ConocoPhillips (COP) explores, produces, transports and markets crude oil, natural gas, natural gas liquids, liquefied natural gas and bitumen. The company mainly focuses on operating producing assets, executing existing major projects and exploring for new resources in promising areas. ConocoPhillips has assets in North America, Europe, Asia and Australia. At the moment, the company is conducting exploration activities in 19 countries and produces hydrocarbons in 13 countries.
The company is known worldwide for its technological expertise in deepwater exploration and production, reservoir management and exploitation and 3-D seismic technology. There have been slight fluctuations in the stock price over the past six months. At the end of January, COP came down due to less than impressive earnings. However, the stock has started to move up again, and I expect ConocoPhillips to continue its rise. There are enough positives for the company to increase profitability in the future.
Use of Technology to Increase Production in Alaska
At the moment, almost all of the energy companies are facing a problem of depleting reserves. As a result, it is important for these companies to get the best out of available reserves. ConocoPhillips is aiming to use its superior technology to increase the production from its reserves. The company has announced a $2.5 billion project over the next five years to gain an additional 35,000 barrels from its three legacy North Slope oil fields. ConocoPhillips is planning on using 4-D seismic, coiled-tubing drilling and casing drilling to lower costs and reach additional deposits.
Proposed project will decrease the production decline to 3% by 2017. The decline can come down to 2%, if the company is able to bring Alpine West/CD5 satellite into production by 2015-16, According to Mathew Fox, EVP of exploration and production. Two techniques will be used in the program. First technique will bring down the cost of developing smaller oil pockets. ConocoPhillips will use time-lapse 3-D seismic to "illuminate pockets of oil that are in separate fault blocks. ConocoPhillips will then use a small tool at the end of coiled tubing equipment, which can "twist and turn through the rock." This tool will allow ConocoPhillips to go to these pockets.
The second technique will allow the company to reach unstable or low-pressure reservoirs, which were not accessible before. For this purpose, the company will be using steerable drilling liners. In such situations, there is not enough time to put in casing as the well bore falls. So, the company will be using casing to drill and the casing will be already in place before drilling. As a result, ConocoPhillips will be able to reach deeper and more difficult reservoirs.
Drilling in Arctic Waters
The company is also on course to start drilling in the arctic waters next year. ConocoPhillips's exploration plan is currently under review by the Bureau of Ocean Energy Management, and the company will submit additional info next week. The area chosen for drilling is called "Devil's Paw" in Chukchi Sea. It is the same area where Shell (RDS.A) started drilling and faced various issues. However, the company believes that most of the issues faced by Shell originated from the use of old equipment. Shell has also announced that it will skip drilling during 2013, and focus on improving the equipment. ConocoPhillips's location for drilling in the area is further south than Shell's drilling area, which will benefit the company. ConocoPhillips will have a longer open-water season in its area as the ice melts there earlier in spring and forms later in the fall. Furthermore, the company will use new equipment for drilling, and the drill is being built by Noble. The jackup rig will be capable of working in extreme weather conditions, and its legs will rest directly on the sea bed.
Dividend, Valuation and Peers
ConocoPhillips is one of the best dividend payers from the energy sector. At the moment, the company pays an annual dividend of $2.64 per share, yielding 4.60%. Furthermore, the stock is trading at an attractive TTM P/E ratio of 9.9 and forward P/E ratio of 9.1. Price-to-book and price-to-sales ratios for the company are 1.5 and 1.2, respectively. Biggest competitors for ConocoPhillips are Exxon Mobil (XOM) and Chevron Corp (CVX). Both of these competitors have attractive dividend yields. Exxon Mobil pays an annual dividend of $2.28 per share, yielding 2.56%. Furthermore, XOM trades at TTM P/E ratio of 9.1 and forward P/E ratio of 9.6. Chevron Corp pays an annual dividend of $3.60 per share, resulting in yield of 3.04%. On the valuation front, Chevron trades at TTM P/E ratio of 8.9 and forward P/E ratio of 8.8.
I believe ConocoPhillips is taking necessary steps to decrease the decline in production. This should allow the company to use its resources efficiently and enhance revenues. Furthermore, COP is also planning to sell more assets to meet its funding gap. COP will spend around $16 billion in capital expenditures in order to replace its depleting reserves. The company has a policy of replacing reserves at the rate of 100%. At the start of 2013, COP announced that the capital expenditures will remain flat for the next year. Over the last twelve months, the company spent $16 billion in capital expenditures. ConocoPhillips should be able to meet CAPEX requirements through assets sale.