There is little doubt that ConocoPhillips (NYSE:COP) has had a good run since its 2012 split up with Phillips66 (NYSE:PSX). Best of all, many retail investors seem to have come along for the ride: ConocoPhillips has been a favorite of many retail investors. Just check the news feeds on any of the popular finance sites and you'll see that Conoco is an often talked-about company on popular sites for retail investors. The Motley Fool, of course, is one of these sites. 

Cop Ychart

Source: YCharts

After running up to about $77 recently from its pre-split low of around $50, many are wondering if it's time to book profits. I believe that retail investors should always look at the big picture. ConocoPhillips has transformed itself from a lumbering, integrated company with far-flung and often second tier assets to a lean, focused, value-creating machine with world-class assets in the world's newest resource plays. These new assets fetch much higher margins than do Conoco's previous assets. Best of all, Conoco's management keenly understands the importance of a dividend. 

These are all reasons why, despite being at multi-year highs, now is still not the time to sell ConocoPhillips. This article will explain some of the forces at work which are driving Conoco's stock higher. This article will also define a good price target at which Conoco may be "fully valued."

Production and cash flow growth
ConocoPhillips will grow production each year by between 3%-5% through 2016. This growth is coming from a variety of places, but it is centered around more politically stable, high-margin locations: the Canadian oil sands, the Gulf of Mexico, the North Sea, and most of all, U.S. shale plays such as the Eagle Ford and the Bakken. 

Compounding this production growth is impressive margin growth. As Conoco sold its lower-margin assets in Nigeria, Kazakhstan, and North Africa, the company invested in projects yielding higher-margins, namely the Canadian oil sands and U.S. shale. As a result, margins are also growing at 3%-5%. Therefore, we get total cash flow growth of between 6% and 10%. 

Management's goal is to harness that 6%-10% cash flow growth and turn it into similar dividend growth. In 2013, ConocoPhillips grew production by 3% and grew margins by 5%. Therefore, I believe we will see a 7.5%-8% dividend increase in 2014. That dividend growth is in addition to the already substantial 3.6% yield that Conoco offers right now. With an expected 8% dividend growth, Conoco will soon yield about 3.9% based on today's price. That is a yield substantially higher than either Chevron or ExxonMobil, despite the fact that Conoco is growing production faster than either of those two.


A rig in the Niobrara Shale. Source: Wikipedia

Beyond 2016
Investors have good reason to believe that ConocoPhillips will continue to grow production into and beyond 2017. Production growth from 2017 onward will be determined by exploration results today. Management has shown a continued focus on high-margin, OECD projects. The lion's share of Conoco's exploration and appraisal budget is going to Alaska, the Gulf of Mexico, and less-developed shale plays such as the Duvernay and Montney in Canada and the Wolfcamp and Niobrara in the U.S. If these shale plays are anything like the Bakken or Eagle Ford, then they will provide high-margin, liquids-rich growth for several years at least. 

A realistic target
Finding appropriate peers to compare ConocoPhillips with can be difficult. Chevron and ExxonMobil are, in my opinion, still the most appropriate peers because they have similar, balanced dividend and growth strategies. Also, Chevron, ExxonMobil, and Conoco all adhere to the 'low-risk' model in which an oil and gas company diversifies over many locations around the world. 

Trading at only 10.5 times trailing earnings, Conoco still has a ways to go. Chevron and Exxon trade at 12.2 times and 14 times trailing earnings, respectively. In addition, Conoco's estimated 3.9% forward yield still outstrips Chevron's at 3.4% and Exxon's at 2.7%. 

In fact, Conoco's dividend yield would fall midway between those two at around $100 per share, which is about where I would consider Conoco to be "fully valued." Currently, Conoco sits at $77 per share. As you can see, there is still plenty of upside remaining.  

Casey Hoerth owns shares of ConocoPhillips. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.