ConocoPhillips In 2013: More Asset Sales, Focus On North American Business

ConocoPhillips (NYSE:COP) had a very eventful 2012. To start with, the company divested its midstream and downstream businesses, such as refining and chemicals businesses into a separate company called Phillips 66. ConocoPhillips wished to unlock the full potential of its more profitable upstream business.

Also, ConocoPhillips generated $2.1 billion through sales in the first nine months of 2012 and sealed another deal to sell its stake in the Kashagan oil field for $5 billion, to Indian state-owned oil company ONGC. It also invited bids for a partial stake sale in its Canadian oil sands assets, and was reported to have received a $5 billion bid from an Indian consortium led by ONGC. The bids have not been opened yet and neither side has agreed to confirm the news officially. But ConocoPhillips will most probably generate a handsome amount for its stake. ^[1]

In recent days, there has been news that ConocoPhillips is selling its Indonesian and Nigerian assets. It has agreed to sell its Algerian business unit to Indonesian state-owned oil and gas company Pertamina for $1.75 billion. The deal is expected to be closed in mid-2013. Its Nigerian oil fields will be sold for $1.8 billion to Oando Energy Resources, which aims to become one of Nigeria’s top oil explorers and producers. ^[2]

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Why Is ConocoPhillips Selling So Many Assets?

There are good reasons as to why ConocoPhillips is on a selling spree. It wants to shed its non-core businesses and generate funds for capital spending in areas with high growth potential. The company has an annual capital expenditure target of $15 billion for the next three years. It also needs to maintain the dividend it pays to investors. Both these objectives need significant cash flow generation, which can be achieved only if the company sells off unproductive or non-core assets. ConocoPhillips will keep selling assets in 2013 to achieve its asset sale targets in line with the three-year restructuring plan, put in place in 2010. ConocoPhillips resolves to sell off assets worth $8-10 billion through 2013.

But some assets like Kashagan are not generating revenues yet, have caused the company to incur significant costs and come attached with significant political risk. You can read a previous article we wrote on the issue here.

Which Are The Major Growth Projects For ConocoPhillips?

Most of ConocoPhillips’ major growth projects are concentrated in North America. It stands to benefit from its assets in the liquid-rich Eagle Ford and Bakken shale plays in the U.S. and is ramping up production in these areas. ConocoPhillips’ oil sand assets in Canada are performing well, and production of bitumen has gone up to 92,000 BOE per day at end of Q3 2012, a 28,000 BOE per day increase compared to Q3 2011. Additional growth is expected from expansion at the FCCL and Surmont projects, which are progressing on schedule.

ConocoPhillips holds 1.5 million acres in the deepwater regions of Gulf of Mexico and continues to explore more in the region. It is also drilling at the Coronado and Shenandoah prospects. Last month, it posted the highest total number of apparent high bids during U.S. Gulf of Mexico lease sale auctions. This leaves no doubt that the company considers Gulf of Mexico to be one of the areas with good future growth prospects. ^[3]

Most of its reserves are now located in regions which are politically stable and non-risky. This gives a sense of security in an industry where nationalization of resources is common, especially in non-democratic countries. ConocoPhillips has already faced such a situation in the past in Venezuela. ^[4]

What Are The Possible Risks And Upsides?

Despite a strong asset base, ConocoPhillips remains vulnerable to the volatility in oil and gas prices. These are influenced by global macro-economic factors as well as geopolitical events. A downtrend in the global economy, either due to a full-blown Euro crisis or a failure to resolve the fiscal cliff issue in the U.S., will have an impact on the demand-supply dynamics of oil and gas. This will hurt the sales prices for crude oil and natural gas.

Any kind of unforeseen geopolitical event, such as blocking of the Strait of Hormuz by Iran, may either cause supply to be disrupted or lead to a widespread belief that a supply shortage is imminent. In both cases, prices are likely to shoot up. In such a scenario, ConocoPhillips stands to benefit on the portion of sales made on spot markets.

We recently revised the Trefis price estimate for ConocoPhillips to $62, which is 10% higher than the market price.

Understand how a company’s products impact its stock price on Trefis

1. Conoco’s Results Hit By Lower Realized Prices But Big Projects On Track, Trefis [↩]
2. ConocoPhillips Gets Big by Going Small, The Motley Fool [↩]
3. ConocoPhillips posts most high bids at US Gulf of Mexico lease sale: BOEM, Platts [↩]
4. ConocoPhillips Wins A Significant Victory In Ongoing Arbitration Battles With Venezuela, Trefis [↩]