A lot of good things have happened at ConocoPhillips (COP 2.10%), but none of them matter much because of one overriding issue. If you are trying to build a million-dollar portfolio, this energy giant could help you get there. But you won't want to go all-in on this stock.
Good things are happening at ConocoPhillips
At the end of May 2024, ConocoPhillips announced that it was planning to buy Marathon Oil. The deal was fully consummated last week. From a big-picture perspective, that was pretty solid execution with regard to closing a big acquisition.
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But the benefits of the Marathon Oil purchase are many. For starters, it lifted ConocoPhillips into the top tier of U.S. oil and natural gas producers -- it's now in third place, production-wise. The combined business also has the second-largest inventory of land to develop in the future. And all of the resources that ConocoPhillips added have a fairly low average cost of around $30 per barrel of oil. Taken as a whole, it seems like a pretty solid deal. At this point, ConocoPhillips will get 60% of its production from the 48 contiguous U.S. states, with the rest coming from Alaska and foreign countries.
Those are not the only positives for investors here, however. When ConocoPhillips announced its Marathon Oil purchase, it also stated that it would increase its dividend dramatically and boost its share buybacks after the deal closed. When the energy company announced third-quarter earnings, it also hiked the dividend by 34% and upped its share buyback authorization to $20 billion (going from roughly $5 billion a year to roughly $7 billion), effectively living up to its promises.
It would be understandable if investors saw all of these positives and thought about adding ConocoPhillips to their portfolios, perhaps hoping that stock gains would follow. Yet ConocoPhillips stock is now more than 15% below its 52-week high, and the reason why is pretty simple.
NYSE: COP
Key Data Points
ConocoPhillips is still an energy company
No matter how much good news there is on the operating front at ConocoPhillips, it can't escape the basic nature of the energy business it operates in. As an upstream company, it produces oil and natural gas -- commodities that are subject to swift and often dramatic price swings. The price of West Texas Intermediate (WTI) crude, a key U.S. oil benchmark, has been heading lower since April. And, thus, ConocoPhillips' stock price has been heading lower, too. It's almost as if the Marathon Oil acquisition didn't matter to investors.
As the chart above reflects, ConocoPhillips' stock price moves generally track the price of oil over time. There's really nothing that the company can do about that because the prices of oil and natural gas basically determine its revenues and earnings. Though it increased production by 3% year over year in the third quarter, a 10% drop in the company's realized price resulted in earnings falling roughly 18% year over year. That's just par for the course in the energy patch.
This is where investors trying to build million-dollar portfolios need to step back and think about what ConocoPhillips actually offers as an investment. It has been executing fairly well, and that could make it an interesting addition to a diversified portfolio. Effectively, it provides exposure to a key industry (energy) to which most investors should probably have exposure. But that industry is volatile, and most investors should tread carefully around it, limiting the money they allocate to the energy sector so that an industry downturn doesn't wipe out their portfolios.
Buy ConocoPhillips, but buy with a hint of caution
There's nothing inherently wrong with ConocoPhillips. In fact, there are a lot of good things happening at the company right now. But it's still an energy company and the energy sector is inherently volatile. Good company-specific news isn't enough to overcome that. Yes, ConocoPhillips could help you grow your wealth, but the best way to invest in the stock would probably be to make it one modest part of a diversified portfolio. Simply put, if you bet the house on ConocoPhillips you could end up losing that house. That's a risk that most investors won't want to take.
