Sociedad Quimica y Minera (SQM -1.79%) is down roughly 33% from its highs in 2020, while ConocoPhillips (COP 1.23%) is off by roughly 50% at the time of this writing. The market is in the middle of a volatile bear market, so big losses are the norm -- not the exception today. And the numbers change fast! However, it is fair to ask if the declines these companies have seen are a buying opportunity. While the comparison between these two names may seem odd, there are some key connections between them that deserve consideration. Here's a match up of Sociedad Quimica y Minera (just SQM from here on out) and ConocoPhillips to help you decide if one of them stands above the other.
1. Energy companies with different angles
ConocoPhillips drills for oil and natural gas. It has a fairly broad portfolio, with investments in traditional onshore drilling around the world, unconventional onshore drilling (U.S. shale), offshore drilling in various regions, and operations in the Canadian Oil Sands. SQM is best known for producing industrial metal lithium, which is largely used in batteries.
Image source: Getty Images
Before you say there's nothing in common here, which on the surface appears to be the case, step back. ConocoPhillips and SQM are both vital cogs in the energy market today. Specifically, oil is a key ingredient in gasoline, and lithium is a key ingredient in the batteries that power electric vehicles. One is the old way of doing things, the other the new way. Or, you could argue, one is focused on the past and the other the future. Natural gas, meanwhile, is increasingly being used to generate electricity instead of dirtier coal. That's a bit of a look toward the future of energy, but it's still a carbon-based fuel. SQM's lithium focus stands out again, as it goes into large-scale batteries that often help store intermittent renewable power, generated by things like solar and wind, so it can be used when it is needed and not when it is produced.
There's no winner here, but you might prefer SQM's clean energy appeal (particularly if you invest with an ESG approach) over ConocoPhillips' more traditional energy industry focus.
2. Pure play oil and gas vs. a diversified approach
Focus is actually an important word here because nearly a decade ago ConocoPhillips made the decision to jettison its downstream operations and focus just on its upstream (drilling) business. Basically it's a one-trick pony. That means that the prices of oil and natural gas are the main drivers of its top and bottom lines. Both have tanked this year because of COVID-19, oversupplies markets, and a price war between OPEC and Russia. While there are inherent connections between all three of those issues, they are actually independent problems. It is highly likely that energy prices will remain weak for a while. And with ConocoPhillips all in on oil, that's not great news for the company.
While SQM is largely known for its lithium business, it only accounts for around 36% of the company's gross profit. The rest is split between plant nutrition (27% of gross profit), iodine (25%), potassium (6%), and industrial chemicals (the rest). This provides some diversification to the company's overall business and, thus, helps to smooth out the impact of weakness in any one division. That's notable today because the lithium market is currently oversupplied, so the price of the metal has been falling (the average price was down roughly 30% in 2019, according to SQM). To be fair, most of SQM's businesses had a difficult year in 2019, but only lithium fell sharply, so having its fingers in more than one pie was still a net benefit.
If you are a conservative investor, SQM's broader business probably gives it an edge here.
3. Financial strength
It's hard to make good balance sheet comparisons between SQM and ConocoPhillips because the underlying businesses are very different. But that doesn't mean that you should ignore this vital financial statement. On this score, ConocoPhillips looks generally healthier. For example, it has a slightly lower financial debt-to-equity ratio (0.21 versus 0.26), and its financial debt-to-EBITDA ratio is 0.9 times compared to SQM's much higher 3.7.
COP Financial Debt to EBITDA (TTM) data by YCharts
Here's the thing, though: ConocoPhillips operates exclusively in the highly cyclical energy sector. It should have a conservative balance sheet. If it used too much leverage, a downturn like the one it is facing today would quickly kill the company. But this type of energy downturn isn't actually all that unusual. So, ConocoPhillips does look like the winner in this comparison, but that's hardly a big achievement. Stepping back, neither company is wildly out of line with peers on these financial metrics, which is a far more important take away. So, in the end, the balance sheet match up is probably a wash.
SQM Financial Debt to EBITDA (TTM) data by YCharts
4. Dividends
SQM's dividend yield is roughly 5.1% at the time of this writing while ConocoPhillips' yield is just a touch higher at about 5.4%. After a 66% cut in 2016, ConocoPhillips has increased its dividend at least once a year. The last increase came in October of 2019. But that 2016 cut is worth a closer look, since it came after oil prices cratered in 2015 (the declines actually started in mid-2014). If history is any guide, investors should probably be concerned about the dividend at ConocoPhillips today. Note that oil falling from the $50 range down into the $30 space means that the company's 2020 guidance should probably be tossed out the window. To be fair, ConocoPhillips' payout ratio in 2019 was fairly low, but if low oil prices lead to red ink, that could quickly change.
SQM's dividend is more structured, with the amount it pays out of net income tied to key financial metrics. The stronger the company's finances the larger the dividend will be in any given year. But, in the end, the dividend will vary along with gross profit. The best you can say is that SQM's dividend is variable and with lithium prices weak, it's more likely to be flat to lower than head higher. All in, SQM's dividend is probably in a safer place right now because of its diversification, but dividend-focused investors looking for consistency probably won't like either of these companies.
No clear winner
At the end of the day, neither of these two companies stands out as great investment opportunities right now. Yes, the stocks have fallen, but there are some pretty good reasons for the declines and no clear evidence that the markets in which they operate are going to pick up -- especially if COVID-19 leads to a global recession. Over the long-term, SQM probably has an edge because it is focused on a commodity (lithium) that looks like it will be increasingly important as the commodity that ConocoPhillips relies on (oil) becomes less important. But right now it's probably better to take a wait-and-see attitude, since near-term financial performance is likely to be weak at both companies.
