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ConocoPhillips (NYSE: COP)

Don’t Let High Oil Prices Get You Down

The age of cheap oil, which fueled economic growth and prosperity for the last century, has come to an end. Don’t blame speculators or big oil companies for the $100-plus prices. The hike is a result of diminishing supplies of cheap oil being replaced with oil in harder-to-reach places that cost more to produce and bring to market.

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THE AGE OF CHEAP OIL IS OVER

Every year, four million barrels of daily production are lost as a result of wells that run out of oil. They’ve been pumped dry after decades of delivering crude from the ground. This means that roughly 4-5% of annual production disappears every year.

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4 MILLION BARRELS OF OIL LOST

oil companies need to discover another 20 million barrels of daily production just to keep pace with current demand requirements. And that assumes no increased demand for oil, which is an unrealistic expectation.

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During the next five years,

I say that because in the past 30 years, oil consumption fell only twice. Those came during the recessionary periods of 1983 and 2009.

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Over the next 15 years, China’s oil consumption is projected to grow 7% annually or 15 million more barrels of oil a day than it does today. This will make China the biggest consumer of oil in the world, taking the lead ahead of the U.S. Americans are no slouches either. Despite President Obama’s focus on alternative energy, demand for oil by the U.S. grew 2% in 2013, the first time since 1999 and the most of any country—including China—according to the International Energy Agency (EAI).

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OIL CONSUMPTION ON THE RISE

So it’s clear that the thirst for energy and oil is going to grow in the coming decades. While renewable sources of energy are an exciting opportunity for the long term, they’re unlikely to have a material impact on the growing demand expected in coming decades.

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For investors, the solution is to add exposure to energy. The reason to be bullish on oil today is because we have likely reached the point of peak oil production, and will therefore see higher oil prices for the long term. This will benefit companies that are in the business of oil and gas production, exploration and services.

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ADD EXPOSURE TO ENERGY

So what looks like the best long -term energy play?

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No doubt you know ConocoPhillips (NYSE:COP), one of the largest oil companies in the world.

ConocoPhillips is a fully-integrated energy company with operations spanning the globe. The company has wide-ranging operations that begin with the exploration for oil and include every step in the process - production, refining, transportation and the ultimate sale of oil-based products such as gasoline.

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The company has around 18,000 employees in 29 countries. Oil continues to be a large part of the business, with gas and liquefied natural gas also playing a significant role. ConocoPhillips has added 850,000 acres since 2011 in North America. It is active in the major oil and natural gas finds including the Bakken, North Barnett and the Eagle Ford in the U.S; and in Muskwa, Montney, Canol Shale, and Duvernay in Alberta and British Columbia, Canada.

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AN EXPANSIVE GLOBAL PRESENCE

ConocoPhillips clearly benefits from a rise in oil prices, as seen in the fourth quarter and full-year 2011 financial results released in late January. Total revenues for the year rose 26.5% to $251 billion, while adjusted earnings doubled to $12.4 billion. While production fell slightly during the final three months of the year, this decline was offset by higher crude oil prices that improved margins and boosted earnings.

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Shares of ConocoPhillips represent a diversified investment on the future rise in the price of oil. Higher prices will translate into higher revenues and larger profit margins for the company. At the current price of roughly $100 per barrel, the company is operating with a 27% margin. Compared with its largest competitors, ConocoPhillips shares appear attractively valued.

The stock trades at 10.85 times forward earnings, compared with 12.42 for ExxonMobil and 10.85 for the major integrated oil and gas sector.

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A DIVERSIFIED INVESTMENT

The company also pays shareholders a healthy cash dividend of $2.76 per year, delivering a yield of 4.1% based on the current share price of $66. This yield puts ConocoPhillips ahead of such competitors as Apache (1.3%), Chevron (3.5%), and ExxonMobil (2.6%). It’s also noteworthy that the company has increased the dividend every year in the past 12 years.

Shares of ConocoPhillips have risen along with the price of oil. This

move has been similar for other oil and gas production and exploration companies, whether they’re fully integrated majors or juniors.

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SHAREHOLDER FRIENDLY

With several mega-cap integrated oil companies to choose from, we prefer one of the smaller ones – ConocoPhillips – based on its financial strength, reserve capacity and healthy dividend.

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Exposure to energy is a must for any long-term portfolio.

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