ConocoPhillips (COP) Last Update 2/12/21
Related: XOM CVX BP EOG
% of Stock Price
Revenue
Gross Profits
Free Cash Flow
ConocoPhillips
STOCK PRICE
DIVISION
% of STOCK PRICE
Crude Oil
78.1%
$42.91
Natural Gas
14.9%
$8.19
Net Debt
1.2% $0.66
TOTAL
100%
$54.97
$54.32
Yours
Trefis Price
N/A
$52.61
Market
 
Top Drivers for Period
Key Drivers
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RECENT NEWS AND ANALYSIS

Potential upside & downside to trefis price

ConocoPhillips Company

VALUATION HIGHLIGHTS

  1. Crude Oil constitutes 78% of the Trefis price estimate for ConocoPhillips's stock.
  2. Natural Gas constitute 15% of the Trefis price estimate for ConocoPhillips's stock.

WHAT HAS CHANGED?

Post Pandemic Recovery

Extension of production curtailments by OPEC lifted benchmark oil prices from $40 to $50 per barrel in the past quarter. Thus, the shares of prominent upstream company, ConocoPhillips recovered a major chunk of their lost value.

The company increased its total production by 30% through Concho’s acquisition and expects its FY2021 production to remain relatively flat. As COP has maintained its dividend policy and its stock has a current dividend yield of 3.6%. Thus, it is a good pick for investors willing to wait for the tides to turn.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are the key drivers for ConocoPhillips, which present opportunities for upside or downside to the current Trefis price estimate for ConocoPhillips.

  • Crude Oil Price: ConocoPhillips' stock price is highly sensitive to crude oil prices as the company derives more than 60% of its total value, by our estimates, from the sale of crude oil. We believe that the recent recovery in oil prices could sustain over the near-term, amid supply cuts by OPEC and non-OPEC allies and geopolitical tension in the Middle East. According to our estimates, annual average crude oil prices (Brent) could average at around $67 per barrel this year and rise back to around $100 per barrel by 2025. However, if oil prices remain depressed for longer than what we currently expect and increase only to around $80 per barrel by the end of our forecast period, there could be almost a 6% downside to our current price estimate for ConocoPhillips.

  • Price of Natural Gas: ConocoPhillips' average selling price of natural gas increased from $5.06 per million cubic feet (Mcf) in 2010 to $5.64/Mcf in 2011 before plummeting in 2012 amidst an oversupply in the market due to the increased availability of shale gas. In 2010, approximately 1% of natural gas production came from shale sources. By 2014, this figure had increased to nearly 25%. Technological improvements have helped improve the ability of companies to discover these new resources. As a result of new discoveries of shale gas, there has been a decoupling between the prices of crude oil and natural gas.
    However, the oil slump that began in 2014 resulted in a sharp drop in natural gas prices. Thus, the company's natural gas price realization declined from $6 per mcf in 2014 to $3.80 per mcf in 2015 and further to $3 per mcf in 2016. Natural gas prices recovered to $3.90 per mcf in 2017 as oil prices recovered. We expect natural gas prices to recover the next couple of years, before gradually recovering to $5.60 per mcf by the end of the Trefis forecast period. This growth will likely be supported by additional demand from the power generation sector (which is switching to gas from coal) and other sources. However, if demand picks up further and prices rise above $8.30 per mcf, there could be an upside of about 7% to our price estimate.

BUSINESS SUMMARY

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.

SOURCES OF VALUE

Crude oil exploration and production is the most valuable segment for ConocoPhillips for the following reasons:

Large base of proven reserves

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%.

Enviable acreage position in the Lower 48 states

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.

KEY TRENDS

Improving drilling efficiencies

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.

Improving volume-mix

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.

Peak oil

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.