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ConocoPhillips Quietly Testing Permian, But M&A 'Not a Priority'

An executive with ConocoPhillips said the company is taking its time to test and understand the geology of the Permian Basin, following the same approach it used to develop its position in the Eagle Ford Shale, but that merger and acquisition (M&A) activity is "not a priority."

Matt Fox, executive vice president for the Houston-based company, told an audience at the Barclays CEO Energy-Power Conference in New York on Wednesday that ConocoPhillips is also focused on modifying its assets in the Canadian oilsands.

Permian development plans

Although ConocoPhillips currently has three rigs deployed in the Permian, Fox said "we still regard ourselves as being in the appraisal and pilot testing phase there.

"We believe that the approach that we adopted in the Eagle Ford, which was to focus on really understanding how to optimize the development to maximize the value and maximize the returns, [is] the approach that we should be taking to the Permian as well, and that's what we're doing. For us, it's not about rushing to grow production in the Permian; it's about doing what we need to do to understand how to maximize returns from a Permian position."

Fox said a "manufacturing and development phase," similar to the one the company went through in the Eagle Ford, should also follow in the Permian.

"That's why we still have 3,500 premium locations to drill in the sweet spot of the Eagle Ford," Fox said. "Many of our competitors drilled themselves out of acreage in the Eagle Ford and developed it inefficiently."

M&A 'not a priority'

That said, Fox said ConocoPhillips currently considers M&A as its sixth priority -- after keeping production flat with a capital budget of less than $5 billion; growing its dividend; reducing its debt to less than $15 billion; buying back $6 billion shares of stock; and maintaining disciplined production growth.

"It's certainly not a priority for us," Fox said of M&A. "The reason is that the amount of value that exists inside the organic portfolio, when you have an average cost of supply of $35/bbl that you can invest in organically, it's really difficult for acquisitions to compete against that."

Case in point, Fox said acreage in the sweet spot of the Permian is currently going for $35,000 to $40,000 an acre. That would add about $15/bbl to the cost of supplying on a net present value basis, the equivalent of a top tier position in the Eagle Ford.

"In the Permian, they may have a $40 cost of supply and make it a $55 cost of supply," Fox said. "That just doesn't compete with investment in the portfolio. So as much as we may like to expand our position, for example, in the Permian, we don't think it's the best use of our shareholders cash to do that.

"Now that's not to say, 'never say never;' there could be circumstances where it makes sense to do that. But as we look at the asset prices at the moment, we think we have better use of our shareholders' money."

ConocoPhillips has been moving away from natural gas projects in favor of those weighted by oil.

Last March, the company agreed to sell most of its Western Canada Deep Basin portfolio to Cenovus Energy Inc. for $13.3 billion. The next month, ConocoPhillips agreed to sell its portfolio in the San Juan Basin to an affiliate of Hilcorp Energy Co. for up to $3 billion. In June, the company agreed to sell its legacy portfolio in the Barnett Shale to an affiliate of Miller Thomson & Partners LLC for $305 million. All of the sales were for gas-rich assets.

Work to do in Canada

But ConocoPhillips didn't unload all of its Canadian assets to Cenovus. It retained a 50% interest in the Surmont oilsands project, where the company has a joint venture with France's Total SA, as well as all of its operated unconventional acreage in the Montney Shale, also known as its Blueberry asset.

"In the Montney, we have a really strong position that we've aggregated quietly over the last few years in the liquids-rich part of the Montney," Fox said. "We see a huge amount of potential of variable cost of supply production there. That was a very deliberate carve-out from the Cenovus deal, in which to retain that Blueberry acreage. We see that as one of the really strong emerging plays."

Fox called Surmont "a very good asset" too, but conceded that the company has some work to do there, particularly with its steam-assisted gravity drainage (SAGD) system, which uses pairs of horizontal wells for simultaneous heat injections and flows of hot bitumen. Because of good geology, Surmont is one of the top three SAGD assets in the oilsands, he said.

"We have some work to do with the Surmont asset because it was designed to use synthetic crude as a diluent to dilute the bitumen," Fox said. "I won't bore you with the details, but over the last year or so that's become a disadvantage, the way to transform bitumen. So we're going to modify Surmont so that it can use a condensate as a diluent, or a synthetic crude, and then the choice can be made as to which is the optimum."

Fox said a low amount of capital is required to maintain production at Surmont, and that ConocoPhillips has several debottlenecking opportunities available across the supply.

"We see Surmont as an asset that we can enhance the value, bring them the break-even price and we'll compete for capital on both the sustaining capital basis and the debottlenecking basis. Right now, [we have] about 75,000 b/d of net capacity, and I can easily see that expanding to 100,000 b/d net. [But] at least in the current outlook for prices, I don't see expanding beyond that."

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