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Understanding ConocoPhillips’s Updated Fiscal 2017 Production Guidance

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Fiscal 2017 updated production guidance

On July 27, 2017, ConocoPhillips (COP) updated its fiscal 2017 production guidance range. COP now expects its fiscal 2017 production to be in the range of 1,340–1,370 Mboepd—a midpoint fall of 200 Mboepd from its original fiscal 2017 production guidance in the range of 1,540–1,570 Mboepd.

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Why COP drastically reduced its fiscal 2017 production guidance

In May 2017, ConocoPhillips closed its transformational Canadian assets divestiture of oil sands mining operations at FCCL (Foster Creek Christina Lake) and natural gas assets in the Canada Deep Basin to Cenovus (CVE). On July 31, 2017, COP closed the divestment of its San Juan Basin assets to an affiliate of Hilcorp Energy.

COP also signed the Barnett asset sale in 2Q17, which will be closed in 3Q17. Together, the San Juan Basin and Barnett asset sales will have an impact of 278 Mboepd on COP’s 1H17 production.

On July 31, 2017, COP Chairman and CEO (chief executive officer) Ryan Lance stated:  “Completion of the sale of our San Juan Basin assets is a key milestone in the continuing high-grading of our portfolio…We believe the proceeds from this transaction along with our other dispositions are strengthening our balance sheet and allowing us to deliver on our value proposition.”

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Balance sheet flexibility

In fiscal 2017, COP carried out these big asset sales to shift its portfolio toward more crude oil (USO) production and achieve balance sheet flexibility. But balance sheet flexibility came in at the expense of future operating cash flows as the above asset sales prompted COP to reduce its fiscal 2017 production guidance.

Peers

By comparison, Marathon Oil (MRO) expects production in a range of 345–360 Mboepd. The ProShares Ultra Oil & Gas Exploration & Production ETF (UOP) invests in oil and gas exploration and production companies in the US. UOP is a leveraged ETF that provides 200% returns based on the S&P Oil & Gas Exploration & Production Select Industry Index.

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