duy.ngo_conocophillips stock - may 2013

8/13/2019 Duy.ngo_ConocoPhillips Stock - May 2013

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I initiate a HOLD recommendation for ConocoPhillips. My target pric

ConocoPhillips is $68.2 per share by the end of 2013, which is 8.23 percent u

potential from current level. ConocoPhillipss stock is expected to provide 9.9%

return for shareholders in 2013 and the years to come.

Some valuation highlights are:

Relatively high World Oil Price in short and long term benefitcompany. ConocoPhillips is an up-stream oil company. The company is a price-therefore, its sale revenues depend on the World Oil price. According to Bloomthe spot crude oil price in 2013 is predicted to increase by $2.89 to $102 per barreincrease is reasoned by the escalated tension in oil export countries in the MiddleIn addition, World Bank predicts that the Worlds oilprice is still expected to staat above $100 dollar per barrel up to the year 2020 due to the recovery of the Weconomy and the thirst of energy in China.

Margin is expected to improve in the years to come. ConocoPhillimplementing restructuring plan in which it sells low margin, non-strategic a

splitting of downstream oil business. The company is expected to improve the margin by three to five percent year to year basis in the next fives year. The comis expected to improve EBITDA margin from 40% in 2013 to 51% in 2017. Th

profit margin is expected to improve from 12.9% in 2012 to 18.1% in 2017.

ConocoPhillips is on schedule of asset divestiture.After the first quar2013, the company has sold total 1.134 billion dollar in asset, equivalent to 55%

proceeds from asset disposition in 2012. In January, ConocoPhillips announced Kashagan interest as well as Algerian and Nigerian business. The asset dispositexpected to provide at least 9.1 billion dollars proceeds in 2013.

Two new sites added into the exploration portfolio provides sustailong-term growth prospect. Recently, ConocoPhillips announced that it

Permian Basin, Biobrara and Angola block in exploration portfolio and wilexploration activities in 2014. ConocoPhillips successfully replaced more than

percent of production in each of the past four years with organic proved reservthe end of 2012 the companys proved reserve was at 8.6 billion BOE andresources of 43 billion BOE, providing ample growth opportunities in the future

ConocoPhillips

Upstream Oil Indus

Date: May 9, 2013

Ticker : COP (NYSE) Recommendation : H

Target Price : $62.58 Target Price (12/31/2013) : $

Source: Author estimate

2 0 1 1 2 0 1 2 2 0 1 3 E 2 0 1 4 E 2 0 1 5 E 2 0 1 6 ET o ta l Sa les in m i l l io n USD ) 6 4, 19 6. 0 5 7, 96 7. 0 4 9, 37 4. 0 5 4, 03 2. 5 5 9, 76 7. 1 6 8, 07 6. 1EBIT DA in m i l l io n USD ) 2 6, 07 0. 0 2 3, 33 6. 0 2 1, 67 5. 2 2 5, 34 1. 2 2 8, 62 8. 4 3 2, 60 8. 5N e t I n c o m e i n m il l io n U S D ) 7 ,188 .0 7 ,481. 0 8,0 08.3 9,2 36.1 1 0,23 5.0 11 ,372 .7R O E 11.0% 15.6% 15.2% 16.0% 16.1% 16.2%

Duy Ngo

Finance 705 final assignment

Instructor: Dr. Steven Isberg



NYSE Ticker COP

# share outstanding

(000)1,243,799

Float 1,243,799

Market Cap 76.51B

52 week high 62.99

52 week low 59.62

Avg. Monthly Volume 6.9 million

Beta 1.38

Adjusted Beta 1.38

% Held by Insiders 0.15%

% Held by Institutions 67.50%

S&P 500 3.70%

COP 10.10%

Peers* Index -6.80%

Market profile

Ownership structure (2012)

Relative perormance (2012)

Book value per share 42.3

Earnings per share 6.4dividend per share 2.8

dividend yield 4.4%

Longterm debt/ equity 0.39

Equity mutiplier 2.36

ROE 0.16

ROA 0.07

EBITDA margin 43.9%

P/B 1.83EV/EBITDA 6.5

EV/EBIT 4.3

P/E 17.9

Key Financial Data


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Business Description:

ConocoPhillips is one of the largest independent Product and Explo

company in the world by proved reserve and the production of liquid

natural gas. By the year 2012, the companys total proved reserved was at

million barrels of oil equivalent. In April 2012, the company complete

separation of downstream business into an independent company, nPhillips 66, which possesses most of the old companys refining, marketin

transportation business.

