ConocoPhillips: Patience Will Be Rewarded, Credit Suisse Raises Price Target To $60

Sale At Higher-Than-expected Implied Value

In a note released on Wednesday, analysts Edward Westlake, Ben Combes and Chandra Meenaga said the implied value of the sale is $60 per share (total proceeds at $13.3 billion), is $5 higher than their NAV estimate of $55 per share. The higher value, according to the analysts, may be reflecting the hidden value in the Deep Basin position and associated infrastructure.

Credit Suisse thinks the sale would raise questions over M&A. But at the same time, the firm believes in a cyclical capital-intensive industry, there is option value for a disciplined management team who wait. Notwithstanding the firm's forecast for a recession within the next three years, it feels patience will be rewarded.

Raising Price Target On Valuation

The firm predicted a strong response at the open on Thursday. Given its belief that the shares are cheap, Credit Suisse raised its price target for the shares of ConocoPhillips to $60 from $55, reasoning that a $60 price target is justifiable in absolute terms.

Remaining At Neutral

However, the firm continues to be Neutral on the shares, given its view that there were three challenges with the company's investor proposition:

1. Leverage.
2. Lower dividend yield, relative to the majors.
3. Lower growth relative to E&P's.

With the sale, the firm believes the first issue will be sorted out. Given that, after the deal, the shares trade at the cheaper end of the majors on free cash flow yield, Credit Suisse believes ConocoPhillips may deliver a higher total shareholder return than Chevron Corporation CVX and Exxon Mobil Corporation XOM.

Accordingly, the firm thinks modest growth and a modest dividend and buybacks may work over time.

"However, there are pure plays delivering 15+ percent pa multiyear cash flow growth from a deep shale inventory that [has] also sold off unfairly. The competition is fierce," the firm cautioned.

Raising Estimates

Accounting for lower production due to the sale and expectations for share buybacks, the firm raised its earnings per share estimates for 2017, 2018 and 2019 to $0.58, $1.86 and $2.02, respectively from $0.05, $1.52 and $1.54.

At Time Of Publication

• ConocoPhillips shares were up 7.83 percent at $49.55.
• Chevron Corporation shares were down 0.19 percent at $107.87.
• Exxon shares were up 1.09 percent at $82.91.

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