ConocoPhillips (NYSE:COP) has been one of the best performers in the sector with year-to-date gain of over 21% while its peers such as Chevron (NYSE:CVX) and Chesapeake (NYSE:CHK) has lagged behind with gains of about5% and 14%, respectively. The stock has shown a sustained upward trend since the start of February, and it still continues to carry on this trend.
We have been talking about the production growth and the attractiveness of COP's assets in our previous articles and suggested that the strength of these assets will push the company forward. The movement in the stock price is in line with our expectations and we believe there is still considerable upside potential in this stock for the patient long-term investors. In this article, we will focus on the following areas: recent progress in the company's resources and the export ban on crude oil being revoked by the U.S. government.
More Black Gold
Eagle ford is one of the richest Shale plays in the U.S. due to the well efficiency in the area - Eagle Ford yields are among the highest in the shale plays. This brings down the exploration and drilling costs of the company. ConocoPhillips has a big chunk of Eagle Ford in its assets which has been a major growth driver for the company. The company's current acreage is 220,000 acres. Most of this area is in Condensate and Black oil window. The breakdown of the company's interest in Eagle Ford is shown in the following image.
The company was already in a good position in the area. According to a recent analyst presentation, ConocoPhillips presented a revised version of its estimates of reserves in Eagle Ford. The company now has 2.5 million barrels of oil equivalent according to the current estimates. This figure represents a 36% increase in its previous estimated resources of 1.8 million barrels of oil equivalent. Although indirectly, but this brings down the exploration cost of the company as the extraction costs are lower in the Eagle Ford area and a larger asset base in the region will have a positive impact on the overall cost structure and the margins of the company.
ConocoPhillips has identified over 3,000 drilling locations in the Eagle Ford region and plans to expand its operations. The company's current capital expenditure budget is $16.7 billion from 2014 to 2017. Out of this budget, $3 billion is allocated to Eagle Ford which represents 18% of the total planned capital spending. With this increased spending, the company's production is likely to improve to more than 250,000 barrels of oil equivalent per day over the next three years. The growth in production is coming at a very opportune time for the company as the political unrest in the Middle East is likely to impact the supply over the next few months, and positive economic outlook will also result in higher crude prices. As a result, the increased production and the rising crude prices will have a double impact on the revenues and the margins of the company.
Crude Oil Export
Crude oil export ban was set in 1975 under Energy Policy and Conservation Act and has been there for almost four decades. It was set due to the oil cartel of Arab states. After much pressures from oil and gas industry and presence of foreign crude oil demand, United States government is giving go ahead to export crude oil. One important thing to understand here is that ConocoPhillips spun-off its refining business last year, which is now known as Phillips66 (NYSE:PSX). It is now strictly an exploration company. Meaning it extracts the condensate for Phillip66 and other refineries which can then make finished products. Now that the export ban is being lifted, the demand for the U.S. condensate will increase and ConocoPhillips and Phillips66 both stand to benefit from this increased demand.
At the moment, only Enterprise Products Partners LP (NYSE:EPD) and Pioneer Natural Resources (NYSE:PXD) have been given permission to export condensate; however, it is likely that the permission will be granted to other energy companies as well. Shipments of these companies are likely to start in August. ConocoPhillips was a big influence on this move and its export license might be under process.
We Believe ConocoPhillips is uniquely positioned to exploit this situation having ample amount of resources and drilling capacity. Not to mention that in the next three years, its oil extraction rate will dramatically increase due to the capital projects underway. The next few years will be good for oil companies. ConocoPhillips, being only an exploration and drilling company, has nothing but to benefit from this situation.
We maintain that ConocoPhillips has one of the best asset bases in the sector and the recent developments will result in a considerable growth driver for the company. ConocoPhillips has been efficient in using its resources and the planned capital expenditures will further enhance the position of the company. We believe ConocoPhillips will be one of the best investments in the sector over the next 3-5 years.
Additional Disclosure: This article is for educational purposes only and it should not be taken as an investment recommendation. Investing in stock markets involves a number of risks and readers/investors are encouraged to do their own due diligence and familiarize themselves with the risks involved.
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.