ConocoPhillips’ European Assets To Boost Earnings Growth Next Year

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ConocoPhillips

Quick Take

  • ConocoPhillips has delivered impressive production growth from its Lower 48 development program over the past few quarters.
  • However, the company’s overall volume performance has been rather flat this year, primarily because of falling production from its European assets.
  • We believe that the recently started projects in the U.K. and Norway would improve ConocoPhillips’ performance in Europe next year and boost its earnings growth potential through higher volumes and better price mix.

The past few quarters have highlighted ConocoPhillips’ strong performance in the development of unconventional onshore plays in the U.S, while production from the company’s European assets has fallen sharply due to heavy maintenance activities and normal field declines. However, we expect European operations to provide a growth impetus to ConocoPhillips’ total net production next year, as the company recently started production from two new projects in the region. Furthermore, better price mix due to higher commodity prices internationally should also boost earnings growth for the company.

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Our $80 price estimate for ConocoPhillips is almost 10% above its current market price.

See Our Complete Analysis For ConocoPhillips

Despite soaring production volumes from unconventional plays in the U.S., ConocoPhillips’ total net production during the first nine months of the year has been largely flat year-on-year. This is because higher production volumes from the Lower 48 and Asia-pacific regions were mostly offset by normal field declines and heavy maintenance activities at the European fields. While total net production from the Lower 48 and Asia-Pacific, and the Middle East regions grew by 8% and 9% respectively, it declined by more than 21% from the company’s European operations. [1] ConocoPhillips recently started production from two new projects in Europe and is working towards starting up another one by early 2015. Below, we take a look at each of these projects in detail.

Jasmine In The U.K.

ConocoPhillips recently started production from the Jasmine gas and condensate field in the “J-Block” area of the central U.K. North Sea. With a gross capacity of 140,000 barrels of oil equivalent per day (boed), it is considered to be the largest discovery in the U.K. since the mid-1990s. ConocoPhillips is the operator of the field with a 36.5% interest. Eni (33%) and BG Group (30.5%) are the other partners in the project. The company expects net production from the field to be around 40,000 barrels of oil equivalent per day (BOED) in 2014. [2]

Ekofisk In Norway

ConocoPhillips also started oil production from the Ekofisk South development project in the Norwegian North Sea recently. Having been in operation since 1971, Ekofisk is one of the oldest oil field complex in the North Sea, made up of four producing fields: Ekofisk, Eldfisk, Tor and Embia. Start-up of Ekofisk South development project increased the productive life of the Ekofisk field by another 40 years. [3] The project includes planned drilling of 35 new production wells and eight water injection wells over a period of time, and is expected to reach a production capacity of around 70,000 boed. [4]

Apart from this, the company is also working on the development of Eldfisk II, which will help in tapping additional reserves in the Eldfisk field. This project is expected to come online by early 2015. ConocoPhillips is the operator of the Greater Ekofisk Area with a 35.1% interest. Total (39.9%), Eni (12.4%) and Statoil (7.6%) and Petoro (5%) are the other partners in the area. The company expects these development projects offshore Norway boost its production output by 60,000 BOED by 2017. [5]

Not Just Production Growth

In addition to providing a boost to ConocoPhillips’ net production volume, the above projects will also improve price realizations for the company, as commodity prices are more attractive in international market than in the U.S. Just to provide some perspective, ConocoPhillips’s average natural gas sales price for the first nine months of the year was just $3.48 per thousand cubic feet in the Lower 48 and Latin America operating regions, compared to $10.53 in Europe. Similarly, crude oil realizations will also improve for the company with a higher proportion of international sales, as the WTI benchmark, which is used in the pricing of domestic crude oil, continues to trade at a discount to the Brent crude oil benchmark followed internationally. [6]

We therefore believe that the start-up of these projects will greatly improve ConocoPhillips’ performance in Europe next year, which has been a drag on the company’s overall performance so far this year.

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Notes:
  1. ConocoPhillips’ SEC Filings, sec.gov []
  2. ConocoPhillips Announces Production Startup and First Gas from the Jasmine Field, conocophillips.com []
  3. New life for an old field, norwaypost.no []
  4. ConocoPhillips Announces Production Startup and First Oil from Ekofisk South, conocophillips.com []
  5. ConocoPhillips Bank of America Merrill Lynch Global Energy Conference Presentation, conocophillips.com []
  6. WTI-Brent Spread, ycharts.com []