ConocoPhillips: High Oil And International Gas Prices To Boost Results

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ConocoPhillips (NYSE:COP) will declare its Q3 results on Thursday, October 25. Conoco’s earnings results should be boosted by the high oil prices in the past few months. On the other hand, production is expected to be lower due to normal field decline, dispositions, reduced production in China and natural gas curtailments in North America. Conoco had already sold assets worth $1.6 billion in the first half of 2012, out of the $8-10 billion worth of asset sales targeted for 2012 and 2013. The assets sold included its Vietnam business as well as the Alba and Statjford fields in the North Sea. The company said that the fall in production due to asset sales might range between 25,000 to 75,000 BOE (barrels of oil equivalent) per day. Conoco aims to produce around 1.5 million BOE per day for the foreseeable future. [1]

ConocoPhillips spun off its refining, transport and chemicals business into a separate entity on May 1, 2012. [2] The newly formed company is called Phillips 66 after the company’s popular retail brand and focuses on the growing pipeline and chemicals business. ConocoPhillips itself is now a pure-play exploration and production firm. It is engaged in the exploration, production and marketing of crude oil, natural gas liquids, natural gas and bitumen.

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How Prices Will Impact Results

To give an idea of how much ConocoPhillips stands to benefit from increased oil prices, it might be instructive to first look at a break-up of its business. About 55% of Conoco’s production consists of liquids and the remaining 45% consists of natural gas. Of the 55% that’s liquids, about 30% is tied to Brent or international prices. The remaining 25% of liquids is tied to North American crude markers, NGL or bitumen prices. On the natural gas side of the business, which constitutes about 45% of its portfolio, roughly 20% consists of gas sold internationally. [3]

Price differentials between Brent and West Texas Intermediate (WTI), a widely used North American crude marker, have been rising of late due to low WTI prices. This leads to wide disparity in realized prices for different grades of crude oil. The price disparity is being driven by an oversupply of WTI bench-marked oil at the storage facility located in Cushing, Oklahoma. The oversupply is being caused by the imported crude oil from Canada and the shale oil produced in North Dakota arriving at this facility. Also, while there is demand for this oil from refineries located on the Gulf Coast, there is a lack of sufficient pipeline capacity to transport it from Cushing. Since almost half of Conoco’s output of crude oil is tied to WTI prices, this places it at some disadvantage.

The average realized prices of gas in domestic and international markets show a wide disparity. In Q2 2012, while Conoco sold gas in the U.S. at $1.93 per tcf (thousand cubic feet), it sold gas in the international market at $11.69 per thousand cubic feet. [4] Natural gas prices in the U.S. are low due to the shale gas revolution, which has resulted in oversupply.

International gas prices are high due to the cost of transportation associated with supply over long distances, costs associated with liquefaction and re-gasification in case of LNG(liquefied natural gas) as well as the strong demand from emerging countries. Keeping in mind the anticipated future demand from Asia, Conoco is adding LNG facilities in Australia and is engaged in the construction of an expensive pipeline from its fields in the North Slope of Alaska. [5] This pipeline will take the gas southward to an Alaskan port and condense it into LNG, for export. [6]

Bright Long Term Outlook

Apart from projects mentioned above, ConocoPhillips is developing a large seam coal gas project in Australia, and exploring in deepwater areas off the Gulf of Mexico, in Malaysia, Indonesia and Bangladesh. It has production operations in Nigeria, Libya, Algeria ad Russia. It is also sitting on vast reserves of oil sands in the Alberta province of Canada. By some estimates, these reserves may contain up to 15 billion BOE. [7]

Most of its reserves are now located in regions which are politically stable and non-risky. This gives a sense of security in an industry where nationalization of resources is common, especially in non-democratic countries. ConocoPhillips has already faced such a situation in the past in Venezuela. [8]

We will be concerned primarily with the negative impact on earnings expected to be caused by field decline, asset dispositions and natural gas curtailments in North America. We think that high oil and international gas prices will most probably outweigh this negative impact and result in an overall increase in revenues.

We have a Trefis price estimate for ConocoPhillips of $63 which will be revised shortly after the earnings report is out.

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Notes:
  1. Q2 2012 10-Q Filing, SEC Website []
  2. Phillips 66 Looks to Pipes to Blunt Refining Volatility, Bloomberg []
  3. ConocoPhillips Business Summary, Trefis []
  4. Second Quarter Conference Call Presentation, ConocoPhillips Website []
  5. Alaska’s Plans To Export LNG To Asian Markets Is Huge For Oil And Gas Majors, Trefis []
  6. ConocoPhillips Adds To LNG Facilities In Australia On Expected Asian Demand, Trefis []
  7. An Indian Consortium Shows Interest In ConocoPhillips’ Alberta Oil Sands Assets, Trefis []
  8. ConocoPhillips Wins A Significant Victory In Ongoing Arbitration Battles With Venezuela, Trefis []
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