ConocoPhillips’ Sale Of Canadian Oil Sands Asset To Boost Returns

ConocoPhillips (NYSE:COP) recently announced a deal with ExxonMobil (NYSE:XOM) and Imperial Oil to sell all of its Clyden oil sands leasehold in Canada. Valued at $720 million, the deal is part of an ongoing restructuring activity at ConocoPhillips as the company focuses on increasing investment in the development of higher growth projects and reducing its operating risk. So far, the company has announced expected proceeds of about $13.5 billion from the sale of non-strategic assets in 2012 and 2013. We expect the ongoing restructuring activities to yield higher return on assets for ConocoPhillips in the long run. ((ConocoPhillips Announces Agreement to Sell Clyden Oil Sands Asset, www.conocophillips.com))

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ConocoPhillips is moving ahead on the agenda of increasing its focus on the development of higher margin and lower risk projects. The company has announced asset sales in Algeria, Nigeria and Kazakhstan to focus on projects based in regions with stable governments and predictable regulatory frameworks such as North America and Australia. (See: ConocoPhillips In 2013: More Asset Sales, Focus On North American Business) The sale of Canadian oil sands leasehold is however aimed at balancing its portfolio and investing in higher margin U.S. shale plays. According to the 2012 annual report, more than 25% of ConocoPhillips’ proved reserves are present in Canada. The company currently holds ~1.1 million net acres of land in the Athabasca Region of northeastern Alberta, which are expected to contain ~16 billion net barrels of resources. Moreover, investment in these assets is not as lucrative as the development of shale oil plays in the U.S., such as the Eagle Ford, Bakken and the Permian basin, which are yielding much higher margins. This can be attributed to both improvements in well productivity in these fields as well as better price realizations compared to heavier crude oil recovered from the Canadian oil sands.

ConocoPhillips’ second quarter earnings also reflected the impact of increased investments in the development of U.S. shale plays in the Lower 48 segment. The Lower 48 business is organized within four regions covering the Gulf Coast, Mid-Continent, Rockies and San Juan. The production of liquids from the Lower 48 grew 20% y-o-y during the second quarter, which now represent ~50% of total hydrocarbons produced by the segment. Liquids-rich plays in the Eagle Ford, Bakken and the Permian basin delivered 203 MBOED (thousand barrels of oil equivalent per day), up 47% y-o-y. Eagle Ford production increased ~100% year-over-year to 121 MBOED, which now represents 25% of the total Lower 48 production. This allowed the company to record ~$3 per barrel cash margin expansion year-on-year despite almost flat price realizations. This is also the reason why the company spent almost two and a half times the capital on Lower 48 region than on developing the Canadian assets for the first six months of this year. ^[1]

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1. Company SEC Filings, sec.gov [↩]