uploads///COP Q San_Juan_Divest Advantages

How Might ConocoPhillips Benefit from the San Juan Divestiture?



Closure of the San Juan asset sale

On July 31, 2017, ConocoPhillips’s (COP) closed the previously announced divestiture of its San Juan Basin assets to Hilcorp Energy. According to COP’s original announcement on April 13, 2017, it was supposed to receive total proceeds up to $3 billion, which included a cash portion of $2.7 billion and contingent payments of up to $300 million.

However, after customary closing adjustments, COP received $2.5 billion in cash. As for contingent payments, it will be effective from January 1, 2018.

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ConocoPhillips’s accelerating its value proposition

In 4Q16, ConocoPhillips (COP) outlined its value proposition during its AIM (analyst and investor meeting) presentation. Financial flexibility is one of the significant focus areas for ConocoPhillips as it helps COP manage its cash allocation priorities more effectively.

Proceeds from the San Juan asset sale should help COP achieve this goal. For fiscal 2016, COP’s operating cash flow from San Juan assets was only $200 million. However, the San Juan assets sale will likely give better balance sheet flexibility to COP due to debt reduction.

Retained exposure to natural gas price upside

COP’s other benefit will be that it will retain exposure to the Henry Hub natural gas (UNG) price upside. ConocoPhillips will receive contingent payment of ~$7 million per month from January 2018 to December 2023, whenever the average monthly Henry Hub price moves above $3.20 MMBtu (million British thermal units). These contingent payments will have a cumulative cap of $300 million.

Other divestitures in the oil and gas industry

In fiscal 2016, Devon Energy (DVN) successfully executed its non-core upstream assets divestment program, wherein it sold various assets across the US for total proceeds of ~$3.2 billion.

Notably, in fiscal 2016, natural gas producer Southwestern Energy (SWN) also sold its acreage in Marcellus Shale to Antero Resources (AR). SWN received ~$450 million from the asset sale, which it used for operational purposes and to reduce debt.


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