Goldman Sachs Neil Mehta believes ConocoPhillips (NYSE:COP) offers compelling relative and absolute valuation, especially given share price underperformance in 2016.
Mehta upgraded the rating on the company from Neutral to Buy, while raising the price target from $47 to $54.
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The analyst believes ConocoPhillips offers the most attractive free cash flow yield among its large cap U.S. majors and E&P peers.
The companys capex is expected to remain low, while oil prices are expected to normalize over 2017-2020 to above $50/bbl WTI.
Mehta sees the company as a solid capital allocation story, with COP growing the dividend, reducing its share count and paying down debt, partly through asset sale proceeds.
ConocoPhillips underperformed during 2016, largely due to its 66 percent dividend cut. However, capital returns are expected to grow again in 20172018, with annual dividend growth of 510 percent and share buyback of $1 billion per year.
There remains skepticism about COPs ability to execute its $5$8 billion asset sale program by YE2017, based on investor conversations. That said, we see this level as achievable given the companys track record of asset sale success, particularly in natural gas, the analyst went on to say.
Despite the capital spending of only $5 billion, Mehta believes the company could grow its production each year through the end of the decade.
At last check, ConocoPhillips shares were up 2.03 percent at $46.68. The United States Oil Fund LP (ETF) (NYSE:USO) was also up, moving upward by 1.45 percent, and seen at $10.48.
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