Along with the exploration and production of energy resources, ConocoPhillips (COP) is focused on minimizing the operational risk of its projects. The company has been able to provide superior returns to its investors over the years along with the assurance to continue providing such returns. The company's stock price increased from around $57 in September last year to around $70 this year. This increase can be attributed to the company's continued focus to invest in low operating risk assets and reach desired targets in production volume.
A positive opportunity
ConocoPhillips operated in the Petrozuata, Hamaca and Corocoro projects located in Venezuela. In early 2007, the government announced its nationalization program in Venezuela, and the government seized the property of private oil companies. During this nationalization process, the Venezuelan government took control of ConocoPhillip's interests in the Petrozuata, Hamaca and Corocoro projects on June 2007 without fairly compensating the company. In late 2007, the company submitted its request for Arbitration to the International Center for Settlement of Investment Disputes, or ICSID. Due to expropriation of assets by the Venezuelan government, ConocoPhillips recorded a $4.5 billion after-tax impairment for its assets in Venezuela in the second quarter of 2007.
In September this year, ConocoPhillips reached a major milestone when the ICSID Tribunal ruled that Venezuela breached its obligation in compensating ConocoPhillips appropriately for its assets. The ICSID ruled that the expropriation was unfair, and the appropriate compensation will be determined in the future. Upon filing with ICSID in November of 2007, ConocoPhillips requested an award of $30 billion for compensation. We assume it estimated this amount with the intent of covering damages and associated expenses.
In a pursuit to increase riskless-revenue
The increasing risks of operations are forcing international oil companies, or IOCs, like ConocoPhillips to reduce their holdings in the Nigerian onshore and near offshore fields due to oil theft and sabotage occurring to employees. The combined output by these companies accounted for 90% of the Nigerian oil production in 2006 and is expected to decrease to around 60% in the next five years through 2018, if the oil companies continue to divest from their projects in Nigeria.
By focusing on improving margins and reducing the operating risk in its projects, ConocoPhillips entered into an agreement to sell its 17% holding in the Brass LNG project located in Nigeria to affiliates of Oando last year. Nigerian National Petroleum Corporation, Total, and Eni hold the rest of the Brass LNG project. However, ConocoPhillips and Oando's deal was called off in September this year. We believe this is a setback for ConocoPhillip's plan to reduce the operating risk of its operations.
An analysis of natural gas production volumes can put more light on the company's strategy in different regions. The chart below shows the company's daily production of natural gas in different parts of the world as of the second quarter ending in June this year.
Regions of production (in the second quarter ending in June 2013)
Natural Gas production (million cubic feet per day)
Natural gas prices (dollars per thousand cubic feet)
Lower 48 and Latin America
Asia Pacific and Middle East
Source: Conoco Phillips
As we can see from the table, "Other International," which includes Africa, is one of the company's lower producing natural gas regions.
Additionally, we can see that the sales price realized from the sale of natural gas from Europe as well as the Asia Pacific and Middle East region are among the highest. Looking at the price realized from different regions in the world, we believe that the company might increase production of natural gas in Europe and the Asia and Middle East region in the future as compared to Africa. The production in Africa reached an average of 167 million cubic feet per day, or MMCFD, last year, and it reduced to 28 MMCFD in the quarter ending in June this year. In the Asia Pacific and Middle East region, the average production of natural gas increased from 1,157 MMCFD in 2012, to 1,219 MMCFD in the quarter ending in June this year.
Another company planning to sale its assets in Nigeria is Chevron (CVX). The company has opened bids for three oil blocks in the Niger Delta in September this year. The three oil blocks include OML 52, OML53, and OML55; the company holds a 40% stake in each of these blocks. These three oil blocks have a combined acreage of around 2500 square kilometers with total oil reserves of around 134 million barrels and 5 trillion cubic feet of gas. The company plans to sell the oil blocks due to operational inefficiencies rising because of oil theft. The sale of these oil blocks is expected to generate around $500 million - $600 million for the company.
Another company that is planning asset sales to increase its foothold in exploration and production of energy resources is Total (TOT). This year the company planned to invest around $28 billion, out of which around 80% went towards oil production and exploration. The company plans to sell around $20 billion worth of assets and use the cash generated for exploration and production. The company plans to bring around 25 production projects on line by 2017 to increase its output from 2.3 million barrels per day last year to around 3 million barrels per day. So, with the sale of assets, the company will be able to fund its long-term objectives.
We are bullish on both Chevron as well as Total.
Source: Yahoo finance
The above chart shows that ConocoPhillips' P/E and forward P/E ratio are higher than both Chevron's and Total's ratios. The company's high forward P/E could be explained by its unsuccessful attempt to sell of its stake in the Brass LNG project. We believe that if the Brass LNG project went through, the company would have been in a better position to use the capital obtained from the sale in higher margin projects. Although the Brass LNG project sale didn't materialize, we believe that there is no immediate threat to the company's revenue potential. One positive for ConocoPhillips is the tribunal hearing indicating that the company is entitled to compensation from the Venezuelan government. With the company's clear strategy for managing its asset portfolio, we believe that ConocoPhillips is heading in the right direction.
Additional disclosure: Fusion Research is a team of equity analysts. This article was written by Madhu Dube, one of our research analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.