Thursday, February 28, 2008

here's another non-financial long idea - COP

looks like surprisingly strong natural gas prices are in-line with fundamentals: a decent winter most places, strong power generation demand, revival of industrial use(especially fertilizer?),large declines in lng, and tapering imports from canada have all conspired to offset healthy onshore production growth and lift natural gas prices to levels unexpected by most.

also looks like the huge, non-commercial (hedge fund) short position in natural gas is just only beginning to be unwound. i'd expect the hedge fund buying to cover to continue to support the natural gas rally.

cop's been ok for an energy stock. i don't own any, but am seriously considering it given that i believe cop might have some serious catching-up to do compared to other energy names.

cop is very well positioned in the us nat gas industry, and is the largest domestic producer of unhedged natural gas with a $strip approaching $10 per mcf. having the lowest component of PSCs for any major integrated oil company is also a plus. at some point, investors will see the benefits of $100+ oil and $10 nat gas. for awhile now, that leverage was masked by some dilutive events like venezuela, a canadian oil sands jv with encana and the oft-criticized burlington transaction. all of these events may soon slip from investors' minds.

cop recently announced healthy reserve replacement numbers. they most likely have rebuilt their domestic gas reserves, and increased their oil reserves with acreage in the deep gulf of mexico and alaska. cop's reserve replacement potential is underappreciated by the chronically negative wall street analyst community.

with high and rising commodity prices, decent reserve replacement, a large share repurchase program, and the seasonal strong refining season just ahead, i think cop can deliver excellent financial results short term and change investors minds about its longer term prospects. just a 10 p/e on a somewhat aggressive earnings estimate of $12 per share would yield a big trade in the stock, up some 40%.

cop, maybe deservedly so, has lagged its peer group the past couple years, if not in shareholder returns, in investor regard and relative valuations. it may be that cop and its shareholders are due for a big, positive change. execution is of course the key - if cop executes in this strong natural gas/oil/refining market environment, as i'm starting to expect it will, investor opinion and the stock price both have solid upside.

disclosure - MY opinions - do your own DD!

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