This analyst is more bullish but less analytical.
Business Summary April 24, 2012
CORPORATE OVERVIEW. On August 30, 2002, Phillips Petroleum and Conoco merged, creating ConocoPhillips
(COP). Today, we estimate COP is the second largest publicly integrated oil company in the U.S.,
based on a blend of its oil and gas reserves and production capacity. COP operates in six segments: exploration
and production (E&P; 23% of 2010 sales, 81% of 2010 net income); refining and marketing (R&M;
73%, 2%); midstream (4%, 3%); 20% stake in the Russian oil company Lukoil (NA; 22%); chemicals (NA; 4%);
and emerging businesses. As of the end of February 2011, COP had sold its 20% stake in Lukoil and received
about $9.5 billion in proceeds from the sale of its shares. In July 2011, COP announced its intention
to split its upstream and downstream businesses, which is expected to occur on May 1, 2012.
Including Lukoil, and COP's share of equity affiliates, net oil and gas production fell 6% in 2010, to 1.75 million
barrels of oil equivalent per day (boe/d), reflecting field declines, the impact of higher prices on production-
sharing arrangements, and the sale of the Syncrude oil sands mining operation. Proved oil and gas
reserves (including Lukoil, bitumen, synthetic oil, and equity affiliates) fell 20%, to 8.3 billion barrels (66%
liquids, 77% developed), in 2010, on asset divestments.
Using data from John S. Herold, we estimate COP's three-year (2008-10) finding and development costs at
$45.21 per boe, above the peer average; three-year proved acquisition costs at $30.86 per boe, above the
peer average; three-year reserve replacement costs at $44.94 per boe, above the peer average; and threeyear
reserve replacement at 29%, below the peer average.We estimate COP's 2010 organic reserve replacement
at 138%.
As of December 31, 2010, COP owned or had interests in 12 U.S. refineries (net crude throughput capacity
of 2.0 million barrels per day, b/d), four European refineries (610,000 b/d), and one refinery in Malaysia
(61,000 b/d). At year-end 2010, fuel was sold through wholesale and retail operations in the U.S. (under
Phillips 66, Conoco and 76 brands) and Europe (under the JET and Coop brands).
MARKET PROFILE. Based on a ranking of oil and gas assets and production, we estimate that COP is the
second largest oil company in the U.S. and the fourth largest publicly traded oil company in the world, the
sixth largest natural gas producer in the U.S., and the third largest U.S. refiner. COP operates in about 40
countries, with the U.S. accounting for 66% of 2010 sales, and the remainder from Europe, Asia Pacific/
Middle East, Canada, Africa and elsewhere. It participates in the chemicals sector through an equally
owned joint venture partnership in Chevron Phillips Chemical Co. LLC (CPChem).
IMPACT OF MAJOR DEVELOPMENTS. On July 14, 2011, COP's directors approved the separation of COP's
refining & marketing and exploration & production businesses into two stand-alone, publicly traded corporations
via a tax-free spinoff of the refining and marketing business (to be called Phillips 66) to COP shareholders.
The proposed separation is expected to be completed May 1, 2012. Trading in Phillips 66 stock began
on a when-issued basis on April 12 under the NYSE symbol PSX.
In 2010, COP said it plans to divest about $10 billion of assets over the next two years, and use some of the
proceeds to pay down debt. Between 60% and 80% of the targeted sales are slated to come from North
American upstream assets (such as onshore mature natural gas), and 20% to 40% from the downstream
(such as U.S. marketing). Refining re-alignments have been postponed for a few years due to market conditions.
As a result, COP ended participation in the new refinery project being built in Yanbu Industrial City
and canceled plans to upgrade its Wilhelmshaven refinery in Germany. In June 2010, COP sold its 9.03%
stake in Syncrude Canada Ltd. to China's Sinopec for $4.65 billion.
After a 19-year absence, in 2006, COP and its Oasis Group partners -- Marathon Oil and Hess -- returned to
their former operations in Libya'sWaha concessions. In 2006, COP acquired Burlington Resources for
about $33.9 billion. In 2007, COP and Encana created an integrated North American oil business consisting
of two 50/50 operating partnerships: one Canadian upstream, and one U.S. downstream. In 2008, COP paid
about $8 billion for a 50% stake in Origin Energy Ltd.'s LNG venture.
CORPORATE GOVERNANCE.We believe COP's corporate governance practices are sound and above average
compared with companies in the S&P 500 Energy Sector. Its board of directors is controlled by a supermajority
of independent outsiders (greater than 90%).
FINANCIAL TRENDS. Capital spending fell to $10.7 billion in 2010 from $12 billion in 2009, but rose to $13.8
billion (mostly for exploration & production) in 2011.
When oil prices dropped to the low $40 per barrel range in the first quarter of 2009, COP suspended its
stock repurchases, but as oil prices rebounded to above $80 in March 2010, the company announced a $5
billion share repurchase program and resumed its share repurchase program in the second quarter of
2010. COP repurchased $11.1 billion of its stock in 2011 and plans up to $10 billion more in 2012. It also plans
$8 billion to $10 billion of asset sales in 2012. |
