ConocoPhillips’ Gulf Of Mexico Discovery Will Help It Hit Growth Targets

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ConocoPhillips (NYSE:COP) announced a major oil discovery from its recently drilled Shenandoah appraisal in the deepwater Gulf of Mexico. According to the company, the Shenandoah appraisal well encountered more than 1,000 feet of net pay in high-quality Lower Tertiary-aged reservoirs. Net pay refers to the thickness of a reservoir capable of producing commercially viable oil and gas.

ConocoPhillips holds a 30% working interest in Shenandoah. Other co-owners are Anadarko (30%), Cobalt International Energy, L.P. (20%), Marathon Oil Company (10%), and Venari Offshore LLC (10%). Conoco also has a 30% working interest in the Coronado prospect located nearby. The exploration data from here is still being evaluated. The company owns 1.9 million acres altogether in the Gulf of Mexico. [1]

From the information given so far, it is not clear how many barrels of oil are expected to be produced. However, the net pay data indicates that the number would be substantial. The discovery is significant because Conoco has been selling assets in some geographies and investing the proceeds into exploration in other areas, particularly shale assets and the Gulf of Mexico.

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ConocoPhillips’ Growth Targets

Conoco has an annual capital expenditure target of approximately $15 billion for the next three years to meet its stated long-term production and margin growth target of 3-5% per year. The company is planning to spend 15% of its 2013 capital budget or nearly $2.5 billion on long-term exploration and appraisal projects designed to deliver growth 2017 and beyond. It has also vowed to maintain the 4.5% dividend it pays to investors. ((Q4 2012 Earnings Presentation, ConocoPhillips Website))

Thus, 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.

In line with this strategy, Conoco completed asset sales worth $2.1 billion in 2012 and has announced further sales deals worth $9.6 billion dollars. This includes its assets at Kashagan in Kazakhastan, Algeria, Nigeria and Cedar Creek. The proceeds from the sales are specifically to be directed towards executing its drilling programs and major high-margin growth projects. [2]

Some of its major growth projects are in the liquid-rich Eagle Ford and Bakken shale regions in the U.S. and the Gulf of Mexico. The latest Gulf of Mexico discovery augurs well for the future of the company. Apart from helping it meet Conoco’s long-term goals, it will help replace the loss in production capacity and oil reserves arising out of asset sales.

We have a Trefis price estimate for ConocoPhillips of $60.

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Notes:
  1. ConocoPhillips Announces Significant Oil Discovery in Deepwater Gulf of Mexico and Provides Program Update, ConocoPhillips News Release []
  2. Howard Weil Energy Conference, ConocoPhillips Presentation []