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The coronavirus crisis has been challenging for the oil & gas industry as demand slump and price weakness have eroded earnings of upstream, midstream, and downstream operators. ConocoPhillips is a prominent upstream company and generates $36 billion of annual revenues with 1,348 MBD of oil & gas production. The company has guided for 1,125 MBOED of total production for the full year, nearly 16% (y-o-y) decline due to continued demand weakness and high operational costs. While the overall macroeconomic environment hinges on the launch of a successful vaccine, the company has hinted towards a slew of measures including suspension of dividend and capex reduction to preserve cash.
Below are the key drivers for ConocoPhillips, which present opportunities for upside or downside to the current Trefis price estimate for ConocoPhillips.
ConocoPhillips is the world’s largest independent exploration and production company, based on proved reserves and production of liquids and natural gas. After the spin-off of its midstream and downstream businesses into an independent company (Phillips 66), ConocoPhillips has become a pure-play exploration & production company. The company conducts exploration activities in 19 countries and supplements its income with equity stakes in other oil & gas and chemical companies. About 56% of its production consists of liquids, and about 44% consists of natural gas. Of the 56% that are liquids, roughly half is tied to Brent or international prices. The remaining 11% of liquids is tied to North American crude markers, NGL, or bitumen prices. On the natural gas side, comprising about 44% of its portfolio, roughly 45% consists of international gas. Price differentials between Brent and West Texas Intermediate (WTI), a widely used North American crude marker, have been narrowing of late. This has reduced the disparity in realized prices for crude oil in domestic and international markets. Price realized by the company on the domestic and international sale of natural gas is also different.
Crude oil exploration and production is the most valuable segment for ConocoPhillips for the following reasons:
The amount of proved hydrocarbon reserves is an extremely critical metric for any oil and gas exploration and production company. It directly impacts the company’s production growth outlook, as it represents the total quantity of technically and economically recoverable oil and gas reserves owned by the company at a given point in time. ConocoPhillips’ total proved hydrocarbon reserves stood at 5.03 billion barrels of oil equivalent at the end of 2017. This implies that the company holds enough reserves to be able to produce oil and gas for more than seven years at current production rates.
More importantly, ConocoPhillips has reported a greater than 100% reserve replacement ratio for the last five years. This shows that the company has been able to grow its reserve base through a successful exploration program consistently. Its average reserve replacement ratio for the last five years (excluding asset disposition) has been over 117%.
ConocoPhillips holds 12.4 million net acres of onshore conventional and unconventional acreage in the Lower 48 states. The company’s unconventional holdings total 1.8 million net acres and include approximately 630,000 net acres in the Bakken, 210,000 net acres in the Eagle Ford, 134,000 net acres in Permian, 98,000 net acres in Niobrara, 66,000 net acres in the Barnett, and nearly 639,000 net acres in other unconventional exploration plays. Currently, ConocoPhillips’ activities in this region are mostly centered on continued optimization and development of existing and emerging assets, with a particular focus on areas with higher liquids production.
Most of the improvement in ConocoPhillips' price-adjusted cash operating margins over the last couple of years has come from better sales volume-mix and continuous improvements in drilling and completion cost efficiencies. Over the last four years, the company has been able to achieve drilling and completion cost efficiency improvements of 37% and 41%, respectively, in the development of its acreage in the Eagle Ford tight oil play. A large part of this efficiency improvement can be attributed to the increased use of multi-pad well drilling. ConocoPhillips plans to further reduce its average total cost per well by using multi-well pad drilling techniques in 75% of all the wells drilled in the Eagle Ford play this year.
ConocoPhillips’ price-adjusted cash operating margins have also been helped over the past few years by the continuous improvement in its sales volume-mix, which is primarily being driven by the development of its assets in the Lower 48 states. Liquids (crude oil and natural gas liquids) now represent 60% 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.
It is estimated that a large part of the world's oil reserves has already been discovered. Recent statistics have indicated that global consumption has been outpacing reserve additions. Peak oil is a commonly used term to describe the point at which world oil output will reach a maximum and decline afterward.
However, many institutions, such as the International Energy Agency (IEA), believe that peak oil will not occur for another 25 years at the very least. Many governments across the world are promoting alternative energy measures to ensure that the supply and demand for energy will be met at all times to come.