ConocoPhillips Reports Light Results But Major Projects Are On Track

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ConocoPhillips (NYSE:COP) released its Q4 2012 results on January 30. This was the first full annual result for ConocoPhillips as a pure-play upstream segment company.

ConocoPhillips reported adjusted earnings of $1.76 billion for the quarter, up 3% from $1.7 billion sequentially and down 14% from $2 billion year-over-year. The earnings declined year-over-year due to lower liquids prices and higher Depreciation, Depletion & Amortization (DD&A) expense, which was offset to some extent by higher sales volumes. [1]

While ConocoPhillips produced 1,578 million barrels of oil equivalent (MBOED) for the year, this includes assets that were sold off or will be sold going forward and so adjusting for these assets production was 1,497 MBOED. For 2013, the company estimates that production will total 1,475-1,525 MBOED, primarily due to an expected dip in production in the second and third quarters owing to seasonal factors and planned maintenance. [2]

While the average realized crude prices showed marginal change from last year, the prices of natural gas in North America as well as the prices of Natural Gas Liquids (NGLs) and bitumen were significantly lower. While the lower natural gas prices could be attributed to oversupply, bitumen prices were lower due to a lack of adequate refining capacity for heavy grades of oil. Low prices for bitumen are expected to persist for another quarter till additional refining capacity comes online.

ConocoPhillips completed asset sales worth $2.1 billion in 2012 and announced agreements for further asset sales worth $9.6 billion. The proceeds from these sales will primarily be directed towards executing its drilling programs and major growth projects. While ConocoPhillips admits that 2013 will represent a low point as far as production is concerned, it is still confident of meeting its long-term growth target of 3-5%.

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Which Assets Is ConocoPhillips Selling?

ConocoPhillips generated $2.1 billion through sales in 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, but no sale has gone through yet. 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. (See ConocoPhillips In 2013: More Asset Sales, Focus On North American Business)

A few days back, it also announced the sale of some oilfields in North Dakota and Montana for $1.05 billion. The deal is expected to be closed in the first quarter of 2013. The company is now including production from Algeria, Nigeria and Kashagan in its discontinued operations section for the current and future quarters. ((ConocoPhillips Announces Agreement to Sell Cedar Creek Anticline Properties for $1.05 Billion, DailyFinance))

The company has an annual capital expenditure target of approximately $15 billion for the next three years. It also needs to maintain the dividend it pays to investors. ConocoPhillips seems to be moving away from projects in regions with high political risk and uncertain regulatory environments. It is instead concentrating on projects in North America and Australia- regions with stable governments and predictable regulatory frameworks. Also, the shale boom in the U.S. and the long term potential of the oil sands business in Canada might have prompted a shift in focus. These regions will require ConocoPhillips to undertake sustained investment over the next few years.

Major Growth Projects On Track

Conoco’s major growth projects around the world remain on track. It stands to benefit from its assets in the liquid-rich Eagle Ford and Bakken shale plays in the U.S. and is ramping up production in there areas.

Conoco continues to explore in deepwater regions in the Gulf of Mexico, and is drilling at the Coronado and Shenandoah prospects. It now holds 1.9 million acres in the deepwater regions of Gulf of Mexico. It is also developing a large seam coal gas project in Australia, and exploring in deepwater areas in Malaysia, Indonesia and Bangladesh.

The company reported total reserve additions of 859 million barrels of oil equivalent (MMBOE) in 2012. This brought its total reserves to 8.6 billion barrels of oil equivalent (BBOE) at the end of 2012. To put this figure in perspective, the total production in 2012 stood at 604 MMBOE. ConocoPhillips is thus replenishing its reserves faster than the depletion rate.

Despite a strong asset base, like any other pure upstream oil and gas player, ConocoPhillips remains vulnerable to the volatility in oil and gas prices. These are influenced by global macroeconomic factors. A downtrend in the global economy will have an impact on the demand-supply dynamics of oil and gas, hurting the sales prices for crude oil and natural gas.

We have a Trefis price estimate for ConocoPhillips of $62 which will be revised shortly in view of the recent earnings results.

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Notes:
  1. ConocoPhillips Q4 2012 Earnings Conference Call, Seeking Alpha []
  2. Q4 2012 Earnings Presentation, ConocoPhillips Website []
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