The chart besides represents ConocoPhillipss five keys exploration

production areas and their revenues. The areas are including: Lower 48, n

the Eagle Ford and Bakken; Oil sands business in Canada; European pro

deep-water developments in Malaysia; Liquid Natural Gas venture on

Island in Australia. Recently, the company added two new exploration

its portfolio: Permian basin and Biobrara and Angola blocks.

Industrial Overview

Macro-economic analysis:

Supply of oil still hidden a lot of uncertainties. The ongoing tension

exporting countries always hidden the new soar in the world oil price. Civ

in Syria is escalating. The stricter embargo of the United States and Eur

Union and the threat of retaliation of Iran, one member of the Organizati

Petroleum Exporting Countries (OPEC) escalates to a new level: Iran thre

close Strait of Hormuz, one of the busiest oil transportation line in the W

The Oil price will continue to stay high in near short and long-term. Rec

Bloomberg increases the forecast oil price by $2.89 to $102 per barrel in

The average oil price would stay $102.2 per barrel in 2014. The table brepresents the estimates energy commodity price according to World Ba

the long run, the world oil price is still expected to stay above $100 per b

until 2025. The increase in the oil price is explained by strong demand

and China, which the economic recovery is on-going and the unstable s

in the Middle East and Africa.

Industry analysis:

Natural gas

In short-term demand for natural gas would be fluctuated because of the

temperature in the winter. The price for natural gas is highly cyclical, hiin the winter and lowest in the summer. Given the warmer than usual w

in 2012, the price of natural gas stayed low at $2.83 per MMBtu1. Howe

its price gradually increase in 2013 and hitting 20-month high in April a

1Btu: British thermal unit, a unit to measure energy

ude oil, avg, spot ($/bbl) $102 $102.20 101.7

atural gas, US ($/mmbtu) $3.50 $4.00 4.95

NG, Japanese ($/mmbtu) $16.00 $15.50 14.7375

average

2013-20202014E2013Energy Commodity price

Source: World Bank estimate, Jan 2013

Source: Companys data


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result of unusual cold March in 2013. The colder winter temperatures

forecast for 2013 and 2014 are expected to increase the amount of natur

demand for heating. US Energy Information Administration (EIA) pred

that the expected Henry Hub2Natural Gas Price will increase from an

average of $2.75 per million Btu in 2012 to $3.8 per MMBtu in 2013 an

$4.00 per MMBtu in 2014.

In long run, natural gas will be the most important resources in the futurits environmental soundness and multiple applications. According to EIA

natural gas demand is expected to grow 0.7 percent annually over the ne

years, reaching 26.55 trillion cubic feet by 2035. It is important to note t

this steady climb in demand for natural gas could increase as climate ch

legislation grows demand for low-carbon fuels clean energy such as nat

gas. Consequently, in the future, I expect the price of crude oil will incre

to $5.3 per million cubic feet in 2017.

Crude oil and liquid fuels:

According to EIA, the demand growth for crude oil is expected to be hig

over the next two years because of the recovery in global economic so thwould consumption grows by 0.9 million bbl/d in 2013 and 1.2 million b

in 2014.

The crude oil price dropped from $109 per barrel on April 1 to $97 per b

in April 17 due to the increases production in North Sea and seasonal

declines in international refinery runs. EIA projects the Brent crude oil s

price will fall from an average $112 per barrel in 2012 to $106 but still

above $100 in 2014.

Valuation Summary:

I initiate a HOLD recommendation for ConocoPhillips with target pr$68.2 per share by the end of the year 2013. The price is derived from

valuation methods: Discounted Cash Flow and Market Multiples.

Discounted Cash Flow Method.

The DCF-derived price for ConocoPhillips is $57.8 per share. Two-

development DCF model was employed: Stage 1 from 2013 to 2017 and

2 from 2017 to perpetuity. I believe this approach to be appropriate to ca

the best estimate of the companys development plan and industry prospe

The valuation incorporates in some of the following assumptions:

2Henry Hub pipeline is the pricing point for natural gas futures on the NYMEX. The settlement prices at Henry Hub are used as

benchmarks for entire North America natural gas market

Stage 1

(2013 - 2017)Analytic stage

Stage 2

(2017 - perpetuity)

Maturity with

constant

growth

DCF model Characteristic

Source:Authors estimate


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Sales:

The companys total revenue is expected to growth 8.7% compounded a

grow rate (CAGR) in the period from 2013 to 2017. The companys

revenue is an aggregation of the sale of crude oil, natural gas, natural gas

and bitumen, of which crude oil and natural gas account for over 89 perc

the total sale (see the beside chart). I forecasted total sale revenue by forec

the companys each production line sale separately.

