ConocoPhillips Is On Track To Grow

Sep. 4.14 | About: ConocoPhillips (COP)


Production growth is going to be vital for the company over the next three years.

COP's ability to grow its production levels will determine the company's ability to grow its revenues as well as earnings.

Focus on Eagle Ford and Bakken will allow the company to enhance its production levels.

ConocoPhillips will also need to replace its reserves in order to ensure long-term growth, which will result in higher capital expenditures.

ConocoPhillips (NYSE:COP) has been working to increase its production levels and the company has been trying to diversify its production mix. At the same time, we have seen COP move out of politically volatile areas and focus on the regions with stronger political and regulatory environment. ConocoPhillips' ability to meet its production growth targets will be key for the future of the company and it will ensure the long-term growth in the revenues as well earnings. We believe COP will be successful in achieving its production growth targets as the company has targeted some rich areas which will contribute heavily towards the future production growth. We will take a look at those areas in this article.

Current and Projected Production

ConocoPhillips plans to increase its total hydrocarbon production to 1,900 MBOED by 2017 from 1,502 MBOED in 2013. This represents a 26% increase in total production in four years. Spread across 4 years it becomes 6.5% flat annual increase. The company further anticipates that its base production will decrease to roughly 1,100 MBOED in the next four years as a result of decline in yield of oil extraction. To counter this fall, it is looking to add 800 MBOED by 2017. More importantly, around 50% of this increase in production will come from the onshore resources in the lower 48 states currently under development, which includes Eagle Ford - in this particular region, yields are higher, which will result in lower cost for the company.

So far, we have seen remarkable progress from the company this year. After adjusting the downtime related variance, the company managed to increase its daily production by 60 MBOED to 1,556 MBOED as of the second quarter. This represents a 4% increase year-over-year. Around 82% of this total growth was accounted for by the development in Lower 48 States. Whereas, the total production from lower 48 states [540 MBOED] increased around 10% year-over-year. The assets mainly responsible for this growth were Bakken and Eagle Ford shale plays.

Where Will The Future Growth Come From?

We are optimistic about the company's long-term growth as it puts more focus on Eagle Ford and Bakken. Currently, Eagle Ford is considered the richest shale play in North America according to EIA. Estimates show that it has 3.4 BOE of oil reserves which easily exceeds Bakken Formation of North Dakota. ConocoPhillips is planning to expand further in this area with projected $3 billion annual investment and the company will increase its production from Eagle Ford by 110% by 2017. As of the second quarter, this increase was 30% year-over-year.

Bakken Shale Play, on the other hand, is not as oil rich as Eagle Ford. However, it could easily fall in the second best category. It has 3.2 billion barrels of oil reserves, according to EIA estimates. The company's projected investment in this area is $1 billion annually. By 2017, ConocoPhillips will boost its production from this area by roughly 106%. As of the second quarter, the company achieved 70% higher production from Bakken as compared to a year ago.

The company's total proved reserves stood at 8.921 million BOE at year-end 2013. This is enough to produce hydrocarbons for the coming 15 years if COP were to maintain the same production levels. However, as the demand of these hydrocarbons continues to increase, the company will increase its production growth and it will need to replace its reserves in order to ensure long-term growth. As a result, capital expenditure will remain high for ConocoPhillips. Looking at the current growth rates of the company, achieving its long-term production growth will not be difficult for ConocoPhillips.

Due to the low prices of crude oil and gas, achieving lower exploration and production cost is the only profitable way out for the oil exploration companies. We believe that by investing in the two richest shale plays, the company can significantly increase its operating margin by reducing the cost. In the future, if the demand helps the prices of oil and gas to increase, the company will have an added advantage in the profit margin.


Production growth is going to be key for ConocoPhillips over the next four years and we believe the company is on track to achieve its production growth targets. The focus on Eagle Ford and Bakken plays will allow the company to continue growth in its production. As the production grows, the company will be able to grow its revenues and cash flows. Fundamentals of COP are extremely attractive - the stock currently trades at P/E ratio of 12.5 compared to the industry average of 36.4 - forward P/E estimates of 12.4 also show that the growth in earnings is expected remain strong. Furthermore, net margin and operating margin of the company are extremely attractive - net margin of 15.2% is better than the industry average of 8.9% while operating margin of 24.6% is better than the industry average of 18.8%. We believe ConocoPhillips remains a solid long-term investment as the growth prospects of the company are attractive along with the solid fundamentals.

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