ConocoPhillips COP recently participated in separate federal and state lease sales in Alaska. The company submitted high bids totaling $788,680 for six high-potential tracts in the US Bureau of Land Management’s 2015 National Petroleum Reserve in Alaska (NPR-A) lease sale and $409,011 for three North Slope tracts at the Alaska Oil & Gas Division’s lease sale.
ConocoPhillips’ initiatives toward liquids-rich plays are gaining momentum in the Eagle Ford, Bakken and Permian plays. In the third quarter of 2015, daily production averaged 1.554 million barrels of oil equivalent (MMBOE). The company is on track to deliver average annual production as well as margin growth of 3–5%, with focus on liquid-rich ventures primarily in the U.S. and Canada.
However, the expected growth is likely to be partially offset by curtailed production from Libya. Organic reserve additions of about 0.7 billion BOE in the third quarter 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.
With leading positions in both natural gas and heavy crude oil in North America, along with a legacy position in the North Sea and growing exposure to lucrative international regions, ConocoPhillips expects to replace reserves and sustain production growth over the long term.
Despite cuts in capital spending, ConocoPhillips expects major capital projects to be brought online in 2016. Surmount 2 and APLNG as well as a further ramp up in Foster Creek/Christina Lake are expected to drive production growth of 1% in 2016. The company also expects lower operating expenses during this period.
However, we remain cautious about the company’s weak near-term production level as output is likely to be adversely impacted by 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 assumptions of lower-than-expected oil prices. ConocoPhillips cut its 2015 capital budget by a fifth of its 2014 level to $13.5 billion.
With the completion of the Phillips 66 spin-off, ConocoPhillips has shifted its total focus to upstream operations. This is likely to reduce its earnings volatility but increase its dependence on oil and gas prices. At the same time, it will lack diversification benefits. Moreover, any price volatility is likely to affect revenues going forward. Hence, ConocoPhillips remains vulnerable to unstable movements in crude oil and natural gas prices as well as the volatile nature of the macro backdrop.
Moreover, with crude prices tumbling drastically since June, ConocoPhillips’ upstream division has been able to extract less value for its products. This has pressured the group’s profit margins.
ConocoPhillips carries a Zacks Rank #3 (Hold). Some better-ranked players from the energy sector are Energy Transfer Equity LP ETE, Murphy USA Inc. MUSA and Seadrill Partners LLC SDLP. Each of these stocks sports a Zacks Rank #1 (Strong Buy).
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