Natural gas sale accounted 44 percent of the companys total sale in 201

is expected to growth 14.1 percent CAGR in the next five years. ConocoPh

average production of natural gas in 2012 was 4,096 million cubic feet pe

and is expected to decrease in 2013 and 2014 due to the low profit margi

low world natural gas price, which remained low at $3.5 per cubic

However, the company still maintains the production capacity to increa

production if the sale price of natural gas improve. In the long run, the n

gas price is expected to increase up to $5.3 per cubic feet by 2015; as the r

the company will improve production from four to 10 percent from n

2017.

Crude oil sale is expected to grow 5.7 percent CAGR, of which 5.

attributed to the production growth. Sale price is expected to stay stabl

remains high at above $100 per barrel in the next five years. Crud

accounted for 45% percent of the companys total sale and is the comp

strategic segment because of high profit margin. Given over one hu

percent organic replacement ratio per year in some previous year and abu

proved reserve, which stays at 2,779 MMBOE, the company has a

potential to sustain the production in at least 20 years in the future.

Natural gas liquid and bitumen sale total accounted for 11 percent in comp

total sale in 2012. Given the stable sale price, the sale revenues for products are expected to growth at the rate at 3.5% CAGR from now to 2

Cost of production:

The chart beside represents the companys costs structure as percent

sale. Purchased commodities, production and other operating exp

accounted for 56% of the companys total sale. However, this port

expected to decrease in the years to come since ConocoPhill

transforming itself from low margin full stream to high margin upstre

company. ConocoPhillips strives to improve profit margin by div

nonstrategic, low margin assets and expects to improve the margin b

5 percent on year-to-year basis in the next five years. Therefore, I ethat Purchased Commodities, Production and operating expenses

significantly decrease in the next five years, leading to the increa

EBITDA margin from 44.8% in 2012 to 56% in 2017. Amortizatio

Depreciation expense, on the other hand, is expected to increase sinc

Sales 2012 break down

Source: Companys data


ource:Authors estimate

rce:Authors estimate


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company is spending 16 billion dollars annually in CAPEX in the nex

years, resulting a substantial increase in companys gross assets.

Capital expenditure:

In 2012, the company spent total $14.712 billion in Capex and additiona

billion for exploration program. Chart besides represents the company

capital expenditure and expected allocation. Accordingly, ConocoPhil

expected to spend $16 billion dollar in capital spending in the next five

of which 10% for asset maintenance and environmental responsibility, 45

development of low-risk incremental programs in and around l

unconventional asset, 30% for major step-change in growth project and

for exploration.

The Capital Expenditure is financed by the proceeds of business divest

which is expected to generate $18 billion in the next two years and the re

be financed by additional source of fund.

Terminal value:

I used to method to derived terminal value: constant growth and EBITDAmultiple. I used 3% constant growth rate and 3.2 times EV/EBITDA mu

for terminal value. The two methods provide approximately the same ter

value of the company, which accounts for 93% of the companys total va

Terminal growth rate bases on an assumption that, beyond 2017, the comp

will generate a constant growth free cash flow at 3%. While EBITDA

multiple is based on the market valuation of the companys earnin

profitability in comparison with other peers company with the same prof

Discounted rate:

By the end of 2012, the company maintained 31% debt ratio and is expecmaintain the ratio in the future. I derived the discounted rate for ConocoPh

at 7.32%. Following are discussions about cost of equity and cost of debt

The companys long-term debt is rated A1 by Moodys investors servic

A by both Standard and Poor Rating Service and Fitch. The comp

current cost of debt is 3.5%, derived by dividing the companys interest ex

to the previous interest bearing debt. However, that cost of debt

companys historical cost of debt. It might not reflect the true cost of borro

when ConocoPhillips issues new debt in the future. Therefore, I construct

term structure for bond rated A by Fitch using regression. The de

discussed in the appendix. The regression has quite accurate predicting pwhich is measure by R-square at 48.44%. Assuming that ConocoPhillips

to issue additional debt with 5 years maturity, the companys will have t

3.7 percent interest.

Since ConocoPhillips has spilt off its downstream business. Ther

historical data cannot be used to estimate the cost of equity. I calculat

rce: Com an s data

ce: Com an s data

Capital expenditure and allocation

ar perpetuity stage start 2017

rpetuity growth 3%

t EV/EBITDA multiple 3.2x

rcentage of firm's total present value 93%

Terminal value assumption



Risk free rate 1.62%

Beta 1.38

Market Risk premium 6%

Cost of equity 9.90%

Cost of Debt 3.70%

Tax Rate 57%

After tax Cost of Debt 1.51

Target Debt to Capital ratio 31%

WACC 7.32%

WACC assumption


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companys beta by tanking the median of 44 comparable companies be

the industry. (The list of companies and the discussion is in appendix) an

the companys beta at 1.378. Given risk free rate at 1.62%, historical equi

premium at 6%, the cost of equity for ConocoPhillips is 9.9 percent.

