Conoco Expects Less, Divests More

Zacks Investment Research
updated | Zacks.com

Houston, Texas-based ConocoPhillips (NYSE:COP) has trimmed its production forecast for the year 2012, reflecting its ongoing asset divestiture program as well as three-year strategic plan.

The company now expects its production level to reach approximately 1.55 million barrels of oil equivalent per day (MMBoe/d) for this year, down from the previous expectation of 1.6 MMBoe/d and 2011 level of 1.62 MMBoe/d. This tepid expectation mainly confirms the company’s $10 billion asset sale venture that will likely hit Conoco’s output level in 2012. In the next five years, Conoco expects its production growth to average between 3% and 5% as the company focuses on liquid-rich ventures primarily in the U.S. and Canada.

ConocoPhillips is in the midst of a three-year strategic operation that includes an asset sale program, large-scale share buybacks and the spin-off of its refining unit. The company is on track with its first initiative, having already divested $20.2 billion of non strategic assets last year and intends to further offload $10 billion worth of properties this year. From 2013, the company may continue to divest $1 billion to $2 billion of mature assets per year.

The U.S. oil company intends to use the proceeds of the sale for its share repurchase program, under which Conoco repurchased 155 million shares for $11.1 billion last year. For 2012, the company aims to buy back shares of up to an additional $10 billion.

Again, in mid 2011, the company announced plans to split its upstream oil and gas exploration and production unit from its downstream refining segment into two standalone, publicly traded corporations. The new refining arm, Phillips 66, will likely have the refining capacity of 2 million barrels a day and will begin regular trading starting May 1, 2012.

We remain positive on the outlook for the new ConocoPhillips post-split, as it holds the promise of unlocking significant value. The idea behind the spin-off is to create value for shareholders who like the volatility in the refining business. The creation of two separate companies is also believed to be lucrative since the two separate entities will get to pursue greater opportunities in their respective market segments without the constraints of the parent company. It will also better serve the needs of both investor groups. We expect this move will narrow ConocoPhillips’ return gap, which historically lags its peers.

However, considering the company’s unpredictable global economic conditions, unpredictable supply-demand fundamentals of oil and gas, and international business risks, we remain on the sidelines and maintain our long-term Neutral recommendation.

The company, with competitors like Hess Corporation (NYSE:HES) and Marathon Oil Corporation (NYSE:MRO), also holds a Zacks #3 Rank (short-term Hold rating).

 
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