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Summary

  • The company's asset mix will allow it to have strong growth over the next few years.
  • ConocoPhillips' focus on high-margin segments will result in substantial margin growth in the next 2-3 years.
  • With the recent movements, unconventional plays in North America are becoming the major segment for the company.

The landscape of the global energy market has changed over the last few months - the companies are now focusing on returning more capital to shareholders instead of investing in new projects. However, ConocoPhillips (NYSE:COP) has been following a plan of its own over the last two years - during this time, the company has spun-off one business unit into Phillips66 (NYSE:PSX), sold-off some under-performing assets and managed its capital budget. At the same time, the company has maintained a conservative growth rate in its production levels of 3-5%.

The policy to focus on the politically stable areas and growth in production levels has had a positive impact on the stock price and the stock is up over 23% during the last twelve months - it is an impressive gain and the stock has outperformed its peers such as ExxonMobil (NYSE:XOM) and Chevron (NYSE:CVX). We believe ConocoPhillips will be a very good long-term investment, and in our previous articles, we have looked at different strengths of the company. In this article, we will focus on the assets that will be key growth drivers for the company over the next few years.

Liquid Plays: A Potential Growth Driver

The production of oil proved to be more profitable than natural gas throughout the last year. This operational transition benefited the companies as liquid plays offer better volume and margins compared to natural gas. Similarly, over the last year, ConocoPhillips also increased its liquids production with a considerable decrease in natural gas. Moreover, the company achieved its targets by trimming off non-core assets, investing in major growth projects, progressing drilling and exploration programs and maintaining a compelling dividend. The image below shows the product mix over the last three years.

(click to enlarge)

Source: SEC Filings

Due to this operational transition, the company managed to generate around $16 billion as operating cash flows in the last year. Moreover, the company's increased focus in the North American region is giving it more geopolitical stability as compared to its rivals.

The prices for natural gas have also made a substantial recovery, which has caused oil and gas companies to report better than expected results from this segment. ConocoPhillips recently announced its first quarter results, showing a decent increase in operational throughput. The reason for this impressive performance in the first quarter is the stronger natural gas and bitumen prices in the period.

Moreover, the daily hydrocarbon production averaged around 1.53 MMBOED, which the company plans to boost to around 1.9 MMBOED by 2017. COP effectively plans to add new production of almost 1 MMBOED in a period of 5 years. This increased operational yield will help the company to considerably enhance its revenues over the next few years. Further, due to increasing shale opportunities and decreasing natural gas price environment in the last year, the company directed its investments toward high-margin, liquid-rich plays in the Lower 48 region, which now contributes 29% of the company's worldwide liquids production and 38% of its natural gas production.

More Avenues for Growth

ConocoPhillips has one of the best asset portfolios with a proportionate mix of natural gas and liquids. During the last year, COP invested nearly $15 billion in capital projects and budgeted $16.7 billion capital investments for the current year. Further, the recent investments in liquid plays of the Lower 48 and Canadian regions will allow the company to meet its production targets and add reserves to its portfolio.

The first quarter earnings revealed that the largest contributing regions in terms of revenue include the Lower 48 and Latin America, and Canada showing increases of 37% and 38%, respectively. The liquids production from the Lower 48 region grew by 50 MBOED over the last year, increasing its total net hydrocarbon production rate by 41 MBOED. Moreover, the company holds significant growth opportunities in the bitumen-rich Canadian oil sands region. Over the first quarter, the company increased its average net bitumen production by 14% compared to the same period last year. The bitumen segment is very important, as the prices are rising for this product, with an average sales price increase of 44% per barrel during the last year.

The shifted focus towards liquid plays continued bearing fruits for the company, and margins and production have expanded over the last few quarters. For the current year, the company intends to invest in its legacy assets and increase its throughput from additional projects like the recent startup at Siakap North-Petai [SNP], and startups in Canada, United Kingdom and Malaysia. Oil and gas production from Malaysia yields relatively higher margins due to its close proximity to Asian markets. Moreover, ConocoPhillips is expected to yield approx. 60 MBOED by 2017 from the Malaysian projects, which will add substantial value to its operational yield.

Last but not least, the drilling pilot programs in South Texas and North Dakota could outpace the company's three-year plan to double its North American shale output. The company is testing whether it can reach oil and natural gas trapped in different levels of shale reservoirs. Moreover, after the company trimmed $12.4 billion of its assets last year, the North American unconventional business became its biggest segment, and is expected to increase its daily production from 1.4 million barrels last year to 1.8 million barrels in 2017. ConocoPhillips also plans to spend an average of $5.5 billion of its capital expenditures on shale and other unconventional plays in North America over the next few years.

Conclusion

The direction of the company as well as the assets shows that it will be a solid long-term investment. The company is going to enhance its production levels over the next few years, and with the global energy market recovering, we will see considerable growth for ConocoPhillips. As a result, the growth in the cash flows and revenues will allow the company to enhance its dividends - furthermore, we will see a considerable rise in the stock price on the back of strong growth in the fundamentals.

Source: ConocoPhillips: A Solid Long-Term Investment