Financial Ratio Analysis on ConocoPhillips Stock

ConocoPhillips (COP 1.23%) is America's largest independent oil and gas company. The company produces nearly 1.6 million barrels of oil equivalent per day, which for perspective equals the amount needed to meet 8% of America's daily petroleum consumption. That being said, a company can be both an industry leader and a lousy investment. So, let's drill down deeper into ConocoPhillips' stock and see what a financial ratio analysis tells us about the company as an investment.

Financial ratio analysis on growth
Stock investors really only care about one thing: growth. So, with growth in mind let's take a closer look at ConocoPhillips' growth and compare it to some notable peers: EOG Resources Inc (EOG 1.07%), Royal Dutch Shell (RDS.A) (RDS.B), Devon Energy Corp (DVN 0.78%), Chesapeake Energy Corporation (CHKA.Q), and Pioneer Natural Resources (PXD 0.87%).  

Sources: Company press releases and investor presentations 

When comparing companies, especially growth rates, it's imperative to put those rates into context. Here we see that ConocoPhillips' average daily production is more than twice the size of many of its well-known American rivals, yet its production is half the size of a big oil giant like Royal Dutch Shell. So, when comparing growth rates this size difference needs to be kept in mind as it's growing off a larger base than many of its peers.

According to analysts, here are the five year projected earnings growth rates of the group as well as the price to earnings growth ratio, or PEG ratio:

Data from Zacks Investment Research via Nasdaq.com

We can make two interesting notes from this data. First, ConocoPhillips is projected to grow its earnings at a pretty healthy clip over the next few years for a company of its size. Its earnings growth is in some cases projected to be faster than its smaller peers. Second, investors can buy that growth at a much cheaper price according to the PEG ratio. So, while ConocoPhillips is neither the fastest growing company, nor the cheapest, it's a very strong option for investors.

Financial ratio analysis on returns
One of the reasons ConocoPhillips is projected to grow its earnings a lot faster than production is because the company is focused on growing its higher-margin production. By focusing on growing margins as well as production the company can earn higher returns. We see this when we drill down a bit deeper using the DuPont Model.

Here are the factors of the DuPont Model:

Image by author

A little spreadsheet magic and here's what we come up with:

Source: S&P Cap IQ

I want to point out two things specifically here. In the first column we see that ConocoPhillips' preinterest pretax margin is the highest of the group and right up there with oil-focused peers EOG Resources and Devon Energy. However, when it comes to the return on equity in the last column ConocoPhillips really shines, as its returns are just a shade better than EOG Resources. Clearly the focus on margins and returns is what's fueling strong earnings growth for the company despite its large size. 

What can a financial ratio analysis tell us about ConocoPhillips' stock?
We could run dozens of different financial ratio analyses on ConocoPhillips' stock comparing it to its peers. However, the two areas to check first are growth and returns. In the case of ConocoPhillips we find a very strong company that, for its size, is growing earnings at a very healthy clip, and almost as fast as some of its peers. Better yet, its growth is priced a bit cheaper than most of its peers so there is some value in the stock. Finally, the company is earning a solid margin and exceptional returns on equity. Add it all up, and this turns up a pretty compelling investment opportunity.