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One of the Safest and Best Ways to Earn High Energy Income

By Matt Badiali, editor, S&A Resource Report
Friday, February 18, 2011

Here's where it gets tough for investors...
 
As longtime DailyWealth readers know, you can make huge gains as a stock goes from "bad to less bad." But should you buy at "things are great" levels?
 
In the depths of the credit crisis, I recommended buying shares of supermajor oil producer ConocoPhillips to readers of the S&A Resource Report. Shares had been clobbered and were trading for around $46.
 
We endured a small dip just after purchasing the stock in February 2009, but as you can see from the chart below, it's been a big run higher ever since. The past five months in particular have been incredible for this income producer...
 
Should You Buy ConocoPhilips (COP) at These Levels?
 
Before we say ConocoPhillips' run has pushed the stock too high to buy, let's take a closer look...
 
From 2000 to today, ConocoPhillips grew its reserves 65% from 5 billion barrels to 8.3 billion barrels. Its oil reserves grew 40%, and its natural gas reserves grew 128%. (In contrast, ExxonMobil barely grew its oil reserves and only grew its gas reserves by one-third.)
 
ConocoPhillips also has an aggressive growth strategy. It plans to spend $12 billion (of its $13.5 billion capital budget) on exploration and production. Nearly half of that money is going to North America... and the Eagle Ford shale in particular.
 
The Eagle Ford is arguably the largest oil and gas field discovered in the lower 48 states in the last 30 years. ConocoPhillips owns 254,000 acres in the heart of the play. Developing that field will be a major focus for the company this year.
 
We can buy ConocoPhillips' existing reserves for $13 per barrel of oil equivalent. That's cheaper than either ExxonMobil or Chevron. And the stock trades at 9.6 times its 2010 earnings... below its 10-year average of 11.6 times earnings.
 
So ConocoPhillips is a solid, growth-focused oil producer trading at a good price. Now here's where it gets really interesting, especially for income investors...
 
In 2010, ConocoPhillips paid out 88% more cash to shareholders than it did in 2005 – about $3.2 billion total. And it has increased its dividend every year for the past five years by an average 12% per year. It sports a current yield of 3.6%.
 
What you might not know is that it bought back another $2.6 billion of shares. By reducing shares outstanding, the company increased the value of the shares we owned. That added an extra 4% boost to our yield.
 
The company plans to buy back another $10 billion of shares this year. Between actual dividends and share repurchases, that would give us a combined annual return of 13% at the current price.
 
So... do you buy here? Well, I like the stock even at this price. But crude oil could drop. And stocks in general have skyrocketed since September. This is a recipe for a short-term correction in ConocoPhillips shares.
 
If the stock declines 8%-10% in the next month or two to the $68 area, I'll like it even better. At that price, I'd recommend loading up... and collecting big oil dividends.
 
Good investing,
 
Matt Badiali




Further Reading:

"It's like insurance against rising oil prices down the road," Matt writes. "And it pays a nice 6.9% dividend while we wait." Read more about master resource investor Rick Rule's "oil insurance" idea here: A High-Income Bet on Rising Energy Prices.
 
There's another resource pick that Matt believes has huge upside. He calls this company "the ExxonMobil of uranium." His subscribers are up 63% in six months on the play, but he sees even more profits ahead. Learn more here: The Best Place in Resources to Potentially Make 200%-Plus.

Market Notes


WHY YOUR PORTFOLIO MIGHT BE "SUPERCONCENTRATED"

Today's chart is a reminder of a major trend nobody is talking about... one we're calling, "Stocks or commodities... what's the difference?"
 
You see, most folks view a position in commodities like crude oil or copper as a way to diversify their wealth away from stocks. And oftentimes, it is. But these days, stocks and commodities have joined at the hip to form one huge "risk on, risk off" trade. This trade rises and falls according to the state of global economic growth.
 
For a picture of this idea, we present a chart plotting the performance of benchmark commodity index CRB (the black line) since September alongside the performance of the benchmark stock index, the S&P 500 (the blue line). As you can see, the two indexes are exhibiting the same trading pattern... and sport the same gains since the market bottomed last fall.
 
This incredible correlation is worth keeping in mind when studying your portfolio. If a big "risk off" selling whim strikes the market, both stocks and commodities will decline. And that "diversified" portfolio you thought you had? It will turn out to be "superconcentrated."

Stocks and commodities are moving in lockstep

In The Daily Crux



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