Weekly Oil & Gas Notes: ConocoPhillips, EOG Resources and BP

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Oil and gas stocks trended lower this week, as benchmark crude oil prices continued to decline on fears that the demand-supply equation might not improve considerably in the short term, as consumption demand growth continues to remain weak in most major economies. The growth in demand for crude oil has slowed down significantly this year due to moderating economic growth in emerging markets, such as China and India, and a slower than anticipated economic recovery in the Euro-zone. In China, the rate of growth in demand for petroleum products has fallen to almost half of what it was a year ago. As a result, the International Energy Agency (IEA) expects the growth in global oil demand this year to hit a 5-year low. It expects demand, which stood at around 91.7 million barrels per day last year, to increase by just around 0.7 million barrels per day this year. For next year, the agency expects demand growth to be a bit higher, around 0.9 million barrels per day, but still less than the growth in supply from non-OPEC countries, which is expected to be around 1.3 million barrels per day. The price of front-month Brent crude oil futures contract on the ICE has declined by around 9% so far this week and is currently trading at around $63/barrel. The NYSE Arca Oil & Gas Index (^XOI) has also declined by around 7.5% this week. [1]

Below, we provide an update on some of the key events that occurred this week related to the oil and gas companies we cover.

ConocoPhillips To Cut Capital Spending By 20% Next Year

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ConocoPhillips (NYSE:COP) recently announced its 2015 capital expenditure plan. The company revealed that it plans to cut capital spending by a fifth next year due to the recent decline in oil prices.  Oil and gas companies capitalize finding and development costs in order to distribute these costs over the lifetime of a drilled well or a raised platform. Lower capital expenditure essentially means lower investment in future production growth, which is what companies do in a commodities down cycle. ConocoPhillips plans to spend around $3 billion less next year on leasing rigs, floating oil platforms, and installing pipelines, compared to this year. The company plans to defer spending on some of the less developed unconventional plays in North America, which include the Montney and Duvernay fields in Canada, the Permian Basin in Texas, and the Niobrara shale field, which extends over Colorado, Wyoming, Nebraska, and Kansas. We expect similar capital expenditure cuts to be announced by most of the independent oil producers in the U.S. [2]

  • We currently have a $78/share price estimate for ConocoPhillips, which is around 25% above its current market price. The company’s share price has decreased by around 7.5% this week.
  • We currently estimate ConocoPhillips’ 2014 Non-GAAP diluted EPS to be at $6.20, compared to the consensus estimate of $5.68 reported by Reuters.

See Our Complete Analysis For ConocoPhillips

EOG Resources Sells A Majority Of Its Canadian Assets

EOG Resources (NYSE:EOG) recently announced the divestiture of a majority of its assets in Canada for around $410 million, net of transaction costs. The company divested  around 1.1 million net acres, estimated to hold 7.7 million barrels of oil, 0.8 million barrels of natural gas liquids (NGLs), and 78.7 billion cubic feet of natural gas in proved reserves. Proceeds from the transaction will help the company reduce its net capital expenditure next year, when commodity prices are expected to remain unfavorable. [3] The move is consistent with EOG Resources’ plan to increase its focus on the development of key high-return assets in its portfolio, like the Eagle Ford shale, where the company is one of the largest acreage holders right in the sweet spot of the play. The company has identified around 6,000 crude oil drilling locations in the Eagle Ford shale and plans to drill more than 500 of these this year itself, employing as many as 23 rigs. At the end of the third quarter, it had already completed 392 wells. [4]

  • We currently have a $101/share price estimate for EOG Resources, which is around 15% above its current market price. The company’s share price has decreased by around 4.5% so far this week.
  • We currently estimate EOG Resources’ 2014 Non-GAAP diluted EPS to be at $5.06, compared to the consensus estimate of $5.32 reported by Reuters.

See Our Complete Analysis For EOG Resources

U.S. Supreme Court Rejects BP’s Causation Appeal

In a crucial blow to BP Plc.’s (NYSE:BP) attempts of limiting charges associated with the 2010 Deepwater Horizon incident, the U.S. Supreme court recently rejected the company’s challenge to the multi-billion dollar settlement agreement it signed in 2012 to compensate Gulf Coast individuals and businesses impacted by the oil spill. The London-based oil giant sought review of the U.S. Supreme Court after an en banc review by the entire Fifth Circuit Court upheld the previous panel ruling by the court, rejecting the company’s arguments to create a new causation standard in the business and economic loss settlement. We believe that this could potentially mean billions of dollars in additional settlement costs for the British oil giant. [5] (See: BP’s Settlement Could Top $16 Billion Amid Failed Attempts To Limit Its Liabilities)

  • We currently have a $52/share price estimate for BP, which is more than 40% above its current market price. The company’s share price has decreased by around 8% so far this week.
  • We currently estimate BP’s 2014 diluted EPS to be at $4.16, compared to the consensus estimate of $4.14 reported by Reuters.

See Our Complete Analysis For BP

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Notes:
  1. IEA Cuts Global Oil Demand Forecast for 4th Time in Five Months, bloomberg.com []
  2. ConocoPhillips Sets 2015 Capital Budget of $13.5 Billion, conocophillips.com []
  3. EOG Resources Divests Majority of Canadian Assets, eogresources.com []
  4. EOG Resources 2014 Q3 Earnings Call Presentation, eogresources.com []
  5. BP Statement On U.S. Supreme Court Decision Not To Review Causation Issue In Settlement, bp.com []