Why These 3 Energy Companies are Getting Domesticated

ConocoPhillips, Hess Corp., and Anadarko Petroleum are each taking steps to sell off under-performing international assets and refocus on domestic production.

Mar 26, 2014 at 9:40AM

The energy production boom taking place in the United States right now is truly impressive. Domestic oil production is now at levels not seen in decades, thanks to revolutionary drilling techniques and the emergence of abundant supplies of natural gas. At the same time, international operations are turning increasingly risky due to rising geopolitical risk.

As a result, in the energy space, exploration and production companies are dealing with a mixed outlook within their portfolios. Rising domestic production is somewhat being offset by declining returns elsewhere, particularly in other parts of the world where business conditions aren't nearly as promising. Energy majors such as ConocoPhillips (NYSE:COP), Hess Corp. (NYSE:HES), and Anadarko Petroleum (NYSE:APC) are responding by reducing the level of geopolitical risk within their portfolios. They are actively shedding international assets in geographies that present pronounced levels of political and operational uncertainty.

Here's why these companies are doubling down on domestic production, and why that strategy may turn out to be an extremely wise decision.

Energy companies actively managing portfolios
Oil majors are increasingly relying on domestic energy as their major source of oil production and development. By the same token, they're unloading overseas assets that are deemed non-critical to future growth, primarily because those assets are located in areas of the world with heightened instability.

For example, ConocoPhillips advised investors it would sell considerable interests in Kazakhstan, Algeria, and Nigeria. Proceeds from Conoco's divestments last year totaled $7 billion, which will be reinvested primarily in U.S. oil fields. Continuing political tensions and unrest prompted the move. In addition, Conoco's results last year were once again adversely affected by poor performance in the company's Libyan operations.

Libya is a specific region becoming increasingly troublesome for U.S.-based oil majors. This is causing many, including Conoco and Hess, to rethink their devotion to Libyan production. Conoco has effectively curtailed production in Libya. This is reflected in the fact that production in Conoco's 'Other International' segment, which houses Libyan operations, fell by 88% in the fourth quarter, year over year.

Similarly, Hess's production was significantly affected by worsening conditions in Libya last year. Extended shutdowns caused from civil uprisings in Libya resulted in a 20,000 barrel-per-day drop in production in the fourth quarter. This was a major contributing factor behind Hess reporting a 22% drop in fourth quarter production versus the same period the previous year.

Anadarko turns away from China
If you heard that a major oil and gas exploration and production company was reducing its exposure to China, one of the fastest-growing emerging economies in the world, you might think they were crazy. And yet, that's exactly what Anadarko is doing now that it's undergone a major divestment there. The company recently announced it would divest its Chinese subsidiary in a deal worth approximately $1.075 billion.

Anadarko Chief Executive Officer Al Walker referred to the transaction as a demonstration of the company's commitment to active portfolio management. The divestment involves a non-operating interest in the Bohai Bay field, where 2013 oil sales volumes totaled approximately 11,000 barrels per day.

The region had underperformed last year, which amounted to a relatively small impact since Anadarko's sales volumes per day rose by 7% last year. Nevertheless, Anadarko is determined to sell interests which are not deemed critical to the future, and that includes its Chinese subsidiary.

Oil and gas majors focusing on the U.S.
In order to keep production growing, energy majors ConocoPhillips, Hess, and Anadarko are increasing investment in domestic production while simultaneously shedding international assets. ConocoPhillips and Hess are currently suffering from poor results in Libya due to continued supply disruptions. For its part, Anadarko reported disappointing results in China last year, despite that nation's status as a premier emerging economy.

The end result is that oil and gas giants are selling off portions of their portfolios located in non-critical geographies and reinvesting the proceeds in more promising domestic plays. With $100 per barrel oil in the United States and a production boom in onshore developments like the Permian Basin and Bakken shale, these three companies are likely to see good results from their strategic initiatives.

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Bob Ciura has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

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