ConocoPhillips (COP Quick QuoteCOP - Free Report) is currently considered relatively undervalued, trading at a trailing 12-month enterprise value to EBITDA (EV/EBITDA) of 5.11x. This figure is below the broader industry average of 10.98x. This discounted valuation suggests that the stock may offer the potential for further price appreciation.

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However, a thorough evaluation is necessary to assess whether this potential is backed by the company’s fundamentals, growth prospects and prevailing market conditions. A more in-depth analysis will help determine the stock's true value.

COP's Low-Cost Inventory Drives Competitive Advantage

ConocoPhillips has extensive oil and natural gas resources that it can develop, earning substantial profits, even if the price of oil declines. The upstream player had claimed on its first-quarter earnings call that it had identified sufficient oil and gas resources that could be developed and produced for decades, which would be highly economical.

The leading upstream player is confident that it will conduct the extraction, development and delivery of the oil to the market profitably even if the price of West Texas Intermediate oil falls to as low as $40 per barrel. Thus, ConocoPhillips has a significant competitive advantage, especially when the pricing environment of oil becomes challenging.

The company’s low-cost resources, which it highlighted in the transcript, are available both in the international market and the United States. ConocoPhillips seems more confident with the resources in the United States, which it calls the Lower 48, comprising the prolific shale regions like the Permian Basin, Eagle Ford and Bakken. This clearly shows that ConocoPhillips’ business model remains resilient, enabling it to navigate the volatile and uncertain business environment, securing shareholders’ cash flows.

Marathon Oil Acquisition Strengthens COP’s Upstream Presence

The acquisition of Marathon Oil late last year has strengthened ConocoPhillips’ upstream presence in the Lower 48, comprising prolific shale plays like the Delaware Basin, Eagle Ford and Midland Basin. With the acquisition, COP has been able to enhance its scale, production capacity and operational efficiencies since the resources of Marathon Oil closely complement the existing assets of the upstream giant.

EOG Resources Inc. (EOG Quick QuoteEOG - Free Report) is another exploration and production company with a strong footprint in the Delaware Basin and Eagle Ford shale play. In 2024, most of EOG’s upstream operations were conducted in both the shale plays. Chevron Corporation (CVX Quick QuoteCVX - Free Report) is also an energy major with a strong presence in the Permian – the most prolific play in the United States – of which Delaware is a sub-basin. The Permian basin has been contributing significantly to CVX’s total production volume.

COP’s Impressive Reserve Replacement & Capital Efficiency

Last year, ConocoPhillips successfully replaced an impressive 244% of the produced oil and natural gas. The replacements primarily came from discoveries, the acquisition of Marathon Oil and the drilling of new wells. Interestingly, COP’s organic reserve replacement was a remarkable 123%, meaning that by excluding the impact of the Marathon Oil acquisition, the company was able to replace reserves just from their discoveries and drilling operations.

In this context, EOG Resources’ name is worth mentioning. EOG’s 201% reserve replacement (excluding price changes) suggests that it was able to replace twice as much of its produced oil and natural gas in 2024. The story, however, was disappointing for Chevron. CVX highlighted that its 2024 proved reserves declined 11% year over year. 

Now, let's focus on ConocoPhillips’ capital efficiency, as reflected in the fact that the company only allocates capital projects in key regions like the Permian, Eagle Ford and Bakken, which command short payback periods and high margins.

Should You Bet on COP?

Like EOG Resources and Chevron, COP is strongly committed to returning capital to shareholders. Considering the dividend yield picture, COP’s 3.41% yield is higher than the 2.35% yield of the composite stocks belonging to the industry. While EOG’s yield is currently 3.28%, Chevron’s is 4.56%.

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Also, COP’s total debt-to-capitalization of almost 27% is lower than almost 50% of the industry’s composite stocks. Thus, the robust financial position will aid the leading oil producer to combat periods of an unfavorable business environment.

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Despite all the positive developments, ConocoPhillips’ upstream operations, like EOG and CVX, remain highly exposed to the volatility in oil and natural gas prices due to the very nature of its business model. Furthermore, ConocoPhillips predicts only a small increase in the production of oil and gas in 2025, much less than the strong growth seen last year. This likely indicates that the upstream energy company, which declined 12.1% in the past six months, is being more cautious because of uncertain market conditions.

Thus, investors shouldn’t rush to bet on the stock right away, despite attractive valuations. Those who have already invested should retain the stock. COP currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.