Wednesday, September 13, 2006

COP Valuation

In the previous article we looked at COP as a company. In this article, we will try to put a off the cuff valuation for COP.

The average selling price for a barrel of crude was $50=00 and $6=00/mcf for natural gas in the first six months of the year respectively*. Net income in this period was 8.4 billion dollars. Subtracting capex and adding back depreciation and amortization to the net income produces a figure of 3.4 billion for the first six months of operation. Using a cost of capital of 0.08, this puts the earning power value of COP at 85 billion for an entire year. If one adds the book value to the EPV, the intrinsic value of COP with no growth is 68% undervalued compared to its market price today.

Let us assume lower selling prices for crude and natural gas as exploration and production constitutes 62% of COP's net income. Let us assume a 20% decline in prices for crude oil and natural gas. This puts the price of crude at $40=00 and $4.8/mcf for natural gas respectively. This reduction in crude and natural gas prices will put COP income at 7.4 billion for the first six months. Subtracting capex and adding back amortization and depreciation, we get an EPV of 60 billion. Adding in the book value gives a value of 137 billion. This is a 43% appreciation potential to intrinsic value.

This represents an intrinsic value for COP in the range of $83-$98. The current price of $58=00 represents a significant discount to the current trading value.

*The crude oil and natural gas prices are at the high end of the spectrum from COP 10-Q for the first six months and our estimate is very conservative.

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