ConocoPhillips: 20% Of The Stock Price Is Tied To Canada

May.23.14 | About: ConocoPhillips (COP)


13% to 20% of Conoco's stock price may be attributed to the Canadian energy business.

The Christina Lake, Surmont and Foster Creek projects are world class, with top quartile average steam-to-oil ratios (i.e., they are more efficient than the XOM Kearl project).

A low steam-to-oil ratio means using less water and burning less natural gas to produce steam.

Finding and development costs for the Christina Lake project are only $15/barrel.

The company projects incremental production of 100K barrels per day by 2017 from the oil sands business.

ConocoPhillips (NYSE:COP) is the world's largest independent exploration and production company, based on proved reserves and production of liquids and natural gas. COP was considered an integrated energy until the company spun off PSX to shareholders several years ago. COP employed 18,400 worldwide as of Dec. 31, 2013. See this excellent article by Michael Fitzsimmons regarding the merits of PSX.

Total production from continuing operations for 2013 averaged 1,502 thousand barrels of oil equivalent per day (MBOED), a 2 percent decrease compared with 1,527 MBOED in 2012. As of May 21, 2014, the market capitalization of the company was $96 billion. Management's goal of 3% to 5% compounded annual growth in production (from now to 2017) is reliant on strong performance from the oil sands business.

Why Does Canada Represent Close to $20B for COP?

  • In FY 2013, operations in Canada contributed 17 percent of worldwide liquids production and 20 percent of natural gas production.
  • In Q1 2014, Canada contributed 18 percent of worldwide liquids production and 18 percent of natural gas production.

Average Daily Net Production Interest Operator Liquids MBD Natural Gas MMCFD Bitumen MBD Total MBOED
Western Canada Various % Various 38 775 - 167
Surmont 50% ConocoPhillips - - 13 13
Foster Creek 50% Cenovus - - 50 50
Christina Lake 50% Cenovus - - 46 46
Total Canada 38 775 109 276
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In the first quarter of 2014, the realized sales prices for the Canadian business (compared to FY 2013 average realized prices) were:

FY 2013

Q1 2014

Crude Oil ($/BBL) - Canada



NGL ($/BBL) - Canada



Bitumen ($/BBL)



Natural Gas ($/MCF) - Canada



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Obviously, the rise in natural gas prices has coincided with a rise in the stock price. Again, because 20 percent of COP natural gas production is from Canada, investors must have this on their radar.

Oil Sands

The bitumen resources in Canada are produced via an enhanced thermal oil recovery method called steam-assisted gravity drainage, whereby steam is injected into the reservoir, effectively liquefying the heavy bitumen, and pumped to the surface for further processing.

  • Surmont: The Surmont oil sands leases are located 35 miles south of Fort McMurray, Alberta. Surmont is a 50/50 joint venture with Total. Following a 2015 startup, Surmont's gross production capacity is estimated to be 150 MBOED, with peak production anticipated by 2018.
  • FCCL: It is a 50/50 heavy oil business venture with Cenovus Energy Inc., the operator of FCCL. The assets include the Foster Creek, Christina Lake and Narrows Lake SAGD bitumen developments. FCCL continues to progress expansion plans to potentially increase total gross production capacity to approximately 750 MBOED.
  • Foster Creek: It is located approximately 200 miles northeast of Edmonton, Alberta. Ultimately, Cenovus expects Foster Creek may produce 295,000 gross barrels per day by 2019 and as much as 310,000 gross barrels per day with future optimization. Foster Creek is the largest project for Cenovus, and is considered among the best commercial SAGD projects in the industry. In 2010, Foster Creek achieved a significant milestone in becoming the largest commercial SAGD project in Alberta to reach royalty payout status. When a project reaches payout, its cumulative revenues exceed cumulative allowable costs, showing a sign of success.
  • Christina Lake is located approximately 75 miles south of Fort McMurray, Alberta. Gross production at Christina Lake increased more than 55 percent in 2013. With the additional expansion phases and optimization work, total gross production capacity from Christina Lake could reach approximately 310 MBOED. Christina Lake is one of the most efficient SAGD operations in the industry, with a steam-to-oil ratio of 1.8 in 2013. A low SOR means using less water and burning less natural gas to produce steam.
  • Narrows Lake is located near Christina Lake and is expected to have a total gross production capacity of 130,000 barrels per day, three phases and a project life of up to 40 years. Ground work for the initial phase of 45,000 gross barrels per day began in the fall of 2012. Narrows Lake will be the third steam-assisted gravity drainage oil sands project operated by Cenovus.

