ConocoPhillips: Continued Growth In Production Will Support The Rise In Stock Price

| About: ConocoPhillips (COP)

Summary

The rise in the stock price since the start of the year has been backed by the expected growth in production levels.

Company's global asset base and expansion will support the growth in production levels over the next few years.

ConocoPhillips has achieved some of the best results both on the cost as well as production sides.

ConocoPhillips (NYSE:COP) has been the best performer in the sector with about 18% gain year-to-date, while Chesapeake Energy (NYSE:CHK) and Phillips 66 (NYSE:PSX) has gained about 12% and 8%, respectively. The company has increased its production substantially over the last two years, due to which the stock also surged this year. The rise in the stock price is mainly due to the company's increased estimated production level. In our previous article, we have highlighted the possible growth avenues for the company; however, this article focuses on COP's efforts to increase its production and exploration activities globally and maintaining profitability in the long-run by decreasing its supply costs.

Increased Global Exploration & Production Programs

In order to achieve the estimated production levels, COP has been increasing its exploration and production activities globally. The company has consistently discovered more commercial resources than it has produced and has also been replacing reserves at competitive exploration and development costs. Furthermore, COP continues to access high-quality unconventional and conventional exploration opportunities that will support its long-term organic growth plans. The image below shows the global exploration and production operations of the company.

Click to enlarge

Source: COP Global Exploration, Fact Sheet, March 2014.

Moreover, COP continues to participate in material new unconventional and conventional discoveries which will further increase the size and quality of its resource base. Currently, there are several North American unconventional programs underway, and the company has increased its North American acreage by more than 850,000 net acres since 2011. ConocoPhillips drilled unconventional test wells in the Montney, Duvernay and Canol Shale in Canada, and exploration activities will continue in 2014. According to the March 2014 Factsheet, Canada holds 6,125 gross and 3,907 net acres of undeveloped acreage and contributed 38% in the company's production activities in the first quarter. The increased contribution from the Canadian region started reflecting in the first quarter results and should further increase the production levels in the coming quarters.

Across the borders, the company has also shared its experience and expertise from North America shale exploration and production to explore internationally. COP has acquired low-cost entry for large acreage positions in Colombia, Poland and Australia as well as in China. Colombia has increased its oil production over the last seven years after a long time of stagnant levels of growth. The region surpassed 1 million barrels per day last year with the total local consumption of 287,000 bpd - remaining product is being exported. Moreover, Colombian Government expects the production to increase to 1.3 million bpd by 2020. Private companies are also now allowed to own 100% upstream activities in the region. COP entered into three contracts with Shell Colombia to acquire a 30% working interest in VMM-3, VMM-27 and VMM-28, over acreage of approx. 116,000 net acres and exploration wells are planned in each block to start in 2014. Further, COP also acquired a 70% working interest for deep water extraction rights in Santa Isabel Block, Colombia. This will substantially increase the operational throughput of the company in the coming years along with 7 other globally diversified projects expected to come online in 2015-2017.

Over the last few years, COP has also grown significantly in conventional deepwater exploration with working interests in several deepwater basins including Gulf of Mexico, Senegal, Angola, Bangladesh and Malaysia.

Click to enlarge

Source: COP Global Exploration, Fact Sheet, March 2014.

The Malaysian region proved to be very beneficial for the company, as it is expecting to yield approx. 60 MBOED from the region by 2017. COP started its involvement in Malaysia in 2000 and currently owns interests in five projects in different stages of exploration, development and production. However, the company holds the largest working interest in Block 3E with acreage of 479,000 acres in the region - the drilling is planned for 2016-2017.

Premium Value from Best Wells in the Region

COP's position in the North American unconventional plays is very strong. and the company has also invested about $5.5 billion in the region. The company also has the sweetest spots in the Bakken and Eagle Ford regions including Permian, Niobrara, Montney and Duvernay. Moreover, the company also managed to achieve the lowest cost of supply relative to its independent competition and large integrated partnerships in the region.

Source: Investor Update, 27th May, 2014

Further, the company also achieved the highest oil rates per well from its sweetest spot territory of Eagle Ford. This rate is achieved by dividing the online wells count of every month by the production throughput achieved from those wells.

Source: Source: Investor Update, 27th May, 2014

Moving towards North, the Bakken shale represents another premier unconventional play in the region. The most resource rich area of the Bakken is located at Nesson Anticline, which is largely owned by COP. The company is growing its production, growing its margins and is therefore ranked as the top oil producers from the Nesson Anticline region in the last year.

Click to enlarge

Source: Source: Investor Update, 27th May, 2014

Conclusion

The asset base of the company and the production activities indicate that COP will be able to grow its production over the next few quarters, and with the rising commodity prices, we believe the company will benefit considerably from the market conditions. One of the biggest advantages of ConocoPhillips is its global diversification in its assets, which provides it stability. Furthermore, the most of these assets are in the politically stable regions which ensure the uninterrupted production activity for the company.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.