Market Multiple Valuation:

Among price relative estimates, P/E ratio is the most frequently us

compare a companys price to its peers price in the same industry. B

using PE, I used the EV/EBITDA method to make additional comparison

EV/EBITDA addresses the capital structure differences between comp

Since ConocoPhillips is capital intensive company, P/B is another frequ

chosen ratio to compare companies in heavy industry.

I selected 44 companies both international and US based as the peer group

besides table summarizes the estimate and the price derived from each m

I used the median instead of the mean to eliminate the outlier effect fro

peers group. The median for PE and EV/EBITDA multiples are 17.93 an

respectively. The median for PB ratio is 1.83. Given the forecasted EBI

total asset and earning per share for year 2013, the share pricConocoPhillips is $111; $80; $85 for three methods PE, PB and EV/EB

respectively.

The average share price of multiples methods for three valuation methodo

PE, PB, EV/EBITDA is $92.41 per share, which is 47% upside fro

current price.

Conclusion:

I assigned 30% weight for market multiple derived value and 70% weig

Discounted Cash Flow derived value. I give higher weight for Discounted

Flow derived value because it is more accurate in reflecting the compbusiness model and controllable for the changes of each assumption param

The aggregated share price using two methods is $68.18 which is 8.3% u

potential from the current price.

Financial Analysis:

The company is expected to run shortage in capital in the next few years

to high capital expenditure, which maintains at 16 billion dollar annually

next five years and the split of downstream business, which provides stabl

flow previously, ConocoPhillips would need at least 17 billion dollar ann

The cash flow from upstream business operation would not be suffici

finance heavy capital expenditure program. In short run, the proceedsasset divestitures, which is expected 8 billion to 10 billion dollar in 2013

partially provide short term financing. However, in the long run, the com

will need to raise additional capital by debt and equity to compensa

shortage of capital.

PE 17.9

PB 1.83

EV/EBITDA 6.48

EPS 6.4

BV per share 42.3

EBITDA per share 17.4

EPS 1.026

BV per share 0.968

EBITDA per share 1.319

PE 112

PB 80

EV/EBITDA 85.5

Median Peers group

COP 2013 estimates

Share price

Adjusted factor

urce: Yahoo Finance, Financial

ualizations, Author estimates


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ConocoPhillips share repurchases and high dividend per share, which is

at the moment, are questionable. According to ConocoPhillipss mana

discussion, the company will try to maintain and increase dividend per

and consider stock repurchase. However, given the shortage of capital,

doubt whether the company would be able to fulfill the statement.

The companys profitability margin is expected to improve. The company

margin is expected to improve from 12.9% in 2012 to 18.1 percent in EBITDA margin is expected to improve from 40.3 percent in 2012 to

percent in 2017. The improvement in profit margin is the result o

companys repositioning plan, in which ConocoPhillips will divest low

margin assets.

Investment Risk and Sensitivity Analysis:

Sensitivity is conducted to see what variables make the most impact o

company stock price. The table beside ranks the variables by correlatio

the contribution to stock prices variance. As can be seen that five most i

variables are WACC, Terminal growth rate, EBITDA margin in 2016, Pr

Crude oil and natural gas in 2017. Additionally, we can see that the prcrude oil and natural gas in 2017, the year before maturity with constant g

stage contributed significantly to the final stock price, not the price in 20

2014. The chart in the sensitivity appendix further discusses abou

correlation with those variable and the impact with stock price. (I

appendix, I discussed in detail how the stock price given one unit chan

these variables).

The table beside further analyzes the impact of terminal growth rat

discounted rate, the two most impacted variables to the valuation of comp

stock price. As can be seen that, the expected price is highlighted in yell

the terminal growth rate increase or decrease by 0.5 percent, the stockvaries from $49.9 to $67.8. Similarly, if the discounted rate change b

percent, the expected price changes from $52.1 to $64.3.

In the Monte Carlos Simulation appendix, I constructed confident interv

ConocoPhillipss stock price. Based on the distribution of the assump

parameters, I ran 100,000 trials. The 90 percent confident interv

ConcoPhillips stock price is from $15 to $68 per share. Howeve

distribution is skew to the right, indicating the downside risks potential f

ConocoPhillipss stock price.

