A lot of good things have happened at ConocoPhillips (COP 0.03%), but none of it matters because of one overriding issue. If you are trying to build a million dollar portfolio, this large energy company could help you get there. But you won't want to go all-in on just this one stock. Here's what you need to know.
There's good things happening at ConocoPhillips
At the end of May 2024, ConocoPhillips announced that it was planning to buy Marathon Oil. The deal was fully consummated at the end of Nov. 2024. From a big picture perspective that's pretty solid execution with regard to closing a big acquisition. That alone is a good thing.
Image source: Getty Images.
But the benefits of the Marathon Oil purchase are many. For starters, it pushes ConocoPhillips into the top tier of U.S. oil and natural gas producers, sitting in third place production wise. The combined business also has the second largest inventory of land to develop in the future. And all of the resources that ConocoPhillips added have a fairly low cost of around $30 per barrel of oil. Taken as a whole, it seems like a pretty solid deal, with ConocoPhillips production now 60% from the continental U.S. with the rest coming from Alaska and foreign countries.
That's not the only positive here, however. When ConocoPhillips announced the Marathon Oil transaction it also stated that it would both increase its dividend dramatically and increase its share buyback plans. When the energy company announced third quarter earnings it also announced that the dividend was being increased 34% and that it was upping its share buyback to $20 billion (roughly going from $5 billion a year to $7 billion), effectively living up to its promises. Not only are those positive outcomes for shareholders, but it is also nice to see the management follow through.
It would be understandable if investors saw all of these positives and thought about adding ConocoPhillips to their portfolio, perhaps hoping that stock gains would follow. Only ConocoPhillips stock is now more than 15% below its 52-week highs. The reason is pretty simple.
ConocoPhillips is still an energy company
No matter how much good news there is on the operating front at ConocoPhillips it can't escape the basic nature of the energy business it operates. As an upstream company it produces oil and natural gas. Oil and natural gas are commodities subject to swift and often dramatic price swings. The price of West Texas Intermediate (WTI) crude, a key U.S. oil benchmark, has been heading lower since April of 2024. And, thus, ConocoPhillips' stock price has been heading lower, too. It's almost as if the Marathon Oil acquisition didn't matter.
As the chart above highlights, ConocoPhillips' stock price generally tracks along with the price of oil over time. There's really nothing that the company can do about that because the price of oil and natural gas basically determine the company's revenues and earnings. Despite increasing production by 3% year over year in the third quarter, the 10% drop in the company's realized price resulted in earnings falling roughly 18% year over year. That's just par for the course in the energy patch.
This is where investors trying to build million dollar portfolios need to step back and think about what ConocoPhillips is actually offering as an investment. It has been executing fairly well and that could make it an interesting addition to a diversified portfolio. Effectively, it provides exposure to a key industry (energy) to which most investors should probably have exposure. But that industry is volatile and most investors should also tread carefully, limiting the money they allocate to the energy sector so that an industry downturn doesn't wipe out your millionaire dreams.
Buy ConocoPhillips, but buy with a hint of caution
There's nothing inherently wrong with ConocoPhillips. In fact, as highlighted, there are a lot of good things happening at the company right now. But it is still an energy company and the energy sector is volatile. The good company-specific news isn't enough to overcome the inherent volatility of energy stocks. Yes, ConocoPhillips could help you reach millionaire status, but the best way to invest in the stock is probably to include it in a diversified portfolio. Simply put, if you bet the house on ConocoPhillips you could end up losing that house, which is a risk that most investors won't want to take.
