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ConocoPhillips Exec Says REX Stake 'Good Candidate' to Sell

The 25% stake that ConocoPhillips owns in the recently completed Rockies Express Pipeline (REX) is a possible candidate for sale, an executive said last week.

The Houston-based integrated producer announced last month that it would "shrink to grow" by selling $10 billion worth of its global assets in 2010 and 2011, including around 10% of its North American portfolio (see NGI, Nov. 2). Canadian assets are to make up around two-thirds of the planned sales; the rest are to come from the Lower 48 states.

One "good candidate for us" is REX, said Jeff W. Sheets, senior vice president for planning and strategy. He suggested the pipeline stake as a possible divestiture target at the Bank of America Merrill Lynch 2009 Energy Conference in New York City.

The eastern portion of 1,679-mile natural gas pipeline, which stretches from Colorado to Ohio, became operational two weeks ago, according to 50% owner Kinder Morgan Energy Partners LP (KMP). Sempra Pipelines & Storage owns the remaining 25% interest. ConocoPhillips exercised an option to buy into the pipeline three years ago (see NGI, July 3, 2006).

Management wants to sell assets that "are not core to the business...in places where we have a minority position, a lack of control, a lack of infrastructure," said Sheets. "It's been a while since we've gone through the North American portfolio, and...10% of that portfolio makes more sense to be in someone else's hands than ours."

ConocoPhillips would target properties where it may hold "infrastructure stakes and capacity rights," said Sheets. "We may only need the capacity rights, and in that case, it would make sense to sell the infrastructure." For example, he said, ConocoPhillips sold its half interest in the Keystone oil pipeline to joint owner TransCanada Corp., but it kept the capacity rights. REX falls into the same category.

Only REX was singled out by name as a possible asset sale candidate in North America. But Sheets sounded less than enthusiastic about the North American gas market -- and prices -- in the near term.

"On natural gas, we think we are in for a difficult next couple of years and I think we will pull back on what we invest in natural gas in the near term...We have a lot of opportunities that we can defer and do later if pricing improves."

North America "as a whole, where we produce about 25% of our total gas, has been a challenged market this year," Sheets said. The "whole focus" of the divestiture plan "is to convey an increased focus on returns we earn from assets...A lot of people look at what we've done and see that we've focused very much on growth. We want to develop our portfolio now to focus on returns...As we look forward, we are thinking what the capital program would be over the next five years...to decide where we put our money."

Devon Energy Corp. last week also announced plans to shrink the company with plans to sell its Gulf of Mexico and international portfolios (see related story).

Whether ConocoPhillips will sell its interest in REX or any other part of its North American portfolio was not detailed by Sheets. But he offered some clues into how the oil giant will make its determinations.

"First, is the asset something that is an important part of our portfolio long term?" Sheets asked. "Is it strategic?...We sell assets [to not] radically change the company if we sell that asset." The producer also would want to "get the maximum value for the asset that we want to sell. We're not interested in a fire sale. We'll sell where there is a good market for the assets.

"For example, if you look at our portfolio, we are weighted more to downstream than we want to be. But this is a difficult market for downstream, and nothing near term is planned on that. In a couple of years the program, the market can change and evolve..."

Since the divestiture plan was announced, "the phone's been ringing quite a bit," he said. "People are telling us what we ought to sell, but mainly what they want to buy. As we step through the asset program, we want to make sure we maximize the value and do it in a way that we can create the kind of portfolio that we want in the long term. To a large extent, we will decide what we want to sell. What people are interested in is not a driver of what we are going to sell."

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