Oil giant ConocoPhillips (NYSE: COP) recently reported third-quarter earnings of $1.5 billion, or approximately $1 per share, a decline of over 70% compared with the year-ago period in which Conoco earned $3.39 a share. No one should be surprised here when you compare oil prices today with those of a year ago.

IN PICTURES: 20 Tools For Building Up Your Portfolio

Still Cashing In
A year ago, oil prices averaged $120 a barrel. In this quarter, prices were nearly 50% less at around $68 a barrel. No matter how good you are at your business, when the market price of your principal product declines by 50%, your profits will go down. Conoco shares currently sell for $50, so if you annualize the Q3 figures to assume annual EPS of $4 a share, shares fetch just under 13-times earnings. Factor in the nearly 4% dividend yield, and Conoco has a relatively attractive valuation in today's market.

Remember, Conoco is a major player in the oil industry with assets all over the world. So the exposure to the long-term play on growth in emerging-market energy demand is a big plus. Of course, the price of oil will always be a key factor. Today at $80 per barrel, it has rallied by over 71% since March. Yet the comparable Dow Jones U.S. Integrated Oil and Gas Index is up 21% over the same period. OPEC has commented that the current price is just about as high as it wants oil to be right now, and if oil does stay around $75 a barrel, excellent profitability is achievable. (For related reading, check out Meet OPEC, Manager Of Oil Wealth.)

Solid Performance
While comparing numbers to last year make net income look weak, deeply entrenched oil companies like ConocoPhillips can do quite well at current oil prices. Today's price enables the majors to take on additional projects. Additionally, Conoco increased E&P production by 5% from 1.76 million to 1.86 million BOE per day. Most of this increase was due to projects in Asia and Russia. Conoco happens to also be one the largest oil refiners, and the refining business is currently in despair. Any improvement in refining margins benefits Conoco more significantly than competitors.

Last year was a blockbuster for oil companies that earned ungodly sums of money - figures we may not see again for quite some time. Nonetheless, their entrenched positions still enable them to deliver very respectable results. ExxonMobil (NYSE: XOM), Chevron (NYSE: CVX) and Royal Dutch Shell (NYSE: RDS.A) will all likely report significantly less earnings than last year. Over a period of several years, those profits translate into dividends, share buybacks and strategic expansions that all serve to increase the value of these businesses.

Control What You Can Control
Oil companies have no control over the price of oil. What they can control are finding costs and, to a certain extent, production and reserve replacement. The bigger players have the economies of scale necessary to operate more efficiently, which is a great advantage during tough times. (For related reading, check out A Guide To Investing In Oil Markets.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  2. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  3. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  4. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  7. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  8. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  9. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  10. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!