ConocoPhillips (COP) recently announced start-up and first gas from the Jasmine field in the U.K.'s North Sea. This morning, the company revealed that the 4 Jasmine wells are the most prolific in the corporation. This news comes on the heels of the Ekofisk South startup in Norway announced last month. These two projects prove that ConocoPhillips is much more than a U.S. unconventional company. In fact, international production will account for the vast majority of the company's production growth by 400,000 bpd by 2017.
I have written often about COP's success in U.S. unconventional plays -the most important of which is the prolific Eagle Ford shale where COP is the #2 producer behind EOG Resources (EOG). While the Eagle Ford has been a jewel of a resource, and a very important component of COP's "shrink-to-grow" strategic plan, the chart above shows it is the company's international conventional operations that will add the vast majority of new production by 2017.
Jasmine's 4 Wells: "The Most Prolific In the Corporation"
Take Jasmine for instance. COP discovered Jasmine in 2006. It was one of the largest discoveries in the U.K. in the last 10 years. COP is the operator of Jasmine and has a 36.5% stake. Other participants are Eni (E) what a 33% interest and BG Group (30.5%). The Jasmine facility has the gross capacity to produce 140,000 boe/day. ConocoPhillips expects net production to be ~40,000 boe/day in 2014.
Let's put this in perspective. As shown in a presentation given this morning at the Bank of America Global Energy Conference, Jasmine's expected 40,000 boe/day production in 2014 is greater than COP's total current production in the Bakken (see slide 15). During the webcast (which you can access here), Conoco Executive VP Al Hirshberg said the 4 Jasmine wells are high pressure, high temperature, and very challenging from a technical standpoint. The good news is that drill bit results came in on the high side of expectations. In fact, Hirshberg said the wells are the most prolific in the corporation and that they are capable of out producing current capacity. Jasmine production is expected to ramp up very rapidly (see slide above).
The great news from Jasmine came close on the heels of last month's announcement that Ekofisk South in Norway had achieved first oil production. ConocoPhillips operates the Greater Ekofisk Area and has a 35.1% stake. Other Ekofisk co-venturers are Total (T) with a 39.9% interest, Eni at 12.4%, Statoil (STO) with 7.6%, and Petoro (5.0%).
Ekofisk South, along with Eldfisk II and other development projects offshore Norway, will add ~60,000 boe/day of net high-margin production to COP's production volumes by 2017:
U.S. To Export Oil?
At a recent IHS CERA/Week conference, Chief Executive Officer Ryan Lance pushed for the U.S. to work toward easing oil export restrictions. Before the U.S. shale revolution, U.S. Gulf Coast refining was re-tooled to process heavy/sour crudes from Venezuela, Saudi Arabia, and Canada. As a result, light-sweet tight oil production growth from the Eagle Ford, Bakken, and the Permian is out-stripping refining capacity. As a result, Lance said the U.S. should export light-sweet crude to Europe, Mexico and countries in South America that have the refining capacity to utilize the crude.
COP Is Not U.S. Unconventional Centric
Perhaps Lance was simply talking his book. I have written many articles on COP and have read many user comments. There appears to be an incorrect perception that COP is primarily a U.S. unconventional centric company. That simply is not the case and these two recent announcements from Europe prove it. Further proof: in the most recent Q3 earnings report, U.S. lower-48 production composed only 548 million in earnings for the first 9 months of 2013. That is only ~8% of the company's total earnings of $6.7 billion through the first 9 months of the year. Going forward, the lower-48 percentage will decrease as more international growth projects kick in.
Summary & Conclusion
Many investors have an incorrect perception that ConocoPhillips is somehow more exposed to the potential for weak WTI prices than are many other companies. It isn't true. In fact, the company's profit margins in the Eagle Ford are over 50% and can therefore deliver very nice returns even if WTI were to drop to $80-85/barrel. In the meantime, the company continues to execute superbly on its promise to investors to deliver 3-5% production and margin growth out to 2017. The company's international growth projects are where the real action is. And these projects will deliver Brent based oil and gas based on international gas prices. So while investors reap the 3.8% dividend yield, they should not be scared out of holding shares due to any concerns about weak WTI prices. Or even that Warren Buffett's Berkshire Hathaway (BRK.A) (BRK.B) recently sold 44% of its stake in COP. Buffet has a record of buying COP when he should have been selling, and selling when he should have been buying. In light of COP's prolific Jasmine results, he probably wished he had held on to the shares, or even increased his position.
ConocoPhillips is a BUY. The company's commitment to a high dividend yield, it's relatively low P/E, and the continued execution of its plan to grow both production and margins by 3-5% out to 2017 are all reasons to own this company.
Mkt Cap: $89.9 billion
P/E ("ttm") = 11.2
EPS ("ttm") = $6.54
Div (Yield) = $2.76 (3.8%)
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