Here's Why ConocoPhillips' Margin Expansion Might Continue

Mar 4 2014, 1:38pm CST | by

ConocoPhillips‘ 2013 full-year cash margins improved by $2.91 per barrel of oil equivalent, which is equivalent to an increase of more than 11% y-o-y. This could partially be attributed to higher natural gas prices in the U.S., compared to 2012. However, even after adjusting for the difference in price realizations, the company’s cash margins improved by $2.35 per BOE, which implies more than 9% year-on-year growth. The key trend behind this spectacular margin expansion has been the company’s improving volume-mix, which we believe is expected to continue for a while. In this article, we take a closer look at why that might be the case.

We currently have a $75 price estimate for ConocoPhillips, which is around 15% above its current market price.

See Our Complete Analysis For ConocoPhillips

What Happened Last Year?

Last year, ConocoPhillips' volume-mix improved on higher proportion of liquids as production growth mostly came from the liquids-rich unconventional plays in the Lower 48 and oil sands in Canada. Higher liquids production boosts operating margins for oil companies as they earn more revenues per barrel of oil equivalent on selling liquids rather than natural gas. ConocoPhillips sold liquids at an average price of over $85 per barrel last year, while the company realized average price of just around $37 per BOE of natural gas.
/>

ConocoPhillips’ 2013 full-year production from continuing operations grew by 30,000 BOE per day, net of field declines. Although not substantial, the growth in production came from the right areas, which boosted its operating margins. In North America, where natural gas prices are heavily depressed compared to international markets, the company’s natural gas production declined by 16,000 BOE per day, while liquids production from the Lower 48 and Canada increased by 49,000 and 21,000 BOE per day, respectively. This boosted ConocoPhillips’ 2013 cash margins by almost $3 to $28.55 per BOE.
/>
Why It Might Continue?

We believe that ConocoPhillips’ cash margins will continue to expand in the coming years as well on further improvement in the volume-mix. The company expects to boost its net hydrocarbon production volume from around 1.5 million BOE per day in 2012 to 1.9 MMBOED by 2017. Since the 2012 base production is expected to decline to around 0.9 MMBOED by 2017 due to normal field declines, the company effectively plans to add new production of almost 1 MMBOED in a period of 5 years. It plans to achieve this through the development of existing projects and new project start-ups. Moreover, It also expects liquids, which primarily include crude oil, oil sands, liquefied petroleum gas, and natural gas liquids (NGLs), to comprise almost 95% of this incremental volume. Since liquids are generally more profitable than natural gas, ConocoPhillips’ cash margins would continue to expand in the coming years. 
/>

Now, the biggest contributor to the company’s production ramp-up and margin expansion plan would be its ongoing development of the U.S. onshore assets in the Lower 48 region. The region is expected to contribute ~60% to its total planned incremental production from the development of existing projects and more than 36% to the total anticipated new production of 1 MMBOED. Lets take a closer look at the company’s activities in the region.
/>

ConocoPhillips holds 13.8 million net acres of onshore conventional and unconventional acreage in the Lower 48. The company’s unconventional holdings total 2.5 million net acres and include approximately 626,000 net acres in the Bakken; 227,000 net acres in the Eagle Ford; 194,000 net acres in Permian; 130,000 net acres in Niobrara; 900,000 net acres in the San Juan Basin; and nearly 430,000 net acres in other unconventional exploration plays. Currently, ConocoPhillips’ activities in this region are mostly centered on continued optimization and development of existing and emerging assets, with a particular focus on areas with higher liquids production.
/>

  • Bakken: The Bakken Shale Play is located in Eastern Montana and Western North Dakota, as well as parts of Saskatchewan and Manitoba in the Williston Basin. Oil was initially discovered in the Bakken play in 1951, but was not commercial on a large scale until the past ten years. The advent of modern horizontal drilling and hydraulic fracturing helped make Bakken oil production economic. ConocoPhillips plans to invest roughly $4 billion in the development of its acreage in the Bakken play and expects to ramp-up production rate from around 24,000 BOE per day in 2012 to over 55,000 BOE per day by 2017. In the fourth quarter of 2013, the company’s average production rate from the Bakken stood at 39,000 BOE per day, which was over 63% higher than the previous year.
    />
  • Eagle Ford: The Eagle Ford shale formation in South Texas runs from the US-Mexico border north of Laredo in a narrow band extending northeast for several hundred miles to just north of Houston. The EIA estimates proved oil reserves in the play to be around 1.25 billion barrels of oil and 8.4 trillion cubic feet of gas. ConocoPhillips plans to invest roughly $8 billion in the development of its acreage in the Eagle Ford play and expects to almost double the rate of production from around 65,000 BOE per day in 2012 to over 130,000 BOE per day by 2017. In the previous quarter, the company’s average production rate from the Eagle Ford jumped over 42% y-o-y to 126,000 BOE per day.
    />
  • Permian: The Permian region, in western Texas and extending into southeastern New Mexico, has been one of North America’s major oil and natural gas producing regions for nearly a century. It accounts for about two-thirds of crude oil production in Texas and nearly 15 percent of that of the entire U.S. ConocoPhillips plans to invest roughly $3 billion in the development of its acreage in the Permian play and expects to increase its production rate from around 45,000 BOE per day in 2012 to over 70,000 BOE per day by 2017. According to our estimates, the company’s production rate from the Permian Basin averaged around 53,000 BOE per day during the fourth quarter of 2013. So, the company is well on its way to achieve its target by 2017.

