2013 has been a good year for ConocoPhillips (COP). The stock has been on a tear, up about 20% since its July lows. However, ConocoPhillips now seems to have landed into a seasonal rough patch, thanks mostly to lower WTI prices. The stock has declined about 5% from its YTD highs. Much like in prior occasions, this decline may prove to be a buying opportunity for long-term focused investors.
2014 Capex budget of $16.7B, with 55% dedicated to North America
ConocoPhillips has recently announced its 2014 capital budget. As expected, the company plans to continue its massive investments in North American energy plays, mostly in the Eagle Ford, Bakken, Permian, and Canadian oil sands. The company noted that about 55% of the $16.7B 2014 capex budget is slated for North American while 45% is going towards Europe, Asia Pacific and other international businesses. ConocoPhillips also noted that it plans to increase capex spending in Alaska as a result of the improved tax environment due to the passage of the More Alaska Production Act (SB21).
Below is a breakdown of ConocoPhillips' 2014 capex budget by category:
13% Base Maintenance
39% Development Drilling Programs
35% Major Projects
13% Exploration and Appraisal
The 2014 capital budget can be seen as a vindication of ConocoPhillips' shift towards North America. As noted above, 39%, or about $6.5B, is slated for development drilling programs. Of this total, about 90% is anticipated to be invested in North America. The company has been seeing solid production growth in the area, especially in the Eagle Ford. By 2017, the Eagle Ford production is expected to grow at a CAGR of 16% to 130 MBOE/D. About 60% of ConocoPhillips' future production growth is expected to come from the region. These wells are typically oil-rich with high margins. By 2017, the North American developments are expected to produce roughly 600 MBOE/D.
ConocoPhillips' major projects include developments in low-risk countries such as Canada, the UK, Norway, Australia, and Malaysia. ConocoPhillips mentioned that the APLNG joint venture will see peak spending in 2014. While F&D costs are high at about $25 per BOE, the project is estimated to generate margins of over $40 per BOE by 2017. The first cargo remains on schedule for mid-2015. Of special note was ConocoPhillips' increased capex spending for the Surmont Phase 2 Canadian oil sands project. The production here is likely to grow rapidly, at a CAGR of 16% through 2017. ConocoPhillips has noted that as production grows it will likely be able to lower operating expenses which are currently quite high on a per BOE basis. By 2017, these major projects are likely to produce about 400 MBOE/D of production for the company.
Prolific Jasmine Field is on track to average 40K BOE/D in 2014
On November 20, ConocoPhillips announced that it had started gas production from the Jasmine field which is located in the North Sea. The company noted that Jasmine is the largest discovery to come onstream in the area since 2007. Jasmine has significant potential, with gross capacity to produce 140,000 BOE/D. For FY 2014, Jasmine is anticipated to produce an average of 40,000 BOE/D for ConocoPhillips. Do note that while ConocoPhillips is the operator of the Jasmine field, it only has a 36.5% stake. The other stakeholders include Italian oil major Eni (E) (33%) and the British BG Group (OTCQX:BRGYY). Fellow SA author Michael Fitzsimmons recently wrote a great article about the Jasmine field and its potential impact for ConocoPhillips.
Divestiture of Algerian assets completed
On November 27, ConocoPhillips announced that it had completed the sale of its Algeria business unit for a total of $1.75B. This continues its trend on divesting perceived high-risk assets. ConocoPhillips has been aiming to rationalize its portfolio, selling off non-strategic assets and reinvesting the proceeds into higher margin developments, oftentimes in North America.
Since beginning the process in 2012, ConocoPhillips has generated about $12.4B in total proceeds. Do note that this figure does not include ConocoPhillips' announced $1.75B sale of Nigerian assets to Oando Energy Resources. This deal has been delayed due to the buyer struggling to come up with the funds needed. ConocoPhillips has noted that it is aiming to finish all of its pending deals by the end of 2013.
Final Thoughts and Conclusion
For those looking for a low-risk, North American based energy play, ConocoPhillips seems to be solid choice. Its current 4% dividend yield is higher than all of the integrated majors, while its growth prospects are arguably much stronger. That being said, I believe that the market may be pricing ConocoPhillips just a tad too richly. ConocoPhillips may struggle in the short term, but it is a keeper long term.
Disclaimer: The opinions in this article are for informational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned. Please do your own due diligence before making any investment decision.