Let us look at Conoco again after the rumors that Warren Buffett is doing something with the stock. We will key off our analysis from FY08 Q2 report as well as FY07 annual report.
Let us look at the proven reserves and the estimated cash flows from proven reserves. Conoco provides an estimate using 2007 year-end prices and costs (adjusted only for existing contractual changes), appropriate statutory tax rates and a prescribed 10 percent discount factor. It also assumes continuation of year-end economic conditions. The calculation is based on estimates of proved reserves, which are revised over time as new data become available. The future cash flows has been trending up primarily because of the increase in crude prices. It has jumped from 51 billion to 67 billion dollars from 2006 to 2007.
In Q2 conference call, the management said that there wont be any more major acquisitions in the near future as it won't provide additional value to share holders. Also ,at the end of Q2, the book value was close to $62/share. Of this, $20 billion came from the Lukoil investment. This has fallen somewhat since the Russian invasion of Georgia and also the subsequent oil price drop. It is likely that oil prices will remain high in the future as there are no significant new discoveries to offset depleting oil fields. COP is also in talks with Petrobras to do some joint venture in some areas ( specifics not known ). The company is also spending significant amount of cash to buy back shares.
The oil prices have since jumped up by about 15% since the end of 2007. This has led to the decline in usage of oil in the US by about 3% year over year. COP has also allocated about $10 billion to buy back its shares. This combined with the increase in gas prices lead one to believe that book value of COP will keep increasing at a steady pace through this year and next.
From a price to cashflow as well as price to book perspective, COP looks more attractive compared to the other oil majors at this point in time.