ConocoPhillips Going For The Long Term

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ConocoPhillips (NYSE: COP) is one of the biggest autonomous exploration and production (E&P) companies in the world. The oil major recently completed the spin-off of its refining and marketing (R&M), chemicals (CPChem) and midstream segments into a separate entity named Phillips 66, the spin-off, however, have got mixed reviews from analysts.

Encouraging Financials

ConocoPhillips posted third-quarter 2012 earnings of $1.8 billion, or $1.46 per share, compared with its 2011 third-quarter earnings of $2.6 billion, or $1.91 per share.

Excluding special items of $26 million, 2012 third-quarter adjusted earnings were $1.8 billion, or $1.44 per share, compared with third-quarter 2011 adjusted earnings of $1.9 billion, or $1.40 per share. 

2013 capital budget

ConocoPhillips declared its 2013 capital and exploratory budget of $15.8 billion, in line with its previous guidance of flat capital spending year-on-year (management has previously guided 2012 capex in the range of $15.5-$16.0 billion) and somewhat lower than the  forecast of $16.0 billion predicted by analysts. Management also restated a campaign to conclude its asset divestiture program ($8-$10 billion in 2012-2013) in 2013. The capital divestiture program is likely to bear neutral impact on the share’s short term performance pertaining to the flat capital.

Geographically, approximately 60% of the total capex will be allocated to North America, while 40% will be focused on its international business. Categorically, 10% of the capital budget will be targeted towards Base Maintenance, 40% in Exploitation, 35% in Major Projects, and 15% in Exploration & Appraisal.

Major projects

Canada: Unrelenting development work is ongoing on the FCCL partnership and the Surmont oil sands projects, with the aim of pulling down steam-to-oil ratios to get better returns. Through its FCCL partnership with Cenovus Energy (NYSE: CVE), the management is looking forward to move ahead in Foster Creek (phase F, G, and H) and Christina Lake (phases E and F).

In Europe, there would be continued development work on the Eldfisk II and Ekofisk South expansion projects in the Norwegian North Sea and Clair Ridge, and Jasmine Field in the U.K. First oil from the Jasmine project is expected in 2H13.

In the Asia pacific region, the focus will be on several offshore developments, along with the construction of the Kebabangan and Malikai projects. Management expects to reach full production at the Gumusut-Kakap oil field in late 2013.

Asset Divestiture program

Management plans to complete its asset divestiture program ($8-10 billion target over 2012-2013) in 2013. Proceeds from the sales will be utilized to bridge the company’s temporary funding gap between cash flows from operations and its capex, dividend, and share repurchase program.

The following major assets are currently being marketed: 8.4% interest in Kashagan (pending sale to ONGC for $5 billion), half of its Surmont and other non-FCCL oil sands interest (net production of 11 mb/d), Nigeria (net production of 43 mboe/d), and a reduction of APLNG interests from 37.5% to 30% (our 3Q production estimate of 113 mmcf/d).

In December 2012, Oando agreed to buy ConocoPhillips Nigerian assets for a total of $1.79 billion, along with customary adjustments. The sale of ConocoPhillips' Nigerian asset is part of its divestiture program aimed at improving returns on capital. The transaction is anticipated to close by mid-2013.

The split up

In May 2012, ConocoPhillips completed the split of its refining, marketing, chemical and transportation businesses. The new company made after the split- Phillips 66 (NYSE: PSX) was not received well initially, but shares have recovered now. Phillips 66 targets growth in its midstream and chemical segments, the company seeks to double shale oil run at its refineries to 460,000 barrel per day and double refined products export to 200,000 barrel per day within two years.

Positives for ConocoPhillips

The company effectively spun off its refinery arm, Phillips 66. This has been a big prize for shareholders who held onto their shares as PSX is up approximately by 60% since it became a split public company. It also recently announced a dividend increase and stock buyback. It has surpassed earnings estimates each of the two quarters since the spinoff. Compromised earnings estimation for both FY2012 and FY2013 has increased over the last three months, regardless of the recent decline of oil prices.

Recently ConocoPhillips entered into an agreement with the Sinopec to survey shale gas reserves in south western China. This will help the company earn profits in the years ahead as China has both huge shale potential and high gas demand, but lacks technical expertise.

Conclusion

While asset sales can clearly bridge the gap for the time being, however, credit for its production growth will not get reflected in its shares until the company demonstrates cash flow break-even at a sub$90/bl oil price environment (Brent spot basis). While the stock should be well supported by its nearly 5% dividend yield, given the current low-yield environment, the upside is limited in the near-term. However, with good and stable dividend history and impressive dividend yield, the company fits well in the income portfolio of those investors looking for generous yield and sustained production.


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