ConocoPhillips May Face Cost Overruns in Australia

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ConocoPhillips (NYSE:COP) may see costs from its multi-billion dollar Australian LNG project escalate in the future as players compete for materials to complete $180 billion worth of projects by 2017. [1] A report from Standard and Poors warned that the credit quality of Australian LNG projects could be negatively impacted by project delays and cost overruns. [2] The scale of the projects in the pipeline could also expose them to execution risks that can hamper plans. ConocoPhillips has a 42.5% stake in the $20 billion Australia Pacific LNG project. Competitor Chevron (NYSE:CVX) is also going ahead with its $37 billion Gorgon and $29 billion Wheatstone projects.

We have an $80 price estimate for ConocoPhillips which is 20% ahead of its current market price.

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Costs escalate

The scale of the projects in Australia could drive up project costs due to a shortage of materials and equipment. According to Jefferies, the projects at Curtis Island in Queensland could see costs shoot up by 15%. [1] The analysts also estimated that Chevron’s Gorgon project could end up costing $40 billion by the time the project is finished because of delays resulting from cyclones last year, although the company maintains that the project costs are not expected to escalate. [3] ConocoPhillips may also see costs from its project in the region shoot up as well. (See: Slice of missing MF Global customer cash may be in Britain)

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Notes:
  1. In LNG, Good Things Come To Those Who Wait?, WSJ [] []
  2. Australian LNG Developments Face Credit Risks Delays S&P Says, Bloomberg []
  3. Chevron sees no cost increase at $37 bln Gorgon LNG, Reuters []