I've been investing in ConocoPhillips (COP) going back to when the price was below $60-per-share. Back then the PE ratio was around 9 and the forward PE was around 7.

The price of oil at that point was $50-a-barrel and natural gas was at $5 per MMbtu. Take a look at where the price of natural gas has gone since then:

click to enlarge

This chart is less familiar then the oil charts and it graphically illustrates why companies like COP are poised to make unprecedented net profits in the months to come.

Remember, this is a company that operates in six segments: Exploration and Production (E&P), Midstream, Refining and Marketing (R&M), LUKOIL Investment, Chemicals and Emerging Businesses. E&P segment explores for, produces and markets crude oil, natural gas and natural gas liquids. It also mines deposits of oil sands in Canada to extract the bitumen and upgrade it into a synthetic crude oil.

The Emerging Business segment is an overlooked and undervalued aspect of this behemoth energy giant.

This segment develops new technologies and businesses. It focuses on the power generation; development of carbon-to-liquids technology through coal and petroleum coke; and alternative energy and programs, such as advanced hydrocarbon processes, energy conversion technologies, new petroleum-based products, and renewable fuels.

It also offers E-Gas, a gasification technology that produces high-value synthetic gas. As of December 31, 2007, the company had 8.72 billion barrels of oil equivalent of proved reserves. The natural gas reserves the company has is not as easily measured. Are all these revenue streams factored into the current share price?

According to the company website the company has total worldwide natural gas production of 4,970 MMCFD. Indicators are that natural gas production would increase as the price of natural gas moves continually higher.

Keep in mind that back on March 31, 2006, ConocoPhillips completed its $33.9 billion acquisition of Burlington resources, one of the world's largest independent oil and natural gas exploration and production companies. This year will see a marked acceleration in positive results from this lucrative acquisition.

In early 2007, ConocoPhillips expanded its position in the Canadian oil sands business by creating an integrated heavy-oil business with EnCana Corporation (ECA) of Canada. The business includes ventures engaged in heavy-oil production in Canada and heavy-oil processing in the United States.

No wonder their operating cash flow (ttm) is approaching $25 billion and their levered free cash flow is almost $17 billion. Their total cash (most recent quarter) was still up around $1.42 billion, and with every passing quarter I anticipate that to grow greatly.

This is a company with a book value per share of over $58 and a new 52-week high share price of $92. So COP is still selling at less than 2 times their book value.

And even at $92-a-share the forward PE is close to an inexpensive 8 times earnings. The question might be asked, "Will COP test it's 50 and 200-day moving average price of around $83? Probably so, and that might be a good entry point.

My contention is that the current price-per-share underestimates the earning power and operating margins of ConocoPhillips. With oil reaching new all-time highs and natural gas likely to be higher by next winter, this company's bottom-line numbers are very likely to surprise to the upside for a number of future quarters.

Disclosure: Long

• Gulf Island Fabrication, Inc. Q2 2008 Earnings Call Transcript  »
• McMoRan Exploration Co. Q2 2008 Earnings Call Transcript  »
• Cano Petroleum Misses Again: Crisis and Opportunity  »
• Oil Price Targets   »
• Trading Places: Energy and Financials  »

Marc Courtenay

• Bio & more articles
• Visit: CheckTheMarkets.com