- A look at what assets ConocoPhillips wants to monetize as part of its $5-8 billion divestment program.
- ConocoPhillips should be getting bids for its San Juan Basin assets very soon.
- Two LNG terminals are also going to be sold off (probably), but the timetable on those sales is less certain.
One of the big strategic shifts ConocoPhillips (NYSE:NYSE:COP) laid out at its November 2016 analyst meeting was its plan to divest $5 billion-8 billion in domestic natural gas weighted assets. This is to fund its $3-billion share buyback program and to bring its gross debt load down by $7 billion to $20 billion by the end of 2019. So the big question is what is on the auction block that could raise such a sum.
The San Juan Basin stretches from southwestern Colorado to northwestern New Mexico, touching parts of Utah and Arizona as well. Home to oil & gas activity since the early 1900s, this is a very established conventional upstream play that is heavily weighted towards natural gas and natural gas liquids production.
ConocoPhillips owns 1.3 million net acres of oil & gas leases in the San Juan Basin that are held by production, 900,000 net of which are prospective for unconventional plays. During 2016, Conoco's San Juan division produced 27,000 BBLs/d and 727 MMcf/d of natural gas net, equal to an average of 124,000 BOE/d. Its liquids production is mostly (or all) NGLs.
A natural gas processing plant in Bloomfield, New Mexico, with 550 MMCf/d of capacity handles a lot of that production. Conoco operates the facility and has a 50% stake in the plant. Most of the firm's production comes from the Fruitland formation which houses one of the largest amounts of coalbed methane resources in the world.
During Conoco's Q4 conference call management commented that "we are seeing a lot of interest" in North American natural gas assets and that "we expect to get bids in and have some decisions probably over the next couple of months with respect to San Juan."
Investors should expect an update on the divestment process by the middle of 2017. The hard part is gauging what Conoco's San Juan position may be worth in the current environment.
When BP plc (NYSE:BP) bought up Devon Energy Corporation's (NYSE:DVN) Northeast Blanco Unit at the end of 2015, which included an interest in 480 gross producing wells and 33,000 gross acres in the San Juan Basin, the purchase price wasn't disclosed. WPX Energy, Inc. (NYSE:WPX) bought 14,300 net acres in the San Juan Basin back in 2015 for $26 million, but that was acreage prospective for the Gallup Oil play.
ConocoPhillips owns a sizeable position in the San Juan Basin that comes with a significant amount of midstream infrastructure and has a lot of exploration potential across conventional and unconventional horizons. The biggest drawback is a sub-$3 Henry Hub environment holding down the price of bids Conoco is currently receiving.
Midstream and downstream sales
There are two domestic midstream/downstream LNG developments Conoco has a stake in that the firm clearly doesn't want to hold onto forever. The first is the Kenai LNG facility up in Alaska, which hasn't been operating over the past year due to weak global LNG prices, and the second is the Golden Pass LNG terminal down in Sabine Pass, Texas.
A relic from the pre-fracking boom era, the Golden Pass facility is an LNG import terminal home to 15.6 million metric tons of gasification capacity (commercial operations started back in May 2011). This comes along with the Golden Pass Pipeline, five LNG storage tanks, two marine berths and other associated infrastructure. Conoco has a 12.4% stake in the development.
Conoco's 2016 Annual Report notes that "utilization of the terminal has been and is expected to be limited, as market conditions currently favor the flow of LNG to European and Asian markets." Now that America is awash in natural gas and domestic prices are very low, it doesn't make sense to import far more expensive LNG and hasn't for some time. This facility needs to be able to export LNG to justify staying open, which is what the venture plans to do.
It's important to note that Exxon Mobil Corporation (NYSE:XOM) has a 17.6% interest in the consortium and Qatar Petroleum owns the remaining 70% stake. ConocoPhillips, in my view, doesn't want to spend the enormous amount of money it would take to add export capabilities to the Golden Pass facility through the Golden Pass Products project.
Part of ConocoPhillips' strategic transition has been focused on not overextending itself by pushing forward with massive long-term projects that tie up billions of dollars that could be put to better use elsewhere. Conoco wants to focus on short-cycle projects after getting burned by having to spend tons on bringing major developments online that were sanctioned during the boom, a problem that hit every oil & gas firm these past two years.
The Golden Pass Products development is currently waiting for FERC approval and a NFTA export permit (the ability to export LNG to nations America doesn't have a free trade agreement with) from the DOE before making a final investment decision. Assuming the venture gets the approval it needs I would expect Conoco would want out, which could lead to a sale of its stake in the facility to Exxon Mobil or another entity looking to build up an LNG export profile.
At the end of 2016, Conoco's stake in the venture had a combined net book value of $260 million and that would most likely go up in the event the project passes the necessary regulatory hurdles. While Conoco may not be considering a sale just yet, it did mention that "we are evaluating opportunities to optimize the value of the terminal facilities." Divestment appears to be the ideal way to optimize value.
Pivoting to the Kenai LNG facility up in Alaska, which I've brought up multiple times before, there is little to update investors on. It wasn't mentioned during its Q4 conference call but in its annual report management included that "we are currently marketing this facility." This comes after Conoco sold off two upstream properties in the Cook Inlet area last year.
ConocoPhillips owns 100% of the Kenai LNG development in the Cook Inlet area, which has the capacity to ship out 1.6 million tons of LNG per year. While its export license was renewed in February 2016 (most of its LNG exports go to non-FTA countries), no LNG was shipped out of the facility last year. It is fully operational and ready to go, but weak global LNG prices and a lack of access to ample shale gas reserves mean operations won't start back up until rising oil prices push up LNG prices.
The next big catalyst for ConocoPhillips, and more importantly its shareholders (including myself), is concrete news of a significant divestment. Management's rationale behind divesting these assets is that the market is placing little to no value on them, and considering the two LNG facilities aren't really operating, those disposals should be received favorably by investors. Investors looking to read about ConocoPhillips should check out this article here.
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Analyst’s Disclosure: I am/we are long COP. 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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