Better Buy: ConocoPhillips vs. BP

These two top oil and gas companies are weathering some worrying industry trends. Which one is a better buy for investors right now?

John Bromels
John Bromels
Jun 22, 2017 at 12:08PM
Energy, Materials, and Utilities

The oil and gas industry has become a downright scary place for investors lately. And it's not just the small companies that are suffering. Even big oil giants like BP (NYSE:BP) and the largest independent oil and gas exploration and production company in the U.S., ConocoPhillips (NYSE:COP), have seen their shares underperform the stock market. 

But for those who anticipate a return to growth in the energy sector, now may be the time to buy some of these beaten-down oil stocks. Let's look at which stock looks like a better buy right now.

Oil workers operating an oil well at sunset.

While ConocoPhillips has been shedding assets to reduce impediments to outperformance, BP is looking for production growth. Image source: Getty Images.

Dividend yield

With oil prices in a prolonged slump, a dividend is important for investors. A solid yield can ease the pain of waiting for an oil price recovery by putting money in your pocket today. And both BP and Conoco currently pay a dividend. But all dividends are not created equal. 

BP's dividend yield is one of the highest in the sector, at about 6.9%, but it wasn't always that way. In 2010, the company's quarterly dividend had reached a massive $0.84 a share, but after the Deepwater Horizon oil spill decimated the company's stock price, the dividend was cut in half to just $0.42 per share. It's since clawed its way back to $0.60 a share, and the company has avoided further cuts, even with the weakness in the oil markets that has persisted since 2014.

ConocoPhillips, on the other hand, was forced to slash its quarterly dividend by almost two-thirds in 2015 as a result of the oil slump, from $0.74 a share to just $0.25 a share. Earlier this year, it bumped it up to $0.265 per share, but the resulting 2.3% yield is a far cry from BP's. It is, however, best-in-class among independent oil and gas exploration and production companies that have no midstream (transportation and storage) or downstream (refining and marketing) operations. 

That said, a dividend yield is a dividend yield, and while some experts have expressed concerns that BP's is unsustainable, it would still outpace Conoco's even if it were cut in half. 

Winner: BP


Of course, even a great dividend can't save a company from poor performance. And profitability has been elusive for many oil companies during the downturn, particularly exploration and production companies like Conoco. 

Indeed, Conoco's most recent first-quarter results showed an adjusted loss of $19 million. While that's a giant improvement year over year --  the company lost an adjusted $1.5 billion in the first quarter of 2016 -- Conoco and its analysts were both hoping for a profit. Worse, Conoco isn't even cash flow positive, ending its first quarter with $501 million less than it started with. It has claimed to be cash flow neutral with oil prices between $45 and $50 per barrel. But oil prices for both Brent crude and WTI crude in the first quarter were above $50 per barrel and the company still lost money. So, clearly it isn't there yet.

BP, on the other hand, did turn a profit of $1.5 billion in its first-quarter 2017, compared to a loss of $558 million in the year-ago quarter. It has bounced in and out of cash flow positivity in recent quarters, and was just barely cash flow positive in the first quarter, ending the quarter with only $310 million more than the $23.5 billion it started with.

Conoco is fighting an uphill fight here, measured against a much bigger company with a robust downstream operation that's contributing significantly to the bottom line.

Winner: BP


Still, dividend yield and financial position are only measures of where a company is today. As long-term investors, we want to look at where the company will be several years down the road. In this uncertain energy environment, of course, that's anyone's guess. But we should still consider the companies' plans for the future and how well management is implementing them.

Conoco has a bold plan that involves shedding underperforming or undervalued assets and deploying the resulting cash toward share repurchases and reduction of its $27.3 billion in long-term debt. The company has already begun executing that plan successfully, ridding itself of many resource-intensive Canadian oil sands and deepwater assets in the past year. That should help to create value for investors, even if production remains flat.

BP's plans are... a bit more murky. The company shocked investors in February when CEO Bob Dudley announced that BP's breakeven oil price would rise to about $60 a barrel by the end of the year. After a public outcry, he walked that statement back a bit, but investors should still be wary. BP is relying on several new global upstream projects for growth, which at least one analyst agrees will boost the company's production levels. But all the production in the world won't matter if oil prices are below the company's breakeven.

Winner: ConocoPhillips

And the winner is...

Although ConocoPhillips seems to have a stronger plan moving forward than BP, the larger company's better recent performance and stellar dividend are enough to earn it a win. However, oil and gas investors will want to keep an eye on both companies moving forward: on Conoco for potential improvement, and on BP for potential weakness.

In the first quarter, Conoco was unprofitable and cash flow negative with oil prices mostly at or above its stated breakeven point. BP, on the other hand, was able to remain profitable and cash flow positive with oil prices below its stated breakeven, thanks in large part to its downstream operations. Investors who buy BP should monitor the company's performance as long as low oil prices persist. If BP can't sustain its performance over the next several quarters at these prices, it may be time to look elsewhere.