While ConocoPhillips (COP) continues to expand to all corners of the world, the company has taken a pull-back approach on some of its non-core overseas assets. The company recently sold a stake in the North Caspian Operating Company in Kazakhstan and also decided to unload its stake in Russia's second-biggest oil producer, LUKOIL (LUKOY.PK). Monies gained from these disposals are to be used for exploration, debt reduction and dividend payments. When a company like this has a large stash of cash, it is a clear sign of future success.
ConocoPhillips historically has bought into profitable ventures that prove successful. When the company doesn't see a good fit, it either walks away or tries to sell off what didn't pan out. The company is beginning to dig deeper into the natural gas exploration and production phase hoping to cash in on the plentiful supply and the hopefulness of upcoming rising natural gas prices. The company's average selling price of natural gas increased from $4.40 per thousand cubic feet in 2009 to $5.64 in 2011 before plummeting in 2012 with an oversupply in the market. With predictions as high as $5 for this winter, and with ConocoPhillips looking to expand as far as China for the gas, the company will be in a great position to increase its bank of capital dollars even more. I believe that this is a company that should be included in the oil and gas investment portfolio as soon as possible. If you own it, buy more.
The expansion into more natural gas is taking ConocoPhillips to China. The company is showing interest in the shale gas blocks that China is putting up for auction and hopes to get in on the extraction of this special process. Shale gas is natural gas that is trapped inside shale rock and has to be extracted using a technology called hydraulic fracturing, or using highly pressurized water mixed with sand and chemicals to crack open rocks. It had been working too well in the U.S., causing a natural gas supply glut that sent prices on a downward spiral. While China doesn't produce shale gas commercially yet, it aims to supply 6.5 billion cubic meters annually by 2015 and as much as 100 billion a year by the end of the decade, and that is the draw and attraction. China is mainly depending on imports from the U.S. and elsewhere, but companies like ConocoPhillips and Exxon Mobil (XOM) would love a piece of the action. Currently, Exxon Mobil is the largest U.S. producer of natural gas with plays all over the world. The company is a 25% co-venturer in the Gorgon Project, which includes the Gorgon and Jansz fields, and serves as the operator of the Scarborough gas field in the Carnarvon Basin. Exxon Mobil earned its claim to the number one natural gas producer with the purchase of XTO Energy back in 2010.
Right now, exporting of the gas seems to be the most profitable with higher demand in Japan, Korea, China and India than in the U.S. ConocoPhillips is part of a partnership with Exxon Mobil and BP (BP) which has plans to export natural gas from Alaska's North Slope in a project that could cost as much as $65 billion. The project is expected to have an impact on Alaska and its economy, as well as on U.S. construction and manufacturing companies because steel and other materials for an 800-mile pipeline and the plant that would convert the gas into liquid for export on tankers would be needed. BP is producing nicely in the natural gas realm too. The company is expected to pump a lot more gas than was originally planned at the Shah Deniz offshore gas field. ConocoPhillips partnership, when approved, is due to add more dollars to the coffers for future plays.
ConocoPhillips has also been playing in the Canadian sands with a Surmont steam-driven development partnership with Total (TOT). Total operates in three segments worldwide as an integrated oil and gas company, in upstream, downstream and chemicals. A segment of Total also produces and markets a range of specialty products, such as lubricants, LPG, jet fuel, special fluids, heavy fuel, and marine fuels, holding interests in 20 refineries located in Europe, the United States, the French West Indies, Africa, and China. The company also operates a network of 14,819 service stations.
The good news for ConocoPhillips is that a second phase at Surmont is expected to boost output from 25,000 barrels a day to 136,000 barrels a day by 2015.
While expanding profitable production in one area, the company is careful to shed assets that aren't in line with the company's mission statement in another. It was announced recently that ConocoPhillips is ready to sell its 8.4% stake in the North Caspian Operating Company (NCOC), the consortium developing Kashagan. The world's ninth-largest country by area with a population of only 16.7 million, Kazakhstan expects the field in the Caspian Sea to be the main driver of its plans to raise oil output by 60% by the end of the decade, from 88.18 million tons in 2011. Centered on a man-made island 70 kilometers (44 miles) from Kazakhstan's coast, the Kashagan project is slated to produce its first oil by the end of this year, and the agreement runs through 2041. In the first phase of the project, Kazakhstan's biggest oilfield will produce 370,000 to 450,000 barrels of oil a day, an amount that may double in the second phase in 2018 or 2019. The Oil Ministry oversees the Kashagan production-sharing agreement, which allows investors to recoup costs before the government takes its share of oil revenue.
ConocoPhillips was one of six international oil companies including Royal Dutch Shell (RDS.A) and Exxon Mobil that control the NCOC. Earlier this summer, Royal Dutch Shell said that it was seeking larger stakes in the Kashagan oil field and operating control before starting to expand the $46 billion project. Both Royal Dutch Shell and Exxon Mobil are interested in buying ConocoPhillips' portion of the agreement. Exxon Mobil started in Kazakhstan in 1993, becoming one of the first major Western oil companies to invest in the newly independent Republic. The company has a 16.81% interest in the North Caspian Sea Production Sharing Agreement (NCSPSA) that includes the Kashagan field, as well as a 7.5% interest in the Caspian Pipeline Consortium (CPC). ConocoPhillips plans to sell $8 billion to $10 billion of assets by the middle of 2013 and has said Kashagan may not offer a long-term, strategic opportunity.
ConocoPhillips has a market capitalization of $69.7 billion with reported second quarter 2012 earnings of $1.22 per share, and had second quarter 2012 revenues of $13.99 billion. The company recently announced a quarterly dividend of $.66 cents per share, payable December 3rd, 2012, to stockholders of record at the close of business on October 15th, 2012. The company is on a path of production, joining forces with other solid companies to get both oil and gas to market. Along with a smart management style of disposing of assets that don't fit the ConocoPhillips mold, this company is one to hang onto for the long thrilling ride.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.