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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.
Trefis Forecast Rationale for Natural Gas Sales Volume
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${forecast} refers to the total quantity of natural gas sold per year by ConocoPhillips.
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${forecast} increased marginally from 1,811 billion cubic feet in 2006 to 1,855 billion cubic feet in 2007 due to higher production but decreased to 1,765 billion cubic feet in 2008. The production decrease was primarily attributable to field decline and unplanned downtime across the US due to hurricane disruptions. The decrease in production in 2010 was due to the production sharing arrangements as a result of higher prices. It declined to 1,372 in 2011.
Going forward, we expect the ${forecast} to increase to naerly 1,800 billion cubic feet by the end of the Trefis forecast period.
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Trefis considered the following factors for its forecast
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- Improvements in technology will help to increase production
- A better understanding of unconventional gas resources and advances in horizontal drilling and improvements in technology have been key in increasing the size of and productivity of recoverable resources. A recent report issued by the Energy Information Administration (EIA) indicated that it expects US domestic natural gas production in 2012 to be up nearly 4% from 2011 levels. In its October
2012 ‘Short-Term Energy and Winter Fuels Outlook report, the EIA said that it expects natural gas production in 2012 to rise by 2.6 bcf (billion cubic feet per day) to a record 68.8 bcf per day.
- Increase in reserves
- Global natural gas reserves have steadily increased over the years. According to BP, at end of 2011, global proved reserves were estimated at about 208.4 tcf (trillion cubic feet).
- Advances in technology and increases in commodity prices have lead to countries increasing exploration both onshore and offshore.
- Countries like Brazil are becoming increasingly promising in terms of offshore activity. Similarly other countries such as Venezuela, Peru etc. are also seeing increased interest in offshore activity.
- ConocoPhillips' Gas Assets
- ConocoPhillips' website gives the following description of its natural gas producin assets.
- In the San Juan Basin, one of the largest U.S. natural gas producing areas, ConocoPhillips is the leading acreage holder and largest producer. The basin holds considerable remaining potential, with 1.7 billion BOE of discovered resources.
- In March 2012, Alaska’s governor announced the state had forged a settlement of the disputes relating to plans for development of the Point Thomson Unit. The settlement agreement provides for both the near-term development plan for the Point Thomson Field and potential subsequent development alternatives. The Point Thomson natural gas resource is significant to a potential major North Slope gas project development. ConocoPhillips owns approximately 5% of working interest in the Point Thomson Unit. Coincident with the Point Thomson settlement, ConocoPhillips, with ExxonMobil, BP and TransCanada (through its participation in the Alaska Pipeline Project) announced that they have agreed on a work plan to assess an LNG export project, with the ultimate goal of commercializing North Slope natural gas resources.
- North American natural gas is now available in abundance as production from shale has become technically and economically viable. North America is believed to hold nearly a century’s supply of natural gas. ConocoPhillips holds assets in Bakken, Permian and Eagle Ford Basins.
- In 2011, it added significant acreage in shale plays around the world. In addition to its North American activities, it executed an agreement in Australia to farm-in to 11 million acres with 75 percent working interest in an exploration shale play. It also increased exploration and delineation drilling activity in existing shale plays.
- At the end of 2011, the company's proven natural gas reserves stood at 3.486 billion BOE.
- Natural Gas is considered environmental friendly source of energy
- Natural Gas is considered to be the world’s third largest source of energy after oil and hydro power.
- Its use as a cleaner source of fuel compared to other alternatives is a reason why governments are encouraging the production of it and use over coal or oil as a source of energy generation.
- Growth in power generation to fuel natural gas demand
- Natural gas remains one of the primary sources for power generation. IEA anticipates that gas demand in the power sector will grow by a CAGR of 1.7% between 2007 and 2030 and will represent 41% of total gas demand in 2030. According to EIA estimates, the natural gas share of electric power generation is expected to increase from 24% in 2010 to 27% in 2035. The estimates also conclude that over the next 25 years, the share of coal in the production of electricity is expected to fall to 39%, much lower
than the 49% share that existed in 2007. The use of natural gas and renewable and stricter policy regulations will help lower the need for coal.
- In countries such as Indonesia and Pakistan, the use of natural gas is being encouraged by governments in a bid to reduce oil consumption and reduce emissions.
- Increased drilling efficiency to boost production
- Improvements in the efficiency of drilling techniques, most notably in the production of natural gas from shale formations has helped boost production. Shale gas has also been the primary source of the recent growth in the US recoverable natural gas resources.
- Growth in pipeline network will lead to higher demand
- Pipeline expansions has helped drive production increases as natural gas can be transported at further distances and in more remote areas. In the US pipeline construction activity has consistently grown.
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- Hurricane induced production outages
- The Gulf of Mexico and the Gulf Coast in general is home to a large portion of the domestic oil and gas production, processing and transportation facilities.
- This area is also often affected by hurricanes which impact production. Potential hurricane threats would likely reduce the supply of gas in the market. In the past, hurricanes Katrina and Isaac have caused frequent production outages in the Gulf of Mexico region.
- Weak economic recovery will lead to slow production growth
- Shallow water operations are more likely to be affected by the economic downturn than the deep water areas, since the lease arrangements for the deep water areas are typically longer and projects take more time to develop.
Back to Company OverviewHow 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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