Finding The Next Legacy: ConocoPhillips Keeps Exploration On Radar

A delectable nugget was missing from ConocoPhillips’ (NYSE: COP) Canadian asset sale earlier this year.

“As part of our 2017 appraisal activity we recently drilled, completed and flow tested two wells that produced at double the average 30-day rates of competitor wells across the play,” Al Hirshberg, executive vice president of production, drilling and products for ConocoPhillips, said referring to the company’s Montney assets. “Our wells are in the 50-60% range for liquids. I think you can see now why we didn’t include this Montney acreage in our Canadian transaction earlier this year.”

The Houston-based company has been working to strengthen its balance sheet by bringing down debt, including through asset sales such as the $13.3 billion March sale of its nonoperated interest in the Foster Creek Christina Lake oil sands partnership and most of its western Canada Deep Basin gas assets to Cenovus Energy. This comes as the company aims to grow returns on capital employed by 20% by 2020—at $50/bbl—while improving its low cost of supply portfolio.

Moves include coring up in areas where there is access to infrastructure and low entry costs.

“This approach is integrated with our overall goal to keep a high degree of flexibility in our capital by adding resources that have shorter cycle times,” Hirshberg said Nov. 8 during the company’s annual Analyst and Investor Day. “Although we’ve retooled our program we have retained the critical expertise that has allowed us to capture over 10 billion barrels [Bbbl] of less than $50/bbl cost of supply resource over the last 10 years, primarily in unconventional plays and around our legacy assets.”

ConocoPhillips, which has grown its Canada Montney acreage position from 14,000 acres to 106,000 in about four years, has increased its total Montney resource estimate to 2 Bbbl—quadruple the 2016 amount—with an average cost of supply of about $30 per barrel, Hirshberg said.

Having also improved drilling times by 50% with plans in 2018 for a 12-well pad to test spacing and stacking, he added “our Montney acreage has the potential to be a significant contributor to future cash flows for our company.”

Another area is Alaska’s Greater Mooses Tooth (GMT), where the company’s 2016 Willow discovery in National Petroleum Reserve-Alaska found at least 300 million barrels of resources, making it “one of the larger recent conventional discoveries globally,” Hirshberg said. He pointed out that since making the discovery ConocoPhillips has increased its acreage in the Willow area by more than 600,000 acres at a cost of $30/acre.

The company’s proprietary seismic technology—compressive seismic imaging (CSI)—has identified more prospects in the area, where ConocoPhillips plans to drill three more exploration wells in 2018 plans and shoot more CSI.

Montney and Willow are two examples of where the company is putting its exploration focus and aligning its portfolio toward its goal to “deliver superior returns to shareholders through cycles by growing the dividend, reducing debt, reducing share count and growing cash from operations.”

ConocoPhillips aims to more than double its cash flow by 2020 and spend an average of $5.5 billion annually over the next three years.

Most, or $1.2 billion of the spend, will go toward short-cycle unconventionals each year, including in the Eagle Ford, Delaware and Bakken. Technology-fueled optimization could lead to production growth for all three. Combined, five rigs would be needed to maintain flat production; however, adding six more rigs could result in 80% more production in three years, or 22% production CAGR from 2017 to 2020.

ConocoPhillips anticipates positive net cash flow for its the three unconventional areas to grow to about $2 billion by 2020.

Future major projects—including Alaska GMT-2 and the Barossa gas and condensate project offshore Australia—are slated to receive $500 million annually, while exploration is lined up for $300 million. Executives said the exploration focus is on infrastructure-led programs in Alaska, Europe and the Asia-Pacific/Middle East regions, liquids-rich unconventional plays in the Americas and low-cost entry in unconventional oil and advantaged gas areas such as in South America.

Having a high-graded portfolio, favorable product mix and a deep inventory of investment options are part of ConocoPhillips’ strategic framework, company executives said.

Other highlights from ConocoPhillips included:

• Sustaining capital of $3.5 billion;
• Having a less than a $40-per-barrel average sustaining price;
• Extending the $1.5 billion per year of share buybacks for an additional year through 2020, resulting in total 2017-2020 share buybacks of $7.5 billion;
• Targeting a 5% to 15% reduction in greenhouse gas emissions intensity by 2030; and
• Reducing debt to $15 billion in 2019.

The presentation was delivered as the oil and gas companies find ways to better cope with the market’s volatile nature. A barrel of West Texas Intermediate crude was fetching more than $57 on Nov. 8. That’s an improvement from lows of below $30 in February 2016 compared with highs above $107 in June 2014.

“We’ve positioned the company to work in high and in low prices,” CEO Ryan Lance said during the presentation. “We have low capital intensity meaning it takes less capital to maintain our production. We believe our $40 per barrel sustaining price is industry-leading today. We maintain a relenting focus on cost. We know the low-cost producer wins in this business.”

ConocoPhillips’ resources with breakevens of $40/bbl or less have increased by 30% compared to a year ago as it sold off some higher-cost assets. These have included exiting deepwater exploration and shedding Canadian oil sands assets.

Technology and improved techniques have played a role in keeping costs low.

Velda Addison can be reached at vaddison@hartenergy.com.