ConocoPhillips (COP): Three Reasons to Buy this Oil and Gas Company

Natural gas prices have been steadily rising over the last year, and ConocoPhillips (NYSE:COP) witnessed a 6% improvement in its cash margins in the last quarter as a result. The company produces around 40% natural gas, while petroleum liquids account for the rest. This allows ConocoPhillips to perform in line with the rising gas prices. Here are three reasons why ConocoPhillips appears to be a solid investment option.

Beneficiaries

Since rising gas prices are an industry-wide advantage, all major oil and gas producers with significant natural gas production stand to benefit here. Anadarko Petroleum Corporation (NYSE:APC) and Eni SpA (ADR) (NYSE:E) perfectly fit the criteria. Eni produces around 51% natural gas, while petroleum liquids account for the rest. On the other hand, Anadarko is the world’s largest natural gas producer by volume, and produces only a fraction of petroleum liquids.

Both Anadarko and Eni are jointly developing the world’s second largest liquid natural gas (LNG) export terminal in Africa, with an estimated development cost of $50 billion. Once the facility is fully operational, Anadarko and Eni would be catering to rising energy demands in Asian and African countries. This would further position both companies towards natural gas, thus allowing them to profit with rising gas prices.

However, I personally prefer ConocoPhillips (NYSE:COP) over its peers. It is the largest natural gas producer in North America, and recently received the regulatory approval to expand its Freeport LNG export terminal. It’s a well known fact that LNG exports from the continent have been bottlenecked due to the lack of liquefaction facilities. Once the expansion work is complete, Freeport LNG terminal would have the capacity to export around 13.2 million tons of natural gas annually.

This would create a strain on the domestic natural gas supply and further push up its prices. This way ConocoPhillips (NYSE:COP)can enjoy higher profits on its domestic gas supply while its exports would capture the international pricing differential.

Aggressive expansions

Besides that, ConocoPhillips would also be spending $15.8 billion on North American capital projects in 2013 alone. Around $6.32 billion has been earmarked for the expansion of existing assets, while around $5.5 billion would be used for Norweigian and Malaysian projects. The remaining budget has been allocated for exploration and drilling related activities.

On the expansion side, ConocoPhillips (NYSE:COP) is heavily investing in the hydrocarbon rich Niobrara region. By the end of 2013, the company plans to drill 32 wells in the region, out of which it has already drilled three wells in the first quarter.