On Dec 30, 2014, we issued an updated research report on ConocoPhillips (COP), a major global exploration and production company.
ConocoPhillips has leading positions in both natural gas and heavy crude oil in North America. Moreover, the company holds a legacy position in the North Sea and has a growing exposure to lucrative international regions. Backed by these positives, ConocoPhillips expects to replace reserves and sustain production growth over the long term.
ConocoPhillips’ initiatives toward liquids-rich plays are gaining momentum through the Eagle Ford, Bakken and Permian plays. For the third quarter, daily production averaged 1.481 million barrels of oil equivalent. The company is on track to deliver an average annual production as well as margin growth of 3–5%, with its focus on liquid-rich ventures primarily in the U.S. and Canada, although partially offset by the curtailed production from Libya. Organic reserve additions of about 1.1 billion barrels of oil equivalent at 2013-end came mainly from Eagle Ford and Bakken in the Lower 48, oil sands and western Canada as well as APLNG. Going forward, these regions are likely to play an important part in increasing the company’s yield.
ConocoPhillips is also poised to benefit from a pipeline of projects in the Gulf of Mexico (GoM), Malaysia, the liquefied natural gas project in Australia, the U.K., Norway, and the Canadian oil sands, besides the U.S Lower 48 liquids-rich plays. Oil sands expansion projects are also on track. In Sep, Foster Creek Phase F and the Britannia Long-Term Compression Project witnessed first yield, while the Gumusut floating production system achieved its first production in October. These ramp-up activities are expected to fuel its long-term production growth.
However, we remain cautious about the company’s weak near-term production level as the output might be adversely impacted due to divestitures. Additionally, downtime in the fields might result in weak production. Further, the company has slashed its capital expenditure budget from the dystopian 2015 oil space based on the assumptions of lower-than-expected oil prices. ConocoPhillips cut its 2015 capital budget by a fifth of its 2014 level to $13.5 billion.
The company faces greater challenges than its larger peers in generating attractive growth, given its above-average exposure to the mature OECD regions. Moreover, ConocoPhillips lacks material exposure to the prolific non-conventional plays, despite being one of the largest natural gas companies in North America.
Other Stocks to Consider
At present, ConocoPhillips carries a Zacks Rank #3 (Neutral). Better-ranked stocks in the same industry include Spectra Energy Partners, LP (SEP), Seadrill Partners LLC (SDLP) and Sandridge Mississippian Trust II (SDR). All of these stocks sport a Zacks Rank #1 (Strong Buy).
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