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(B)(N) COP ConocoPhillips

December 13, 2012

Deal Book. The fabled oil company, ConocoPhillips, is taking extraordinary – and one could say  “iconoclastic” – measures in order to “increase shareholder value” (Company “mission statement” of October 24, 2010, ConocoPhillips Takes Steps to Increase Shareholder Value) which is a dramatic reversal of the previous policy of growth by acquisition, joint ventures and new businesses, many of which are now for sale in the pursuit of “shareholder value”. We are the beneficiaries for now but the increasing gap between the ambient stock price and the price of risk or Risk Price (SF) (please see Exhibit 1 below) needs to be earned and one wonders how that might be possible and even if it is possible.

For example, it seems a rather basic observation about business in general that if we can’t sell what is on the shelf, then we might have to sell the shelf, so to speak, if we are marching to someone’s quarterly drum beat. And there appears to be no shortage of “things” to sell such as, for example, the spin-off of its refinery arm, Phillips 66 (NYSE: PSX), in April 2012 which (it is said) “created” $20 billion of “shareholder value” ($15 per share) while keeping the market value of ConocoPhillips about the same at $70 billion. And then we have for sale widespread interests in the Canadian oil sands, Lukoil (Russia), the North Caspian Sea (Kashagan), and Peru (please see the company announcements for more details) to which we can also add share buybacks of currently $5 billion and an increased stock dividend $2.64 per share or $3.2 billion per year and a current yield of 4.5% which is well above the current rate of inflation.

We have bought and held ConcoPhillips in the Perpetual Bond™ since $30 in 2009 and still hold it at $57 (please see Exhibit 1 below, Red Line above the Black Line which is the Risk Price (SF)) but stock prices above the price of risk are provably an “economic free good” and (as we said) need to be earned and the investors who are willing to buy and hold the stock at these prices believe that they will be earned absent the unexpected and unknowable such as, for example, the oil spill in China’s Bohai Bay in 2011 (Forbes, April 30, 2012, ConocoPhillips Pays Up $297 Million For China Oil Spill) which seems to have knocked off as much as $10 per share or $12 billion from the “market value” of the firm for a short period of time.

Our mandatory protection is two-fold. The current stop/loss due to volatility is set at minus ($7.50) (please see our Post, Popoviciu’s Volatility, September 2012) but that’s a lot to lose if we were just buying the stock at $50 or more instead of taking profits. Alternatively, the May 2013 put at $55 is available for $2.20 per share today and we can partially offset the cost of that by shorting (or selling) the opportunistic call at $60 for $1.55 per share so that for a net cost of $0.65 per share ($2.20 less $1.55) we can lock in the current price at no less than $55 and no more than$60 for the next six months and, of course, collect our quarterly dividends of $0.66 per share while we wait and think about this investment.

That kind of consideration absent bravado and a gambling spirit would have saved the vaunted Berkshire Hathaway Incorporated $2.5 billion in 2008 when the stock price collapsed from $60 to $30 (adjusted for dilution) within six months of their buying it. For example, they could have executed the put and recovered their $60 per share or sold the put and doubled the size of their share holdings with their profits in the face of calamity.

We hope, of course, that the Risk Price (SF) which is currently $42 and up from $32 in 2010 but down from $44 last year will rise to meet the stock price (please see our Post, The Nash Equilibrium & Its Stock Price, October 2012) but, at the moment, we simply don’t know and we have, therefore, made sure that it doesn’t matter. Anything else would be a gamble, wouldn’t it.

Exhibit 1: (B)(N) COP ConocoPhillips – Risk Price

(B)(N) COP ConocoPhillips

ConocoPhillips operates as an integrated energy company organized into Exploration and Production, Midstream, Refining and Marketing, Lukoil Investment, Chemicals, and Emerging Businesses segments.

(Please Click on the Chart to make it larger if required.)  Stock prices are adjusted for 40% dilution since 2008 despite multi-billions of dollars of share buybacks.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of  investment lore. We have just one product

The Perpetual Bond™
“Alpha-smart with 100% Capital Safety and 100% Liquidity”
Guaranteed
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.

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