ConocoPhillips (COP) will declare its Q4 results on Thursday, January 31. This will be the first full annual result for ConocoPhillips as a pure-play upstream segment company. Therefore, any comparison of revenues or profits to figures from last year would be a meaningless exercise at this point. We expect the company to release revised figures for previous years as an upstream company. Once those figures are available, a year-on-year comparison will become possible.
ConocoPhillips spun off its refining, transport and chemicals business into a separate entity on May 1, 2012. The newly formed company is called Phillips 66 after the company’s popular retail brand and focuses on the growing pipeline and chemicals business. ConocoPhillips itself is now a pure-play exploration and production firm. It is engaged in the exploration, production and marketing of crude oil, natural gas liquids, natural gas and bitumen.
ConocoPhillips had a very eventful fourth quarter as well. It was in the news mainly for asset sales announcements at regular intervals. The company announced its exit from several projects as well as asset sales. It exited the Kashagan project in Kazakhastan, sold its businesses in Algeria and Nigeria, and is also reportedly considering selling stakes in its Canadian oil sands assets. Earlier this month, it also sold some oilfields in North Dakota and Montana. The overall aim is to generate sufficient resources for its capital expenditure plans for the next three years and focus on businesses which can generate enough returns for it to meet its dividend yield promises.
Compared to Q3 2012, oil prices haven’t been higher in Q4 2012. Combined with probable production declines due to the sale of assets, we expect ConocoPhillips to report lower sequential earnings for the fourth quarter.
Why Is ConocoPhillips Selling So Many Assets?
There are good reasons as to why ConocoPhillips is on a selling spree. It wants to shed its non-core businesses and generate funds for capital spending in areas with high growth potential. The company has an annual capital expenditure target of $15 billion for the next three years. It also needs to maintain the dividend it pays to investors. Both of these objectives need significant cash flow generation, which can be achieved only if the company sells off unproductive or non-core assets.
Also, some assets like Kashagan are not generating revenues yet, and have caused the company to incur significant costs and come attached with significant political risk. You can read a previous article we wrote on the issue here. ConocoPhillips seems to be moving away from projects in regions with high political risk and uncertain regulatory environments. It is instead concentrating on projects in North America and Australia - regions with stable governments and predictable regulatory frameworks. Also, the shale boom in the U.S. and the long term potential of the oil sands business in Canada might have prompted a shift in focus. These regions will require ConocoPhillips to undertake sustained investment over the next few years.
An indicator that confirms our speculation was the sale of oilfields in North Dakota and Montana this month. ConocoPhillips’ major assets in these two states are shale assets which are a part of the Bakken formation, but none of them were part of the deal. The oilfields sold were conventional fields with declining output. The $1.05 billion generated from the deal can be used to acquire more acreage in the Bakken.
On account of this deal, Conoco expects to record an after-tax net earnings benefit of approximately $120 million in the fourth quarter of 2012.
While asset sales might result in benefits over the long term, we think that it might result in lower production figures for some time going ahead.
We are primarily concerned with the expected negative impact from declining fields, asset sales and natural gas curtailments in North America. However high oil and international gas prices will most likely outweigh these headwinds and support positive revenue growth in the quarter.
We have a price estimate for ConocoPhillips of $63 which will be revised shortly after the earnings report is out.
Disclosure: No positions.