) is selling some oilfields in North Dakota and Montana to Denbury
Resources Inc. for $1.05 billion. These properties cover an area of
roughly 86,000 acres and net production from them averaged 13,000
barrels of oil equivalent (
) last year. ConocoPhillips' worldwide production averages between
1.5-1.6 million BOE per day. Although Conoco's major assets in
North Dakota and Montana are shale gas assets under the Bakken
formation, these were not a part of the deal.
The deal will help ConocoPhillips in optimizing its portfolio to
meet its growth and dividend targets. It will also help in
financing its capital expenditure commitments over the next three
years. The assets in question here are a part of its overall asset
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The Thought Process Behind The Deal
The deal is a win-win for both sides owing to the nature of the
assets in question. These oilfields are in decline, nearly
exhausted even, from the point of view of conventional extraction
methods. However, Denbury specializes in squeezing out more oil by
injecting carbon dioxide into fields and expects to extract 140-180
million barrels of oil from the acquired assets. It also has
a ready supply of carbon dioxide available near the acquired
properties and has prior experience in carrying out such activities
in the Gulf of Mexico. The shale assets owned by ConocoPhillips in
the same region use hydraulic fracturing to extract oil. This
technology involves the use of a mixture of sand, water, and
chemicals rather than carbon dioxide.
The returns from extraction of shale oil are more lucrative over
the long term than those from declining conventional oilfields.
This explains why ConocoPhillips chose to sell the latter.
The Larger Picture
There are good reasons as to why ConocoPhillips is on a selling
spree. It wants to shed its non-core businesses and generate funds
for capital spending in areas with high growth potential. This will
help the company in achieving its target production growth rate of
3-5% per year. The company has an annual capital expenditure target
of $15 billion for the next three years. It also aims to pay a
dividend yield of 4.5% to investors.
Both of these objectives need significant cash flow generation,
which can be achieved only if the company sells off unproductive or
non-core assets. Including this deal, Conoco has already managed to
generate $12 billion from asset sales thus far, exceeding its
initial stated target of $8-10 billion. (
ConocoPhillips In 2013: More Asset Sales, Focus On
North American Business
ConocoPhillips generated $2.1 billion through sales in the first
nine months of 2012 and sealed another deal to sell its stake in
the Kashagan oil field for $5 billion, to Indian state-owned oil
company ONGC. It also invited bids for a partial stake sale in its
Canadian oil sands assets, and was reported to have received a $5
billion bid from an Indian consortium led by ONGC. It has also
agreed to sell its Algerian business unit to Indonesian state-owned
oil and gas company Pertamina for $1.75 billion. The deal is
expected to be closed in mid-2013. Its Nigerian oil fields
will be sold for $1.8 billion to Oando Energy Resources, which aims
to become one of Nigeria's top oil explorers and producers.
ConocoPhillips has been betting big on shale and Gulf of Mexico
deepwater assets. The cash generated from this deal can be used to
acquire more acreage in the unconventional space.
On account of this deal, Conoco expects to record an
after-tax net earnings benefit of approximately $120 million in the
fourth quarter of 2012.
We have a
Trefis price estimate for ConocoPhillips of $62
, which will be revised after the fourth quarter earnings
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