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ConocoPhillips 'Shrinking to Grow,' Says Mulva

ConocoPhillips is moving away from the integrated oil and gas model and will sell billions in global assets, including 10% of its North American portfolio, to pare debt and improve shareholder returns, CEO Jim Mulva said last week.

Under the plan the Houston-based oil major plans to divest around $10 billion worth of its global assets in 2010 and 2011. More detail on the projected North American asset sales is to come in early 2010, but most of the assets to be sold (two-thirds) would be from Canada; the rest, or about one-third, would come from the Lower 48 states.

Capital spending in 2010 also would be cut to $11 billion, which would be down 12% from this year. Acquisitions are off the table.

"Some will say what we are doing essentially is shrinking to grow," Mulva told energy analysts during a 3Q2009 earnings conference call. "That would be a fair assessment."

The restructuring of its business model is a huge change in strategy for ConocoPhillips, considered one of the top energy producers in the world. The major has been criticized by analysts and shareholders in its quest to buy assets instead of developing its vast portfolio. That is changing, said the CEO.

"We certainly believe we have the size to compete, the technology and the people to compete," he said. "But the business environment has changed quite dramatically here in the last 12 to 18 months. We are in a very deep worldwide recession, and also what's very important: a lack of access continues and will continue be an issue for Conoco and international oil companies."

The strategy was launched "following an exhaustive review of our portfolio over the past six months," said Mulva. "We believe $11 billion is the sweet spot for capital spending given this business environment."

Less spending will mean less project development, he admitted.

"As a company we have 50 billion barrels of resources...50 billion barrels to commercialize. We will continue as an integrated company, but we will be somewhat smaller...For us it's about prioritization...which projects we need and want to do to improve our return on capital...Over the next several years our objective is to enhance the portfolio returns."

CFO Sig Cornelius, who shared the microphone with Mulva during the conference call, said there are "still challenges for North American gas and refining, but today it's a better picture...Gas prices have seasonally rebounded from summer, but we expect them to remain weak in the near term on record storage levels, declining demand and new shale developments.

"These factors can be reversed fairly quickly, and the potential exists for coal-to-gas substitution," he said. However, "longer term, [gas] prices need to recover to a higher level for investment to continue in North American gas."

Mulva emphasized that the assets to be sold would not be selected because of current commodity prices. Those assets on the market instead are at the bottom of ConocoPhillips' to-do list and may be a better fit for another producer, he said.

"Strategically, we are moving E&P [exploration and production] to about 90% of our portfolio over time, and downstream will be about 10%," Mulva said. "The replacement of the reserves will come from existing opportunities..."

As the company spends more on its high-return assets, about 40% of the reserve additions are expected to come from oilsands developments in Canada.

"By prioritizing future investments and with cost constraints, we expect over a two years' period of time to point to several improvements on the return on capital employed," Mulva said. Projections are based on long-term oil prices of $70/bbl West Texas Intermediate and $5/Mcf gas at Henry Hub.

ConocoPhillips' "refocused" E&P program is beginning to deliver, with two big discoveries in the deepwater Gulf of Mexico (GOM) and "encouraging" results from the Eagle Ford Shale in West Texas, Mulva said.

"Although we operated well, we were adversely impacted by low North American natural gas prices and worldwide refining margins, which led us to curtail approximately 300 MMcf/d of natural gas production starting in late August and reduce refinery runs," Mulva said. The shut-in volumes, which began to be returned to sales this month, should be completely restored in November, said Cornelius.

"During the third quarter, the BP-operated Tiber discovery was announced," he said, pointing to the recent deepwater GOM discovery in which ConocoPhillips holds an 18% stake (see NGI, Sept. 7). "This is our second discovery in the Lower Tertiary play in the Gulf of Mexico this year, and we are currently drilling the Rickenbacker prospect."

Net profits in the quarter fell 71% from the year-ago period to $1.5 billion ($1.00/share) from $5.2 billion ($3.39) in 3Q2008. Cash from operations totaled $2.9 billion in the quarter, and the company raised $700 million from asset dispositions.

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