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ConocoPhillips’ Shift to Pure-Play E&P Leads in Stronger Margins, Output

ConocoPhillips' decision to sell its refinery arm and become a pure-play exploration and production (E&P) company proved its mettle in 2013, with higher output, stronger margins and solid cash flow, particularly in North America.

The Eagle Ford and Bakken shales, combined with some sauce from the Permian Basin, cooked up a 31% hike year/year in production in the fourth quarter. Annual organic reserve replacements for its worldwide operations rose 179% on reserve additions of nearly 1.1 billion boe.

CEO Ryan Lance and the management team held court with analysts on Thursday to discuss the strategic shift, which created the biggest independent in North America. Last year most of the capital budget was directed to North America (see Shale Daily, Dec. 11, 2012).

"We should see ongoing improvement in underlying margins as we bring on new volumes, and we will maintain our focus on improving returns while staying committed to returning capital to our shareholders," Lance said. "On the strategic front, we are moving beyond the positioning phase of our journey as an independent E&P company. So now we are focused on executing our current plans to deliver growth in volumes, in margins, while positioning the company for long-term success."

The Houston-based independent's goal, he said, is "to have a deep inventory of choices and options for investment and to be the best capital allocators in the business...We are not dependent on any single product, play type or geography, and this allows us to consistently execute our programs through the cycles.

CFO Jeff Sheets said everything points to an underlying performance that is improving. Realizations, he said, were about flat in the final period of 2013, "but margins are growing due to increases in liquids production -- liquids production from places of better fiscals, which was consistent with our strategy."

The E&P continues to have far-flung exploration efforts, with overseas projects and solid success in the deepwater, including the Gulf of Mexico. However, the North American onshore liquids bounty, both from gas and oil in the United States and from oilsands in Canada, has provided a windfall.

"Growth of 207,000 boe/d was 30,000 boe/d higher than decline of 177,000 boe/d," Sheets said. "This reflects underlying production growth in the Lower 48, the oilsands, Indonesia.

"During 2013, liquids production from continuing operations increased to 56% of total production and should continue to improve in 2014 and beyond," Sheets said. Last year's cash margins grew 11% from 2012 "on an absolute basis despite flat realized prices compared to 2012, just like in the impact of production mix and location."

The "cash flow waterfall...is another good story," said the CFO. "We began [2013] with about $4.5 billion of cash on the balance sheet. For the year, we generated about $16 billion of cash from operations and over $10 billion from asset sales."

Matt Fox, who runs the E&P segment, said ConocoPhillips ended 2013 with 8.9 billion boe of reserves, up 3% from 2012.

"Importantly, we added over 1 billion bbl of reserves organically, resulting in our organic reserve replacement ratio of 179%," Fox said. "Including last year, we averaged over 165% organic reserve replacement as an independent E&P company. Our all-in reserve replacement ratio was 147%," taking into account the effect of asset sales.

"Some of the key additions came from the Eagle Ford and Bakken" shales, Fox said. "Most of the additions in these two plays were a result of higher competence in performance and offset bookings. However, we have only booked less than 30% of identified resource in Eagle Ford and Bakken, and that’s based on our current well spacings at 80 acres in the Eagle Ford and 320 acres on the Bakken."

Like many operators in North America's onshore, the producer was impacted by adverse weather in the final three months of 2013. However, despite the freeze-offs and work stoppages, the Eagle Ford in South Texas reached a milestone of more than 500 total wells on line. Production averaged 126,000 boe/d in the final period, 42% growth from the year earlier period. A peak rate of 141,000 boe/d was reached in late December.

In the Bakken, the peak rate was 43,000 b/d, averaging 39,000 b/d in the fourth quarter -- a 63% jump year/year.

Organic reserve additions represent a portfolio shift that began in early 2012 as the operator moved from gas targets to higher-value liquids, which comprised about 60% of the 2013 reserve additions. Another 15% of the additions were tied to liquids pricing through liquefied natural gas.

Reserves added in North America included:

  • 470 million boe in the Lower 48; and
  • 250 million boe in Canada, from oilsands operations at Foster Creek, Christina Lake,
  • Narrows Lake, Surmont and across Western Canada unconventional formations.

In North America and Latin America combined, quarterly output rose by 22,000 boe/d from a year earlier to 497,000 boe/d.

Today unconventional exploration remains focused on drilling in the Niobrara formation and in the Permian Basin, as well as Canada's Montney, Duvernay and Canol plays. A deepwater drilling program is being prepped as well for overseas projects and in the deepwater Gulf of Mexico.

Net profits in 4Q2013 totaled $2.5 billion ($2.00/share), higher than the year-ago earnings of $1.4 billion ($1.16). Full-year 2013 earnings were $9.2 billion ($7.38/share), versus 2012's $8.4 billion ($6.72). About $7 billion in assets were sold over the year.

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