ConocoPhillips Earnings Preview: Lower Oil Prices To Offset Production Growth

ConocoPhillips (NYSE:COP) is scheduled to announce its 2014 fourth quarter earnings on January 29. We expect lower crude oil prices to weigh significantly on the company’s year-on-year earnings growth. Benchmark crude oil prices have declined sharply over the past few months on rising supplies and falling demand growth estimates. The average Brent crude oil spot price declined by more than 30% year-on-year during the fourth quarter. This is expected to result in thinner operating margins on ConocoPhillips’ spot crude oil sales.  However, higher liquids production, primarily driven by increased development of tight hydrocarbon reserves in the U.S.,  is expected to partially offset the impact of lower oil prices. ConocoPhillips has already announced a 20% cut in its capital spending budget for the current year, but during the earnings conference call, we will be looking for some more color on the company’s operating strategy under the changed crude oil price environment. ^[1]

ConocoPhillips is the world’s largest independent exploration and production company by proved reserves and annual production. Its daily hydrocarbon production from continued operations averaged 1,473 thousand barrels of oil equivalent (MBOED) during the third quarter of 2014, 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.  We currently have a $70/share price estimate for ConocoPhillips, which is almost 12.3x our 2014 full-year adjusted diluted EPS estimate of $5.70 for the company.

See Our Complete Analysis For ConocoPhillips

Tight Oil Development To Fuel Production Growth

ConocoPhillips expects to deliver close to 4% year-on-year growth in net hydrocarbon production for 2014 and is targeting another 3% growth this year, despite the recent decline in oil prices. A large majority of this growth is expected to come from the ongoing development of its onshore assets in the Lower 48 states, where the company has made some great progress recently. During the third quarter of 2014, ConocoPhillips’ average daily net hydrocarbon production (adjusted for downtime-related variance) increased by 62 MBOED or 4.3% y-o-y.  Almost 71% of this production growth (44 MBOED) came from its operations in the Lower 48 states of the U.S., where the company is ramping up the development of its acreage in the Eagle Ford and the Bakken/Three Forks shale plays.  Production from the Lower 48 states at 543 MBOED was up by around 8.8% y-o-y. ^[2] ConocoPhillips holds approximately 2.7 million net acres in unconventional shale plays in the Lower 48 states. ^[3]

The Bakken/Three Forks 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/Three Forks is the largest tight oil play in the U.S. and holds more than 4.8 billion barrels of technically and economically recoverable crude oil. ^[4] ConocoPhillips plans to invest roughly $1 billion annually in the development of its acreage in the Bakken/Three Forks play and expects to ramp up the production rate from around 33 MBOED in 2013 to over 68 MBOED by 2017.  During the third quarter of 2014, the company’s average production rate from the play stood at 55 MBOED, which was almost 62% higher than the previous year’s quarter. ^[2]

The Eagle Ford shale, which is the second largest tight oil play in the U.S. (by EIA estimates), is estimated to hold proved crude oil reserves of almost 4.2 billion barrels. Together, the Eagle Ford and the Bakken/Three Forks shale plays hold almost 90% of the total proved tight oil reserves in the U.S. ^[4]  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 third quarter of last year, the company’s average oil and gas production from the Eagle Ford play jumped almost 25% y-o-y to 157 MBOED.  We expect to see a similar volumes growth during the fourth quarter as well. ^[2]

However, ConocoPhillips operates a broad portfolio of upstream assets and production from the Lower 48 states contributes just around 37% to the company’s total net production. Therefore, even a 9% growth from the Lower 48 states (same as Q3 2014) would translate to just around a 3.3% boost for the whole company, which would be more than offset by the sharp decline in crude oil prices.

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap

More Trefis Research

1. ConocoPhillips Sets 2015 Capital Budget of $13.5 Billion, conocophillips.com [↩]
2. 2014 Q3 Earnings Call Presentation, conocophillips.com [↩] [↩] [↩]
3. ConocoPhillips 2013 10-K SEC Filing, sec.gov [↩]
4. U.S. Crude Oil and Natural Gas Proved Reserves, eia.gov [↩] [↩]