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ConocoPhillips Priorities: Oily Shales, Oilsands, LNG

To advance more profitable North American shale and oilsands projects, as well as Australian liquefied natural gas (LNG) plans, ConocoPhillips will sell up to $20 billion of its properties over the next two years, double the amount it set in late 2009.

The company's strategy plans were unveiled at the annual analyst meeting in New York City. The Houston-based producer said in late 2009 it planned to sell $10 billion of assets in 2010 and 2011 to reduce debt and enhance shareholder returns (see Daily GPI, March 25, 2010; Oct. 29, 2009).

However, the company has $5-10 billion more of assets in its portfolio that don't fit with its long-term strategy, CEO Jim Mulva told energy analysts. Proceeds are primarily to be used to fund a $10 billion share repurchase program, as well as for investments.

High on the list are refinery and marketing properties. And back on the sales block is the company's stake in Rockies Express Pipeline (REX), which was put on the market in 2009 only to be taken off the block last year (see Daily GPI, Oct. 28, 2010).

"Strategically I'd like to part with our interest in REX," said Mulva. "The offers last year were not good enough. We will revisit it in the future."

As to what else might be sold, Mulva said the company wasn't "in love" with any of its assets. All of them could be sold for the right price. Properties being considered for sale are "nonstrategic" and "mature, high-cost properties." ConocoPhillips has to be able to achieve a fair value on the asset's sale, it has to be "tax efficient" and have "limited growth potential."

Mulva conceded that in the near term, production would fall on the asset sales but would be somewhat offset by the share repurchase program. "Absolute production growth is expected in the long term," he added.

There won't be a big focus on natural gas development for at least the next two years, said Al Hirshberg, senior vice president of Planning & Strategy.

"Long-term hydrocarbon demand is expected to increase, and it will be supply-challenged," Hirshberg said. There is expected to be "strong near-term oil demand growth with the economic recovery, and improved international natural gas markets."

ConocoPhillips is forecasting that fossil fuels will meet 80% of energy demand to 2035. Over that period, said Hirshberg, global LNG demand will be rising and new supplies will be needed. The "key challenges" for the company are "cost pressures and competition for resources."

Unconventional natural gas "will dominate new U.S. supply." However, with a near-term surplus of gas in North America, "gas prices will remain weak due to rapid growth in shale gas production." Meanwhile, oil prices are expected to "remain strong from increasing demand and higher reserve replacement cost."

Nearly all (90%) of the company's 2011 capital program of $13.5 billion is allocated to the Exploration and Production (E&P) segment. Reserves and production growth are expected from several international projects, as well as unconventional liquids and oilsands resources in North America.

In the Lower 48 liquids growth is forecast from the Eagle Ford, Barnett and Bakken shales, as well as in the Permian Basin. ConocoPhillips also is investing in the Golden Pass LNG terminal on the Gulf Coast, as well as the Tiber prospect in the Gulf of Mexico. In Alaska, where ConocoPhillips is one of the biggest producers, several projects are under way.

The E&P budget would support the company's 100%-plus reserve replacement target and allow increased spending to develop and integrate new technology over the next five years, said Mulva.

Of the total E&P spend, North America would capture the lion's share at $6.8 billion, followed by Europe, Africa and the Middle East with $3.6 billion; and the Asia Pacific region would be budgeted $2.8 billion. "Major" projects are allocated $6.2 billion, while exploitation was budgeted $2.6 billion and exploration has $1.7 billion earmarked.

Mulva shot down notions of acquisitions in the near term.

"I could be wrong on this, but the environment for buying, [or making a] substantial investment for another company, I don't see it in the next several years," he told analysts. "We could see consolidations, but otherwise..."

Mulva, who disclosed that he is retiring in 2012, said he was "confident that the execution of our plan uniquely positions ConocoPhillips for long-term value creation. We think our focus on capital discipline and increasing shareholder distributions is the most appropriate approach for our company."

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