2.0% 2.5% 3.0% 3.5% 4.0%

6.4% 58.5 68.2 80.9 97.9 122.1

6.7% 52.8 61.3 71.9 86.0 105.2

7.0% 47.9 55.2 64.3 76.1 91.8

7.3% 43.5 49.9 57.8 67.8 80.8

7.6% 39.6 45.3 52.1 60.7 71.6

7.9% 36.1 41.1 47.2 54.6 63.9

8.2% 33.0 37.4 42.8 49.2 57.2

Discounted

rate

Terminal Growth rate

Assumptions Contribution

ToVariance

Rank

Correlation

wacc 55% -72%

terminal growth 13% 35%

EBITDA margin 2016 10% 31%

Price_CO_17 9% 29%

Price_NG_17 8% 27%

Other 6%

ConocoPhillip's stock price


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Appendix:

I. Pro-forma Financial StatementsConocoPhillips

Proj Proj Proj Proj Pro

INCOME STATEMENT Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-1

Total Revenues 56,215.0 64,196.0 57,967.0 49,374.0 54,032.5 59,767.1 68,076.1 76,223.8

COGS 31,081.0 36,223.0 32,025.0 25,674.5 26,475.9 28,688.2 32,676.5 33,538.5

Gross profit 25,134.0 27,973.0 25,942.0 23,699.5 27,556.6 31,078.9 35,399.6 42,685.3

Gross margin 44.7% 43.6% 44.8% 48.0% 51.0% 52.0% 52.0% 56.0%

SGA 809.0 865.0 1,106.0 740.6 810.5 896.5 1,021.1 1,143.4

Exploration Expenses 1,125.0 1,038.0 1,500.0 1,283.7 1,404.8 1,553.9 1,770.0 1,981.8

EBITDA 23,200.0 26,070.0 23,336.0 21,675.2 25,341.2 28,628.4 32,608.5 39,560.2

EBITDA margin 41.3% 40.6% 40.3% 43.9% 46.9% 47.9% 47.9% 51.9%

Depreciation 8,004.0 6,827.0 6,580.0 4,937.4 5,403.2 5,976.7 6,807.6 7,622.4Amortization of intangibles 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

EBIT 15,196.0 19,243.0 16,756.0 16,737.8 19,938.0 22,651.7 25,800.8 31,937.8

EBIT margin 27.0% 30.0% 28.9% 33.9% 36.9% 37.9% 37.9% 41.9%

Other oper expenses (taxes other 3,193.0 4,445.0 3,981.0 2,962.4 3,241.9 3,586.0 4,084.6 4,573.

Gain (loss) on asset sales 5,563.0 370.0 1,657.0 0.0 0.0 0.0 0.0 0.0

Interest income 0.0 0.0 0.0 35.4 36.2 39.8 44.7 50.

Interest expense 1,167.0 954.0 709.0 721.7 787.8 838.2 847.8 843.4

EBT 16,399.0 14,214.0 13,723.0 13,089.0 15,944.5 18,267.4 20,913.2 26,571.5

EBT margin 29.2% 22.1% 23.7% 26.5% 29.5% 30.6% 30.7% 34.9%

Provision for taxes 7,570.0 8,208.0 7,942.0 7,460.7 9,088.3 10,412.4 11,920.5 15,145.

Equity earnings in affil iates 1,376.0 1,239.0 1,911.0 1,911.0 1,911.0 1,911.0 1,911.0 1,911.0

Other Income 181.0 264.0 469.0 469.0 469.0 469.0 469.0 469.0

Impairment 81.0 321.0 680.0 0.0 0.0 0.0 0.0 0.0

Net income from Operation 10,305.0 7,188.0 7,481.0 8,008.3 9,236.1 10,235.0 11,372.7 13,805.7

Net margin 18.3% 11.2% 12.9% 16.2% 17.1% 17.1% 16.7% 18.1%

Net Income from discontinued op 1,112.0 5,314.0 1,017.0 0.0 0.0 0.0 0.0 0.0

LESS: Minority Interest 59.0 66.0 70.0 0.0 0.0 0.0 0.0 0.0

Net income available to common 11,358.0 12,436.0 8,428.0 8,008.3 9,236.1 10,235.0 11,372.7 13,805.7

Common dividends 3,175.0 3,632.0 3,278.0 3,443.6 3,971.5 4,401.0 4,890.3 5,936.

Share Repurchases 3,866.0 11,123.0 5,098.0 0.0 0.0 0.0 0.0 0.0

Net to retained earnings 4,317.0 (2,319.0) 52.0 4,564.7 5,264.6 5,833.9 6,482.4 7,869.3


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II. ConocoPhillipss valuation results.

