ConocoPhillips (NYSE:COP) is scheduled to announce its fourth quarter and full-year earnings on January 30. We expect the company to report full-year adjusted diluted earnings per share (EPS) of $5.85, compared to $5.37 last year, which implies a growth of ~9% y-o-y. According to our estimates, ConocoPhillips’ earnings growth would primarily come from thicker margins due to higher commodity prices and better production mix.
While the average West Texas Intermediate (WTI) crude oil price has been up by ~11% y-o-y during the fourth quarter, natural gas spot prices have been approximately 13% higher during the same period. This is expected to boost ConocoPhillips’ fourth quarter and full-year operating margins.
We also expect ConocoPhillips to post better production mix due to higher growth in liquids (crude oil and natural gas liquids) production during the quarter, primarily driven by the ramp up of its Lower 48 operations in the U.S. However, ongoing disruptions in Libya are expected to negatively impact its overall production growth.
During the fourth quarter earnings call, we will be looking for an update on the company’s ongoing new project development and the restructuring program, which is aimed at improving its overall profitability.
Our $79 price estimate for ConocoPhillips is almost 20% above its current market price.
Climbing Lower 48 Production
ConocoPhillips’ Lower 48 business is organized within four regions covering the Gulf Coast, Mid-Continent, Rockies and San Juan. Combined with Latin America, it contributes almost one-third to the company’s total production volume.  ConocoPhillips has been investing heavily in the segment, which is fueling its robust production growth. During the first three quarters of 2013, the company spent as much as $4 billion or ~35% of its total capital expenditure in the development of reserves in this region.  As a result, production from the liquid-rich plays in the Eagle Ford, Bakken and the Permian basin grew by ~40% y-o-y during the third quarter of 2013. 
More importantly, liquids now represent ~50% of the total hydrocarbons produced from the Lower 48 region, compared to just over 45% at the end of 2012, and their production has been growing steadily over the last few quarters. Liquids production grew by more than 18% y-o-y during the first nine months of 2013, while overall production from the region increased by just around 7%.  This means a higher proportion of liquids produced by ConocoPhillips, which means better margins, as oil companies earn more dollars per barrel of oil equivalent (BOE) on selling liquids compared to natural gas. Because of this, production growth from the Lower 48 segment is not only boosting ConocoPhillips’ net production volume, but is also improving its operating margins through better mix.
This is expected to continue for some time, as ConocoPhillips expects the ongoing development activities in the Lower 48 region to boost its production volume by ~365 thousand barrels of oil equivalent per day (MBOED) by 2017. The company had as many as 11 rigs operating at both the Bakken as well as the Eagle Ford plays at the end of the third quarter.  We therefore expect the Lower 48 region to boost its fourth quarter earnings as well.
Project, Restructuring Updates
ConocoPhillips plans to boost its total production volume by ~400 MBOED by 2017 from its strategically aligned new projects.  The company recently started production from the Jasmine gas and condensate field in the “J-Block” area of the central U.K. North Sea. Earlier in 2013, it also announced the start-up of its Canadian oil sands Christina Lake Phase E project and the Ekofisk South in Norway. (See: ConocoPhillips’ European Assets To Boost Earnings Growth Next Year) Other projects lined up for start-up include the Siakap North-Petai (SNP) and the Gumusut projects in Malaysia. We will be looking for an update on the status of these projects as well as the ongoing development programs and any other new projects slated for start-up this year.
We will also be looking for an update on the ongoing restructuring program at ConocoPhillips, which is aimed at increasing its focus on the development of higher margin, lower risk projects. The company has announced asset sales in Algeria, Nigeria and Kazakhstan, and Trinidad & Tobago, to focus on projects based in regions with stable governments and predictable regulatory frameworks such as North America and Australia. ConocoPhillips also announced the sale of its Clyden oil sands leasehold in Canada, to focus on the development of higher margin shale reserves in the U.S. (See: ConocoPhillips’ Sale of Canadian Oil Sands Asset To Boost Returns) As a part of this restructuring program, the company has announced transactions involving nonstrategic assets worth over $14 billion. However, proceeds of more than $10 billion were still to be received at the end of the third quarter.Notes: