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ConocoPhillips Buys Liquids, Shuts in Gas

ConocoPhillips revealed Wednesday that in the last three months of 2011 it acquired more than 100,000 acres in North American liquids-rich shale plays, bringing its unconventional acquisitions last year to more than 500,000 acres.

At the same time it revealed it won't be spending much on North American natural gas-directed drilling due to low prices and plans to shut in about 100 MMcf/d.

Most of the purchases were in Canada, while the remaining acreage was in the Lower 48, CFO Jeff Sheets said. He shared a microphone with Clayton Reasor, vice president of corporate affairs, to discuss the company's 4Q2011 and year-end results. The executives were reluctant to provide too many details about the acquisitions "because we're not finished buying," said Reasor.

However, Sheets said about two-thirds of the land acquisitions were in Canada's Duvernay Shale. The other one-third of the purchases were in areas that included the Avalon, Wolfcamp and Niobrara formations. "All of them target plays we believe are liquids-rich plays, not gas plays," said Sheets.

"We're making progress in growing our liquids-rich shale business," said Sheets. Most of ConocoPhillips' North American onshore spending this year will target the Eagle Ford and Bakken shales, the Permian Basin and the Cardium play in Canada.

"In the Eagle Ford we are running 16 rigs in the play and we expect to maintain a 16-rig-count average, which will drive around 180 wells this year," he said. The play was producing 50,000 boe/d in late December; by the end of 2012 output is expected to double.

"We've had some impact from curtailments from higher well volumes and increasing liquids content, but we anticipate averaging 100,000 boe/d by the end of 2012." The company first reported takeaway problems last October (see Shale Daily, Oct. 27, 2011).

In the Permian Basin and the Bakken Shale, a total of 10 rigs is in operation, and that number could increase "by as much as 50% this year," said the CFO. In the last three months of 2011 the Permian was producing 50,000 boe/d, while Bakken output was at 18,000 boe/d.

"We see over time that those [liquids plays] are going to grow to where they get to be in the 2013-2015 time period over 250,000-275,000 boe/d," said Sheets.

Production from Eagle Ford, Bakken and Barnett shale plays, as well as Canadian oilsands, averaged 153,000 boe/d in 4Q2011, which was 53,000 boe/d more than in the year-ago quarter.

In 2011 the producer spent $12.7 billion, or 91%, of its capital program for exploration and production (E&P). Plans are to spend about $14 billion for E&P this year. However, because of "the current market environment, the company continues to limit investments in North American natural gas production, which represented 26% of 2011 production," it said.

ConocoPhillips plans to shut in about 100 MMcf/d in North America and doesn't anticipate spending heavily on new natural gas drilling this year, Sheets told analysts. Performance from liquids and offshore properties in North America continues to be strong, but the gas business is not faring as well, he explained.

"Our gas volumes continue to decline," he said in discussing North American asset performance. "I don't think much capital will be allocated to new gas drilling" in 2012.

In the last quarter of 2011 ConocoPhillips produced about 2.5 Bcf/d from U.S. and Canadian properties. Where the company can shut in gas, it will, Sheets said. However, the shut-ins would be done only in places where it managed the operations or partners also agreed to the shut ins. On Monday the second-largest gas producer in the United States after ExxonMobil Corp., Chesapeake Energy Corp., said it would shut in 0.5 Bcf/d, or 8% of its operated output (see Shale Daily, Jan. 24).

"When you look across our portfolio, two-thirds of the [gas well] economics are really driven by liquids production and not natural gas prices," said Sheets. "So, off the top, a portion of the portfolio would not make sense to shut in. Of the remaining Bcf/d, some we operate, some we don't. We have partners in a lot of it and partners generally are not wanting to shut in gas and the associated cash with that. A portion of the production that we control we'll make a decision on that and I think we will have some shut ins on natural gas going forward, on the order of 100 MMcf/d...We'll continue to watch that as the year goes on and natural gas markets develop."

According to data published on ConocoPhillips' website, there were three places in the Lower 48 with triple-digit gas output in 2010. (2011 numbers were not posted.) Most of the gas production at the end of 2010 was from the San Juan Basin, where it produced 799 MMcf/d. However, because it has partners in the basin, the company could be constrained on shutting in output. In the Lobo formation in the Lower 48, ConocoPhillips' average output in 2010 was 173 MMcf/d. The company operates and holds a 97% stake in the play. The company also produced 123 MMcf/d with various partners in the Permian Basin in 2010.

"We've got one rig running at Lobo; in the San Juan we've got four rigs running there," said Reasor. "Of the 35-40 rigs operating in the Lower 48, less than five are pointing at gas..."

In the 2012 capital budget, plans now are to allocate "a few hundred million dollars to the gas program," said Sheets. "Even with that expenditure, pricing is something we are looking pretty closely at."

ConocoPhillips is preparing to spinoff its refining business and in turn create the largest pure-play independent in North America. Paperwork has been filed and the split could be completed by the end of May, said Sheets.

The company generated net profit of $3.4 billion ($2.56/share) in the final quarter of 2011, well ahead of the $2 billion ($1.39) earned in 4Q2010. Cash from operations totaled $5.8 billion, and it received $2.7 billion in proceeds from asset sales, which were used to fund a $4 billion capital program, repurchase $3.1 billion of common stock, pay $900 million in dividends and reduce debt by $500 million. Full-year 2011 earnings were $12.4 billion ($8.97/share), compared with $11.4 billion ($7.62) for 2010.

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