What Could Cause A More Than 10% Drop In ConocoPhillips' Valuation?


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Since the commodity downturn has prevailed longer than anticipated, independent oil and gas producers are struggling to finance their future capital expenditure and repay their huge debt obligations. As a result, many of them have resorted to asset sales and monetizations to fund their drilling activities and optimize their balance sheets, with an aim to better prepare themselves for the recurring commodity cycles.

In line with this strategy, ConocoPhillips ( COP ), one of the largest independent oil producers in the US, recently announced its plans to divest its core assets, mainly natural gas, worth $5 to $8 billion over the next two years. A majority of these assets are likely to be the company's North American natural gas assets, which will enable the company to reduce its exposure in this market. This would allow the company to reduce its capital budget by 4% in 2017, and utilize the preserved cash to return higher value to its shareholders. Thus, in this article we discuss the impact this asset divestment will have on ConocoPhillips' valuation.

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According to the company's management, its North American natural gas production accounted for 28% of its total production in 2012. Due to the company's consistent divestment program over the last few years, this proportion has dropped to roughly 18% at the end of third quarter 2016. Further, the company aims to reduce its North American natural gas production to less than 10% of its total production over the next two years. Hence, below we assume a downside scenario, where ConocoPhillips is able to cut down its exposure to the North American gas markets and materialize its asset sales as planned. In this case, the company's overall gas production is expected to fall around 4% by 2018, due to the divestment over the next two years. As a result, we estimate an 11% decline in ConocoPhillips' valuation, if this scenario comes true.

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Have more questions about ConocoPhillips ( COP )? See the links below:

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for ConocoPhillips

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.



This article appears in: Investing , Stocks , US Markets , Investing Ideas
Referenced Symbols: COP , CHK , APC , EOG


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