ConocoPhillips: What Would It Do Without North American Shale Growth?

Aug.18.14 | About: ConocoPhillips (COP)


Article explores shift to unconventional assets.

Valuation is attractive, but comps might offer better value.

Non-domestic shale offers long-term growth avenue.

The amazing part about the strong gains in ConocoPhillips (NYSE:COP) is that the company has become absolutely dependent on North American shale growth. The company is a global producer with exploration projects all around the world with production of 1.56 MMboe/d and proved reserves of 8.9 Bboe at the end of 2013.

The company though faces a situation where base operations in places like the North Sea and conventional North America production are in decline. The majority of the growth is coming from development of the Eagle Ford Shale and the Bakken Shale where margins are currently strong. Can the growth from unconventional plays offset the declines from North American natural gas fields to justify the current valuation that has now soared to nearly $100 billion?

After the recent selloff, the stock trades at a reasonable 12 multiple of next years earnings estimates. The valuation appears stretched compared to an energy giant like Chevron (NYSE:CVX) and an independent energy firm like Devon Energy (NYSE:DVN) trading at slightly lower multiples.

COP PE Ratio (Forward 1y) Chart

COP PE Ratio (Forward 1y) data by YCharts

Squeezing Out Limited Growth

Despite the strong 38% production growth in the Eagle Ford and Bakken during Q214, ConocoPhillips is only projecting volume growth of 3 to 5%. The shale plays combined for 208 MBoe/d for the quarter so the production isn't immaterial. Along with other North American unconventional plays, the company expects growth in this segment to average 22% through 2017 to reach production totals of over 350 Mboe/d. With all the major plays struggling, the unconventional growth comes at a cost of not focusing on the major projects and further constraining production from the established areas. The main set back comes from North American natural gas production that is forecasted to decline up to 6% on an annualized basis.

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Source: ConocoPhillips

Chevron is in a similar situation where growth is difficult to obtain with annual revenues hitting over $225 billion. The company has several projects to kick off growth in the next couple of years including the massive LNG projects in Australia. Analysts forecast revenue declines for the next couple of years.

Devon Energy offers better production growth with retained assets increasing 14% over the prior year period in Q2 to 620 Mboe/d. With all of the non-core assets liquidated, investors will closely watch how the production numbers turn out moving forward. The exploration firm that was once focused on the Barnett Shale and off-shore production has now shifted the company to a focus on the Permian Basin and other unconventional plays.

Exploring Non-Domestic Shale

The one interesting part of the ConocoPhillips playbook is the exploration of unconventional plays in places like Canada and Poland. In Canada, the company has 230,000 net acres in the Montney play and 118,000 net acres in the Duvernay play with a combined 17 horizontal wells planned for 2014. These assets are expected to produce liquids in the 30 to 40% range.

Outside Canada, the company has 354,000 net acres in the Baltic Basin in Poland and a sizable position in Colombia. Both areas will undergo drilling experiments in 2014 to further explore the possibility for production.

The size of the positions in these non-domestic shale plays provide for a catalyst for the stock, but the lack of exploration and infrastructure in the regions suggest the rewards are a long way off.

Bottom Line

Let's be clear, ConocoPhillips is a solid exploration and production firm offering slow growth. The energy producer only expects revenue growth to top out at 5% in the short-term providing limited value for a stock trading at 12.3x forward earnings. The 3.2% dividend yield pays investors to wait, but the number is not nearly as exciting after the stock gains this year.

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.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.