No Gusher Expected With ConocoPhillips Earnings Amid Weak Oil Prices

by Trefis Team
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ConocoPhillips (NYSE:COP) will release its Q1 results on Thursday, April 25. In its 2012 annual earnings conference call, Conoco noted that 2013 will represent a low point as far as production is concerned. This is largely due to an expected dip in production in the second and third quarters owing to seasonal factors and planned maintenance as well as asset sales. While the company produced 1,578 million barrels of oil equivalent (MBOED) in 2012, it estimates that production will total 1,475-1,525 MBOED in 2013. [1]

The discouraging Chinese economic data resulted in lower average year-over-year crude oil prices in the first quarter which will impact revenues negatively. However, higher Henry Hub natural gas prices will offset the impact to some extent. [2]

In the first quarter, there were some notable developments. Conoco reported major discoveries in its Shenandoah and Coronado prospects in the Gulf of Mexico. It also announced plans to boost investment in the North Slope fields in Alaska after the Alaskan Legislature lowered taxes on the oil industry. [3]

On the other hand, it suspended its plans to drill in Alaskan Arctic waters in 2014 because of uncertainties over federal regulatory and permitting standards. It also sold some aging oilfields in North Dakota and Montana to Denbury Resources Inc. for $1.05 billion. [4]

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The Gulf Of Mexico Discoveries

Last month, ConocoPhillips announced major oil discoveries from its Shenandoah and Coronado appraisals in the deepwater Gulf of Mexico. It holds a 30% working interest in both prospects. While the Shenandoah appraisal well encountered more than 1,000 feet of net pay in high-quality Lower Tertiary-aged reservoirs, the Coronado exploration well encountered more than 400 feet of net pay. Net pay refers to the thickness of a reservoir capable of producing commercially viable oil and gas. [5]

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. We expect the company to quantify this in the earnings conference call. 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. [6]

Sale Of Rockies Oilfields

The properties sold in North Dakota and Montana 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. [7] 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. These oilfields are in decline and Denbury Resources, the buyer, specializes in squeezing out oil from such fields by injecting carbon dioxide. Thus, the deal is a win-win for both sides.

In the earnings call, we will be watching out for announcements about the production potential of recent Gulf of Mexico discoveries and further asset sale plans, if any.

We have a Trefis price estimate for ConocoPhillips of $60, which will be revised once the earnings results are out.

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Notes:
  1. Q4 2012 Earnings Presentation, ConocoPhillips Website []
  2. Exxon, Chevron, Conoco: Q1 Earnings Preview, Seeking Alpha []
  3. ConocoPhillips to increase Alaska production, Bloomberg Businessweek []
  4. ConocoPhillips Suspends Its Arctic Drilling Plans, New York Times []
  5. ConocoPhillips Announces Second Oil Discovery in Deepwater Gulf of Mexico, MarketWatch []
  6. ConocoPhillips Announces Significant Oil Discovery in Deepwater Gulf of Mexico and Provides Program Update, ConocoPhillips News Release []
  7. Denbury to Buy Rockies Oilfields From ConocoPhillips, Bloomberg []
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