ConocoPhillips' Willow Discovery Could Enhance Its Future Value

| About: ConocoPhillips (COP)

Summary

ConocoPhillips has made a promising new oil discovery in the Alaska region.

This discovery could expand its production by 100,000 barrels of oil per day over the next five to six years.

Not only will this discovery be profitable for ConocoPhillips, but it will also be beneficial for Anadarko, which holds about one-fifth interest in the discovery.

After the tumultuous times faced by ConocoPhillips (NYSE:COP) in 2016, fate has finally reversed its course in favor of the US-based independent oil and gas company. While the company was busy devising its operational strategy for 2017, it has made a promising new oil discovery in the Alaska region, which could expand its production by 100,000 barrels of oil per day (BOPD) over the next five to six years. According to the initial tests conducted on two wells in the region, the Houston-based company forecasts that the northeast portion of the National Petroleum Reserve of Alaska (NPRA) has a recoverable resource potential in excess of 300 million barrels of oil. ConocoPhillips holds a working interest of 78% in the discovery, while Anadarko Petroleum (NYSE:APC) owns the remaining 22% share. The news has been received well by the investors and ConocoPhillips’ stock price is likely to see a sudden rise over the next few days.

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Source: Google Finance

The Discovery

ConocoPhillips has been exploring and drilling wells in the NPRA since the mid-90s. In early 2016, the company had tested two of its wells – Tiŋmiaq 2 and 6 – in the Greater Mooses Tooth (GMT) unit located in the northeast portion of the NPRA, and reported notable initial results from these wells. After continued efforts and technical tests, ConocoPhillips now estimates that the area has a recoverable resource potential of more than of 300 million barrels of oil. The area is being termed as the Willow discovery, and the company expects to commence the 3D seismic evaluations of the discovery in January 2017 to confirm the initial results. The first commercial production of this discovery is likely to come on stream by 2023, subject to appraisal results and the choice of development scenario. It is expected that the discovery could produce up to 100,000 BOPD. As the outlook for the commodity markets has improved, the discovery will augment ConocoPhillips’ long-term production growth, and help enable the company to recover from the downturn.

Implications of the Discovery

Over the last one year, there have been some significant discoveries in the North Slope of Alaska, particularly the NPRA, making the region an attractive investment for large exploration and drilling companies. With the latest Willow discovery by ConocoPhillips, the market is placing a high value on these assets, as the experts expect further discoveries in the region in the near future. Thus, if ConocoPhillips decides to divest these assets rather than developing them, the company will be able to extract a good value for its shareholders. On the contrary, if the company continues to explore further and drill more wells to reach commercial production as per its current plan, the discovery will be financially profitable for the company. The two tested wells are located about 28 miles away from ConocoPhillips’ Alpine Central Facility, making it convenient for the company to produce and store the increased output from the region.COP-Q&A-2016-2

Source: Goldman Sachs Energy Conference, ConocoPhillips, 5th January 2017

Further, the E&P company has worked consistently over the years to optimize its costs in the Alaska region and improve its well performance. For instance, the company managed to reduce the cost of production of its CD5 Project in the Alaska region by almost 40% since its sanction in 2012. In fact, the Alaska region is the only region that has remained profitable for the company throughout the commodity downfall. Thus, with the cost efficiencies gained in the region over the years, the company will be able to maintain a relatively low cost structure for the new wells and deliver higher returns.

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Long-Term Perspective

Since ConocoPhillips has been present in the region for over two decades, it understands the importance of the resource potential of the assets in the region. As a result, the company was quick to grab the opportunity to increase its acreage in the region by bidding for federal lease sale in the North Slope in December 2016. ConocoPhillips, along with its partner in the region, Anadarko, bid for the federal lease sale, and won 65 tracts for a total of 594,972 gross acres. In addition to this, the US-based oil and gas player also placed independent bids for the lease sale, and successfully obtained another 74 tracts for a total of 142,280 gross acres. With the increased acreage in the region, ConocoPhillips will have the flexibility to explore and drill more wells to leverage the rich resource base of the region.

Greater Impact

Not only will this discovery be profitable for ConocoPhillips, but it will also be beneficial for Anadarko, which holds about one-fifth interest in the discovery. Further, the discovery will require investment worth millions of dollar for its exploration and development. That would increase the flow of capital in the Alaska region, and is likely to create potential job opportunities in the region. This would, in turn, improve the economy of the state and generate robust revenues for the government.

Apart from this, the Willow discovery, coupled with the discoveries made by Armstrong Energy and Caelus Energy in the last one year, could be a strong driver to revive the dying Trans-Alaska Pipeline System (TAPS). The TAPS, which became operational in 1977, reached its peak capacity in 1988. But, of late, the pipeline has been operating at a capacity of merely 25%, making it highly uneconomical to transport oil through the pipeline. However, with the anticipated production from the new discoveries in the Alaska region, the TAPS could come back to life.

Thus, we believe that the Willow discovery will be crucial for ConocoPhillips’ future growth and could enhance its valuation, assuming that the appraisal results deliver as expected.

Disclosure: No position.

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