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Small Is The New Big For Major Energy Companies Like ConocoPhillips

Nov. 13, 2016 4:26 AM ETConocoPhillips (COP)XOM17 Comments
Gary Bourgeault profile picture
Gary Bourgeault


  • ConocoPhillips shows what all the majors must do to weather the oil storm.
  • Spending cuts and assets sales more important than production growth under current market conditions.
  • Business model changing to match low-price oil environment.
  • What the company will spend the most on next year.

source: Stock Photo

It wasn't a surprise to hear the recent announcement from ConocoPhillips (NYSE:COP) that it was going to sell as much of $8 billion in natural gas assets, while at the same time cutting as much as 4 percent from its 2017 budgets. The move will help raise capital to shore up operations, according to company management.

This move, and other steps and changes the company is making, lines up with my thesis that the major oil producers that remove more costs and underperforming assets from its portfolio, will be those that do the best in the continuing low-price-for-longer oil market.

While I see austerity being the most important adaptations to make at this time, there is still room for strategic spending on specific production assets which will allow for at least a maintaining of production levels while improving margins, and eventually starting to generate meaningful and sustainable earnings again.

Chief Executive Officer Ryan Lance recently stated in an interview that the company couldn't sit around and wait for the prices to "bail out your business model." He's right. Companies must aggressive change the model to reflect market realities, which are concerning oil and gas, they're going to take a significant amount of time to reach levels that would have generate a profit under the former business model.

source: StockCharts.com

No company can wait for price of oil to recover

As I've proven to all my readers for a long time, the oil sector has been completed disrupted by the success of shale oil producers, which has added supply to the market and driven down the price of oil. Many analysts, pundits, writers and money managers have projected very optimistic outlooks for oil in the near term, which I have said over and over again isn't going to happen; and it hasn't.

This article was written by

Gary Bourgeault profile picture
I am a former investment advisor and owner of several businesses. These days I invest only for myself while continuing to write on a variety of financial and economic topics.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (17)

Natural Gas, in the long run seems to have a significantly longer runway than oil and a larger potential for both higher demand and prices. Selling premium Natural Gas assets may seem very short sighted by 2020!
COP is over-weight in natural gas (compared to most other energy producers), so if they need to sell assets to reduce debt, it is not surprising that a lot those assets would be natural gas.
d_may profile picture
14 Nov. 2016
ConocoPhillips has assets in Libya. What about selling those?.
COP needs to sell assets that other companies want to buy, and for which they are paid a fair price.
Selling such assets while also discussing a major buy back in recent presentations seems very short term to me. Once again management is putting its own ST interests ahead of the LT future of the company. Strange that some shareholders have a more concern for the LT benefit of the company than its own management team. Business as usual for corporate greed.
Whether or not COP is a "major" is debatable. Back in 2012, COP spun-off its downstream (refining, marketing, chemicals) business to shareholders as PSX (Phillips 66). So now, COP is a pure E&P upstream only player. Traditionally, the term "major" meant a "large integrated oil company" with both upstream and downstream operations.

Therefore, comparing COP today to XOM (or CVX, BP, RDS, etc) is not very useful, since the later are integrated majors whose economics and requirements for crude oil and natural gas prices are much different than a COP. The integrated majors purchase oil and gas to feed their refineries, so the are not completely at the mercy of crude oil and natural gas prices.
I'm surprised XOM and Chevon haven't made more investments in shale. Maybe in 2017
Craig Cooper profile picture
Corporate overhead et al costs of the majors / super majors makes it really difficult for shale projects to (economically) compete with the other opportunities they have in their portfolio.
Look at XTO's operations as a subsidiary of XOM in the shale assets. Not as impressive as EOG and PXD, but they have assets overseas that are making more profit than shale.
Not sure how you can be happy with COP and dissapointed with the other majors. Last I saw COP had negative earnings in total for 3Q16 while XOM and Chevron had positive earnings in the upstream segments. Rather than sell U.S. gas assets, they should lock in some hedges. Selling assets and then buying back stock instead of paying down debt is ludicrous. I wish them the best.
M4four profile picture
Ugh, you are not reading into the numbers correctly. If you applied dividend and other corporate expenditures to CVX and XOM upstream earnings only, they are most certainly negative. CVX has negative earnings overall anyway through first 9 months of 2016. Also, COP was only negative due to debt repayment. Positive cash flow was otherwise achieved.
Are you implying that the split of earnings between upstream, refining, and chemicals is not correct or just that they are spending more on capex and dividends than operating cash flow?
Over the course of time, it seems to me that Gas will be more in demand than oil. But that doesn't help in the very near term. In the not to distant past everybody ran away from dry gas to wet gas and oil. Now all are struggling. I think that the Saudis recognize that oil is the new coal pollution wise and are trying to suppress the competition from gas as much as from from other oil sources.
With the new government in Washington and more conservative state and local politicians I would expect that the many stalled large gas pipeline projects to large cities will start moving.
The juggling act of balancing the resource inventory of both oil and gas to produce positive financial results is no easy job.
I sold out of BP and XOM because they had so many assets in world trouble spots and expensive other projects. I kept COP because they were divesting themselves from troubled nations and projects. One can only hope that this move COP is now making is the right one.

The world is going to have to depend on fossil fuels for a long time, so called sustainables aside, the question is what is that mix of fossil fuels going to be and how long will the changes take. And will companies make the right moves to keep pace with the changes in supply/demand of different fuels.
Well, I agree that focusing on domestic production is a good move, but shedding natural gas assets is puzzling. One could argue that the market for natural gas will continue to grow faster than for oil. The export potential for LNG is also greater.

What you say is correct. But that is also why COP probably could not get very much by selling their undeveloped oil reserves, and the gas reserves would probably yield a relatively higher price in today's market. COP needs the cash.

I assume they are also betting that sometime down the road, that crude oil would make more of a recovery than natural gas. But COP is already skewed to natural gas production, as opposed to companies like CVX who produce a much larger percentage of oil.
"Conoco has decided its next divestment would be natural gas assets located in North America, suggesting it sees natural gas having more headwinds and less potential than oil. It is selling off anywhere from $5 billion to $8 billion in North American natural gas assets."

I agree with Mark_A. No one is buying what is not going to be profitable in the shorter term and that is oil. NG on the other hand is making a comeback and is what buyers want. It is good that COP did not sell all its NG assets like so many others did in their rush to get "oily". I believe that XOM will be seen to have been wise to buy the NG company they did even though they probably paid too much IMHO. As a side note, I am here in the Philippines and overseas workers coming back from the Middle East are telling of reduced salaries being offered there and increased cost of living expenses due to the countries there just not having the money to fund the lifestyles to which their citizens have grown accustomed. We might be surprised at what OPEC will agree upon at their next meeting. Of course, who knows how any of them will abide by the agreement but it might cause a short-term pump in oil prices.
Well wrote. One could argue that 50$ Oil might be stretch!
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