Can This Oil Major Reclaim a $100 Billion Market Cap?

ConocoPhillips said goodbye to its downstream assets, but what's next for this oil giant?

Jan 15, 2014 at 11:13AM

What will it take to bring ConocoPhillips' (NYSE:COP) market cap north of $100 billion? According to its management, by spending $16 billion annually, a combination of margin expansion and output growth will add production of 400,000 barrels of oil equivalent per day by 2017 and will drive shareholder value creation.

In order to achieve these goals, ConocoPhillips is focusing on unconventional U.S. shale plays. 60% of the additional output is going to come from American shale plays, and it gets even better. By focusing on the Eagle Ford, the Permian Basin, and the Bakken, ConocoPhillips hopes to shift its production mix from ~40% liquids to ~80% in the lower 48 states.

Higher margins and more output will compound ConocoPhillips' growth plans and significantly boost free cash flow, which can be returned to investors via share buybacks and dividend increases. All this sounds nice, of course, but words are cheap.

Words may be cheap, but mining oil sands isn't
Unconventional shale plays are a crucial part of ConocoPhillips ambitions', but that shouldn't overshadow ConocoPhillips' Canadian assets. At the end of 2012 Conoco was pumping out 93,000 bpd from its oil sands operations. Consider that the base Conoco hopes to grow off of over the next decade.

In a 50/50 joint venture with Total's (NYSE:TOT) E&P Canada subsidiary, Conoco and Total are spending billions to grow capacity at the Surmot facility. Surmot first starting producing 27,000 bpd of bitumen in the fourth quarter of 2007. By undergoing a second phase of construction, Surmot should start producing 136,000 bpd of bitumen by 2015.

Oil sand projects are notorious for cost overruns and delays, which is why both Total and Conoco investors should play close attention to what Conoco's management has to say. Conoco is the operator of Surmont, but Total has also poured billions into bringing this thing online, which is why shareholders of both companies should take note.

Over the course of ConocoPhillips' guidance, it plans to spend $5 billion on Canadian oil sands projects on top of the enormous amount it has already spent. If Surmont takes longer than expected to come online, shareholders of both ConocoPhillips and Total will see earnings depressed while no additional cash flow is being generated.

Eagle Ford, Permian Basin, and the Bakken
As I mentioned before, ConocoPhillips plans on driving its margins higher by focusing on liquids-rich plays in America.

By developing its position in the Bakken with a $4 billion investment, Conoco hopes to tack on an additional 45,000 boe/d of output by 2017. Considering most of Conoco's leaseholds are in the core counties of the play, such as McKenenzie and Dunn, roughly 90% of that output will be liquids.

Conoco will spend $8 billion developing Eagle Ford acreage to grow output by 130,000 boe/d over the same time period. With 227,000 net acres centered around the oil- and condensate-rich windows of the region, Conoco has prime acreage to generate value.

The Permian Basin growth story comes in two parts: The first is less interesting, as it involves developing the conventional part of the play to increase output by 40,000 boe/d through a $3 billion investment. What really should excite investors is Conoco's acreage in the Delaware Basin, which houses a stacked play that could be the second largest oilfield in the world according to some.

Unconventional shale development is singlehandedly the most important thing to watch for this earning season, as Conoco follows the same trajectory others have taken to grow high-margin liquids output. If Conoco is able to double the percentage of liquids in its production mix while boosting output, those assets will become cash generation machines.

Angola
Over the past two years Conoco was able to use seismic imaging to locate several promising prospects off the coast of Angola. In 2014, the company will begin to see if the data from four well programs holds up, which could provide Conoco will a large reserve base to grow output past 2017.

Foolish final thoughts
This year could bring about many great things for ConocoPhillips as it expands shale output and its projects in Angola begin to take shape. Conoco may be able to reclaim a 12-digit market cap if guidance is met, but never count your chickens before they hatch. In the near term look for comments around shale developments but keep an eye out for how its major long-term projects are unfolding as well.

Another Buffett energy favorite
Imagine a company that rents a very specific and valuable piece of machinery for $41,000… per hour (that’s almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company’s can’t-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we’re calling OPEC’s Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock… and join Buffett in his quest for a veritable LANDSLIDE of profits!

 

Callum Turcan has no position in any stocks mentioned. The Motley Fool recommends Total SA. (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers