What Is ConocoPhillips’ Operational Strategy For 2017?

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ConocoPhillips

Like most of the companies in the oil and gas industry, 2016 was a difficult year for ConocoPhillips (NYSE:COP). The year began with the US-based oil and gas company’s stock dropping more than 30% in February, when crude oil prices hit their multi-year lows of under $25 per barrel due to the rising demand and supply mismatch in the commodity markets. However, the company recovered strongly in the later half of the year due to the Organization of Petroleum Exporting Countries’ (OPEC) decision to cut its cumulative production by 1.2 million barrels of oil per day (Mbpd). Although the series of unplanned and unexpected events during the year led to an improvement in the outlook of the commodity markets, they forced ConocoPhillips to continuously revise its strategy through the year to weather the uncertainty and volatility in the markets. Thus, in order to be on top of the situation from the beginning of the year, the company has devised its strategy for the year 2017 well in advance and is likely to continue to revisit it, as and when required, to sustain its operations in the ongoing commodity slump. Here’s a quick look at ConocoPhillips’ guidance for the year 2017.

COP-Q&A-2017-3

Source: Google Finance; US Energy Information Administration (EIA)

Production Growth To Vary With Recovery In Oil Prices

Given that the year 2016 began on a gloomy note for the oil and gas industry, ConocoPhillips had anticipated its production to remain pretty much flat compared to 2015, with an overall production of 1,500-1,540 thousand barrels of oil per day (Mboed) during the year. However, as the year progressed, the commodity prices bounced back sharply, enabling the company to revise its production guidance to 1,560-1,570 Mboed for the year. That said, the company completed asset disposition of approximately $1.3 billion by the end of the December quarter, causing its production (including the impact for dispositions) to be around 1,535-1,545 Mboed for the year.

With a change in the outlook for commodity markets, ConocoPhillips has set its production growth target in the range of flat to 2% for 2017, depending upon the recovery in oil prices. While the company will continue to maintain its focus on the Lower 48 and Asia Pacific & Middle East (APME) regions, it plans to reduce its global footprint by almost 50% and concentrate its operations in strategic and high margin markets. For this, the oil and gas producer aims to divest assets worth $5-$8 billion between 2017 and 2018, mainly to reduce its exposure in the North American natural gas market.

ConocoPhillips’ Production Target For 2017

COP-Q&A-2017-1

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Lower Operating Costs Further To Sustain Margins

The prolonged weakness in commodity prices has forced independent oil and gas companies, such as ConocoPhillips, to optimize its cost structure in order to survive in the industry. In this quest, the company has taken sincere measures over the last two years to bring down its break-even price by controlling its operating costs, reducing its dividend payments, and exiting the deepwater markets. As a result of these audacious initiatives, the oil and gas player’s break-even price has come down by more than 60%, and is expected to remain less than $50 per barrel in 2017.

Based on these cost efficiencies, ConocoPhillips estimates its operating expenses to fall further to $6 billion for 2017, 9% lower than the costs in 2016. While some of these cost savings could disappear as the company’s production growth picks up, some of these efficiencies will continue to keep the costs low, enabling the company to improve its operating income and margins in the coming quarters.

ConocoPhillips’ Guidance For Operating Expenses For 2017

COP-Q&A-2017-2

Restricted Yet Focused Capital Spending 

With the plunge in commodity prices, ConocoPhillips was forced to pull back their exploration and drilling budget drastically to conserve its deteriorating cash flows. The oil and gas major reduced its capital spending from $17.1 billion in 2014 to $10.1 billion in 2015, and planned to reduce it to $5.7 billion for 2016. However, due to the capital efficiency gains during the year, partially offset by the continued volatility in the commodity markets, the company revised its capital expenditure target to $5.5 billion in the second quarter and further to $5.2 billion in the third quarter.

Despite the improving expectations from the commodity markets, ConocoPhillips has decided to keep a conservative capital budget and spend around $5 billion over the next few years. Alaska, the company’s largest market, will continue to play a key role in its future growth, as the company plans to invest heavily in the region to pursue new opportunities while increasing oil produced from legacy fields. Additionally, the Lower 48 region will contribute a large portion in the company’s capital allocation, while the company will restrict capital spending in the Canadian markets.

ConocoPhillips’ Capital Expenditure Target For 2017COP-Q&A-2017

Based on the above mentioned targets, we believe that while ConocoPhillips is working consistently to bring down its break-even price, it is being conservative in its operational strategy by restricting its production growth through disciplined capital spending in 2017. However, as the year progresses, the recovery in commodity prices will shape the course that the company will take to further deal will the commodity downturn.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for ConocoPhillips

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