uploads///COP Q San_Juan_Divest Operations

Why ConocoPhillips Is Divesting San Juan Basin Assets

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Apr. 18 2017, Updated 12:29 p.m. ET

San Juan divestiture

On April 13, 2017, crude oil (USO) and natural gas (UNG) producer ConocoPhillips (COP) announced an agreement with an affiliate of Hilcorp Energy to sell its upstream assets in the San Juan Basin. This divestiture will earn a maximum of $3 billion for the company.

According to COP’s press release, some of the key highlights of this divestiture are as follows:

  • ConocoPhillips will receive $2.7 billion in cash.
  • ConocoPhillips will receive contingent payment for six years whenever the average monthly Henry Hub price moves above $3.20 MMBtu (million British thermal units). The total contingent payment is capped at $300 million and will be effective from January 1, 2018.
  • The divestiture is expected to close in 3Q17, pending customary closing conditions.
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Why ConocoPhillips sold San Juan Basin assets

In November 2016, while presenting at the AIM (Analyst and Investor Meeting) in New York, ConocoPhillips revealed its production mix strategy for the next two years. COP is planning to reduce natural gas exposure in North America. COP’s production mix in the San Juan Basin is ~78%. Thus, the San Juan asset sale will reduce COP’s exposure to North American natural gas significantly.

COP’s recent divestiture of Canadian gas assets to Cenovus (CVE) was part of its production mix strategy. After the Canadian and San Juan asset divestitures, COP’s North American natural gas percentage in its overall production mix will decrease from ~20% to ~10%.

To know more about COP’s production mix strategy, refer to Market Realist’s ConocoPhillips’s Production Mix Strategy for 2017–2018.

Other oil and gas producers

Recently, in the second week of March, Marathon Oil (MRO) sold its OSM (oil sands mining) assets located in Canada to Royal Dutch Shell (RDS.A) (RDS.B) and Canadian Natural Resources (CNQ). This transaction was valued at $2.5 billion and marked MRO’s exit from Canada.

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