Companies operating in the energy sector are usually stable, and follow a smooth path toward future growth. ConocoPhillips (COP) recently suffered due to less-than-impressive earnings and concerns about the depleting reserves. There were also concerns about the cash position of the company, due to the need for heavy capital expenditures. However, recent developments have made ConocoPhillips probably the most attractive investment in the energy sector.
Over the past year, ConocoPhillips has only returned 2.1% -the stock has been through a lot of ups and downs during the same period. Recent discoveries by the company indicate that ConocoPhillips will be able to replace its depleting resources, and the company may well achieve higher growth than the predicted figures of 3%-5%.
A Change in Strategy
ConocoPhillips has recently changed its strategy, and the company is now focusing on oil rich areas that are politically stable. Working in volatile political conditions can always have a negative impact on the operations of the business. Furthermore, ConocoPhillips is also looking to operate in the regions with stable regulatory environment. It is especially important for energy companies to work in a stable regulatory environment as massive capital investments might be wasted due to a change in the regulatory framework.
The Middle East and Asia provide an opportunity, but these regions have volatile political environments and less certain regulatory framework. Recently, ConocoPhillips held talks with Qatar Petroleum regarding the country's natural gas project. ConocoPhillips has a 30% stake in the 7.8 million mt/year Qatargas 3 LNG production joint venture. Qatar is currently looking to expand and accelerate its natural gas production, which might provide another opportunity to the company. However, political unrest in the region can cause troubles. Qatar has already suspended well development in the north field, which is the world's biggest conventional gas deposits, shared between Qatar and Iran.
As a result of these issues, ConocoPhillips has shifted focus to North America and Australia. The company is drilling in the Gulf of Mexico along with a focus on the shale oil reserves. ConocoPhillips and Karoon Gas (KAR) have started work on the third of five planned wells in offshore Western Australia. On the other hand, increased focus on shale oil will allow the company to have much more certain production levels than in politically unstable areas.
ConocoPhillips has been extremely active in the Gulf of Mexico. The company has acquired about 2 million in acreage, and exploration efforts in the area have been fruitful. The company has announced two significant discoveries in the Gulf of Mexico over the period of one week. The first discovery was at Shenandoah well, where ConocoPhillips and Anadarko Petroleum Corporation (APC) both have 30% interest each. In addition, Cobalt International Energy (CIE), has a 20% interest, Venari Resources and Marathon Oil Company (MRO) both hold 10% interest each in the Shenandoah well. The discovery in Shenandoah well is significant, which will add substantially to the reserves of the company.
The second discovery was in the Coronado wildcat exploration well, which is also jointly operated. ConocoPhillips has 35% interest in the well while the other biggest holder is Chevron Corp (CVX) at 40%. Remaining interest is divided between Anadarko (15%) and Venari offshore LLC (10%). Coronado well encountered 400 feet of net pay while Shenandoah well encountered 1,000 feet of net pay. Shenandoah oil discovery is one of the largest in the Gulf of Mexico, and it has the potential to be a massive project. It is not yet clear how many barrels of oil will be produced from this area; however, it is likely to be sizable.
After the spin-off, the company has become lean and it is focused on growth. As a result, ConocoPhillips is selling its less productive assets and investing in high-growth assets. The company will sell about $9.6 billion in assets during 2013, and the money will be invested in high-growth areas. Recent discoveries mean that the company's efforts to focus on high growth areas are paying off, and it will be successful replacing its depleting reserves. Due to the growth potential of the company; ConocoPhillips is a compelling buy at the moment. The stock is priced attractively, and ConocoPhillips should be picked up as a long-term investment.