Eagle Ford, Bakken Development Drives Earnings Growth At ConocoPhillips

+3.49%
Upside
120
Market
124
Trefis
COP: ConocoPhillips logo
COP
ConocoPhillips

ConocoPhillips’ (NYSE:COP) second quarter earnings rose higher on increased hydrocarbon production and higher commodity prices. The company’s earnings per share (EPS) adjusted for one-time items grew by over 14% year-on-year to $1.61. Its hydrocarbon production increased by 6.5% y-o-y, which could be partly attributed to reduced downtime at some production facilities, compared to the previous year’s quarter. After adjusting for the impact of lesser downtime this year, the company’s total oil and gas production increased by 4% y-o-y, mostly driven by its operations in the Lower 48 states of the U.S.

More importantly, production growth came primarily from liquids, which are priced higher than natural gas that led to a positive volume-mix effect. In addition, higher benchmark commodity prices also led to an increase of around $3.35 or almost 5% in its average price realization per barrel of oil equivalent, compared to last year. Going forward, we expect the ongoing development of onshore assets in the Lower 48 states to drive most of the earnings growth at ConocoPhillips in the short to medium term. [1]

ConocoPhillips is the world’s largest independent exploration and production company by proved reserves and annual production. Its daily hydrocarbon production averaged at around 1,530,000 barrels of oil equivalent (MBOED) during the first quarter of this year, and it had proved reserves of around 8.9 billion barrels of oil equivalent (BOE) at the end of last year. Headquartered in Houston, Texas, the company has operations in 27 countries, generating annual sales revenue of more than $60 billion. Based on the recent earnings announcement, we have revised our price estimate for ConocoPhillips to $85/share, which is around 12.8x our 2014 full-year adjusted diluted EPS estimate for the company.

Relevant Articles
  1. Up 15% In Last Six Months, Will ConocoPhillips Stock Continue To Grow Post Q3?
  2. ConocoPhillips Q2 Earnings: What Are We Watching?
  3. What’s Next For ConocoPhillips Stock?
  4. ConocoPhillips Stock To Likely Trade Higher Post Q4
  5. This Stock Appears To Be A Better Bet Than EOG Resources
  6. Earnings Beat In The Cards For ConocoPhillips Stock?

See Our Complete Analysis For ConocoPhillips

Lower 48 Development Drives Earnings Growth

ConocoPhillips’ second quarter hydrocarbon production adjusted for downtime related variance increased by 60 MBOED or 4% y-o-y. Almost 82% of this production growth (49 MBOED) came from its operations in the Lower 48 states of the U.S., where the company is ramping up the development of its onshore assets. Production from the Lower 48 states at 540 MBOED was up by around 10% y-o-y, which not only boosted the company’s sales revenue but also improved its volume-mix that led to thicker margins. [1]

Most of the growth in ConocoPhillips’ Lower 48 production came from the development of its acreage in the Eagle Ford and Bakken shale plays. The Eagle Ford shale is now the largest tight oil play in the U.S. by EIA estimates. Its proved crude oil reserves of 3.4 billion barrels are greater than those of the Bakken Formation of North Dakota. ConocoPhillips plans to invest $3 billion annually in the development of its acreage in the Eagle Ford play and expects to more than double the rate of production from around 119 MBOED in 2013 to over 250 MBOED by 2017. During the second quarter, the company’s average production rate from the Eagle Ford jumped almost 30% y-o-y to 157 MBOED. [2]

The Bakken Shale Play is located in Eastern Montana and Western North Dakota, as well as parts of Saskatchewan and Manitoba in the Williston Basin. According to latest EIA estimates, the Bakken tight oil play holds 3.2 billion barrels of technically and economically recoverable crude oil. ConocoPhillips plans to invest roughly $1 billion annually in the development of its acreage in the Bakken play and expects to ramp up production rate from around 33 MBOED in 2013 to over 68 MBOED by 2017. During the second quarter, the company’s average production rate from the Bakken stood at 51 MBOED, which was almost 70% higher than the previous year’s quarter. [2]

More importantly, liquids now represent almost 54% of the total hydrocarbons produced by ConocoPhillips from the Lower 48 states, compared to just over 45% at the end of 2012, and their production has been growing rapidly over the last few quarters. During the second quarter, the company’s crude oil production from the Lower 48 states grew by 30% y-o-y, while total hydrocarbon production from the region increased by just around 10%. This is significant because natural gas volumes are not as lucrative in the U.S. owing to lower commodity prices. Last year, ConocoPhillips sold liquids at an average price of over $85 per barrel, while the company realized average price of just around $37 per BOE of natural gas. [3]

Therefore, a shift in production volume towards liquids is driving better volume-mix, which is boosting the company’s cash operating margins. ConocoPhillips’ second quarter cash margins improved by $3.20 per BOE, which is equivalent to an increase of more than 11% y-o-y. This could partially be attributed to higher commodity prices in the U.S., compared to last year. However, even after adjusting for the difference in price realizations, the company’s cash margins improved by $0.70 per BOE, which implies a growth of almost 2.5% over the previous year’s quarter. [2]

See More at TrefisView Interactive Institutional Research (Powered by Trefis)

Get Trefis Technology

Notes:
  1. ConocoPhillips Reports Second-Quarter 2014 Results; Strong Operational Performance, conocophillips.com [] []
  2. 2014 Q2 Earnings Call Presentation, conocophillips.com [] [] []
  3. ConocoPhillips 2013 10-K SEC Filing, sec.gov []