Upstream production, mostly focused in North America and northwestern Europe, is the new ConocoPhillips’ strategy going forward, with up to 75% of the capital deployed toward exploration and production, the company’s E&P chief said Wednesday. Although the combined companies’ current production mix is 59% oil and 41% natural gas, by mid-decade gas production will be close to half.

Rob McKee, executive vice president for exploration and production (formerly of Conoco), acknowledged that the new company currently has a large downstream asset base. He said the objective going forward will be to gradually redirect capital toward more exploration and production, which currently gets 57-65% on average of capital deployed. “The real prize is integration across the United States,” he added. “I guess if I was looking at it from an upstream perspective…we have a very aggressive plan to optimize.”

ConocoPhillips’ combined E&P program is about 1.2 billion boe/year, said McKee. “We’re obviously going to reduce that going forward, but we have a high-grade portfolio. We have to center that investment we make in exploration to about 70% in lower risk and proven basins.” The new company has “every chance now to compete favorably.”

A complete strategy won’t be completed before November, said McKee, and he added that it was “too early” to speculate on definitive growth plans — the official merger was completed just days ago. However, he said, “what we do know is that we have an outstanding set of reserves and outstanding prospects. The future looks good; the question is how much do we select going forward?”

Almost 93% of ConocoPhillips’ production reserves lie in four core areas: North America, the northern part of South America, northwestern Europe and Asia. “Though we are bigger, the company is focused,” said McKee. “Our portfolio is low risk, with 52% in North America, and actually, three-quarters in North America and northwestern Europe. We have an ‘unrisky’ portfolio.”

With the merger of the two majors, the E&P chief said North American reserves stretch from Alaska, into Canada and across the country into Texas and the deepwater Gulf of Mexico. ConocoPhillips is the largest producer in Alaska, and the third largest natural gas producer in the United States. It also is the second largest natural gas producer in Texas, McKee said.

Another key — for now at least — is its 30% equity in the midstream natural gas assets of Duke Energy Field Services (DEFS) that Phillips brought into the merger. Passing off questions about whether ConocoPhillips might be interested in selling some or all of its equity in DEFS to Duke Energy, McKee said that unit is set up to be completely separated from ConocoPhillips through a “Chinese wall” in the near term, but said a decision on what to do with the assets needed to be resolved. The merger was approved by the Federal Trade Commission with a requirement that the new company divest some of its gas gathering and midstream assets, and DEFS is not the only midstream asset now held by ConocoPhillips.

“The midstream is really important for us with all of the growth opportunities we have,” said McKee. “We don’t want to lose those opportunities down the line.” DEFS, he said, “gives us equity in over 60,000 miles of pipeline and processing plants…, 15 Bcf/d of gas… It’s important to look at how we will be leveraging our capabilities and skill sets.”

CFO John Carrig added that the midstream assets offered an “opportunity to make something happen here,” but added that it was too soon to be more specific.

Carrig noted that as of last Friday (Aug. 30), ConocoPhillips had a total $60 billion of capital deployed, with 60% in the upstream and 40% in the downstream. One of the tantalizing aspects of the mega-merger are the synergies the companies brought together, he said. With an expectation to realize $750 million in savings with the merger, Carrig said the new company actually hopes to “overachieve on our synergy target.”

Referring to the turmoil within the business world in recent months, Carrig said, “If we do these things and do them well, we have a very strong portfolio of high value, known reserve opportunities. If we exercise financial discipline, have measures to be accountable, and improve the return on the capital employed, the greatest challenge is to convince you that we can do this on an ongoing basis and compete with the majors.”

ConocoPhillips will have “full and transparent disclosure,” said the CFO, which “fairly clearly, you can tell the results of our operation from volume and variance analysis. You will be able to pretty much tell how we’re doing…there’s no magic to it. We don’t engage in self dealing.” He said the new company would have to “balance a strong portfolio with our desire for debt reduction.” However, the dividend will not be a target for reduction, he noted.

Reducing the company’s debt ratio is important, he said, to secure at least an “AA” credit rating. Standard & Poor’s Ratings Service and Moody’s Investors Service rate ConocoPhillips “A-/A3,” which Carrig said was not good enough. “We were hopeful we could come out of the box with a somewhat better rating than what we got,” he said. “But the agencies are being conservative right now.”

Carrig added that ConocoPhillips’ dividend will be competitive and therefore won’t contribute to debt reduction. The company won’t sacrifice shareholder returns simply to secure a lower leverage, he said.

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