Goldman Sachs Upgrades ConocoPhillips (COP) to 'Buy' and Adds Stock to Conviction List

(Updated - November 28, 2016 8:32 AM EST)

Goldman Sachs upgraded ConocoPhillips (NYSE: COP) from Neutral to Buy with a price target of $54, implying upside of 20%. The stock was also added to the bank's Conviction List. Analyst Neil Mehta said he sees "compelling" valuation.

"Three factors drive our upgrade: (1) COP offers the most attractive free cash flow yield among large cap US majors/E&Ps, as we expect capex to stay low and 2017-2020 oil prices to normalize to above $50/bbl WTI; (2) we see a solid capital allocation story, with COP growing the dividend, reducing its share count and paying down debt, partly through asset sale proceeds; and (3) COP offers compelling relative and absolute valuation, especially given share price underperformance in 2016 (lagging XLE by 22% YTD)," said Mehta.

Discussing catalysts for shares, Mehta said, "COP underperformed in 2016, largely on the back of its 66% dividend cut, but we expect capital returns to grow again in 2017-2018, with 5%-10% annual dividend growth and a $1 bn/year buyback. We also expect continued deleveraging, reducing investment risk ... There remains skepticism about COP’s ability to execute its $5-$8 bn asset sale program by YE2017, based on investor conversations. That said, we see this level as achievable given the company’s track record of asset sale success, particularly in natural gas."

"Despite only $5 bn in capital spending, we believe COP will grow its production every year through the end of the decade, led by APLNG, the Eagle Ford, Canada oil sands and conventional projects, including in Alaska/Europe/Asia," added the analyst. "That said, if oil prices stay low, we believe COP can trade defensively given valuation/FCF support."

For an analyst ratings summary and ratings history on ConocoPhillips click here. For more ratings news on ConocoPhillips click here.

Shares of ConocoPhillips closed at $45.75 yesterday.

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