Conoco cuts back on free-spending ways
SUCCESSFUL INVESTING by Andrew Leckey
Q. Can I expect my ConocoPhillips shares to improve in performance? — CG, via the Internet
A. The third-largest US oil company, an aggressive leader in acquisitions earlier in this decade, had to end its free-spending ways because of weak demand and low prices for oil and natural gas.
It will sell $10 billion worth of non-strategic or mature assets over the next two years and significantly decrease its capital spending. Operating with less than $1 billion in cash and more than $30 billion in debt, it has laid off thousands of workers and taken large write-downs.
"We will replace reserves and grow production from a reduced, but more strategic, base," said chairman and CEO James Mulva, who has not indicated whether the company's 20 percent stake in Russia's Lukoil Holdings might be a sale possibility.
Shares of ConocoPhillips are up three percent this year following last year's 39 percent drop. The company raised its quarterly dividend, which surprised some analysts who considered that extravagant in light of its other challenges.
Ranking behind ExxonMobil Corp. and Chevron Corp. in revenue and market capitalisation, ConocoPhillips has a much smaller cash reserve than those rivals because of its acquisition spending during the period of high demand and high commodity prices.
It focused on acquiring companies as competitors stressed exploration. Besides its purchase of a Lukoil stake in 2004, it made a $35 billion acquisition of US natural-gas producer Burlington Resources in 2006 and entered into an $8 billion joint venture in Australia last September to export natural gas.
Taking into account the positives of the company's significant holdings and cost-cutting potential, the consensus analyst opinion on ConocoPhillips stock is "hold", according to Thomson Reuters, consisting of two "strong buys", two "buys", 11 "holds" and one "underperform."
ConocoPhillips recently announced its second major oil discovery in a portion of the deep waters of the US Gulf of Mexico, though the extreme depth will present significant technical requirements. In addition, federal officials recently permitted ConocoPhillips and partner Anadarko Petroleum to pull together a number of Alaskan North Slope oil and gas leases into a new oilfield unit.
Earnings are expected to decline 67 percent this year, versus the 61 percent forecast for the major integrated oil and gas industry. Next year's projected 64 percent rise compares with the forecast of a 59 percent gain industry-wide. The expected five-year annualised decline of one percent compares with a six percent increase for its peers.
Q. What is your opinion of Calamos Growth & Income Fund? It was recommended to me. — VB, via the Internet
A. This hybrid fund maintains a fairly even split between convertible securities and growth stocks. Its goal is to exceed the results of Standard & Poor's 500 with less downside risk than that index.
The $3.7 billion Calamos Growth & Income Fund is up 39 percent over the past 12 months to rank in the top one percent of the moderate allocation category of Morningstar Inc. Its annualised return of one percent over the past three-year period places in the top 10 percent of that group.
"Convertibles, which are hybrid securities that have both debt and equity attributes, have been one of the best-performing asset classes this year after being beaten up last year," said Miriam Sjoblom, analyst with Morningstar Inc. in Chicago.
This fund has an outstanding record of beating the Standard & Poor's 500 over long periods, primarily because it cushions losses on the downside, Sjoblom explained. That's why an argument can be made for it as a defensive play. It should provide more upside potential than convertibles and less downside risk than growth stocks.
Calamos Growth & Income Fund, with seven co-managers that include John Calamos Sr. and Nick Calamos, has a consistent process and stable team of experienced convertible managers. Its convertibles, chosen through a combination of quantitative and fundamental analysis, are often low- and mid-quality issues from small and mid-cap firms. Managers regularly visit firms they invest in.
Among its larger sector weightings, energy represents 27 percent of the portfolio, with software at 13 percent and consumer goods at 11 percent. Stocks include Citigroup, Oracle, Cisco Systems, eBay and United Technologies. Preferred shares of Archer Daniels Midland and convertible securities of Freeport-McMoRan Copper & Gold are also top holdings.
The less than three percent of the portfolio in bonds has an average credit quality of BBB.
"This is one of our analyst picks," said Sjoblom.
"But if you're looking for a more traditional balanced fund that invests in stocks and bonds, you'll experience more volatility than that type of fund."
This 4.75 percent "load" (sales charge) fund requires a $2,500 minimum initial investment and has a one percent annual expense ratio.
Andrew Leckey answers questions only through the column. Address inquiries to Andrew Leckey, 555 N Central Ave., Suite 302, Phoenix, AZ 85004-1248, or by e-mail at andrewinv@aol.com
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