VALUATION HIGHLIGHTS
- Crude Oil constitutes 77% of the Trefis price estimate for ConocoPhillips's stock.
- Natural Gas constitute 15% of the Trefis price estimate for ConocoPhillips's stock.
WHAT HAS CHANGED?
FY 2024 Snapshot
ConocoPhillips reported a 16% decline in net income for the year 2024, despite achieving a 9% increase in production. This decline was attributed to a 6% reduction in average realized prices. The company enhanced shareholder returns by 34% in the fourth quarter and has announced plans to provide $10 billion in shareholder returns for 2025. Furthermore, COP's proved reserves grew by 15% year-over-year, replacing 244% of its production.
However, total debt increased by $5.4 billion, reaching $24.3 billion, primarily due to the acquisition of Marathon Oil. This acquisition is anticipated to generate $1 billion in synergies within a year. Additionally, COP is actively expanding its LNG portfolio, entering into new agreements in Belgium and Asia.
Merger With Marathon Oil
COP completed the acquisition of Marathon Oil, adding high-quality, low-cost supply inventory adjacent to the company’s U.S. unconventional position - in an all-stock transaction valued at $22.5 billion. The merger includes $5.4 billion of net debt.
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 plunge in oil prices could be sustained over the near term amid an easing of curtailed output by the OPEC allies and geopolitical tensions.
The OPEC+ group, which comprises OPEC and allies led by Russia, is set to begin its program of monthly increases in oil production in April 2025. The group will likely continue to raise oil output in May 2025.
According to our estimates, annual average crude oil prices (Brent) could average around $75 per barrel this year and increase gradually by the end of our forecast period. However, if oil prices remain high for longer than what we currently expect and increase to around $91 per barrel by the end of our forecast period, there could be almost a 10% upside to our current price estimate for ConocoPhillips.
- Price of Natural 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. In 2021, COP reported $6/mcf of natural gas prices due to global shortages. However, the prices shot up to $10.60/mcf in 2022 before falling hard to $3.90/mcf in 2023. In 2024, this metric stood at $2.6/mcf.
We expect natural gas prices to gradually rise to levels of $4/mcf by the end of our forecast period. However, if demand picks up further and prices rise to around $8 per mcf, there could be an upside of about 10% to our price estimate.
BUSINESS SUMMARY
ConocoPhillips is the world's largest independent exploration and production company, based on proven 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. The 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 proven 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.
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. Proved reserves increased by 15% year-over-year to 7.8 billion BOE, with a 244% reserve replacement ratio, ensuring long-term production capabilities in 2024.
Enviable acreage position in the Lower 48 states
ConocoPhillips holds 11.4 million (as of 2024) net acres of onshore conventional and unconventional acreage in the Lower 48 states. The company's unconventional holdings include approximately 792,000 net acres in Delaware, 790,000 net acres in the Bakken and 484,000 net acres in the Eagle Ford. Currently, ConocoPhillips' activities in this region are mostly centered on the continued optimization and development of existing and emerging assets, with a particular focus on areas with higher liquid production.
KEY TRENDS
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 76% (as of 2024) of the total hydrocarbons produced by ConocoPhillips from the Lower 48 states, compared to just over 45% at the end of 2013, and their production has been increasing over the last few years.
