ConocoPhillips, the largest U.S. independent by market value, plans to sell stakes in an Australian project and in the Canada oilsands to direct more funds to U.S. onshore plays, CEO Ryan Lance said Thursday.
The operator spun off its integrated refining operations last year and the meeting was its first as an independent exploration and production (E&P) company. Still, executives have acknowledged that the company remains too big to keep its costs in line and to lift production to levels that would sustain operations going forward.
ConocoPhillips plans to spend $16 billion a year over the next five years, which would include about $2.5 billion annualy for exploring unconventional formations from North America to Colombia, Lance said.
“We think our diversification and scale are a competitive advantage,” he told analysts. However, selling stakes in the expensive Australia Pacific Liquefied Natural Gas (APLNG) project, as well as in oilsands, would help to focus more attention on domestic unconventional plays, he said at the annual analyst meeting. The Houston operator already had planned to shed billions of dollars in assets to pool its domestic resources and free up cash for higher margin projects.
The U.S. onshore is the primary growth driver for the company, said Lance. About one-third of total capital expenditures over the next five years, or about $25 billion, is set to be spent in the Lower 48 states, with $1.5-2 billion on infrastructure to support netbacks. The company also is considering a master limited partnership to drop down some of the infrastructure projects.
ConocoPhillips has U.S. operations spread from Alaska to the deepwater Gulf of Mexico. Exploration-wise, the company globally primarily plans to focus on the Gulf of Mexico this year. Of late it’s been touting successful development in the Eagle Ford Shale and other unconventional plays, including the Bakken Shale.
The Eagle Ford Shale continues to be its onshore jewel, with more than 52,000 boe/d growth anticipated this year from 2012, the management team said. Efficiencies have reduced drilling times in the play; it now takes 13 days to drill 10,000 feet, and it’s moving to 80-acre spacing from 160 acres.
Also showing strong growth is the Bakken Shale, where the company plans to spend $800 million/year through 2017. In 2012 the company spent $600 million in the play.
ConocoPhillips plans to “lighten up” on some long-term projects to keep costs down, Lance said. Until production grows and natural gas prices move higher, the operator is challenged to bring in enough cash to cover its operations and continue to pay a dividend, something that the company remains committed to doing.
Costs have continued to rise in Australia by about 7% a year, in part because of the country’s changing exchange rate, said E&P chief Matt Fox. The APLNG project, in which ConocoPhillips has a 37.5% stake, is set to deliver its first cargo in mid-2015, adding 80,000 boe/d by 2017.
However, by reducing its stake in APLNG, the company would be able to continue to participate but have more cash for other projects with quicker turnarounds, like those in the U.S. onshore. The same goes for Canada’s oilsands, Fox said. ConocoPhillips doesn’t want to end its participation in the oilsands but the commitment has a longer payoff.
One analyst questioned the company about why it continued to prioritize a dividend when it needed more cash for operations.
CFO Jeff Sheets said the cash flow is growing “to where we can fund the capital program and a dividend higher than where it is today.” The “high-margin growth” would add an additional $6 billion in cash flow by 2017. At the end of 2012 the company reported cash flow from operations of $13.5 billion.
“We are a company that believes that a significant part of what shareholders are looking for is a dividend they can count on,” Sheets said.
The “story is still the same,” said Tudor, Pickering, Holt & Co. (TPH) analysts. ConocoPhillips is “borrowing to pay the dividend while waiting for production/cash flow growth” beyond 2014 to modestly grow dividends down the road. However, the production and capital spending guidance is “unchanged,” at 3-5%/year production growth on $16 billion in spending a year “while ’13 has flat organic growth.”
Based on their calculations, the TPH team said ConocoPhillips could sell all of the oilsands stakes for up to $5 billion and farm out additional interest in APLNG, where they think selling 10% might fetch $1.4 billion.
The analysts were disappointed by the lack of clarity on the emerging liquids plays, since about 90,000 boe/d of growth to 2017 is to come from “other North American unconventionals, which excludes Eagle Ford, Permian and Bakken.”
In Canada’s Canol Shale, ConocoPhillips “thinks it could be similar to Eagle Ford and has 216,000 net acres there, said TPH. It currently is drilling one exploration well “with another planned right after both of which are vertical. Plan is to return next year with horizontals.” In the Niobrara formation, the producer also said there were “encouraging results” from four wells drilled “but none with long-term tests so still a guesstimate at this point.”
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