ConocoPhillips (NYSE:COP), the largest independent E&P company in the world, has outperformed most of its peers by a significant margin since the company spun off its downstream business in May 2012. Since the spinoff ConocoPhillips is up by 32%, while its competitors ExxonMobil (NYSE:XOM), Chevron (NYSE:CVX), BP (NYSE:BP), and Royal Dutch Shell (NYSE:RDS-A) are up by 13%, 12%, 10.5%, and 3% respectively during the same period.
Moreover, if we look at the performance over the past year, Conoco again outperformed its peers by a handsome margin. In the last 12 months, COP is up by 19%, while during the same period Shell, ExxonMobil, BP, and Chevron are up by 14.3%, 9.1%, 16%, and 0.2% respectively.
Production growth from areas with higher margins
Since the spinoff, Conoco's strategy has been consistent; it plans to grow production volumes organically through the development of North American unconventional plays and international projects. The company is expected to grow production by 400mboed by 2017. The overwhelming majority of incremental volume additions are expected to come from liquids and from areas with higher margins than the company. The growth is largely delivered by a portfolio of projects from the Eagle Ford, oil sands, the North Sea, Australia, and Southeast Asia.
While U.S. unconventional assets are expected to deliver half of the growth, the rest is expected to come from the projects in the North Sea, Southeast Asia, and Australia. All of these projects remain on schedule and on budget except the APLNG project in Australia, which has seen cost overrun due to higher well costs and currency. The company not only offers investors diversified market exposure but also lower geographic and geological risks. It is also important to note here that the company plans to deliver this growth while continuing to grow its dividend as well.
While production volumes for Conoco are expected to increase, ExxonMobil recently revised down both its short-term and long-term production volumes. ExxonMobil's 2014 production volumes are expected to decline 4% Y/Y. Exxon has also cut its long-term production volumes. The company revised down its 2017 production volumes to 4.3mmboe/d (from previous estimates of 4.8mmboe/d). Among other reasons, the expiration of ADCO license in the UAE and the Dutch government's decision to cut production at the Groningen natural gas field contributed to decreases in production growth.
Continues to discover and explore
With two Gulf of Mexico deepwater discoveries in the non-operated positions in Shenandoah and Coronado, Concoco had a strong start to 2014. The company, which has spent more than five years in strengthening its position in deepwater, is now the fourth largest leaseholder in the Gulf of Mexico and has begun to see the results of its efforts. Conoco is a 50% participant in an operated deepwater rig in the Gulf of Mexico this year and is considering adding another operated rig. To test its new deepwater Gulf of Mexico portfolio, Conoco is expected to drill 5-8 wells per year for the next five years.
Moreover, the company will also be drilling four back-to-back wells in Angola this year. COP has a well-diversified asset portfolio and is not exposed to any one product type, geology, or geography. Its operations are mainly concentrated in the U.S., North Sea, Canada, and Asia. On the other hand, Conoco's competitors are facing geopolitical risks, which may result in declines in production. While the Russian-Ukrainian crisis is threatening BP's production, the unrest in Egypt, Libya, and Nigeria is adversely affecting production volumes for Shell, Total, and ENI.
Moving down the cost curve
Conoco is also expected to strengthen its cash margins per boe by 3%-5% by 2017. The increase in cash flows is likely to come from both asset divestments and operational activities. Last year, Conoco generated more than $10 billion from assets sales, shoring up its balance sheet for a capital spending cycle that will deliver over $6 billion in additional operating cash flow through the decade. Moreover, Conoco is further planning to sell off some of its interests in the oil sands and Australia. The company's asset sale and reinvestment program is expected to create shareholder value over the long run as Conoco sells assets at the high end of curve (oil sands and LNG) and reinvests down the cost curve (Permian and Gulf of Mexico deepwater).
Two discoveries in the Gulf of Mexico, production growth in the Eagle Ford, and a large asset program keep me bullish on Conoco. The company is also trading at a discount compared to its U.S. peer ExxonMobil. Finally, it offers a higher dividend yield compared to its U.S. integrated oil peers: Conoco currently yields 4%, compared to 2.6% for Exxon, and 3.4% for Chevron.