Published: November 24, 2008

Between March and September, billionaire investor Warren Buffett picked up about 66 million shares (6%) of ConocoPhillips (NYSE: COP, $46.84), one of the world's largest integrated oil companies. What do Buffett and I like about this company?

To start, the firm's exploration and production (E&P) business has operations that span nearly two dozen countries around the globe. Last year, producing wells from Alaska to Libya spit out 854,000,000 barrels of oil and over 5 billion cubic feet (bcf) of natural gas daily.

As for reserves, the company still has a mountain of 10.6 billion barrels of oil equivalent (BOE) waiting underground, and exploratory drilling in Africa, the Middle East, the North Sea and many other regions should add to that total going forward.

Conoco is also the nation's second-largest refiner, with 12 facilities capable of processing and converting oil into gasoline, diesel fuel and other products. From there, the firm's marketing segment operates a chain of 10,500 wholesale and retail outlets (Conoco and Phillips66) throughout the U.S. and Europe.

Outside of this core business, the company also has extensive midstream natural gas gathering and processing assets and a massive petrochemicals division that produces $13 billion in annual revenues just by itself.

Added up, you're looking at a company that has generated $25 billion in operating cash flow over the last 12 months on revenues exceeding $230 billion. Over the past three months alone, Conoco has raked in enough cash to repurchase $2.5 billion worth of stock, dish out $700 million in dividend distributions, and still have over $4 billion left over to upgrade facilities and expand exploration activity.

Of course, the windfall of profits from soaring commodity prices has died down for the time being, with crude backtracking from $147 per barrel to around $50. But don't feel too bad for Conoco -- the firm still banked over $12 billion in profits last year by selling oil at an average price of $67 per barrel (with an average production cost of $7.21 per barrel).

In other words, Conoco will still be immensely profitable even if oil prices continue falling. But it's the firm's strategic partnerships that really help it stand out. Decades ago, global oil companies had a world of opportunities to explore. But now, only a small fraction of the planet's oil reserves are accessible, as most have been locked up by national oil companies (think Venezuela) trying to hoard their own supplies.

But Conoco has proven that it can be a valuable ally, particularly when it comes to extracting the oil/gas from new discoveries. That's why the company has been able to strike lucrative deals with state-owned companies in Brazil, Abu Dhabi, and Saudi Arabia, among other places. The firm also has a valuable 20% equity stake in Russian giant Lukoil, and its investment in that oil-rich country has yielded almost $2 billion in profits so far this year.

However, despite all this, the shares have been cut in half since this past summer and can now be had for just four times earnings -- about half the pricier multiples commanded by rivals like Chevron (NYSE: CVX) and ExxonMobil (NYSE: XOM).

Many companies might be toppled by this harsh economic downturn, but Conoco will not be one of them. Now is an excellent time to buy this world-class energy company (and its valuable untapped reserves and foreign partnerships) for a deeply discounted price.

Thanks to the sharp downturn, these shares offer an attractive risk/reward profile and a respectable yield. I see COP at this level as a blue-chip stock that you can sleep easy owning. I estimate its fair value at about $87, which means I'm optimistic for a potential gain of +86% from current levels.

Nathan Slaughter
Editor
Half-Priced Stocks

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About Nathan Slaughter

Nathan Slaughter has developed a long and successful track record over the years by investing primarily in deeply discounted securities. He uses advanced discounted cash flow techniques, along with a host of fundamental research, to uncover quality stocks that are trading well below their actual intrinsic value.

Nathan's previous experience includes a long tenure at AXA/Equitable Advisors, where he provided comprehensive investment advisory services to small businesses and high net-worth clients. He also honed his research skills at Morgan Keegan, where he performed asset allocation, retirement planning, and consultative portfolio management services.

Several years ago Nathan switched gears and decided to devote his time exclusively to financial analysis and writing. He has since published hundreds of articles for a variety of prominent online and print publications, and he now writes exclusively for StreetAuthority.com.

Nathan's educational background includes NASD series 6, 7, 63, & 65 certifications, as well as a degree in Finance/Investment Management. He currently resides in Shreveport, LA with wife Julie and sons Aidan and Riley. 

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