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Investment Overview for ConocoPhillips (NYSE:COP)
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Below are the key drivers for ConocoPhillips which present opportunities for upside or downside to the current Trefis price estimate for ConocoPhillips
- Crude Oil Price: The sales price of crude oil & natural gas liquids for ConocoPhillips increased from $56/bbl in 2009 to $97/bbl in 2011 and maintained levels in 2012. ConocoPhillips' stock price is highly sensitive to crude oil prices as the company derives over 40% of its value from the sales of these products. We expect crude oil prices to remain elevated (above $100/barrel) throughout our forecast period.
Demand from rapidly growing countries such as India and China is expected to keep prices elevated. The global fleet of vehicles is expected to grow by 60% from 1 billion today to nearly 1.6 billion by 2030. Vehicle density per 1000 people on the other hand will grow from approximately 50 to 140 in China and from 20 to 65 in India. If price increases are muted and prices remain around the $100 level mark in the long-term, there could be a downside of nearly 20% to our price estimate.
- Price of Natural Gas: ConocoPhillips' average selling price of natural gas increased from $4.40 per million cubic feet (Mcf) in 2009 to $5.64/Mcf in 2011 before plummeting in 2012 amidst an oversupply in the market due to the increased availability of shale gas. In 2001, approximately 1% of natural gas production came from shale sources. By 2011, this figure had increased to nearly 20%. The EIA estimates that global basins contain approximately 5,760 trillion cubic feet of shale gas reserves which add 40% to the world’s gas volumes. Technological improvements have helped improve the ability of companies to discover these new resources.
As a result of new discoveries of shale gas, there has been a decoupling between the prices of crude oil and natural gas. In the past, usually when oil prices increased, natural gas prices did so as well. However, in the past year, while WTI has increased 11%, natural gas prices have decreased by 1.3% with a greater decline over the past three years. We expect that natural gas prices will recover, albeit gradually, to the mid-$5 range by the end of the Trefis forecast period as additional demand comes from the power generation sector (which is switching to gas from coal) and other sources. However, if demand picks up further and prices rise above $7/Mcf there could be an upside of about 10% to our price estimate.
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ConocoPhillips is the third largest oil producing company in the world. After the spin-off of its midstream and downstream businesses into an independent company, Phillips 66, ConocoPhillips has become a pure-play exploration & production company. The company conducts exploration activities in 19 countries and supplements its income with equity stakes in other oil & gas and chemical companies. About 55% of its production consists of liquids and about 45% consists of natural gas. Of the 55%
that's liquids, about 30% is tied to Brent or international prices. The remaining 20% of liquids is tied to North American crude markers, NGL or bitumen prices. On the natural gas side, about 45% of its portfolio, roughly 20% consists of international gas.Price differentials between Brent and West Texas Intermediate (WTI), a widely used North American crude marker, have been rising of late. This leads to wide disparity in realized prices for different grades of crude oil. Similarly, the difference between the company's domestic and international gas prices is huge. For 2012, the average realized price for WTI crude was $90/bbl while it was $110/bbl for International and Alaskan crude. The average realized price for natural gas was $2.49 for the North American market while it was $12.31 for the International market.The respective prices for NGL and Bitumen were $46/bbl and $54/bbl.
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Crude Oil and Natural Gas Liquids production and sales is the most valuable segment for ConocoPhillips. Its value comes from the following sources:
Significant production capacity
The company has significant crude oil and natural gas liquids production capacity. As a result of this we estimate that it will be able to sell well in excess of 200 million barrels of crude oil and natural gas liquids over the next few years. Coupled with high crude prices, this will translate into significant cash flows for the company.
Crude prices stronger than natural gas
Crude oil prices have been elevated of late and we expect them to remain at over the $100/bbl for the foreseeable future. Conversely, natural gas prices have been depressed in the U.S. market as a result of oversupply from shale gas sources. Accordingly, Crude Oil & NGL has been a more lucrative business for the company.
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Increasing costs associated with upstream activities
According to a recent report by IHS, global upstream capital and operating expenditures are expected to
reach a record of $1.23 trillion for 2012 and rise to $1.64 trillion in 2016.
The capital expenditure for 2012 was $14 billion, while that for the next 5 years has been pegged at $15 billion annually.
Due to various new finds offshore, oil and gas producers are increasingly focusing on offshore projects to boost their reserves. According to IHS findings, onshore projects command the largest share of capital expenditures but offshore projects are expected to outpace the growth in capital expenditures compared to onshore projects going forward. Capital expenditures on offshore projects are expected to increase 58% from 2011 to 2016 compared to 39% for onshore projects.
This is due to several reasons:
Increasing commodity prices:
Prices of items such as fuel, chemicals, steel and other inputs have risen sharply in the last few years as demand grew in emerging markets. Some refineries typically use 5-7% of their feedstock as fuel to run refineries. Firms are increasing focus on energy efficiency to drive this downComplexity of projects:
Various oil companies have embarked on projects in the unconventional space. It includes oil extracted from deepwater regions, oil sands, oil shale, and oil obtained by conversion of gas to liquids (GTL). Some of these resources are located in geographically and geologically complex locations and require a lot of technological innovation and ingenuity. This has led to longer development timelines which have, in turn, resulted in higher costs.
Peak oil
It is estimated that a large part of the world's oil reserves have already been discovered. Recent statistics have indicated that global consumption has been outpacing reserve additions. Peak oil is a commonly used term to describe the point at which world oil output will reach a maxima and decline afterwards.
However, many institutions such as the International Energy Agency (IEA) believe that peak oil will not occur for another 25 years at the very least. Many governments across the world are promoting alternative energy measures to ensure that supply is able to keep pace with demand.
Improvements in technology
Due to limited underlying growth in product demand, there has been a tendency in recent years to increase the complexity of refineries rather than expand their capacity. In the US, no new refineries have been built since 1980. However, improvements in process design and technology has seen refining capacity increase by around 1% per year.
The refineries that were established earlier were mainly used to process light sweet crude resulting in an increase in demand for the latter. With oil prices climbing to record highs in recent times, heavy crude oil is becoming more economically attractive. There has been an increasing interest in the development of new cost-effective methods which will allow economical extraction and transportation of heavy crude oil for refining into valuable light and middle distillate fuels.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
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