uploads/2017/02/COP-4Q16-AIM-Production-Mix-1.jpg

Analyzing ConocoPhillips’s Production Mix Strategy for 2017–2018

By

Updated

Asset sales

On February 16, 2017, Reuters reported that ConocoPhillips (COP) is trying to sell many of its conventional natural gas (UNG) assets from Canada. Per Reuters, these assets could fetch up to $2 billion in divestiture proceeds. These potential asset sales are part of ConocoPhillips’s strategy to accelerate its value proposition by means of shifting towards more profitable crude oil production and international natural gas production.

Article continues below advertisement

Production mix strategy

ConocoPhillips’s production mix in 4Q16 was ~51% oil (crude oil and bitumen), ~9% natural gas liquids, ~22% international natural gas, and ~18% North American natural gas. As seen in the above chart, over the last four years, ConocoPhillips reduced its North American natural gas percentage in its production mix by almost ten percentage points to ~18%. In order to accelerate its value proposition, ConocoPhillips is planning to reduce its North American natural gas percentage in its production mix even further to ~10% over the next two years.

ConocoPhillips is planning to sell $5 billion–$8 billion of assets with exposure to North American natural gas in order to achieve its production mix strategy. ConocoPhillips’s North American natural gas includes natural gas production from Alaska, Canada, and the Lower 48 operations, whereas international natural gas includes production from Europe as well as Asia Pacific and Middle East operations. Typically, North American natural gas has lower operating margins when compared with international natural gas due to local price dynamics.

These potential asset sales are also part of COP’s debt reduction strategy where COP is planning to reduce its debt load from $27 billion to $20 billion in the next three years.

Other oil and gas producers

In 2016, many oil and gas producers like Southwestern Energy (SWN), Denbury Resources (DNR), and Devon Energy (DVN) completed asset divestitures in order to reduce debt.

Next, we’ll study the possible trading range for COP stock for this week based on its implied volatility.

Advertisement

More From Market Realist