ConocoPhillips

Proj Proj Proj Proj

BALANCE SHEET Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 D

ASSETS

Excess cash 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Operating cash 0.0 5,780.0 3,618.0 3,456.2 3,782.3 4,183.7 4,765.3 5

ST investments 0.0 581.0 0.0 0.0 0.0 0.0 0.0 Account receivable 0.0 16,526.0 9,182.0 5,924.9 6,483.9 7,172.1 8,169.1 9

Inventory 0.0 4,631.0 965.0 641.9 702.4 777.0 885.0

Prepaid expenses & Other current 0.0 2,700.0 10,224.0 4,937.4 5,403.2 5,976.7 6,807.6 7

Current assets 0.0 30,218.0 23,989.0 14,960.3 16,371.8 18,109.4 20,627.1 23

Net PPE 0.0 84,180.0 67,263.0 77,325.6 86,922.4 95,945.6 104,138.0 111

Investment in affiliates 0.0 32,108.0 23,489.0 25,400.0 27,311.0 29,222.0 31,133.0 33

Intangibles 0.0 745.0 4.0 4.0 4.0 4.0 4.0

Loans and advanced - related part 0.0 1,675.0 1,517.0 1,283.7 1,404.8 1,553.9 1,770.0 1

Goodwill 0.0 3,332.0 0.0 0.0 0.0 0.0 0.0

Long-term assets 0.0 972.0 882.0 740.6 810.5 896.5 1,021.1 1

Total assets 0.0 153,230.0 117,144.0 119,714.3 132,824.5 145,731.5 158,693.2 170

LIABILITIESRevolver 0.0 0.0 0.0 7,130.3 12,171.7 15,322.4 17,068.3 16

Short-term notes 0.0 1,013.0 955.0 790.0 864.5 956.3 1,089.2 1

Accounts payable & accrued Expe 0.0 22,835.0 13,122.0 9,847.8 10,155.1 11,003.7 12,533.5 12

Other current liabilites 0.0 4,220.0 3,366.0 2,715.6 2,971.8 3,287.2 3,744.2 4

Current liabilites 0.0 28,068.0 17,443.0 20,483.6 26,163.1 30,569.6 34,435.1 34

Longterm Debt 0.0 21,610.0 20,770.0 20,470.0 20,470.0 20,470.0 19,220.0 19

Asset Retirement Obligation 0.0 9,329.0 8,947.0 7,406.1 8,104.9 8,965.1 10,211.4 11

Joint Ventuure Obligation 0.0 3,582.0 2,810.0 2,810.0 2,810.0 2,810.0 2,810.0 2

Deferred Income taxes 0.0 18,040.0 13,185.0 10,862.3 11,887.1 13,148.8 14,976.7 16

Employment Benefit Obligations 0.0 4,068.0 3,346.0 2,962.4 3,241.9 3,586.0 4,084.6 4

Long-term liabilities 0.0 2,784.0 2,216.0 1,728.1 1,891.1 2,091.8 2,382.7 2

Total liabiliities 0.0 87,481.0 68,717.0 66,722.5 74,568.2 81,641.3 88,120.5 92

MINORITY INTEREST

Minority interest 0.0 510.0 440.0 440.0 440.0 440.0 440.0

SHAREHOLDERS' EQUITY

Preferred stock 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Common stock 0.0 44,742.0 45,342.0 45,342.0 45,342.0 45,342.0 45,342.0 45

Treasury Stock 0.0 (31,787.0) (36,780.0) (36,780.0) (36,780.0) (36,780.0) (36,780.0) (36

Retained earnings 0.0 49,049.0 35,338.0 39,902.7 45,167.3 51,001.2 57,483.7 65

Accumulated Other Comprehensi 0.0 3,246.0 4,087.0 4,087.0 4,087.0 4,087.0 4,087.0 4

Other equity account 0.0 (11.0) 0.0 0.0 0.0 0.0 0.0

Shareholders' equity 0.0 65,239.0 47,987.0 52,551.7 57,816.3 63,650.2 70,132.7 78

Total liabs, min int and SH equity 0.0 153,230.0 117,144.0 119,714.3 132,824.5 145,731.5 158,693.2 170


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III. Cost of capital calculation1. Calculating beta coefficient:

ConocoPhillips is a new upstream company after the split of downstream business. Therefore, hist

ConocoPhillips stock return cannot be used to calculate the beta coefficient. Therefore, I derived the beta coeff

by comparing to other companies in the Independent Oil Exploration and Production sector.

