ConocoPhillips Undervalued Given Soaring Oil Prices

7/7 - "Coastal Caribbean Oil & Minerals Inc. Ltd., a development stage oil and gas lease administrator, controls large sections of oil and gas leases in Montana and North Dakota. Through a series of ventures and individually struck deals, the company effectively administers well over 120,000 acres of oil and gas leases. In 2008 and 2007, the company did not drill a well under its own auspices but rather “farmed-out” the work to others working within the region."

"For the most part, the company exists on royalty checks from the partners that it contracts or shares rights with...the company is receiving several nice checks on a regular basis. These checks may not be considered large by the usual oil and gas exploration measures, but since the company has next to no overhead (because of the way it has structured its agreements), it is experiencing solid results."

"The oil and gas game has been romantically linked to the “roughneck” and getting the oil and gas out of the ground, but, in today’s evolving oil and gas market, this notion has been modified...If an investor is willing to risk a paper cut to get into the oil and gas game, Coastal Caribbean may be one to take a look at."

7/4 - "Spectra has what appears to be a very assertive, yet stable, long term growth plan that is focused on organic growth and project development. This includes a very lucrative joint venture with Conaco Phillips and already transports some 12% of the natural gas consumed in the United States."

"Spectra Energy owns and operates critically important pipelines and related infrastructure connecting natural gas supply sources to premium markets. Based in Houston, Texas, the company operates in the United States and Canada approximately 18,000 miles of transmission pipeline, 265 billion cubic feet of storage, natural gas gathering and processing, natural gas liquids operations and local distribution assets."

"Pipelines are traditionally managed very conservatively, as is Spectra Energy, and make their money through cost-of-service contracts and other required services. This means that cash flow is relatively stable and predictable when compared to the market as a whole. This can be referenced by viewing the Beta coefficients of pipeline stocks which show significantly less volatility than the broader markets.

I have stated before, and I will state again that pipelines are great recession proof stocks...For those of you looking to preserve capital during these rough market times and collect a solid dividend, I highly recommend pipeline stocks. Along, with Spectra Energy I suggest looking at Trans Canada Pipeline (TRP)."

6/30 - "The stock has more than doubled from $30 to $75 in the last three months as excitement over the company’s ownership of land in the Haynesville Shale area has grown. The Haynesville Shale has got a lot of press of late as an area with substantial, albeit difficult to extract, gas reserves. Many naïve investors assume that the value of a company’s reserve position (i.e. the value of the estimated oil and gas under the land the company owns or leases) should translate into its market cap. What they neglect to take into account is that it takes a substantial amount of operational and capital expenditure to extract the reserves. With costs spiraling for exploration companies, the net value to equity investors may turn out to be next to nothing."

"Capital expenditure for the company is running well above D&A, and its free cash flow is hugely negative. The company plans to spend $350Mn on capital expenditures this year. The company’s current run rate suggests it will generate cash from operations of about $80Mn, so it will take on a substantial amount of debt to fund the capital program."

"Fair value for GDP stock: $18 (generous 25x multiple on ’09 EPS estimate of $0.73; valuation approximately 3x ’09 revenues)"

7/8 - "Recently, many investors have begun to speculate that the bull run in crude oil prices has reached bubble-like proportions. Some folks are saying that "speculators" have driven the price of crude to unsustainable levels and a painful correction is just around the corner...There's one sub-sector of the energy industry that would actually benefit big time from such an oil correction: Refiners."

"...profits at U.S. refinery operators plunged 98% in the first quarter because they were caught behind-the-curve on skyrocketing oil prices. Refiners have been raising prices to be sure. But they just haven't been able to hike prices for gasoline, heating oil, and jet fuel fast enough to keep up...These stocks have sunk 40% even as oil prices set new record highs. But the key to refinery profits is what's called the crack spread.

The crack spread is the theoretical profit margin a refiner should earn from processing three barrels of crude into two barrels of refined gasoline and one of heating oil. That spread has plunged 38% over the past year...But crack spreads, like so many relative price relationships in financial markets, are constantly shifting from peak to valley and back again...In the last month alone, refining company executives have purchased US$2 million worth of their own shares, according to Bloomberg."

"Unfortunately, there's no ETF I know of that gives you a broad based bet on the refining sector, at least not yet. Several leading refiners including Valero Energy (VLO) and Tesoro Corp (TSO) are among the stocks with big recent insider buys, according to Bloomberg...here's a pairs-trade twist that goes long-long — perfect for retirement accounts...Buy the ProShares UltraShort Oil & Gas (DUG), which is designed to go up in price as the overall energy sector declines. "