Should You Buy ConocoPhillips With Oil Below $75 a Barrel?

On Feb. 27, oil markets closed with West Texas Intermediate (WTI) crude oil at about $67 a barrel, and a share of ConocoPhillips (NYSE: COP) could be bought for less than $113.

As of June 22, WTI costs just a little more than $74 a barrel -- 10% more expensive -- while Conoco stock has fallen below $110, 2.5% cheaper than four months ago.

And I ask you: Does this make sense?

Image source: Getty Images.

How risky does the world feel to you?

Consider the situation in the Persian Gulf right now. Six weeks of fighting ended (sort of) with a ceasefire announced on April 8, followed by a "memorandum of understanding" officially ending the conflict on June 17. As of today, the U.S. naval blockade of Iran has ended, and the Strait of Hormuz is open (except when it isn't).

Does all of this feel only 10% more dangerous to you than how things stood on Feb. 27?

Because the world feels about twice as dangerous, and oil prices about twice as uncertain -- and I'm about as confident in the prospects for lasting peace in the Mideast as I've ever been.

Which is to say, not confident at all.

How likely is it that oil prices stay low?

Oil today costing only 10% more than it did four months ago makes little sense given:

• The continued perilous situation in the Gulf
• The depleted state of oil reserves around the world after being denied resupply from the Gulf for the past four months
• And the tens of billions of dollars of damage done to oil production facilities in the Gulf nations, which will have to be repaired (and those repairs paid for), and which will slow oil production

Going forward, I expect the wartime trend of countries cutting back on oil use to conserve supplies will reverse now that oil is flowing (somewhat) again, thereby increasing demand. Turbocharging this trend will be countries that drained their reserves during the war, attempting to restock supplies now that the war is subsided This added demand is likely to drive oil prices even higher.

What this means for ConocoPhillips stock

All of this is good news for ConocoPhillips stock.

Priced at $133.6 billion in market capitalization today, Conoco stock trades for about 18.3 times trailing earnings. Even with a 3.1% dividend yield, this seems expensive if Conoco's earnings over the next five years grow only at the 10% rate that Wall Street analysts forecast (according to data from S&P Global Market Intelligence). These analysts expect Conoco's earnings to fall next year, however -- which is the opposite of what I think will happen. If oil prices instead rise as I expect, Conoco's earnings could outperform estimates.

And Conoco stock could be even cheaper than it looks.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends ConocoPhillips. The Motley Fool has a disclosure policy.