ConocoPhillips (NYSE:COP)

Present Value of Free Cash Flow to Equity (FCFE)

In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Free cash flow to equity (FCFE) is generally described as cash flows available to the equity holder after payments to debt holders and after allowing for expenditures to maintain the company asset base.

Intrinsic Stock Value (Valuation Summary)

ConocoPhillips, free cash flow to equity (FCFE) forecast

US\$ in millions, except per share data

Year Value FCFEt or Terminal value (TVt) Calculation Present value at 19.27%
01 FCFE0 1,450
1 FCFE1 1,463 = 1,450 × (1 + 0.92%) 1,227
2 FCFE2 1,538 = 1,463 × (1 + 5.13%) 1,082
3 FCFE3 1,682 = 1,538 × (1 + 9.35%) 992
4 FCFE4 1,910 = 1,682 × (1 + 13.56%) 944
5 FCFE5 2,250 = 1,910 × (1 + 17.78%) 932
5 Terminal value (TV5) 177,529 = 2,250 × (1 + 17.78%) ÷ (19.27%17.78%) 73,561
Intrinsic value of ConocoPhillips common stock 78,738

Intrinsic value of ConocoPhillips common stock (per share) \$59.70
Current share price \$86.74

Based on: 10-K (reporting date: 2020-12-31).

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.

Required Rate of Return (r)

 Assumptions Rate of return on LT Treasury Composite1 RF 2.13% Expected rate of return on market portfolio2 E(RM) 11.52% Systematic risk of ConocoPhillips common stock βCOP 1.83 Required rate of return on ConocoPhillips common stock3 rCOP 19.27%

1 Unweighted average of bid yields on all outstanding fixed-coupon U.S. Treasury bonds neither due or callable in less than 10 years (risk-free rate of return proxy).

3 rCOP = RF + βCOP [E(RM) – RF]
= 2.13% + 1.83 [11.52%2.13%]
= 19.27%

FCFE Growth Rate (g)

FCFE growth rate (g) implied by PRAT model

ConocoPhillips, PRAT model

Average Dec 31, 2020 Dec 31, 2019 Dec 31, 2018 Dec 31, 2017 Dec 31, 2016
Selected Financial Data (US\$ in millions)
Dividends paid 1,831  1,500  1,363  1,305  1,253
Net income (loss) attributable to ConocoPhillips (2,701) 7,189  6,257  (855) (3,615)
Sales and other operating revenues 18,784  32,567  36,417  29,106  23,693
Total assets 62,618  70,514  69,980  73,362  89,772
Common stockholders’ equity 29,849  34,981  31,939  30,607  34,974
Financial Ratios
Retention rate1 0.79 0.78
Profit margin2 -14.38% 22.07% 17.18% -2.94% -15.26%
Asset turnover3 0.30 0.46 0.52 0.40 0.26
Financial leverage4 2.10 2.02 2.19 2.40 2.57
Averages
Retention rate 0.79
Profit margin 1.34%
Asset turnover 0.39
Financial leverage 2.25

FCFE growth rate (g)5 0.92%

Based on: 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31).

2020 Calculations

1 Retention rate = (Net income (loss) attributable to ConocoPhillips – Dividends paid) ÷ Net income (loss) attributable to ConocoPhillips
= (-2,7011,831) ÷ -2,701
=

2 Profit margin = 100 × Net income (loss) attributable to ConocoPhillips ÷ Sales and other operating revenues
= 100 × -2,701 ÷ 18,784
= -14.38%

3 Asset turnover = Sales and other operating revenues ÷ Total assets
= 18,784 ÷ 62,618
= 0.30

4 Financial leverage = Total assets ÷ Common stockholders’ equity
= 62,618 ÷ 29,849
= 2.10

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.79 × 1.34% × 0.39 × 2.25
= 0.92%

FCFE growth rate (g) implied by single-stage model

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (114,405 × 19.27%1,450) ÷ (114,405 + 1,450)
= 17.78%

where:
Equity market value0 = current market value of ConocoPhillips common stock (US\$ in millions)
FCFE0 = the last year ConocoPhillips free cash flow to equity (US\$ in millions)
r = required rate of return on ConocoPhillips common stock

FCFE growth rate (g) forecast

ConocoPhillips, H-model

Year Value gt
1 g1 0.92%
2 g2 5.13%
3 g3 9.35%
4 g4 13.56%
5 and thereafter g5 17.78%

where:
g1 is implied by PRAT model
g5 is implied by single-stage model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5g1) × (2 – 1) ÷ (5 – 1)
= 0.92% + (17.78%0.92%) × (2 – 1) ÷ (5 – 1)
= 5.13%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 0.92% + (17.78%0.92%) × (3 – 1) ÷ (5 – 1)
= 9.35%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 0.92% + (17.78%0.92%) × (4 – 1) ÷ (5 – 1)
= 13.56%