We have upgraded our long-term recommendation on a major
global exploration and production (E&P) company −
) − to Neutral from Underperform.
The better-than-expected third quarter financial results, its
robust crude oil production growth as well as its pipeline of
project start-ups are the main drivers behind our upbeat note.
ConocoPhillips reported impressive third quarter results that
exceeded our expectation and were also up by almost 2.9% from the
year-earlier profit. This came on the back of
higher-than-expected production of crude oil from its high-margin
areas like the Eagle Ford and Bakken. The third quarter marked
the completion of the first full quarter of operation for
ConocoPhillips as a pure play oil and gas producer after the
spin-off of its refining and marketing business. The midstream
business now operates as
The company's exploration initiatives in the liquids-rich plays
are gaining momentum through the Eagle Ford, Bakken and North
Barnett shale plays. It is stepping up its drilling activities in
the North American onshore liquids-rich plays and expects
combined production from its Eagle Ford, Bakken, and Permian
acreage to exceed 200 thousand barrels of oil equivalent per day
(MBoe/d) in 2013.
Again, ConocoPhillips has a pipeline of project start-ups that
are likely to fuel its production growth story. These include the
Malaysian deepwater projects, the liquefied natural gas (LNG)
project in Australia, the UK, Norway, and the Canadian oil sands,
besides the U.S. Lower 48 liquids-rich plays.
As part of ConocoPhillips' three-year strategic plan, the
Houston, Texas-based company plans to divest assets that do not
fit well with its business model. It has generated $2.1 billion
in proceeds from asset sales for the first nine months of 2012
and maintained a divestment target of $8-10 billion by the end of
2013. The proceeds are earmarked for portfolio optimization, debt
reduction and increasing shareholder distribution.
However, the company's near-term weak production volume keeps us
wary. Its production declined almost 1% in the most recent
quarter. The decline was mainly due to the impact of divestitures
and maintenance. In addition, the natural decline in fields also
resulted in the weak production. This year's production guidance
range was consequently narrowed to 1.570-1.580 million barrels of
oil equivalent (MMBOE/d) from 1.565-1.585 MMBOE/d.
The third quarter also highlighted the company's cash flow
deficit issue. Again, management remains committed to maintaining
the dividend payout as its highest priority. As operating cash
flow is currently below the necessary level to cover its costs
and dividend payouts, the cash flow deficit will likely linger
Hence, in view of above discussion, we expect the stock to
perform in line with the broader market.
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