More importantly, liquids now represent over 50% of the total hydrocarbons produced from the Lower 48 region, compared to just over 45% at the end of 2012, and production has been growing steadily over the last few quarters. In 2013, crude oil production from the Lower 48 region grew by 24% y-o-y, while total hydrocarbon production from the region increased by just around 7%. Based on ConocoPhillips’ long-term plan and its progress so far against it, we are compelled to believe that the company’s cash margins might continue to expand going forward.

See More at Trefis | View Interactive S&P Capital IQ Analyses (Powered by Trefis)

Like our charts? Embed them in your own posts using the Trefis WordPress Plugin.

Source: Forbes Business

 
 

Don't miss ...

 

<a href="/latest_stories/all/all/30" rel="author">Forbes</a>
Forbes is among the most trusted resources for the world's business and investment leaders, providing them the uncompromising commentary, concise analysis, relevant tools and real-time reporting they need to succeed at work, profit from investing and have fun with the rewards of winning.

 

blog comments powered by Disqus

Latest stories

Fresh cases of Ebola recorded in Nigeria: Official
Abuja, Aug 22 (IANS) Fresh cases of the Ebola virus disease have been recorded in Nigeria, where the highly contagious disease has already claimed five lives, Minister of Health Onyebuchi Chukwu said Friday.
 
 
Fuel cell technology gets a boost
Washington, Aug 22 (IANS) In an impetus for fuel cell technology to build "smart" cars, scientists at Stanford University have developed a low-cost, emissions-free device that uses an ordinary AAA battery to produce hydrogen by water electrolysis.
 
 
3D-printed technology to make drug delivery better
Washington, Aug 22 (IANS) The US researchers have developed an innovative method for using affordable, consumer-grade 3D printers and materials to fabricate custom medical implants that can contain antibacterial and chemotherapeutic compounds for targeted drug delivery.
 
 
Sunlight, not bacteria, key to CO2 in Arctic
Washington, Aug 22 (IANS) Sunlight and not bacteria is the key to triggering the production of carbon dioxide (CO2) from material released by Arctic soils, says a significant study.
 
 
 

Latest from the Network

Somali militants behead abducted Kenyan driver
Nairobi, Aug 22 (IANS) Militants of the Al Shabaab extremist organisation Friday beheaded a Kenyan driver who was kidnapped at Kiunga near the border with Somalia in the coastal town of Lamu. The body of George Mwita...
Read more on Politics Balla
 
Fresh cases of Ebola recorded in Nigeria: Official
Abuja, Aug 22 (IANS) Fresh cases of the Ebola virus disease have been recorded in Nigeria, where the highly contagious disease has already claimed five lives, Minister of Health Onyebuchi Chukwu said Friday. The...
Read more on Business Balla
 
JD-U suspends its legislator for six years
Pat Aug 22 (IANS) Bihar's ruling Janata Dal-United (JD-U) Friday suspended its legislator Rajiv Ranjan from the party for six years. JD-U president Sharad Yadav suspended Rajiv as he was involved in anti-party...
Read more on Politics Balla
 
Malaysia receives bodies of MH17 victims on day of mourning
Bangkok, Aug 22 (IANS/EFE) Malaysia Friday paid tributes to victims of the Malaysia Airlines passenger plane which was shot down last month in eastern Ukraine, as the remains of 20 of the 43 countrymen on board were...
Read more on Politics Balla
 
PTI lawmakers quit National Assembly
Islamabad, Aug 22 (IANS) Lawmakers of the Imran Khan-led Pakistan Tehreek-i-Insaf (PTI) party Friday submitted their resignations from the National Assembly of Pakistan, the lower house of parliament. PTI leaders Shah...
Read more on Politics Balla
 
Indian junior squash team finishes sixth
Windhoek (Namibia), Aug 22 (IANS) India lost 1-2 to England to finish sixth in the World Junior team squash championship here. Four-time champions England made up for the shock of losing out on a semifinal place for...
Read more on Sport Balla
 
Ice bucket challenge hits B-Town, celebs get chills
Mumbai, Aug 22 (IANS) After amassing global popularity, the ALS ice bucket challenge, which involves dumping buckets of ice water over one's head to spread awareness for amyotrophic lateral sclerosis (ALS), or Lou...
Read more on Celebrity Balla
 
Spanish Primera Liga gets underway Saturday
Madrid, Aug 22 (IANS) Saturday sees the start of the new Spanish Primera Liga season with four games scheduled to be played on the opening day. All four matches take place in Andalusia, where the temperature will be...
Read more on Sport Balla
 
Ukraine accuses Russia of invading country
Kiev/Moscow, Aug 22 (IANS) Ukraine Friday accused Russia of invading the country after a convoy of Russian trucks carrying humanitarian aid crossed the border allegedly without permission or supervision of the Red...
Read more on Politics Balla
 
Fuel cell technology gets a boost
Washington, Aug 22 (IANS) In an impetus for fuel cell technology to build "smart" cars, scientists at Stanford University have developed a low-cost, emissions-free device that uses an ordinary AAA battery to produce...
Read more on Apple Balla