Stock pick: Consider ConocoPhillips for southern exposure on energy

Cashing in on the shale boom

Chart showing trailing 12-month stock performance of ConocoPhillips

Just because Canada is home to so many energy companies doesn’t mean you should only own domestic oil and gas stocks. In fact, thanks to the U.S. shale boom, a lot of southern energy stocks are outperforming Canadian ones.

ConocoPhillips (NYSE: COP) is one company investors should consider. The Houston-based oil and gas business has assets all over the world, but its more local plays have been giving the business a big boost.

On April 25, the company revealed its first quarter earnings and total net revenue came in at about $16 billion, up 10% from last year at this time.

While first quarter production averaged about 1.53 million barrels of oil equivalent per day (Mboe/d) — up 3% year-over-year — crude oil production in its Eagleford and Bakken Shale plays, in Texas and North Dakota, respectively, increased by 41%. Scott Hanold, an analyst with RBC Capital Markets, wrote in a May 2 report that company will likely increase production growth by 20% to 25% in these two regions over the next year.

Overall, he thinks ConocoPhillips can produce 1.54 Mboe/d in 2014, though he does point out that production will be shut down in certain places in Alaska, Canada, the U.K. and Australia for 36 days this summer for upgrades. That will slow production dramatically, but it should bounce back in Q4.

The company is also expanding more internationally, writes Hanold. It plans to allocate 15% of its annual budget to overseas exploration activities.

The best case scenario would see the company’s production growing by 3% to 5% annually, says Hanlon. To hit the top end of that growth estimate, shale projects will need to see more development and other projects in the Gulf of Mexico and Australia will have to see “successful realizations… that could provide an additional significant potential upside to our valuation assessment.”

The downside is falling energy prices, which is always a risk, and international projects that end up performing worse than expected. Hanlon, though, is optimistic that the company will only improve from here.

It’s currently trading at $76 a share, but he has an $85 12-month price target. He increased it from $83 on May 2. The mean price target is even higher at $88, while the most optimistic estimate is $103, according to S&P Capital IQ.