ConocoPhillips: A Transformation

09/13/2013 7:00 am EST


This energy firm has transformed itself into more of a large-scale independent exploration and production (E&P) company, by spinning off its refining and marketing, midstream, and chemicals businesses, observes Geoffrey Seiler, editor of

Where ConocoPhillips (COP) remains similar to its former super-major peers is that its portfolio of assets is very diversified, consisting of onshore and offshore positions, along with LNG operations, a presence in the Canadian oil sands, and it operates worldwide.

Its smaller E&P rivals tend to have more concentrated positions, which, some would argue, gives them an advantage, because they have more focus. As of the end of 2012, ConocoPhillips' reserves totaled 8.6 billion BOE, more than half of which is liquids and 65% of which is developed.

ConocoPhillips has large acreage positions in the Eagle Ford, Permian Basin, and Bakken regions of the United States. It also has its oil sands properties in Canada. Its US shale plays are expected to provide about 60% of the company's production growth through 2017.

Outside of North America, it operates in the North Sea, Malaysia, and has an LNG project in Australia. The company said its various major projects are on track to deliver about 400,000 BOE per day of additional production by 2017.

The company is also moving into the Gulf of Mexico where it has been a relatively small player in the past, with one offshore platform in operation, but its operations in the North Sea give it plenty of experience in offshore operations.

ConocoPhillips was the largest bidder in the most recent round of lease auctions held by the US Bureau of Ocean Energy Management.

The auction drew the second-lowest amount of bids in the last three decades overall, but ConocoPhillips bid $30.58 million for the rights to explore in a tract about 200 miles south of Galveston, Texas.

Looking ahead, ConocoPhillips has guided for its production to grow by 3% to 5% through 2017, when average daily production is expected to be about 1.9 million BOE/day. Last year, it produced 844,000 barrels per day of oil and natural gas liquids and 4.2 billion cubic feet a day of natural gas.

The company has also been selling off assets it considers to be non-core. To date, it has deals for almost $14 billion in asset sales.

It has received approximately $1.7 billion in proceeds from asset sales since the beginning of the year and it expects to close deals by year-end that would add approximately $9 billion of additional proceeds in 2013.

ConocoPhillips has been a shareholder friendly company. Management has said the goal is to return 20% to 25% of cash flow to shareholders each year. It currently pays an annual dividend of $2.76 per share, which is yielding about 4.2%.

ConocoPhillips is in the process of evolving. Once one of the super-major integrated oil companies, it has transformed itself into a very large independent E&P.

Its production footprint, even with its asset sales, keeps the company more on par with the majors in terms of the breadth of its asset base, but operationally it is now more similar to other large E&Ps.

From a valuation standpoint, ConocoPhillips' shares currently are valued at 11 times the 2014 EPS estimate. ConocoPhillips' stock has followed the price of crude oil higher over the last two months, which the integrated oil stocks have not done.

We like the direction the company is headed and think ConocoPhillips could become a solid option as an independent E&P company.

It has a large footprint in the liquids-rich US shale plays and its near-term growth projects are expected to deliver higher-margin production than some of the assets it has sold over the past year.

Investors looking for long-term growth with generous dividend should keep ConocoPhillips on the radar, especially if oil prices retreat.

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