Ticker Company BetaLong-term

Debt/Equity

APA Apache Corp. 1.34 0.36

CEO CNOOC Ltd. 1.27 0.09

PVA Penn Virginia Corporation 1.51 0.66

END Endeavour International Corporation 1.85 5.9

ConocoPhillipsValuation Date May-11-13

Hard-coded WACC 7.30% Discounting: M(id) or E(nd of Year) M

-- or --

Risk-free Rate 1.62% Terminal Value selection 1

Beta (Levered) 1.38

Equity Risk Premium 6.00% Constant Growth 3.0%Calculated Cost of Equity na EBITDA Multiple 3.20x

Cost of Debt 3.50%

Tax Rate 57.00% Number of Shares Outstanding 1,243,799

Calculated After-Tax Cost of Debt na

Target Debt to Capital Ratio 26.00%

WACC 7.30%

8 mos

VALUATION Dec-13 Dec-14 Dec-15 Dec-16 Dec-17

EBITDA 21,675.2 25,341.2 28,628.4 32,608.5 39,560.2

Tax 0.6 0.6 0.6 0.6 0.6

EBITDA (1-Tax) 9,320.3 10,896.7 12,310.2 14,021.6 17,010.9

Depreciation (Tax) 2,814.3 3,079.8 3,406.7 3,880.3 4,344.8

Capex 15,000.0 15,000.0 15,000.0 15,000.0 15,000.0

Chang in NOWC 4,942.2 (521.8) (172.2) 50.8 (1,119.7)

FCFF Full year 2,076.8 (1,545.2) 544.7 2,952.7 5,236.0

FCFF to deal date 1,331.4 (1,545.2) 544.7 2,952.7 5,236.0

Terminal value 125,419.3

# of years 0.639 1.639 2.639 3.640 4.639

PV of cash flow 1,272.8 (1,376.7) 452.3 2,284.8 3,776.0

PV terminal value 90,448.0

Enterprise value 96,857.2

Debt value 24,934.1

Equity Value 71,923.1

Share price 57.8


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DVN Devon Energy Corporation 1.2 0.4

APC Anadarko Petroleum Corporation 1.52 0.64

LPI Laredo Petroleum Holdings, Inc. 1.46

EOG EOG Resources, Inc. 1.12 0.44

EOX Emerald Oil, Inc. 1.4 0.21

TGA TransGlobe Energy Corp. 1.27 0.27

CNQ Canadian Natural Resources Limited 1.56 0.33

CRK Comstock Resources Inc. 0.9 1.48NBL Noble Energy, Inc. 0.97 0.44

CLR Continental Resources Inc. 1.71 1.12

PXD Pioneer Natural Resources Co. 1.79 0.42

MEMP Memorial Production Partners LP 1.15

RRC Range Resources Corporation 0.6 1.3

COG Cabot Oil & Gas Corporation 1.13 0.5

CHKR Chesapeake Granite Wash Trust 0

SN Sanchez Energy Corporation 0

TLM Talisman Energy Inc. 1.49 0.45

LINE Linn Energy, LLC 0.69 1.53

XEC Cimarex Energy Co. 1.66 0.22

PXP

Plains Exploration & Production

Company 1.48 2.84

KOS Kosmos Energy Ltd 0.97

SM SM Energy Company 1.49 1.06

GPOR Gulfport Energy Corp. 2.38 0.27

EGN Energen Corp. 1.21 0.4

OAS Oasis Petroleum Inc. 1.51

WPX WPX Energy, Inc. 0.29

UPL Ultra Petroleum Corp. 0.87 0

NFX Newfield Exploration Co. 1.42 1.09

ROSE Rosetta Resources, Inc. 2.12 0.51

MMR McMoRan Exploration Co. 1.35 0.31

BRY Berry Petroleum Co. 2.15 1.64

GTE Gran Tierra Energy, Inc. 1.28 0

XCO EXCO Resources Inc. 1.31 0

BCEI Bonanza Creek Energy, Inc. 0.27

EPL Energy Partners Ltd. 1.99 1.18

LNCO Linn Co, LLC 0

SGY Stone Energy Corp. 2.84 1.05

QRE QR Energy, LP 1.07

CRZO Carrizo Oil & Gas Inc. 2.06 1.65

FANG Diamondback Energy, Inc. 0

Median 1.42 0.445

The median beta calculated above is leveraged beta for peers companies. In order to derive beta for ConocoPh

I need to deleverage the beta above and then re-leverage with ConocoPhillipss capital structure. The following

formula:


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The average tax rate for companies in the peers group is 55%. Therefore, beta unleveraged is

=1.42

1 + (1 55%). 0.445= 1.18

ConocoPhillipss long-term debt to equity in 2012 was 0.39; effective tax rate was 57%. Therefore, the leverag

beta for ConocoPhillips is

Beta ConocoPhillips = 1.18 [1+(1-57%)*0.39] = 1.378.

2. Calculating the cost of borrowing:Data description:

I retrieved data from Yahoo Finance for over 541 bonds with grade A credit rating. Each bond contains the

information of yield to maturity, current yield, callable feature and maturity date.

From the data set, I constructed the term structure using Ordinal Least Square method.

Choice of model:

There are several suggested model to constructed the term structure such as polynomial, linear,etc. However, s

the data is time series; therefore, it has the autocorrelation problem, which make the coefficient estimated bias

and not the minimal variance. Taking the log for the maturity will address the problem.

