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Tickers in this Article: COP
The major oil companies (also known as Supermajors) have long been known for their steady growth and cash flow generating capabilities. This has translated into share buybacks and rock solid dividends for investors.

But what happens when the United States threatens to become energy independent? Well, that would seem to be great news for the major oil companies that have exposure to the fast growing oil and gas shale plays scattered across the United States. The International Energy Agency (IEA) believes the United States can become the world's top oil producer by 2015, with complete self-sufficiency being achieved in less than two decades.

The Supermajors that are leveraged to oil production will be the biggest benefactors. There's one major U.S. oil and gas company that is heavily levered to liquids, as opposed to lower margin natural gas. This same company has also transformed itself into the largest U.S. exploration and production company, having divested its lower growth downstream operations.

This Supermajor looks to be one of the markets best investments for 2014, while also paying the highest dividend in the exploration and production (E&P) space. With a 4% dividend yield, ConocoPhillips (NYSE: COP) is that company.

However, it's not just an income play, but the major oil and gas stock is selling very cheaply and has a lot of growth ahead. Back in 2012, ConocoPhillips split its downstream and upstream operations, a big positive when it comes to positioning itself to cater to the United States' rising energy consumption. The move turned ConocoPhillips into the largest independent E&P company in the United States. This has also put the company as the highest-margin Supermajor, with a 35.8% earnings before interest, taxes and amortization (EBITDA) margin and 14.6% net margin over the trailing 12 months.  

And after completing a three-year optimization program, which included selling off various underperforming assets, 2014 should prove to be an inflection point for ConocoPhillips. The asset sales mark the completion of its "shrink to grow" plan, and the start of full blown organic growth mode. The company has a plan to add 400,000 net barrels per day worth of production between now and 2017. For its production growth going forward, ConocoPhillips believes that 75% will be oil.

To do this, ConocoPhillips is looking to spend $15 billion per year in capital expenditures. The majority, some 60%, will be targeted toward North America liquid plays, namely the high growth Bakken, Permian and Eagle Ford Shale plays. The real benefit to its production growth will be the fact that it will add upward of $6-$7 billion in additional yearly cash flow over the next three years. Ultimately, on the high end, that's a 10% annualized growth rate in cash flow.

As far as the upside to the stock price, ConocoPhillips could easily trade above $80 in 2014. ConocoPhillips currently trades at an EV/EBITDA (enterprise value/EBITDA) multiple that's less than 5 times. Meanwhile, other Supermajors trade at 5.5 times and above.



The case for a premium multiple can easily be made for ConocoPhillips, given other Supermajors have downstream and chemical operations that are less profitable and offer lower growth.

However, if we assume just slight multiple expansion to 5.5 times EV/EBITDA on ConocoPhillips' trailing twelve month EBITDA of $22 billion, the upside is still very compelling, with a price target of $80, or 15% upside. And don't forget about its near 4% dividend yield; together, suggesting that investors could see a 20% total return in 2014.  

Risks to Consider: With ConocoPhillips operating strictly an upstream exploration and production company, it's much more exposed to the price movements of oil and gas. Overall, ConocoPhillips is heavily levered to oil, which means it will be reliant on a strong U.S. and international demand going forward.

Action to Take --> Buy ConocoPhillips for upside to over $80 in 2014. The 4% dividend helps protect on the downside and also increases the potential total return to 20%.

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