ConocoPhillips: Looking to Reduce APLNG, Oil Sands Stakes

ConocoPhillips (COP) plans to sell some parts of its stakes in expensive developments such as the Australia Pacific LNG project and in the Canadian oil sands in order to steer more cash to its U.S. shale plays, Chief Executive Ryan Lance told analysts Thursday.

The company has already announced plans to shed billions of dollars in assets as it seeks to focus on fast-growing shale plays in the U.S. and bring in much-needed money, but the new potential sales could generate more cash and would free up cash for higher-margin projects. Mr. Lance said Thursday at its annual analyst meeting that ConocoPhillips will also "lighten up" on these long-term projects, which come with high price tags, in order to keep costs down.

The announcement underscores Conoco's transformation in the midst of an energy revolution unleashed by hydraulic fracturing. Fracking, as the technique is known, has allowed oil and gas to be unlocked from tight geological formations and revitalized the U.S. energy industry. Though the formations were first explored by smaller independent producers, now even large international companies such as Conoco and Marathon Oil Corp. (MRO), which have traditionally focused on massive international developments, are shifting their focus to domestic energy.

One of the challenges ConocoPhillips faces is to bring in enough cash to cover its operations and dividend. So far it has worked toward this by selling assets that aren't essential to its strategy, such as operations in Nigeria, Algeria and Kazakhstan. But Mr. Lance said the company is on track to increase production in low-risk, high-reward areas such as the U.S.

Mr. Lance said the company is targeting a $16 billion annual capital budget for the next five years, which includes about $2.5 billion set aside for exploration in unconventional formations from Colorado to Colombia.

Matt Fox, executive vice president for exploration and production, said costs have crept up in Australia by about 7% in Australian dollars, which is compounded by the changing exchange rate. The project is set to deliver first cargo by mid-2015, he said.

The company has a 37.5% stake in the project. Even with some reduction in the company's stake there, the APLNG project is expected to add 80,000 barrels of oil equivalent per day by 2017, Mr. Fox said.

ConocoPhillips's production in the Canadian oil sands is expected to double in the same period, even assuming the company will dilute its stake there, Mr. Fox added.

ConocoPhillips split from its refining arm last year, and Thursday's analyst meeting was the company's first as an independent exploration and production company. But as activist investors have taken aim at what they see as overly large, unfocused energy producers, ConocoPhillips has faced criticism from some analysts who say the company could stand to whittle itself down further.

The company has said it believes its global reach is a positive, and that its size gives it the technological expertise to replicate its success around the world.

"We think our diversification and scale are a competitive advantage," Mr. Lance said, noting that the company is not dependant on one formation or one type of asset.

But analysts were skeptical as to whether ConocoPhillips can deliver on all its plans and keep money flowing to shareholders. Already one of the highest in the industry, Mr. Lance said maintaining and even expanding ConocoPhillips's dividend is one of the company's top priorities.

"The companies you compare yourself to pay dividends out of cash flow," noted Bank of America Merrill Lynch analyst Doug Leggate during the meeting. "Why is the dividend still a core priority?"

Jeff Sheets, ConocoPhillips's chief financial officer, said the company's cash flow is growing "to where we can fund the capital program and a dividend higher than where it is today." He said "high-margin growth" will add $6 billion in additional cash flow by 2017. At the end of 2012, ConocoPhillips reported cash flow from operations of $13.5 billion.

"We are a company that believes that a significant part of what shareholders are looking for is a dividend they can count on," he said.


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