It's impossible to catch the very bottom of any market crash. The oil market, known for crazy volatility, is no different. So while there are signs we're nearing a bottom in the oil market, I'm not expecting to buy at the lows. However, I do expect that the long-term outlook for oil means we'll need a lot more of it in the future than we produce today, and oil companies won't pump it out of the ground unless there's plenty of money to be made. That's why I'm taking advantage of the sell-off in oil stocks to invest for the long haul. One company I expect to profit from the long-term future of oil is ConocoPhillips (COP 1.88%), and I plan to add to my position in this energy giant.
Source: ConocoPhillips.
Surviving the unknown
The key to surviving any downturn in commodity prices is to have a strong balance sheet and low cost of supply. We see both at ConocoPhillips.
The following two slides illustrate the company's low cost of supply. The first slide shows that ConocoPhillips holds the lowest cost of supply in the entire U.S. shale space, with a breakeven price of less than $40 per barrel.
Source: ConocoPhillips Investor Presentation.
This means ConocoPhillips can make money at prices that would break most of its competitors. It can keep drilling and growing, while other companies will need to make big cuts.
The other thing to note is that ConocoPhillips is not just a U.S. shale story. As this next slide shows, the company has high-margin oil, natural gas, and LNG projects around the world that will deliver growth over the next few years. While its cash margin per barrel of oil equivalent is falling along with oil prices, the company has a significant cushion on margins that enable it to continuing profiting amid the downturn.
Source: ConocoPhillips Investor Presentation.
As that slide notes, the company's focus is to grow its highest-margin production, which will keep it solidly profitable even in today's low oil price environment.
Meanwhile, ConocoPhillips' investment-rated balance sheet is rock solid -- so strong that the company could take on new debt without suffering a rating downgrade.
Source: ConocoPhillips Investor Presentation.
Because debt reduction is not a priority, the company could use the market downturn to make an acquisition or use debt to buy back some of its now-cheap stock. That valuation is the other reason I want to buy the stock right now.
Valuation and a compelling dividend
I recently looked at the company's valuation relative to its historical averages. As we see in the next chart, the company's valuation multiples are all at or near historic lows since the company spun off its refining arm in 2012.
COP P/E Ratio (TTM) data by YCharts.
This means investors are getting a pretty good price when buying the stock today. The valuation could always get cheaper, particularly if oil prices keep falling, and that's a risk when it comes to oil stocks. However, over the long term this looks like a great time to buy the stock based on its historical averages.
Meanwhile, I'm also getting a compelling 4.2% dividend yield. That dividend is also about as safe as we'll find in the oil industry. ConocoPhillips' ability to keep making money amid falling oil prices and its hardy balance sheet provide a lot of safety for that payout, which management has said remains a top priority
Add it all up
ConocoPhillips has everything I want to see in an oil stock investment. It has some of the lowest oil supply costs via its globally diverse portfolio. That is topped off with a rock-solid balance sheet, a cheap valuation compared to its historical averages, and a compelling dividend. So, while I doubt I'm buying at the bottom, I still think I'll be rewarded over the long term, as this company will survive the oil downturn and thrive when things turn around.
