ConocoPhillips Sheds Oilfield Assets In Rockies To Refocus Exploration Efforts

ConocoPhillips (NYSE:COP) is selling some oilfields in North Dakota and Montana to Denbury Resources Inc. for $1.05 billion. These properties cover an area of roughly 86,000 acres and net production from them averaged 13,000 barrels of oil equivalent (BOE) last year. ConocoPhillips’ worldwide production averages between 1.5-1.6 million BOE per day. ^[1] Although Conoco’s major assets in North Dakota and Montana are shale gas assets under the Bakken formation, these were not a part of the deal.

The deal will help ConocoPhillips in optimizing its portfolio to meet its growth and dividend targets. It will also help in financing its capital expenditure commitments over the next three years. The assets in question here are a part of its overall asset divestiture program.

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The Thought Process Behind The Deal

The deal is a win-win for both sides owing to the nature of the assets in question. These oilfields are in decline, nearly exhausted even, from the point of view of conventional extraction methods. However, Denbury specializes in squeezing out more oil by injecting carbon dioxide into fields and expects to extract 140-180 million barrels of oil from the acquired assets.  It also has a ready supply of carbon dioxide available near the acquired properties and has prior experience in carrying out such activities in the Gulf of Mexico. The shale assets owned by ConocoPhillips in the same region use hydraulic fracturing to extract oil. This technology involves the use of a mixture of sand, water, and chemicals rather than carbon dioxide. ^[2]

The returns from extraction of shale oil are more lucrative over the long term than those from declining conventional oilfields. This explains why ConocoPhillips chose to sell the latter.

The Larger Picture

There are good reasons as to why ConocoPhillips is on a selling spree. It wants to shed its non-core businesses and generate funds for capital spending in areas with high growth potential. This will help the company in achieving its target production growth rate of 3-5% per year. The company has an annual capital expenditure target of $15 billion for the next three years. It also aims to pay a dividend yield of 4.5% to investors.

Both of these objectives need significant cash flow generation, which can be achieved only if the company sells off unproductive or non-core assets. Including this deal, Conoco has already managed to generate $12 billion from asset sales thus far, exceeding its initial stated target of $8-10 billion. (ConocoPhillips In 2013: More Asset Sales, Focus On North American Business, Trefis)

ConocoPhillips generated $2.1 billion through sales in the first nine months of 2012 and sealed another deal to sell its stake in the Kashagan oil field for $5 billion, to Indian state-owned oil company ONGC. It also invited bids for a partial stake sale in its Canadian oil sands assets, and was reported to have received a $5 billion bid from an Indian consortium led by ONGC. It has also agreed to sell its Algerian business unit to Indonesian state-owned oil and gas company Pertamina for $1.75 billion. The deal is expected to be closed in mid-2013. Its Nigerian oil fields will be sold for $1.8 billion to Oando Energy Resources, which aims to become one of Nigeria’s top oil explorers and producers.

ConocoPhillips has been betting big on shale and Gulf of Mexico deepwater assets. The cash generated from this deal can be used to acquire more acreage in the unconventional space.

On account of this deal, Conoco expects to record an after-tax net earnings benefit of approximately $120 million in the fourth quarter of 2012. ^[3]

We have a Trefis price estimate for ConocoPhillips of $62, which will be revised after the fourth quarter earnings results.

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1. Denbury to Buy Rockies Oilfields From ConocoPhillips, Bloomberg [↩]
2. ConocoPhillips, Denbury deal plays to strengths, MarketWatch [↩]
3. ConocoPhillips Announces Agreement to Sell Cedar Creek Anticline Properties for $1.05 Billion, DailyFinance [↩]