one of the higher yields among large E&Ps). Their analysis relies on two assumptions. First, current oil prices are unsustainable and will soon rebound. Second, ConocoPhillips’ dividend is sacred to management and is therefore safe from being cut.

I believe these investors have fallen prey to a bit of recency bias and a lot of wishful thinking. Dig into the assumptions and you find that buying ConocoPhillips as a value income play is far from a sure thing – and in fact comes with quite a bit of downside risk.

A bet on ConocoPhillips is a bet on the future price of oil.

In 2012, ConocoPhillips spun off its downstream business (refining and marketing) into what is now Phillips 66 (NYSE:PSX), making COP a pure upstream E&P company. When this decision was made, oil was trading around the $100 level. It was thought that this move would unlock value for shareholders. But there’s a problem.

The downside of this split is that it made the company vulnerable to falling oil prices. Integrated oil companies benefit from their downstream businesses because refiners see higher profits when the price of oil falls – acting as a kind of hedge on lower energy prices.

Without its downstream business, ConocoPhillips is essentially a levered bet on the future price of oil with a 6.4% yield (that has a high chance of being cut as we’ll soon discuss). Compare the company’s stock chart to one of oil and the correlation is easy to see. (Keep reading….)

 

 

Related Posts

Subscribe To Our Newsletter

Brandon Beylo

Value Investor

Brandon has been a professional investor focusing on value for over 13 years, spending his time in small to micro-cap companies, spin-offs, SPACs, and deep value liquidation situations. Over time, he’s developed a deeper understanding for what deep-value investing actually means, and refined his philosophy to include any business trading at a wild discount to what he thinks its worth in 3-5 years.

Brandon has a tenacious passion for investing, broad-based learning, and business. He previously worked for several leading investment firms before joining the team at Macro Ops. He lives by the famous Munger mantra of trying to get a little smarter each day.

AK

Investing & Personal Finance

AK is the founder of Macro Ops and the host of Fallible.

He started out in corporate economics for a Fortune 50 company before moving to a long/short equity investment firm.

With Macro Ops focused primarily on institutional clients, AK moved to servicing new investors just starting their journey. He takes the professional research and education produced at Macro Ops and breaks it down for beginners. The goal is to help clients find the best solution for their investing needs through effective education.

Tyler Kling

Volatility & Options Trader

Former trade desk manager at $100+ million family office where he oversaw multiple traders and helped develop cutting edge quantitative strategies in the derivatives market.

He worked as a consultant to the family office’s in-house fund of funds in the areas of portfolio manager evaluation and capital allocation.

Certified in Quantitative Finance from the Fitch Learning Center in London, England where he studied under famous quants such as Paul Wilmott.

Alex Barrow

Macro Trader

Founder and head macro trader at Macro Ops. Alex joined the US Marine Corps on his 18th birthday just one month after the 9/11 terrorist attacks. He subsequently spent a decade in the military. Serving in various capacities from scout sniper to interrogator and counterintelligence specialist. Following his military service, he worked as a contract intelligence professional for a number of US agencies (from the DIA to FBI) with a focus on counterintelligence and terrorist financing. He also spent time consulting for a tech company that specialized in building analytic software for finance and intelligence analysis.

After leaving the field of intelligence he went to work at a global macro hedge fund. He’s been professionally involved in markets since 2005, has consulted with a number of the leading names in the hedge fund space, and now manages his own family office while running Macro Ops. He’s published over 300 white papers on complex financial and macroeconomic topics, writes regularly about investment/market trends, and frequently speaks at conferences on trading and investing.

Macro Ops is a market research firm geared toward professional and experienced retail traders and investors. Macro Ops’ research has been featured in Forbes, Marketwatch, Business Insider, and Real Vision as well as a number of other leading publications.

You can find out more about Alex on his LinkedIn account here and also find him on Twitter where he frequently shares his market research.