Should You Buy Into the ConocoPhillips Metamorphosis?

It's difficult for those of us who have been in and around the so-called oil patch for more than a few years to think of ConocoPhillips (NYSE: COP  ) as an independent producer, rather than a major integrated company with upstream and downstream operations. Beyond that, it's not easy to judge the company's future before the torrid pace of its asset dispositions begins to slow.

Generally solid results
For the final quarter of 2012, ConocoPhillips recorded net income of $1.43 billion, or $1.16 per share, or less than half of its $3.39 billion, or $2.56 per share for the comparable quarter a year earlier. But if you back out special items, earnings for the quarter come to $1.76 billion, or $1.43 per share. Analysts who follow the company had reached a consensus expectation of $1.42 a share. Revenue for the quarter increased by 1.5% to $16.37 billion, versus $16.12 billion for the final quarter of 2011.

Production for the quarter averaged 1.566 million barrels of oil per day, up from 1.483 million BOE from the year-ago quarter. That represents approximately 6% growth on an apples-to-apples basis. Among the milestones achieved during the quarter was the topping of 100,000 barrels in the peak daily production rate from Conoco's Eagle Ford properties. In other active areas, the company produced an average of 50,000 BOE daily in the Permian basin, and 24,000 daily BOE in the Bakken formation.

Through lease sales in the deepwater Gulf of Mexico, management expects to increase the total Gulf position by about 1.9 million acres. Internationally, production in Canada reached 475,000 BOE/D, while output in Alaska was 222,000 BOE/D, a slight decline year-over-year, based largely on normal field declines. Quarterly production from the Asia Pacific and Middle East regions grew by 10%. Production in Europe slid by about 22%, largely due to normal field declines and an increase in downtime.

A key to the changing composition of ConocoPhillips involves the company's sales, spin-offs, or abandonment of non-core assets. As you know, last May 1 the company spun off its downstream properties, including 15 refineries, 10,000 branded marketing outlets, and 15,000 pipeline miles. Those assets comprised what became Phillips 66 (NYSE: PSX  ) , a generous gift to Conoco shareholders as it turns out, given the 87% increase in the value of the new company's shares since May Day.

Disappearing properties
Other aspects of ConocoPhillips's being downsized so that it ultimately can be made larger include key assets dispositions announced during the most recent quarter:

  • In November, the company disclosed its intention to abandon its interests in two blocks in Peru. As a result, it won't be involved in future exploration activities in the area, despite having participated in two rounds of seismic exploration there.
  • Later in the same month, Conoco told authorities in Kazakhstan and its partners of its desire to sell its 8.4% interest in the Kashagan play in that country. Assuming the necessary approvals are forthcoming, the interest will be sold to India's ONGC Videsh Limited.
  • As of December, Conoco is moving toward the sale of several entities that make up its Nigerian business unit to Oando PLC, a Lagos-based African oil and gas operating company.
  • Also in December, ConocoPhillips announced the sale -- pending approvals -- of its Algerian business unit for approximately $1.75 billion to Pertamina, Indonesia's state oil company.
  • Last month, Conoco said that it had reached an agreement with Texas-based Denbury Resources (NYSE: DNR  ) for the sale of 86,000 net acres in the Cedar Creek Anticline of southwestern North Dakota and eastern Montana. The $1.05 billion transaction won't include any of ConocoPhillips' s more than 600,000 net acres in the Bakken.
  • While it has newly entered the unconfirmed rumor stage, there appears to be a possibility that ConocoPhillips and Origin Energy Ltd., its Australian partner, may unload of portion of the $24 billion APLNG liquefied natural gas project in Australia. The potential buyers are said to be Royal Dutch Shell (NYSE: RDS-B  ) and PetroChina Co., also known as Sinopec (NYSE: SNP  ) . Sinopec already owns  a 25% stake in APLNG, while Conoco and Origin each hold 37.5% interests.

The Foolish takeaway
As an erstwhile analyst, I'd be hard pressed to declare a belief that ConocoPhillips appears to warrant a "Buy," "Sell," or "Hold" rating. Until the figurative clouds of dust that are spewing from the company begin to abate and its new form becomes more apparent, I'll simply recommend that Fools maintain a watchful eye on the developing new entity.

While ConocoPhillips has become the biggest of the independent producers, another independent is front and center in the news and merits your attention. Chesapeake Energy's share price depreciated after negative news surfaced concerning the company's management and spiraling debt picture. While these issues still persist, giant steps have been taken to help mitigate the problems. To learn more about Chesapeake and its enormous potential, you're invited to check out The Motley Fool's brand new premium report on the company. Simply click here now to access your copy, and as an added bonus, you'll receive a full year of key updates and expert guidance as news continues to develop.

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