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ConocoPhillips to 'Starve' Dry Gas Drilling, Says CEO

July 30, 2012
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Energy commodity prices aren't cooperating in any arena at the moment, but ConocoPhillips is confident that diverting its natural gas rigs to more liquids targets in North America is the right path forward, CEO Ryan Lance said last week.

Quarterly profits for ConocoPhillips, the largest pure-play explorer in North America, plunged by one-third from a year ago in part because of a hangover from one month's of earnings from the now spun-off refinery arm, as well as lower natural gas and oil prices, Lance said.

Lance, who led his first earnings conference call as the company chief, said the company's 2Q2012 performance also was stymied by voluntary curtailments in some North American natural gas plays. The company's realized commodity prices year/year also dented earnings. Natural gas prices were down 20%, while oil prices fell 6.5% from the same period of 2011.

However, the volumes were in line with company guidance. "Our production was on target, our major growth projects are on track and we are continuing to add to our conventional and unconventional exploration inventory," said Lance. "We continue to progress our asset sales program."

Even though gas, liquids and oil prices "have weakened, we think they are robust enough to complete projects at a range of prices for the longer term," he said. Some energy analysts have suggested that North American explorers need to reduce their programs or their capital until prices gain some strength but Lance said, "We do not think it is prudent to reduce capital at this time."

With 2012 "half over we've scrubbed our outlook and we have good visibility," said Lance. The company still plans to spend about $16 billion on capital programs this year.

In the meantime, results from the Lower 48 state operations continue to be encouraging. "Operationally, the business ran well, and we were at the high-end of the production range," said Lance. "The continued ramp-up from the shales and the oilsands were led by the Eagle Ford, Bakken and Permian Basin," but he said the production outlook was "overshadowed by weaker commodity prices."

ConocoPhillips has begun initial development on the "potentially impactful" Mancos Shale in the San Juan Basin, which could be a producer "for years and years," Lance said. ConocoPhillips is the largest leaseholder in the play with 900,000 net acres that are held by production; results from early well tests aren't expected before late this year or early next. "Other companies are testing [the Mancos] now so we are derisking our play with other people's money." The play has the potential to be a long-time oil producer for the company, he said.

Some "incremental spending" is being planned for infrastructure in the Eagle Ford this year "to ensure we're not constrained," said Lance. If natural gas and oil prices remain flat, the company expects production to grow 3-5%, said the CEO. The plan is to "starve dry gas drilling and divert to liquids-rich plays."

ConocoPhillips is testing some liquids "opportunities" in North America, with pilots under way in the Niobrara formation, the Wolfcamp and Avalon formations of the Permian Basin, and the Duvernay Shale in Alberta.

Three nonoperated wells also are being drilled in the deepwater Gulf of Mexico, where ConocoPhillips "continues to build deepwater prospects, particularly in the Paleogene play," said Lance. Today the company has stakes in 325 blocks in the GOM, he noted.

The Houston-based producer completed the spinoff of Phillips 66 on April 30, which reorganized ConocoPhillips as the top U.S. independent by production volume (see NGI, April 30). As an independent, ConocoPhillips now is second to Occidental Petroleum Corp. in value. Before the split the company had been the third-largest U.S. integrated producer by market value after ExxonMobil Corp. and Chevron Corp.

Profits were $2.27 billion ($1.80/share) in 2Q2012, down from $3.4 billion ($2.41) a year ago. Excluding one-time items and asset sales, earnings from continuing operations were down at $1.22 from $1.64. Sales and other operating revenue decreased 14% to $15.17 billion. Results included one month of earnings from the former refinery and chemical operations.

Production also declined, falling 6% in the latest period from a year ago to 1.54 million boe/d from 1.65 billion boe/d, which the company attributed to dispositions and maintenance downtime, as well as the North American gas curtailments. The drop in output was in line with previous guidance.

The company is on track to have $8-10 billion of asset sales completed by the middle of 2013, said Lance. However, he said the deals are taking time in the low-price environment. The company wants to sell some noncore properties, but he said ConocoPhillips won't be giving anything away.

"We have several packages on the market today," he said. "We understood that it would take some time to sell, but overall, we're pretty pleased with our progress...We've sold $1.6 billion to date and there are several more in progress. We are being patient and we are committed to getting [the sales] completed at acceptable prices."

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