FCCL Financial Items

  • COP accounts for the investment in FCCL under the equity method of accounting.
  • COP was obligated to contribute $7.5 billion, plus accrued interest, to FCCL over a 10-year period that began in 2007. In December 2013, COP repaid the remaining balance of the obligation.
  • In the first quarter of 2014, COP received a $1.3 billion distribution from FCCL Partnership, which is included in the "Undistributed equity earnings" line on the consolidated statement of cash flows.

How Does COP Allocate Capital?

COP provides an excellent dividend yield of 3.5%, has paid down debt tied to FCCL (see "Financial Items" above) and is investing in high margin projects. The scope of this article is the Canadian operation, so let's see how that compares to other investment opportunities that COP has undertaken.

During the first three months of 2014, capital expenditures and investments supported key exploration and development programs, primarily:

  • Oil and natural gas development in the Eagle Ford and Bakken shale plays, and the Permian Basin.
  • Oil sands development and liquids-rich plays in Canada.
  • Development of coalbed methane projects associated with the APLNG joint venture in Australia.

Capital Spending (Millions of Dollars)

Q1 14 (March 31, 2014)

Q1 13 (March 31, 2013)




Lower 48 and Latin America












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*Other includes the APLNG joint venture in Australia and European activities including Greater Ekofisk, Jasmine and others which are not the focus of this article.

COP - Canadian Operations and Key Statistics in Q1 2014

Q1 14 (March 31, 2014)

Q1 13 (March 31, 2013)

Income from Continuing Ops (millions of $)



Bitumen (thousand barrels/day)*



Total Production (MBOED)**



Average sale prices

Total Bitumen average sales price ($/BBL)



Natural gas ($/MCF)



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*Equity affiliate production (i.e., FCCL) was 111 in Q1 2014 and 96 in Q2 2013.

**Includes natural gas, bitumen, crude oil and NGL.

Proved Undeveloped Reserves

COP had 3,314 million BOE of proved undeveloped reserves at year-end 2013, compared with 3,017 million BOE at year-end 2012.

As of Dec. 31, 2013, proved undeveloped reserves represented 37 percent of total proved reserves, compared with 35 percent at Dec. 31, 2012. Costs incurred for the year ended Dec. 31, 2013, relating to the development of proved undeveloped reserves were $12.5 billion.

Approximately 75 percent of proved undeveloped reserves at year-end 2013 were associated with seven major development areas. Six of the major development areas are currently producing and are expected to have proved undeveloped reserves convert to developed over time as development activities continue and/or production facilities are expanded or upgraded, and include:

  • FCCL oil sands -- Foster Creek and Christina Lake in Canada
  • The Surmont oil sands project in Canada
  • The Eagle Ford area in the Lower 48
  • The APLNG project onshore Australia
  • The Ekofisk Field in the North Sea

Discounted Future Net Cash Flows

In accordance with SEC and FASB requirements, amounts were computed using 12-month average prices and end-of-year costs (adjusted only for existing contractual changes), appropriate statutory tax rates and a prescribed 10 percent discount factor. The calculations were based on estimates of proved reserves, which are revised over time as new data becomes available. Probable or possible reserves, which may become proved in the future, were not considered.

Millions of $

FYE 2013

FYE 2012

FYE 2011

Canada Equity Affiliates*




Total company




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*This indicates that 13% of the value of COP's future cash flows are tied to FCCL. Remember, the company will allocate $5B to the oil sands from now until 2018. Also, the Equity Affiliates figure does not include the natural gas side of the Canadian operations (which produced 775 MMCFD in 2013).


Yes, 20% of the stock price of COP is tied to Canada. Importantly, the Canadian operations have a long runway for growth. There is growing production and distributions ($1.3B in Q1 2014) from the FCCL Partnership. Also, bitumen production is likely to grow, and the company sees FCCL having potential gross production of 750M Barrels Oil Equivalent/Day (MMBOED). In 2013, FCCL had 96MMBOED of production (implying that gross production was 192MMBOED as COP owns 50% of the venture).

Fitch Ratings rates the company's debt an A as of April 2014. COP has a below market P/E ratio of 10.7x, and COP sports a strong dividend yield of 3.5% compared to the S&P 500 yielding 1.70%. The stock represents a buy at these levels.

Disclosure: I am long COP, PSX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: The above is not intended to be investment advice, and is only the opinion of the author. Observers may want to consider various oil and natural gas prices, labor costs, and impacts of deepwater drilling activity. The scope of this article is only a small part of COP's overall operations, and the company is exposed to commodity and labor costs in many continents.