Here is the formula of regression model:

= + () +

Estimated coefficient for the model is:

SUMMARYOUTPUT

Regression Statistics

Multiple R 0.695993

R Square 0.484406

Adjusted R

Square 0.483447

Standard Error 1.77251

Observations 540

ANOVA

df SS MS F

Significanc

e F

Regression 1 1588.038

1588.03

8

505.456

4 2.01E-79

Residual 538 1690.283 3.14179


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Total 539 3278.321

Coefficient

s

Standard

Error t Stat P-value Lower 95%

Upper

95%

Lower

95.0%

Upp

95.

Intercept 1.876124 0.106857

17.5573

3 6.86E-55 1.666216

2.08603

2 1.666216 2.08

Ln(time) 1.13662 0.050556

22.4823

6 2.01E-79 1.037308

1.23593

2 1.037308 1.23

In overall, the model is significant, illustrating by significant F statistics. The model can explain 48 percent of

observation.

Suppose ConocoPhillips wants to raise 5 years longterm bond with the same credit rating. It would have to pay

Yield = 1.1366 * ln(5) + 1.8761 = 3.705 (percent interest rate.)

Therefore, the estimate cost of debt for ConocoPhillips would be 3.705 percent.

IV. Monte Carlos Simulations and sensitivity analysis:I have a set 47 assumption parameters for variables. Some of them are: the production capacity for crude o

natural gas, natural gas liquid, Bitumen and the selling price for each products from 2013 to 2017; the EBI

margin from 2013 to 2017; discounted rate and terminal growth rate.

The set of assumption parameters are subjected to change expected value. Probability distribution function

product selling prices are based on fitting historical price of crude oil, natural gas, natural gas liquid and

bitumen. The distribution assumption for EBITDA margin are subjected to 10 percent change from expect

value. With WACC and terminal growth rate, I set triangular distribution, in which I specifies the maximu

minimum and most likely value for each variable.

I ran the Monte Carlos Simulation with 100,000 trials. The following are some of its results:


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As can be seen that the expected stock price for ConocoPhillips with 90 percent certainty is from 15.1 to 90.42

mean value is 36.1 and median is 33.4. The current level of stock price is 63 and expected forecasted value is 5which are on far left tail of the distribution. Although, the current value is still in 90 percent confident range, th

downside risk is still potential because of the right skewness of the distribution and the far above expected valu

The table above is the scatter plot with fitted variable. The shape of fitted line indicates the concavity, which m

the change of one percent in explanatory variable and the percentage change of stock price is not indifferent al

with the line. For example, one percent change in WACC at lower 6% results in more drop in stock price than

percent change in WACC at above 8%.


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Additionally, the scatter plot and the correlation give information of the relevance in the model. The above cha

represents five most impact variables to the stock prices, ranking by correlation. Therefore, we need to pay mo

attention to those variables in forecast because their variation greatly impact the stock price.

The above chart represents the regression between the stock price and five most impacted assumption paramet

Price of Natural gas, Crude oil price in 2017, COGS in 2016, terminal growth rate and WACC. The R-square,

goodness of fit of each variable is equal to square of correlation. = . The beta coefficient indicates how

unit change of each variables results in unit change in ConocoPhillipss stock price.We see that, the slope of Natural gas price in 2017 is 21.6. It means, $1 increase in expected natural gas price

2017 results in 21.62 dollar increase in the stock price. In fact, if the expected price for natural gas in 2017

increased from $5.3 to $6.3, hold other variables constant, the expected price increased from 57.8 to 82.5, whi

increases by $24.7. On the other hand, if one dollar increase in crude oil, the result increase is just $1.17. For

WACC, if one percent increase in WACC, the result decrease in stock price is 1159% dollar or $11.59.


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Disclaim:Ownership and material conflicts of interest:The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company.The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the content or publication of thReceipt of compensation:Compensation of the author(s) of this report is not based on investment banking revenue.Position as an officer or director:The author(s), or a member of their household, does not serves as an officer, director or advisory board member of the subject company.Market making:The author(s) does not act as a market maker in the subject companys securities.Ratings guide:Banks rate companies as either a BUY, HOLD or SELL. A BUY rating is given when the security is expected to deliver absolute returns of 15% or greater over the nemonth period, and recommends that investors take a position above the securitys weight in the S&P 500, or any other relevant index. A SELL rating is given when theis expected to deliver negative returns over the next twelve months, while a HOLD rating implies flat returns over the next twelve months.Disclaimer:The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the authonot make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any invdecisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. Thisfor educational purpose only and should not be considered an investment recommendation.

duy.ngo_conocophillips stock - may 2013

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